REACHING THE UNREACHABLE

Annual Report 2016

Licensed and regulated as an Islamic Retail Bank by the Central Bank of Bahrain. 17 005500
Al Salam Bank-Bahrain B.S.C.| Annual
alsalambahrain.com
Report 2016 1
 With an infinite ambition, celebrating
10 years of excellence and innovation in
the Islamic banking industry, we set the
pace for the future that will lead to global
presence and delivering dynamic Shari’a-
compliant products and financial solutions
tailored to meet our increasingly diverse
clientele.
We, at Al Salam Bank-Bahrain, transcend
the boundaries of possibilities and build
new paradigms on the journey towards
success.

2 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

His Royal Highness His Majesty King Hamad His Royal Highness
Prince Khalifa bin bin Isa Al Khalifa Prince Salman bin
Salman Al Khalifa Hamad Al Khalifa
The Prime Minister of The King of the Kingdom The Crown Prince,
the Kingdom of Bahrain of Bahrain Deputy Supreme
Commander and First
Deputy Prime Minister of
the Kingdom of Bahrain

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 3

 CONTENTS

Vision and Mission 5

Corporate Overview 6

Annual Highlights 7

Board of Directors 9

Fatwa and Shari’a Supervisory Board 16

Executive Management Team 18

Board of Directors’ Report to the Shareholders 28

Message from the Group Chief Executive Officer 32

Management Review of Operations and Activities 35

Corporate Governance Report 42

Remuneration Policy 59

Risk Management and Compliance 67

Corporate Social Responsibility 70

Fatwa and Shari’a Supervisory Board Report to the Shareholders 72

Independent Auditors’ Report to the Shareholders 74

The Consolidated Financial Statements 76

Notes to the Consolidated Financial Statements 80

4 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 DYNAMIC
DIVERSIFIED
DIFFERENTIATED

OUR VISION
To become a regional force in the Islamic financial services industry by
providing differentiated Shari’a compliant products to focused segments.

OUR MISSION
• Become a “one-stop-shop” for Islamic financial services.

• Create a strong onshore presence in select countries.

• Develop a premier brand image as an Islamic financial shaper.

• Achieve high returns for stakeholders commensurate with the risks

undertaken.

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 5

 ASBB is
an Islamic bank
head-quartered in the
Kingdom of Bahrain and
is licensed and regulated
CORPORATE by the Central Bank of
OVERVIEW Bahrain.

Al Salam Bank-Bahrain (ASBB) was established on 19 January 2006 in the Kingdom of

Bahrain with paid-up capital of BD 120 million (USD 318 million) and was the largest Initial
Public Offering (IPO) in the Kingdom’s history with subscriptions reaching over BD 2.7 billion
(USD 7 billion). Currently, ASBB total owners’ equity is BD 325 million (USD 862 million). The
Bank commenced commercial operations on 17 April 2006. ASBB was listed in Bahrain
Bourse on 27 April 2006 and subsequently on Dubai Financial Market (DFM) on 26 March
2008.

Following a resolution of ASBB’s The Bank’s high-calibre management

Extraordinary General Assembly meeting team comprises highly qualified and
held on 4 May 2009, ASBB completed its internationally experienced professionals
merger with the Bahraini Saudi Bank (BSB) with proven expertise in key areas of
on 22nd of December 2011. On the 2nd of banking, finance and related fields.
February 2014, Al Salam Bank-Bahrain
Key factors that contribute to the Bank’s
and BMI Bank B.S.C (c) (BMI) confirmed
distinct market differentiation include:
the conclusion of a business combinations
between the two institutions after obtaining • Strong paid-up capital base;
the approval of their shareholders at their
• Pre-eminent founding shareholders;
respective extraordinary general assembly
meetings by way of exchanging 11 ASBB • High-calibre management team;
shares for each BMI Bank share wherein • State-of-the-art IT infrastructure;
ASBB acquired 58,533,357 BMI Bank shares
of BD1 each and issued 643,866,927 ASBB • Innovative, tailor-made Shari’a-
shares of 100 fils each. As of the 30th of compliant product solutions;
March 2014, both Banks updated their • Universal business model covering
respective CRs to give effect to the share deposits, financing and investment
swap and consequently BMI Bank became a products and services;
wholly owned subsidiary of ASBB.
ASBB is adopting internationally recognized
ASBB offers its customers a comprehensive standards and best practices in areas
range of innovative and unique Shari’a- such as corporate governance, compliance
compliant financial products and services and risk management, operating with the
through its extended strong network of highest levels of integrity, transparency and
branches and ATMs utilizing the state-of- trust.
art technologies to meet various banking
requirements. In addition to its Retail
Banking services, the Bank also offers
Corporate Banking, Private Banking,
Investment as well as Treasury Services.

