CITI ISLAMIC INVESTMENT BANK EC 31 December · PDF fileaudited financial statements of Citi Islamic Investment Bank EC ... ORGANIZATIONAL STRUCTURE Support Functions (Compliance,

Commercial registration : 35731 (registered with Central Bank of Bahrain

as an Islamic wholesale investment bank).

Ultimate holding company : Citigroup Inc., USA

Office : Citibank House

Al Seef District

PO Box 548, Manama, Kingdom of Bahrain

Telephone 17588588, Fax 17588654

Directors : Mohammed Al-Shroogi (Chairman)

Atiq-Ur Rehman

Khalid Qurashi

Javed Kureishi

Muwaffik Bibi

Managing Director : Mayank Malik (Citi Country Officer, Citibank N.A.)

Chief Executive Officer : Samad Sirohey (Citi - Islamic Business)

Auditors : KPMG Fakhro

CITI ISLAMIC INVESTMENT BANK EC

ANNUAL REPORT

31 December 2008

Citi Islamic Investment Bank EC

ANNUAL REPORT

for the year ended 31 December 2008

CONTENTS Page

Report of the Board of Directors 1 - 2

Corporate Governance 3 - 6

Sharia Supervisory Board report 7

Independent auditors‟ report to the shareholders 8 - 9

Financial statements

Balance sheet 10

Income statement 11

Statement of changes in equity 12

Statement of cash flows 13

Statement of changes in restricted investment accounts 14

Notes to the financial statements 15 - 25

Risk and capital management disclosures 26 - 32

Citi Islamic Investment Bank EC 1

REPORT OF THE BOARD OF DIRECTORS

as at 31 December 2008 US$ 000's

In accordance with Bahrain Commercial Companies Law 2001, I have pleasure in presenting the

audited financial statements of Citi Islamic Investment Bank EC (the “Bank”) for the year ended 31

December 2008 (pages 10 to 25).

During the past 6 months, the global financial markets have seen unprecedented disruptions. As the

economies of United States and Europe got impacted by the credit and liquidity crisis, the economies

of Middle East have also been affected.

FINANCIAL PERFORMANCE

The financial highlights of the Bank for the year 2008 are as follows:

2008 2007

Total income 3,208 7,854

Profit for the year 1,559 6,951

Total assets 27,714 26,152

Total equity 27,563 26,004

The total income and profit for the year was lower as compared to the year 2007 as the Bank

executed only one advisory deal during the year as compared to 5 deals during 2007. In addition, the

profit rates earned on murabaha deposits were also lower when compared to the previous year due

to overall decline in the benchmark rate (LIBOR).

During the year the Bank had a one-off deposit of US$ 200 million from which an income of US$

1,071 was earned by placing the amount in murabaha deposits. The depositors share of profits

transferred amounted to US$ 676.

The Bank believes that 2009 would be very challenging year for the banking sector as a whole and is

looking forward to the challenges ahead.

FINANCIAL INDICATORS

The key financial indicators of the Bank for the past 5 years are as follows:

2008

2007 2006 2005 2004

Return on average equity (ROAE) 5.82% 30.85% 2.12% 2.12% 5.05%

Return on average assets (ROAA) 5.79% 30.64% 2.09% 2.08% 4.83%

Cost to income ratio 51.40% 11.50% 69.47% 73.20% 56.40%

Earnings per share (EPS) 0.156 0.695 0.040 0.039 0.090

REPRESENTATION AND AUDIT

The activities of the Bank have been conducted in accordance with the Bahrain Commercial

Companies Law 2001, the Central Bank of Bahrain and Financial Institutions Law 2006 and other

applicable statutes in the Kingdom of Bahrain.

Proper and complete accounting records have been maintained and these, together with all other

information have been made freely available to the auditors KPMG.


REPORT OF THE BOARD OF DIRECTORS


No events have occurred since 31 December 2008 to date which would have a material effect on the

2008 financial statements.

On behalf of the board of directors.

Citi Islamic Investment Bank EC

Mohammed Al-Shroogi

Chairman

8 March 2009


CORPORATE GOVERNANCE

FRAMEWORK

The Bank‟s Board of Directors comprise of five non-executive directors. The Directors on a regular

basis maintain oversight over the activities of the Bank. The nature of the Bank‟s business is two-fold:

offering a Sharia compliant Murabaha-based deposit product to Islamic Financial Institutions and

Corporates and to provide structuring services to Citigroup Global Markets (or any of its affiliates) in

respect of capital market and risk management transactions. The Bank at present does not offer, or

intend to offer, any asset products.

The Managing Director of the Bank is the Citi Country Officer (“CCO”) of Citi Bahrain and also chairs

the Country Coordinating Committee (CCC) and the Business Risk Compliance and Control

Committee (BRCC) of Citi Bahrain. Furthermore, the Bank‟s Sharia Advisory Board conducts

meetings on a frequent basis in order to review and approve all Islamic transactions undertaken by

the Bank.

Organisation structure

The Bank operates under the umbrella of Citi Bahrain and has 2 employees. Since the scope of

activities of the Bank is fairly limited, it utilises services from the various Citi Bahrain departments via

Inter Citi Service Agreements. The Bank also obtains support services rendered by the Dubai

Citibank office.

Composition of the Board Of Directors

The Board of Directors of the Bank consist of the following:

1) Mr. Mohammed Al-Shroogi - Chairman

2) Mr. Atiq-Ur Rehman - Board Member

3) Mr. Khalid Qurashi - Board member

4) Mr. Javed Kureishi - Board member

5) Mr. Muwaffak Bibi - Board member

The following members also attend the Board of Directors‟ meeting:

1) Mr. Mayank Malik - Managing Director (Citi Country Officer – Citibank N.A.)

2) Mr. Samad Sirohey - Chief Executive Officer (Citi – Islamic Business)

Board Risk

Risk Compliance &

Control

l Committee

Country Coordinating Committee

Chief Executive Officer

Key Responsibilities: • Oversight over the day - to -

day management of CIIB • Report to the Board

Key Responsibilities: • Conduct on its own or in

in partnership with internal audit units an annual Sharia audit of Islamic products products

Internal Control

l Function

Key Responsibilities: • Discussion of issues

corresponding to legal, compliance, risk, regulatory, etc.