6 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

ANNUAL
HIGHLIGHTS
Total Operating Income Net Profit
(million) (million)

2012 BD24 (USD 64) 2012 BD10 (USD 27)

2013 BD26 (USD 69) 2013 BD12 (USD 33)

2014 BD46 (USD 122) 2014 BD16 (USD 42)

2015 BD59 (USD 156) 2015 BD11 (USD 28)

2016 BD63 (USD 167) 2016 BD16 (USD 43)

Total Assets Net Equity

(million) (million)

2012 BD942 (USD 2,499) 2012 BD208 (USD 552)

2013 BD1,088 (USD 2,887) 2013 BD246 (USD 653)

2014 BD1,955 (USD 5,186) 2014 BD329 (USD 872)

2015 BD1,657 (USD 4,395) 2015 BD320 (USD 849)

2016 BD1,681 (USD 4,460) 2016 BD325 (USD 862)

Earnings per share Cost to Income Ratio

(fils)

2012 7 2012 48%

2013 8 2013 44%

2014 8 2014 57%

2015 6 2015 45%

2016 8 2016 41%

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 7

 RISING TO THE
OCCASION
Largest IPO shares issued with subscriptions
in the history of the Kingdom reaching over
BD 2.7 billion (USD 7 billion) and with paid-up capital
of BD 120 million (USD 318 million).

8 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

BOARD OF
DIRECTORS
H.H. Shaikha Hessa bint Khalifa bin Hamad Al Khalifa
Chairperson

Chairperson of the Remuneration, Nomination and

Corporate Governance Committee
Independent and non-executive
Director since: 18 April 2009
Term started: 24 February 2015
Experience: more than 18 years

H.H. Shaikha Hessa Al Khalifa gained her Bachelor’s degree in Management (1998), and
her Master degree in Social Policy and Planning (2002) both from the London School of
Economics and Political Science. Gained a MSc Development Finance 2010 from University
of London. She joined the Supreme Council for Women in 2001 as a member of the Social
Committee. Since 2004 she has been a Permanent Member of the Council’s Board. In 2005,
she founded “INJAZ Bahrain” which is an international organization to inspire and prepare
young Bahrainis to succeed in a global economy and is presently its Executive Director.

With her experience and active role in enterprise education and developing skills of young
women, she has been invited as speaker and panelist at various occasions including the UN,
and the World Economic Forum.

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 9

 Board of Directors (continued)

H. E. Shaikh Khalid bin Mustahail Al Mashani

Vice Chairman

Independent and non-executive

Director since: 5 May 2014
Term started: 24 February 2015
Experience: more than 22 years

H.E. Shaikh Khalid bin Mustahail Al Mashani holds a BSc. in

Economics and a Master’s Degree in International Boundary
Studies from the School of Oriental and African Studies
(SOAS), University of London. Shaikh Khalid is the Chairman of the Board of Directors of Bank
Muscat S.A.O.G.; Director of Al Omaniya Financial Services Company and Chairman of Dhofar
International Development & Investment Holding Company S.A.O.G.

Mr. Hussein Mohammed Al Meeza

Director

Chairman of the Executive Committee

Independent and non-executive
Director since: 20 March 2012
Term started: 24 February 2015
Experience: more than 42 years

Mr. Hussein Mohammed Al Meeza is considered one of the

renowned personalities in the Islamic banking sectors and
Islamic finance and insurance. Mr. Al Meeza’s outstanding career success was crowned in
December 2006 when the International Conference of Islamic Bankers chose him as the
2006 Best Islamic Banking Personality. Having graduated from the Beirut Arab University
in 1975, Mr. Al Meeza started his professional career at the Dubai Islamic Bank (DIB) where
he spent 27 years during which he played a pioneering role in enhancing and developing the
bank’s services. His landmark achievement was the establishment of the Al Salam Banks in
Sudan, Bahrain and Algeria. Mr. Al Meeza is currently the Board Member and Chairman of
the Executive Committee of Al Salam Bank-Bahrain, Chairman of Al Salam Bank-Seychelles,
Chairman of Top Enterprises L.L.C., Chairman of Lycée Fracais Jean Mermoz L.L.C., Vice
Chairman and Chairman of the Executive Committee of Al Salam Bank- Algeria. He was
a founder member of Emaar properties, Amlak finance, Emaar Industries & Investments,
Emaar Financial services, Dubai Islamic Insurance & Reinsurance Company (AMAN). Mr. Al
Meeza occupied the positions of the CEO and Managing Director of Dubai Islamic Insurance
and Reinsurance Company (AMAN), Vice Chairman and Chairman of the Executive Committee
of Al Salam Bank-Sudan, Chairman of LMC Bahrain, Chairman of the Executive Committee
of Islamic Trading company in Bahrain, Board member and Chairman of the Executive
Committee in Amlak Finance – Dubai and Chairman of Emaar Financial Services Dubai, Vice
Chairman of Emirates Cooperative Society – Dubai. Board member of the General Council
of Islamic Banks and Financial Institutions, Chairman of the founding committee of Islamic
Insurance and Re-Insurance Companies. He was also a Board Member of Emirates Society
for Insurance. Mr. Al Meeza holds an MBA degree from La Jolla University, USA.