• Escalate issues to region & corporate management Key Responsibilities:

• Discuss/update on new structured transactions

• Approve new structured transaction documentation

• Conduct annual Sharia audit

CITI BAHRAIN CITI ISLAMIC INVESTMENT BANK (Roles and responsibilities specific to CIIB)

Key Responsibilities: • Discuss business strategy • Review business results • Review/approve business

budget Board of

Directors

Sharia

Board

Key Responsibilities: • Oversee adherence to

minimum capital standards s

• Endorse annual funding and liquidity plans and limits

• Monitor utilization against limits limits

• Monitor balance sheet trends

Country ALCO Committee

Key Responsibilities: • Oversee RCSA exercise • Oversight over RMD,

legal & compliance issues

• Approve business self - assessment ratings

ORGANIZATIONAL STRUCTURE

Support Functions (Compliance,

RMD

OperationsKey Responsibilities: • Provide support to CIIB

activities along with their day - to - day responsibilities. (Citi Bahrain)

Business

Key Responsibilities: Responsibilities: • Day - to - day management of

CIIB ’ s business activities

Business Risk

Compliance & Control

l Committee

Country Coordinating Committee

Chief Executive Officer

Key Responsibilities: • Oversight over the day - to -

day management of the Bank • Report to the Board

Key Responsibilities: • Conduct on its own or in

partnership with internal audit units an annual Sharia audit of Islamic products

Islami

Control

l Function

Key Responsibilities: • Discussion of issues

corresponding to legal, compliance, risk, regulatory, etc.

• Escalate issues to region & corporate management Key Responsibilities:

• Discuss/update on new structured transactions

• Approve new structured transaction documentation

• Conduct annual Sharia audit

CITI BAHRAIN CITI ISLAMIC INVESTMENT BANK (Roles and responsibilities specific to the Bank)

Key Responsibilities: • Discuss business strategy • Review business results • Review/approve business

budget Board of

Directors

Sharia Supervisory

Supervisory Board

Key Responsibilities: • Oversee adherence to

minimum capital standards s

• Endorse annual funding and liquidity plans and limits

• Monitor utilization against limits limits

• Monitor balance sheet trends

Country ALCO Committee

Key Responsibilities: • Oversee RCSA exercise • Oversight over RMD,

legal & compliance issues

• Approve business self - assessment ratings

ORGANIZATIONAL STRUCTURE

Support Functions (Compliance,

RMD

OperationsKey Responsibilities: • Provide support to CIIB

activities along with their day - to - day responsibilities. (Citi Bahrain)

Business

Key Responsibilities: Responsibilities: • Day - to - day management of

the Bank’s business activities activities



Profile of the Directors

1. Mr. Mohammed Al-Shroogi - Chairman

Mohammed Al-Shroogi is the Chairman of the Bank and the Division Executive for the Middle East,

Levant, Egypt and Pakistan and Chief Executive Officer for United Arab Emirates, based in Dubai.

Mohammed joined Citibank in 1976 in Treasury, and up to his move into U.A.E. in June 2006 was the

Managing Director - Middle East for Citigroup, based in Bahrain.

Mohammed has attended the Management Executive Program at Harvard University in Cambridge,

USA. His undergraduate studies were done at the University of Kuwait (with one year at the A.U.B.

in Lebanon).

2. Mr. Atiq-Ur Rehman - Board Member

Profession : Bank Officer

Business title : Managing Director. Co-Head of Capital Markets

for Europe, Middle East and Africa.

Experience in years : 25 years

Qualifications : MBA

3. Mr. Khalid Qurashi - Board member

Profession : Banker. Senior Credit Officer

Business title : MD. Global Industries and regional mkts head for M East Africa

Experience in years : 33 yrs with Citibank

Qualifications : MBA; BSc.

4. Mr. Javed Kureishi - Board member

Profession : Banker

Business title : Chief Operating Officer - Middle East and Pakistan

Experience in years : 24 years

Qualifications : Bachelor of Arts (Hon), University of Sussex (United Kingdom)

5. Mr. Muwaffak Bibi - Board member

Managing Director & Region Head - Middle East & North Africa Citi Private Bank.

Muwaffak Bibi is the Head of the Middle Eastern and North Africa region for Citi Private Bank, and is

currently based in Geneva. He is responsible for managing and developing Citi Private Bank‟s

franchise in the region. In addition, Mr. Bibi is a Senior Credit Officer of Citigroup.

Mr. Bibi has been with Citigroup for 29 years and has extensive experience in corporate banking,

credit, consumer banking and private banking.

Mr. Bibi has an MBA from McGill University in Montreal and a BA from the American University of

Beirut.



6. Mr. Mayank Malik - Managing Director

Citi Country Officer, Citibank N.A.

Mayank joined Citi in 1985 as a Management Associate after graduating with a Bachelor of

Commerce Honours degree (University Topper Gold Medal) from Delhi University and an MBA from

the Indian Institute of Management, Ahmadabad, India.

He moved to Bahrain in 2007 as the CCO of Citibank.

7. Mr. Samad Sirohey - Chief Executive Officer (Citi – Islamic Business)

Prior to taking on the responsibility for Citi‟s Islamic business, Samad was the Co-Head of Citi's Bond

Origination business in Central Eastern Europe Middle East and Africa. He has significant experience

of introducing issuers from CEEMEA region to international capital markets.

Samad has been involved in Islamic capital finance transactions since the development of the Sukuk

market. He lead Islamic Development Bank's debut Sukuk issue in 2002, followed by Sukuk issues

for the Central Bank of Bahrain, Republic of Pakistan, the Dubai government (through Dubai Civil

Aviation) and Sorouh Real Estate Securitization Sukuk.

CHANGES IN THE STRUCTURE OF THE BOARD DURING THE YEAR

During the year Mr. Usama Mikdashi vacated his position as a Director on account of retirement. The

following 3 new directors were appointed during the year:

Mr. Khalid Qurashi

Mr. Javed Kureishi

Mr. Muwaffak Bibi

During the year Mr. Samad Sirohey was appointed as the Chief Executive Officer of Citi – Islamic

Business.

SHARI’A COMPLIANCE

Citi‟s islamic business has a dedicated Group wide internal Islamic control function and the Bank has

a Shari'a Supervisory Board (SSB) to ensure Shari'a compliance of its activities on ongoing basis

throughout the year complying with the Shari'a Standards of AAOIFI. The Group Islamic control

function and the SSB also conduct a Shari'a audit every year.

SOCIAL RESPONSIBILITY

The Bank discharges its social responsibility at a group level in Bahrain. The Citi Bahrain operations

contributes/ donates to charitable organisations and participates in various community initiatives.

REMUNERATION POLICIES

The Bank has 2 employees on its payroll who are remunerated as per the Citigroup compensation

policies. The operations, compliance and other support functions are carried out by Citi Bahrain as

per a service level agreement between the 2 entities. No remuneration is awarded by the Bank to the

Board of Directors of the Bank. The Sharia Supervisory Board is paid attendance fee for the meetings

held which is as per the resolution approved by the Board.



COMMUNICATIONS POLICY

The disclosure policy applies to all modes of communication to the public including written, oral and

electronic communications. These disclosures are made on a timely basis in a manner required by

applicable local and international laws and regulatory requirements. Information on new products or

any change in existing products will be placed on the Bank‟s website www.citibank.com/ciib/ and/or

published in the media. Product details are also shared with customers through brochures and/ or,

advertisements.

COMPLAINT HANDLING

The Bank takes disputes and complaints from all customers very seriously. These have the potential

for a breakdown in relationships and can adversely affect the Bank‟s reputation. Left unattended

these can also lead to litigation and possible censure by the regulatory authorities. The Bank has a

comprehensive policy on handling of external complaints. No complaints were lodged with the Bank

during the year.

http://www.citibank.com/


SHARIA SUPERVISORY BOARD REPORT

as at 31 December 2008

8

INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS

Citi Islamic Investment Bank EC 8 March 2009

Manama, Kingdom of Bahrain

Report on the financial statements

We have audited the accompanying financial statements of Citi Islamic Investment Bank EC (“the

Bank”), which comprise the balance sheet as at 31 December 2008, and the income statement,

statement of changes in equity, statement of cash flows and statement of changes in restricted

investment accounts for the year then ended, and a summary of significant accounting policies and

other explanatory notes.

Responsibility of the Board of Directors for the financial statements

The Board of Directors of the Bank is responsible for the preparation and fair presentation of these

financial statements in accordance with Financial Accounting Standards issued by the Accounting

and Auditing Organisation for Islamic Financial Institutions and International Financial Reporting

Standards. This responsibility includes designing, implementing and maintaining internal control

relevant to the preparation and fair presentation of the financial statements that are free from material

misstatements, whether due to fraud or error; selecting and applying appropriate accounting policies;

and making accounting estimates that are reasonable in the circumstances. The Board of Directors is

also responsible for the Bank‟s undertaking to operate in accordance with Islamic Shari‟a rules and

principles.

Auditors’ responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We

conducted our audit in accordance with both the Auditing Standards for Islamic Financial Institutions

and International Standards on Auditing. Those standards require that we comply with relevant

ethical requirements and plan and perform the audit to obtain reasonable assurance whether the

financial statements are free of material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures

in the financial statements. The procedures selected depend on our judgment, including the

assessment of the risks of material misstatement of the financial statements, whether due to fraud or

error. In making those risk assessments, we consider internal control relevant to the entity‟s

preparation and fair presentation of the financial statements in order to design audit procedures that

are appropriate in the circumstances, but not for the purpose of expressing an opinion on the

effectiveness of the entity‟s internal control. An audit also includes evaluating the appropriateness of

accounting principles used and the reasonableness of accounting estimates made by management,

as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis

for our audit opinion.

9

INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS (continued)

8 March 2009

Opinion

In our opinion, the financial statements present fairly, in all material respects, the financial position of

the Bank as at 31 December 2008, and its financial performance, its cash flows, the changes in its

equity and the changes in restricted investment accounts for the year then ended in accordance with

Financial Accounting Standards issued by the Accounting and Auditing Organisation for Islamic

Financial Institutions and the Shari‟a rules and principles as determined by the Shari‟a Supervisory

Board of the Bank.

In addition, in our opinion, the financial statements present fairly, in all material respects, the financial

position of the Bank as at 31 December 2008, and its financial performance and its cash flows for the

year then ended in accordance with International Financial Reporting Standards.

Report on other legal and regulatory requirements

In addition, in our opinion, the Bank has maintained proper accounting records and the financial

statements are in agreement therewith. We have reviewed the accompanying report of the Board of

Directors and confirm that the information contained therein is consistent with the financial

statements. We are not aware of any violations of the Bahrain Commercial Companies Law 2001,

the Central Bank of Bahrain and Financial Institutions Law 2006, the terms of the Bank‟s license or its

memorandum and articles of association having occurred during the year that might have had a

material effect on the business of the Bank or on its financial position. Satisfactory explanations and

information have been provided to us by the management in response to all our requests.


BALANCE SHEET


Note 31 December

2008

31 December

2007

ASSETS

Cash and bank balances 236 203

Murabaha receivables 3 27,447 25,893

Fixed and other assets 31 56

Total assets 27,714 26,152

LIABILITIES AND EQUITY

Payables and other accrued expenses 151 1 148

Total liabilities 151 148

Equity

Share capital 4 10,000 10,000

Retained earnings 15,807 14,404

Statutory reserve 1,756 1,600

Total equity (page 12) 27,563 26,004

Total liabilities and equity 27,714 26,152

Restricted investment accounts (page 14) 17,069 465,024

The financial statements, which consist of pages 10 to 25, were approved by the Board of directors

on 8 March 2009 and signed on their behalf by:

Mohammed Al-Shroogi Mayank Malik

Chairman Managing Director

The accompanying notes 1 to 18 form an integral part of these financial statements.


INCOME STATEMENT

for the year ended 31 December 2008 US$ 000's

Note 2008 2007

INCOME

Income from murabaha contracts 6 1,987 1,522

Income from restricted investment accounts 409 1,027

Income from advisory services 5 812 5,305

Total income 3,208 7,854

EXPENSES

Murabaha expense 6 676 -

Staff costs 7 405 321

Other expenses 8 568 582

Total expenses 1,649 903

PROFIT FOR THE YEAR 1,559 6,951

The financial statements, which consist of pages 10 to 25 were approved by the Board of directors on

8 March 2009 and signed on their behalf by:

Mohammed Al-Shroogi Mayank Malik

Chairman Managing Director



STATEMENT OF CHANGES IN EQUITY


2008 Share

capital

Retained

earnings

Statutory

reserve

Total

As at 1 January 10,000 14,404 1,600 26,004 Profit for the year - 1,559 -

Total recognised income and expense for the year - 1,559 - 1,559 Transfer to statutory reserve - (156) 156 -

As at 31 December 10,000 15,807 1,756 27,563

2007 Share

capital

Retained

earnings

Statutory

reserve

Total

As at 1 January 10,000 8,148 905 19,053 Profit for the year - 6,951 - 6,951

Total recognised income and expense for the year - 6,951 - 6,951 Transfer to statutory reserve - (695) 695 -

As at 31 December 10,000 14,404 1,600 26,004



STATEMENT OF CASH FLOWS

for the year ended ended 31 December 2008 US$ 000's

2008 2007

OPERATING ACTIVITIES

Receipt of advisory income 812 5,305

Receipt of income from murabaha contracts 1,987 1,522

Receipt of income from restricted investment accounts 415 1,036

Payment of murabaha expense to a non-bank customer (676) -

Payments to employees and suppliers (836) (771)

Management fees paid (115) (129)

Cash flows from operating activities 1,587 6,963

INVESTING ACTIVITIES

Purchase of fixed assets - (52)

Cash flows used in investing activities - (52)

Net increase in cash and cash equivalents 1,587 6,911

Cash and cash equivalents at 1 January 26,096 19,185

Cash and cash equivalents at 31 December 27,683 26,096

Cash and cash equivalents comprise:


Murabaha receivables 27,447 25,893

Cash and cash equivalents at 31 December 27,683

26,096



STATEMENT OF CHANGES IN RESTRICTED INVESTMENT ACCOUNTS


2008 2007

Deposit

Murabaha

Total

2008

Citi Private

Investment

Mudaraba

Deposit

Murabaha

Total

2007

As at 1 January 465,024 465,024 14,954 67,196 82,150

Net (withdrawals)/ deposits (458,319) (458,319) (14,996) 389,030 374,034

Gross income 10,773 10,773 42 9,825 9,867

Bank‟s income as an agent (409) (409) - (1,027) (1,027)

As at 31 December 17,069 17,069 - 465,024 465,024

The Bank acts as an agent and invests the funds only in Commodity Murabaha transactions on behalf

of its customers.



NOTES TO THE FINANCIAL STATEMENTS


1 INCORPORATION AND ACTIVITIES

Citi Islamic Investment Bank EC (the “Bank”) was incorporated in the Kingdom of Bahrain as an

exempt closed shareholding company on 29 June 1996. The Bank operates as a Islamic Wholesale

Investment Bank under a licence granted by the Central Bank of Bahrain.

The Bank‟s principal activities are to undertake and carry on banking and investment activities in

compliance with the principles of Islamic Sharia.

The Bank's activities are supervised by a Sharia Supervisory Board consisting of three members,

appointed by the General Assembly for a period of 3 years. The role of the Sharia Board is defined in

a separate agreement between the Bank and Sharia Board members. The finance and administrative

activities of the Bank are carried out by Citibank N.A., Bahrain under a service agreement between

the two parties.

The transactions, balances and results reported in the financial statements are those of Citi Islamic

Investment Bank EC, Bahrain, and accordingly do not include the results of other Islamic banking

activities carried out by Citibank worldwide.

2 SIGNIFICANT ACCOUNTING POLICIES

The significant accounting polices applied in the preparation of these financial statements are set out

below. These accounting policies have been consistently applied by the Bank and are consistent with

those used in the previous year.

(a) Statement of compliance

The financial statements have been prepared in accordance with both the Financial Accounting

Standards („FAS‟) issued by the Accounting and Auditing Organisation for Islamic Financial

Institutions (AAOIFI) and International Financial Reporting Standards („IFRS‟).

(b) Basis of preparation

The financial statements are presented in US Dollars. The financial statements have been drawn up

from the accounting records of the Bank, under the historical cost convention. The preparation of

financial statements in conformity with International Financial Reporting Standards may require the

use of certain critical accounting estimates. It also may require management to exercise its

judgement in the process of applying the Bank‟s accounting policies.

The use of significant estimates and judgment in the process of preparation of financial statements for

the year ended 31 December 2008 is limited to recognition of income from advisory services (Note 5).

(c) Foreign currencies

(i) Functional and presentation currency

Items included in the financial statements of the Bank‟s are measured using the currency of the

primary economic environment in which the entity operates (the functional currency). The financial

statements are presented in US dollars, which is the Bank‟s functional and presentation currency.

(ii) Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates

prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the

settlement of such transactions and from the translation at year-end exchange rates of monetary

assets and liabilities denominated in foreign currencies are recognised in the income statement.




2. Significant accounting policies (continued)

(d) Fixed assets

Fixed assets are stated at cost, net of accumulated depreciation. Depreciation is computed using the

straight-line method to write-off the cost of the assets over their estimated useful lives ranging from

3 to 5 years. The assets residual values and useful lives are reviewed, and adjusted if appropriate, at

each balance sheet date.

(e) Murabaha receivables

Murabaha receivables are stated at cost less impairment allowances, if any. Murabaha receivables

are impaired when they are considered to be uncollectible. The deferred income relating to murabaha

contracts is netted off against the related receivable for the purpose of presentation in the financial

statements.

(f) Income and expense from Murabaha contracts

Income and expense from Murabaha contracts is recognised on a time-apportioned basis over the

period of the contract.

(g) Restricted investment accounts

Restricted investment accounts represent assets acquired by funds provided by holders of restricted

investment accounts and their equivalent and managed by the Bank as an agent or based on a

Mudaraba contract. The restricted investment accounts are exclusively restricted for investment in

specified instruments as directed by the investments account holders. Restricted investment accounts

are not included in the Bank's balance sheet.

(h) Income from advisory services

Income from advisory services is recognised when the service is provided and income is earned. This

is usually when the Bank has performed all significant acts in relation to the service and it is highly

probable that the economic benefits from the transaction will flow to the Bank.

(i) Income from restricted investment accounts

The Bank‟s share of profits, as a Mudarib or fee charged as an agent to restricted investment

accounts, are normally recognised on the basis of the Bank's entitlement to receive such revenue

from the restricted investment accounts, as per agreed contractual terms, except when the Bank

elects to waive its entitlement in favour of its customers.

(j) Statutory reserve

In accordance with the requirements of the Bahrain Commercial Companies Law 2001, a minimum of

10% of the net profit is appropriated to a statutory reserve, until it reaches 50% of the paid-up share

capital. This reserve is not normally distributable, except in the circumstances stipulated in the

Bahrain Commercial Companies Law 2001.

(k) Employee benefits

Pensions and other social benefits for Bahraini employees are covered by the General Organization

for Social Insurance scheme to which employees and the company contribute monthly on a fixed-

percentage-of salaries basis. The Bank‟s contribution to this scheme, which represents a defined

contribution scheme under International Accounting Standard 19 – Employee Benefits, is expensed

as incurred.




2. Significant accounting policies (continued)

(l) Trade date accounting

All “regular way” purchases and sales of financial assets are recognised on trade date, i.e. the date

that the Bank contracts to purchase or deliver the asset. Regular way purchases or sale are

purchases or sale of financial assets that require delivery of assets within the time frame generally

established by regulation or convention in the market place.

(m) Provisions

A provision is recognised in the balance sheet when the Bank has a legal or constructive obligation

as a result of a past event that can be measured reliably, and it is probable that an outflow of

economic benefits will be required to settle the obligation.

3 MURABAHA RECEIVABLES

31 December

2008

31 December

2007

Gross contract value 27,532 26,012

Less: Deferred profits (85) (119)

27,447 25,893

All Murabaha receivables at 31 December 2008 are financed through equity. Profit and/ or principal

repayment in respect of murabaha receivables are not past due at 31 December 2008.

4 SHARE CAPITAL

31 December

2008

31 December

2007

Authorised

20,000,000 shares of US$ 1 each 20,000 20,000

Subscribed, issued and paid-up

10,000,000 shares of US$ 1 each 10,000 10,000

5 INCOME FROM ADVISORY SERVICES

Income from advisory services is earned by the Bank in the capacity of an agent for shari'a compliant

structuring and arranging execution of Islamic financing deals. The Bank currently provides such

advisory services only in relation to financing deals in which other Citibank entities originate/

participate. Advisory income is recognised only on completion of the financing syndication process.

The revenue recognition of fees earned from syndication is dependent upon the level of participation

of Citigroup in the syndication, the aggregate fees received by Citigroup and the fees received by

other participants. The fee earned on each financing transaction is shared between the Bank and

other Citibank entities on an agreed proportion by way of a service level agreement.




6 NET FINANCING INCOME

31 December

2008

31 December

2007

Income from murabaha contracts 1,987 1,522

Less: Murabaha expense (676) -

1,311

1,522

Income from murabaha contracts represents the income earned by the Bank on its murabaha

placements with Citigroup entities. During the year, the Bank received a one-off deposit of US$ 200

million from the promoters of a company under formation. These funds were placed by the Bank in a

short term murabaha with a Citigroup entity on which a profit of US$ 1,071 was earned. The

depositors share of profits transferred amounted to US$ 676 which has been treated as a murabaha

expense.

7 STAFF COSTS

31 December

2008

31 December

2007

Salaries and short term benefits 352 272

Social security costs 53 49

405

321

8 OTHER EXPENSES

31 December

2008

31 December

2007

Management fees 115 129

Sharia Board expenses 185 187

Professional fees 61 24

Head office charges 47 111

Depreciation 19 19

Travelling expenses 20 13

Others 121 99

568

582




9 RELATED PARTY TRANSACTIONS

A significant portion of the Bank‟s transactions in the normal course of business are with other

branches of Citibank NA and other companies of Citigroup. These financial statements may not

necessarily be indicative of the financial position that would have existed or of the Bank‟s results of

operations, if the Bank had been operated as an unaffiliated bank.

The significant income, expenses and balances arising from dealing with related parties included in

the financial statements are as follows:

31 December

2008

31 December

2007



Income from murabaha contracts 1,987 1,522

Head office charges 47 111

Management fees 115 129

Sharia board expenses 185 187

No remuneration is being paid to the board of directors.

10 ZAKAH

The Bank is not obliged to pay Zakah. Further, the Bank does not collect or pay Zakah on behalf of its

shareholders and investors in restricted investment accounts.

As per the requirements of AAOIFI standards, disclosure of Zakah due per share is required to be

made in the financial statements. The Zakah payable by the shareholders as at 31 December 2008

computed by the Bank on the basis of the method prescribed by the Bank‟s Shari‟a Supervisory

Board amounts to US cents 71 (2007: US cents 65) for every share held.

11 SHARI’A SUPERVISORY BOARD

The Bank‟s Shari‟a Supervisory Board consists of three Islamic scholars who review the Bank‟s

compliance with general Shari‟a principles and specific fatwas, rulings and guidelines issued. Their

review primarily includes examination of evidence relating to the documentation and procedures

adopted by the Bank to ensure that its activities are conducted in accordance with Islamic Shari‟a

principles.




12 CONCENTRATION OF ASSETS, LIABILITIES AND RESTRICTED INVESTMENT

ACCOUNTS

The concentration of the Bank‟s credit exposures on financial instruments and the distribution of other

assets and liabilities as at 31 December 2008 were as follows:

(a) Sectoral classification

31 December 2008

Banks and

financial

institutions

Trading and

manufacturing Inter-group Others Total

Cash and bank balances - - 236 - 236

Murabaha receivables - - 27,447 - 27,447

Fixed and other assets - - - 31 31

Total assets - - 27,683 31 27,714

Payables and other accrued

expenses - - - 151 151

Total liabilities - - - 151 151

31 December 2007

Banks and

financial

institutions

Trading and

manufacturing Inter-group Others Total

Cash and bank balances - - 203 - 203


Fixed and other assets - - - 56 56

Total assets - - 26,096 56 26,152


expenses - - - 148 148

Total liabilities - - - 148 148

Restricted investment accounts 2008 2007

Banks and financial institutions 17,069 465,024

17,069

465,024




12 Concentration of assets, liabilities and restricted investment accounts (continued)

(b) Geographical distribution

31 December 2008

Middle East Asia Europe Americas Total

Assets

Cash and bank balances 67 - - 169 236


Fixed and other assets 31 - - - 31

Total assets 98 - 27,447 169 27,714

Total liabilities 151 - - - 151

31 December 2007

Middle East Asia Europe Americas Total

Assets

Cash and bank balances 87 - - 116 203


Fixed and other assets 56 - - - 56

Total assets 143 - 25,893 116 26,152

Total liabilities 148 - - - 148

Restricted investment accounts 2008 2007

Europe 17,069 465,024

13 MATURITY PROFILE

This note presents the expected maturity profile of assets and liabilities of the Bank. The contractual

maturity of the assets and liabilities is not significantly different from the profile presented below.

31 December 2008 Within

8 days

9 days

to 1

month

Over 1

month to

3 months

Over 3

months

to 1 year

Over 1

year Total

Assets

Cash and bank balances 236 - - - - 236

Murabaha receivables - 15,609 11,838 - - 27,447

Fixed and other assets - - 10 - 21 31

Total assets (a) 236 15,609 11,848 - 21 27,714

Liabilities

Payables and other

accrued expenses - - 151 - - 151

Total liabilities (b) - - 151 - - 151

Net (a-b) 236 15,609 11,697 - 21 27,563




13 Maturity profile (continued)

31 December 2007 Within

8 days

9 days

to 1

month

Over 1

month to

3 months

Over 3

months

to 1 year

Over 1

year Total

Assets

Cash and bank balances 203 - - - - 203

Murabaha receivables - 15,332 10,561 - - 25,893

Fixed and other assets - - 16 - 40 56

Total assets (a) 203 15,332 10,577 - 40 26,152

Liabilities


expenses - - 148 - - 148

Total liabilities (b) - - 148 - - 148

Net (a-b) 203 15,332 10,429 - 40 26,004

The maturity profile of restricted investment accounts:

31 December 2008 Within 8

days

9 days to

1 month

Over

1 month to

3 months

Over 3

months to

1 year

Total

Murabaha receivables - 6,977 10,092 - 17,069

31 December 2007 Within 8

days

9 days to

1 month

Over

1 month to 3

months

Over 3

months to

1 year

Total

Murabaha receivables 396,399 50,778 534 17,313 465,024

14 RISK MANAGEMENT AND FINANCIAL INSTRUMENTS

OVERVIEW

Financial instruments consist of financial assets and financial liabilities.

Financial assets of the Bank include cash and bank balances, accrued income on restricted

investment accounts and murabaha receivables.

Financial liabilities of the Bank include payables and other accrued expenses.

The Bank has the following risks from the use of financial instruments

credit risk

liquidity risk

market risks


This note presents information about the Bank‟s exposure to each of the above risks and the Bank‟s

management of capital.



14 Risk management and financial instruments (continued)

RISK MANAGEMENT FRAMEWORK

The Board of Directors has overall responsibility for the establishment and oversight of the Bank‟s risk

management framework.

The Bank‟s risk management policies are established to identify and analyse the risks faced by the

Bank, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk

management policies and systems are reviewed regularly to reflect changes in market conditions and

the Bank‟s activities.

CREDIT RISK

Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and

cause the other party to incur a financial loss. The Bank attempts to control credit risk by monitoring

credit exposures, limiting transactions with specific counterparties, continually assessing the

creditworthiness of counterparties and securing exposures by collateral, where appropriate.

Exposure to credit risk

The carrying amount of financial assets represents the maximum credit exposure. The maximum

exposure to credit risk at the reporting date was:

31 December

2008

31 December

2007



Other assets 10 16

27,693

26,112

The Bank‟s exposure to credit risk on these financial assets is limited as the murabaha receivables

and the cash and bank balances are placed with Citigroup entities.

All the murabaha receivables are neither past due nor impaired. For concentration profile of assets

and liabilities refer note 12.

LIQUIDITY RISK

Liquidity risk is the bank‟s inability to meet a financial commitment to a customer, creditor, or investor

when due, on account of maturity mis-match between assets and liabilities. This risk is dimensioned

and continuously monitored through limits on maximum cumulative outflow across various tenors.

The Bank‟s exposure to liquidity risk is very limited as it does not have any significant liabilities. For

maturity profile of assets and liabilities refer note 13.

MARKET RISK

Market risk is the risk that changes in market prices, such as foreign exchange rates, profit rates and

equity prices will affect the Bank‟s income or the value of its holdings of financial instruments. The

objective of market risk management is to manage and control market risk exposures within


acceptable parameters, while optimising the return on risk. The Bank does not have a trading portfolio

and is therefore not exposed to equity price risk.



14 Risk management and financial instruments (continued)

Market risk (continued)

Profit rate risk

Profit rate risk arises due to different timing of re-pricing of the Bank‟s assets and liabilities. The

Bank‟s profit rate risk arises from Murabaha receivables and is considered limited due to the short

term nature of Murabaha receivables.

Foreign exchange risk

Foreign exchange risk is the risk that the Bank‟s earning will be affected as a result of fluctuations in

currency exchange rates. The Bank‟s exposure to foreign exchange risk is very limited as most of its

transactions are in US$ which is the Bank‟s functional currency or in Bahraini dinars which is pegged

to US$.

OPERATIONAL RISK

Operational risk is the risk of loss arising from systems and control failures, fraud and human errors,

which can result in financial and reputation loss, and legal and regulatory consequences. The Bank

manages operational risk through appropriate controls, instituting segregation of duties and internal

checks and balances, including internal audit and compliance.

15 FAIR VALUE AND CLASSIFICATION OF FINANCIAL INSTRUMENTS

Fair values represent the amount at which an asset could be exchanged or a liability settled, in a

transaction between knowledgeable, willing parties in an arm's length transaction. Differences can

therefore arise between the book values under the historical cost method and fair value estimates.

The estimated fair values of the financial assets and liabilities are not significantly different from their

book values as the items are primarily short term in nature.

Under IAS 39, all of the financial assets of the Bank are classified as “Loans and receivables” and all

liabilities are classified as “Others amortised cost” liabilities

For accounting policies for financial assets and liabilities, refer Note 2.

16 CAPITAL MANAGEMENT

The Bank‟s lead regulator Central Bank of Bahrain (CBB) sets and monitors capital requirements for

the Bank. In implementing the current capital requirements, the CBB requires the Bank to maintain a

prescribed ratio of total capital to total risk-weighted assets.

The Bank‟s policy is to maintain sufficient capital to sustain investor and market confidence and to

support future development of the business.

With effect from 1 January 2008 the Bank is required to comply with the provisions of the revised

Capital Adequacy Module of the CBB (revised based on the Basel II framework) in respect of

regulatory capital. The Bank has adopted the standardised approach to credit and market risk


management and the basic indicator approach for the operational risk management under the revised

framework.



16 Capital management (continued)

The Bank‟s regulatory capital position at 31 December was as follows:

31 December

2008

(Basel II)

31 December

2007

(Basel I)

Tier 1 Capital 27,563 26,004

Tier 2 Capital - -

Total capital base (tier 1 + tier 2) 27,563 26,004

Total risk-weighted assets 12,205 47,404

Total regulatory capital expressed as a percentage of total

risk weighted assets 225.83% 54.85%

On adoption of the revised CBB capital computation guidelines the method of measuring risk for

capital charge purposes have been changed and hence the current year ratio is not comparable with

the previous year ratio.

The Bank has complied with all externally imposed capital requirements throughout the year.

17 NEW INTERNATIONAL FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS

NOT YET ADOPTED

During the year the following relevant new/ amended IFRS‟s and interpretations have been issued

which are not yet mandatory for adoption by the Bank:

Revised IAS 1 “Presentation of Financial Statements” – Effective for financial periods beginning on

or after 1 January 2009

The adoption of this standard and certain other amendments to existing standards with varied

effective dates made by International Accounting Standards Board as part of its first annual

improvements project are not expected to have any material impact on the financial statements.

18 COMPARATIVES

Certain prior year amounts have been reclassified to conform to the current year‟s presentation. Such

reclassifications do not affect previously reported profit or equity.


RISK AND CAPITAL MANAGEMENT

DISCLOSURES

FOR THE YEAR ENDING

31 December 2008

These disclosures have been prepared in accordance with the Public Disclosure Module (“PD”), Section PD-1.3: Disclosures in

Annual Reports, CBB Rule Book, Volume II for Islamic Banks. To avoid any duplication, information required under PD module

but already disclosed in other sections of annual report has not been reproduced. These disclosures are part of the annual report

for the year ended 31 December 2008 and should be read in conjunction with the financial statements for the year ended 31

December 2008 and other sections of the annual report.


RISK AND CAPITAL MANAGEMENT DISCLOSURES


1. EXECUTIVE SUMMARY

The Central Bank of Bahrain‟s (CBB) Basel II guidelines outlining the capital adequacy framework for

banks incorporated in the Kingdom of Bahrain became effective from 1 January 2008. These

disclosures have been prepared in accordance with the CBB requirements outlined in the Public

Disclosure Module (“PD”), Section PD-1.3: Disclosures in Annual Reports, CBB Rule Book, Volume II

for Islamic Banks. The requirements of Section PD 1.3 follow the requirements of Basel II - Pillar 3

and the Islamic Financial Services Board‟s (IFSB) recommended disclosures for Islamic banks.

The PD Module requires disclosure of the Bank‟s exposure to risks on its banking and trading book.

As the Bank does not have a trading book all its disclosures are limited to the risks faced on its

banking book.

The Bank has adopted the Standardised Approach for Credit Risk, Market Risk and the Basic

Indicator Approach for Operational Risk to determine the capital requirement. This section contains a

description of the Bank‟s risk management and capital adequacy policies and practices including

detailed quantitative information on risk components and capital adequacy.

The nature of the Bank‟s business is two-fold: offering a Sharia compliant Murabaha-based deposit

product to Islamic Financial Institutions and Corporates and to provide structuring services to

Citigroup Global Markets (or any of its affiliates) in respect of capital market and risk management

transactions. The Bank at present does not offer, or intend to offer, any asset products. All policies

and procedures have been designed to cover risks arising from these products of the Bank.

The capital adequacy ratio is calculated by dividing the regulatory capital base by the total Risk

Weighted Assets (RWAs). CBB has mandated that the ratio be maintained at a minimum of 12% with

a trigger ratio of 12.5%. If the capital adequacy ratio falls below 12.5%, additional prudential reporting

requirements apply, and a formal action plan to restore the ratio above the target level is to be

formulated and submitted to the CBB.

As at 31 December 2008, the Bank‟s total risk weighted assets amounted to US$ 12,205; Tier 1

Capital and total regulatory capital amounted to US$ 27,563. Accordingly, Tier 1 and Total Capital

Adequacy Ratio was 225.83%. These ratios exceed the minimum capital requirements under the

CBB‟s Basel 2 framework.

2. RISK FRAMEWORK

The Bank operates under the One-Citi model. The Board of Directors and the Sharia Supervisory

Board (SSB) maintain the Board level oversight of the Bank‟s activities. The Bank is represented on

the main country level management committees (Country Coordinating Committee, Business Risk

Compliance and Control Committee) of Citi Bahrain by its Managing Director to ensure oversight of

the Bank‟s transactions and activities.

The Sharia Supervisory Board of the Bank along with the Group Internal Control Function is

responsible for approval and oversight of all Islamic transactions undertaken at the Group level. The

SSB is further assisted by the Group Internal Control Function which conducts annual Sharia Audits

over all the Islamic products and transactions undertaken by the Bank.

The Bank has a Business Manager to oversee all Islamic business activity. The operations,

compliance, financial control, risk management and other support functions are managed by Citi

Bahrain staff through Inter-Citi Service Agreements with the Bank (under the one-Citi approach).




2. Risk Framework (continued)

As per the revised CBB capital adequacy framework, the Bank is exposed to the following risks:

Credit and counterparty risk

Market risk (limited to forex risk in the banking book)

Operational risk

Liquidity risk

Profit rate risk in the banking book

(a) Credit and Counterparty Risk

All the murabaha placements of the Bank are on a short term basis (maturing within 3 months) and

are placed only with Citigroup entities.

All the new Islamic products introduced by the Bank are approved by the Capital Market Approval

Committee (CMAC) of Citigroup. Moreover, Islamic financing/product structures are discussed in the

Board meetings to discuss the risks involved in them.

There are no loans extended or other asset products offered by the Bank to its customers. Moreover,

the off balance sheet exposures where the Bank acts as an agent between a purchaser (restricted

investment account) and a seller (a Citi entity) do not expose the Bank to any type of credit risk.

Quarterly updates on the current credit exposures of the Bank are reported to the Business Risk

Compliance and Control Committee (“BRCC”) and the Country Coordinating Committee (“CCC”).

Overall, the Bank considers that its policies and procedures constitute a reasonable approach to

managing the credit risk in the activities it is engaged in.

(b) Foreign Exchange Risk

The Bank‟s on-balance sheet exposures to foreign exchange risk is very limited as all of its

transactions are denominated in US$ which is the Bank‟s functional currency. The inter-bank

Murabaha transactions do not expose the Bank to any commodity price risk.

Moreover, the FX risk in the off balance sheet exposures is borne by the purchaser and the seller of

the contract, and the Bank does not incur any market risk in these transactions since it undertakes

the role of an agent.

(c) Operational Risk

The on-balance sheet activities of the Bank are limited in volume. However, as a part of its off-

balance sheet activities, where the Bank acts as an agent between a purchaser and a seller, the

Bank is exposed to operational risk in the event of any negligence on its part.

Citi Bahrain‟s Compliance Function is headed by the Country Compliance Officer. Along with its

compliance related responsibilities, the Compliance function is also responsible for coordinating the

Risk and Control Self Assessment (RCSA) exercise at the country level which includes the Bank‟s

operations. As part of the RCSA, all the processes and activities undertaken by the various

departments at Citi Bahrain are identified. The processes and activities relating to the Bank are also

documented as part of the Citi Bahrain RCSA. Furthermore, the relevant risks and controls are

identified and tested on a quarterly basis through the operational risk management system “Catalyst”.





(c) Operational risk (continued)

The individual departments undertake tests to assess the effectiveness of the existing controls. Any

issues arising from these tests are escalated to the BRCC and the summary results are discussed in

the CCC. The Managing Director of the Bank chairs these committees, hence fulfilling the oversight

role over the operational risk management framework encompassing the Bank.

Furthermore, corrective actions agreed on all issues identified are discussed and tracked in the CCC

meeting. Major business issues are also escalated to the regional management committees.

The operational risk is supplemented by the Internal Control Function. The Internal Control Function

conducts annual Sharia audits in order to ensure the Bank‟s adherence to the CBB Rulebook for

Islamic Financial Institutions, Sharia and AAOIFI standards as well as Fatwas issued by the Sharia

Advisory Board.

The Audit Risk and Review (ARR) which is the group audit team responsible for global reviews

covers the Bank based on the frequency derived from the global risk based approach. The last two

audits conducted by the ARR over the Bank were conducted within a period of twenty months

(November 2006 and July 2008).

(d) Liquidity Risk

Based on the financial statements as at 31 December 2008, the Bank does not have any unrestricted

investment account (URIA) deposits on its balance sheet. If the Bank receives a deposit from the

customers (as done on a one-off basis for a period of 3 months during 2008), the policy is to place it

in short term inter-bank Murabaha with Citigroup entities. The Bank matches the tenor of its

murabaha receivables with the deposits received in order to avoid a short term liquidity mismatch.

The Bank follows the global liquidity management policy of Citibank which provides the overall

guidelines for liquidity management. The Market and Liquidity Risk Manager in Citi Bahrain is

responsible for monitoring the overall liquidity risk in the Bank and routinely monitors its financial

statements to assess any significant changes which might expose it to liquidity risk. The Business

Manager of the Bank is also a member of the Country ALCO Committee. Refer Note 13 for the

maturity profile of assets, liabilities and restricted investment accounts.

Following are the key liquidity ratios as at 31 December 2008:

Description

Ratio

Short Term Assets : Total Assets 0.99 : 1.00

Short Term Assets : Short Term Liabilities 183.33 : 1.00





(e) Profit Rate Risk in Banking Book

Currently the Bank does not have any profit bearing liabilities and therefore does not face the risk of

mismatch between the rate of return earned on assets and liabilities.

(f) Compliance Risk

The Compliance Function at Citi Bahrain is the designated compliance function for the country and

covers the Bank‟s compliance activities. The Compliance Function has established a “Regulatory

Risk Matrix” which constitutes the rules and regulations pertaining to all businesses operating under

the umbrella of Citi Bahrain. This includes the Bank as well (local regulatory requirements and global

policy compliance requirements).

The RCSA is intended to encompass all the businesses and control activities in Citi Bahrain including

the Bank. The RCSA includes the Regulatory Risk Matrix which identifies the key local regulatory

requirements as well as global policy compliance requirements pertaining to Citi Bahrain. As part of

the RCSA process, the Bank has identified procedures for every department to conduct tests in order

to ensure adherence to all rules and regulations. These tests are conducted by the business and

support units on a quarterly basis. The results of these tests are reviewed by the Quality Assurance

Officer on an ad-hoc basis, who in turn reports to the Country Compliance Officer of Citi Bahrain.

All material compliance issues identified during these tests are escalated to the BRCC. A member of

the Bank‟s team is also represented on the BRCC. The BRCC is headed by the Citi Country Officer

who is also the Managing Director of the Bank, hence fulfilling the Bank‟s oversight role over its

management of compliance risk.

(g) Displaced Commercial Risk

Displaced Commercial Risk refers to the market pressure to pay returns that exceeds the rate that

has been earned on the assets financed by the liabilities, when the return on assets is under

performing as compared with competitor‟s rates. Currently the bank is not exposed to any displaced

commercial risk that may arise from its restricted investment accounts as it only acts as an agent for

its customers.

(h) Restricted Investment Accounts (RIA)

The Bank structures its RIA products to offer its customers an opportunity to choose from a wide

range of returns, maturity periods, sectors, asset classes and risk levels.

All RIA offering documents (“Offering Document”) are drafted and issued with input from the Bank‟s

Investment Banking, Shari‟a, Financial Control, Legal and Risk Management Departments to ensure

that the investors have sufficient information to make an informed decision after considering all

relevant risk factors.

The Board of Directors is responsible for providing clear guidelines for the development, management

and risk mitigation of its RIA investments and to ensure that there exist sound management and

internal control systems to ensure that the interests of the investment account holders are protected

at all times.





(h) Restricted Investment Accounts (continued)

The Bank is aware of its fiduciary responsibilities in management of the RIA investments and has

clear policies on discharge of these responsibilities. The Bank‟s policy regarding its fiduciary

responsibilities to the RIA investors and their funds, includes the following:

Ensuring that the investment structure, Offering Documents and the investment itself are fully

compliant with Islamic Shari‟a principles and the CBB regulations;

Appropriately advising Investors, as part of the RIA Offering Document, of all the relevant and

known risk factors and making it clear that the investment risk is to be borne by the Investor

before accepting the investment funds;

Ensuring that the funds are invested strictly in accordance with the provisions outlined in the

Offering Documents;

Distributing the capital and profits to the Investor in a just and equitable manner as agent; and

In all matters related to the RIA, and the investment, act with the same level of care, good faith

and diligence as the Bank would apply in managing its own investments.

Historical returns over the past five years:

Product Launch

date

Annualised returns Status

2008 2007 2006 2005 2004

Deposit Murabaha 1996 3.64% 5.22% 5.36% - - Active

Citi Private Investment

Murabaha (CPIM)

1996 - - 7.13% 6.35% 1.12% Closed

Citi Emerging Market

Murabaha (CEMM)

1996 - - 4.48% 3.63% 4.39% Closed

The movement in the Restricted Investment Accounts is disclosed on Page 14.

3. CAPITAL STRUCTURE AND CAPITAL ADEQUACY

The Bank is comfortably placed in terms of regulatory capital adequacy and the current regulatory

Capital Adequacy Ratio (CAR) is 225.83% as opposed to the minimum CBB requirement of 12%.

The Bank‟s paid up capital consists only of ordinary equity shares and does not have any other type

of capital instruments.

The Bank‟s Tier 1 capital comprise share capital, retained earnings and eligible reserves. Retained

profits are included in Tier 1 pursuant to an external audit.

The Bank‟s Tier 2 Capital comprises of interim profits (if any).

The capital of the Bank is currently not subject to any regulatory adjustments/ deductions.




3. Capital Structure and Capital Adequacy (continued)

(a) Capital structure, minimum capital requirement and capital adequacy:

Amount

Tier 1

Issued and fully paid ordinary shares 10,000

Statutory reserves 1,756

Retained earnings 15,807

Total Tier 1 capital (A) 27,563

Tier 2 -

Total eligible capital (B)

27,563

Risk

weighted

exposure

Capital

requirement

@ 12%

Claims on Banks 5,536 664

Other assets 31 4

Credit risk exposures 5,567 668

Market risk exposures - -

Operational risk exposures 6,638 797

Total risk weighted exposures (C)

12,205

1,464

Total capital adequacy ratio (B/C)

225.83%

Tier 1 capital adequacy ratio (A/C)

225.83%

(b) Credit risk weighted assets

The exposure to credit risk for the Bank is from the following:

Gross

credit

exposure

Risk

weight

Credit risk

weighted

assets

Average gross

credit

exposures

during the year *

Murabaha receivables 27,447 20% 5,489 77,135

Cash and bank balances 236 20% 47 233

Other assets 31 100% 31 48

Total gross credit risk exposures

27,714

-

5,567

77,416

* These have been computed based on a quarterly average.

The murabaha receivables and bank balances are with Citigroup entities for which the Bank uses the

rating provided by External Credit Assessment Institutions (ECAI) to ascertain the risk weight. As per

the rating provided by Standard & Poor‟s rating services, Citigroup falls in the bucket of “AAA to AA-“

based on which a risk weight of 20% is used to arrive at the risk weighted assets. For the other

receivables, a risk weight of 100% is used to arrive at the risk weighted assets.


None of the exposures are either past due, impaired or restructured. The exposures are not backed

by collaterals and hence no benefits for credit risk mitigation is applicable.



3. Capital Structure and Capital Adequacy (continued)

(b) Credit risk weighted assets (continued)

The Bank does not have any unfunded exposures.

Refer Note 12 for the geographical and sectoral concentration and Note 13 for the maturity profile of

assets, liabilities and restricted investment accounts.

Large exposure limits

The Bank has significant exposure to Citigroup entities (as a Group) as mentioned below.

Type of exposure Amount of

exposure

% of capital

base

Direct exposure 27,683 100.44%

Restricted investment accounts 17,069 61.93%

Combined exposure

44,752

162.37%

However, these exposures qualify as exempt exposures as they are in the nature of short term inter-

bank exposures and hence no regulatory capital deduction is considered necessary.

(c) Operational risk weighted assets

The operational risk weighted assets are computed as per the guidelines of the CBB which are as

follows:

Average gross income for the past 3 years * 15% * 12.5

(excluding extraordinary and exceptional income)

2007 2006 2005

Gross income (excluding extraordinary and

exceptional income)

7,854

1,307

1,459

Average gross income (A) 3,540

Alpha (B) 15%

(C) = (A) * (B) 531

Risk weighted exposures ((C) * 12.5) 6,638

The Bank did not have any non-sharia complaint income/ sharia violations/ material legal

contingencies during the year 2008.

(d) Capital management and allocation

The Bank‟s capital management framework is intended to ensure that there is sufficient capital to

support the underlying risks of the Bank‟s business activities and to maintain a well-capitalised status

under regulatory requirements. The allocation of capital between specific operations and activities is

primarily driven by regulatory requirements. The Bank‟s capital management policy seeks to

maximise return on risk adjusted while satisfying all the regulatory requirements.