10 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 Board of Directors (continued)

Mr. Salman Saleh Al Mahmeed

Director

Chairman of the Audit and Risk Committee

Independent and non-executive
Director since: 15 February 2010
Term started: 24 February 2015
Experience: more than 32 years

Mr. Salman Al Mahmeed is the Deputy Chief Executive

Officer of Bahrain Airport Services, the Deputy Chairman
of Dar Albilad, the Managing Director and Owner’s
Representative of Global Hotels, Global Express and Movenpick Hotel in Bahrain. He was
a Board Member of the Bahraini Saudi Bank as well as being a member of its Investment,
Executive and Strategic Options Committees. He was also the Investment Director of Magna
Holdings. Mr. Al Mahmeed holds an MBA in Business Administration, Master in Hotel
Management and Management BSc. Degree and he is currently a Board member of Al Salam
Bank and Chairman of the Audit Committee.

Mr. Essam bin Abdulkadir Al Muhaidib

Director

Independent and non-executive

Director since: 17 April 2006
Term started: 24 February 2015
Experience: more than 32 years

Mr. Essam A. Al Muhaidib is the Board Member and Group CEO of Al Muhaidib Group. In
addition, he also sits in the Board of Directors of multiple FMCG, Banking, Financial, Real
Estate, Industrial and Contracting companies. Savola Group, ACWA Holding, Nestle Waters,
Bawan, Abyat, Al Salam Bank, Blominvest KSA, Rafal Real Estate are few of them. He is
also the Chairman of Panda Retail Company and Herfy Foods Services Company. He is a
Board Member of Economic Cities Authority Saudi Arabia. He is the Chairman of National
Housing Company (NHC, KSA) and King Fahad Specialist Hospital Dammam Board. He is a
Board Member of various charity, benevolence and educational institutions like Educational
Services Company of Prince Mohamed Bin Fahad University, King Fahad University for
Petroleum and Minerals Endowment Fund, Saudi Food Bank, Disabled Society, Benevolence
Society (Al Bir Society). He holds a Bachelor of Science in Statistics from King Saud
University, Riyadh (1982).

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 11

 Board of Directors (continued)

Mr. Sulaiman bin Mohamed Al Yahyai

Director

Independent and non-executive

Director since: 5 May 2014
Term started: 24 February 2015
Experience: more than 22 years

Mr. Sulaiman bin Mohamed Al Yahyai is the Deputy Chairman of the Board of Directors of
Bank Muscat since June 2011, Chairman of the Board Risk Committee and a member of
the Board’s Nomination and Compensation Committee. Mr. Al Yahyai holds a certificate in
Assets Management-Lausanne University, Switzerland (2002), MBA – Institute of Financial
Management – University of Wales, UK (2000), and a certificate in Financial Crisis – Harvard
University, USA (1999). Mr. Al Yahyai is an Investment Advisor at the Royal Court Affairs, a
Chairman – Oman Chlorine Co. “SAOG”, a Director – Al Madina Real Estate Co. “SAOC”, a
Director – Falcon Insurance “SAOC”, Chairman of Oman Fixed Income Fund, Chairman of
Integrated Tourism Projects Fund, Chairman of Telecom Oman, Chairman of the National
Bank of Oman GCC Fund, Chairman of Gulf Chlorine “W.L.L” (State of Qatar), a Director of
Union Chlorine “L.L.C” (United Arab Emirates) and a Director in Al Salam Bank (Kingdom of
Bahrain).

Mr. Hisham Saleh Al Saie

Director

Independent and non-executive

Director since: 5 May 2014
Term started: 24 February 2015
Experience: more than 22 years

Mr. Hisham Al Saie is a Bahraini national with extensive experience in the Investment
Management, Corporate Finance Advisory and Investment banking. Hisham holds an MBA
from London Business School and a Bachelor degree in Accounting from the University
of Texas and has attended a number of executive education courses at INSEAD and other
reputable institutions.

Prior to his current responsibilities in Overseas Investment Company S.P.C., Mr. Al Saie
was Head of Corporate Finance at SICO Investment Bank, where he was responsible for
structuring key local and regional equity and debt capital market transactions. He also held
previous positions at BDO Jawad Habib, PriceWaterhouse Coopers and Arthur Andersen.

Mr. Al-Saie is a member of the Remuneration, Nomination and Corporate Governance

Committee of Al Salam Bank Bahrain. He additionally occupies a number of directorship
roles mainly in the following institutions:

• Nass Corporation B.S.C. • Al Khalij Commercial Bank (al khaliji) Q.S.C.

• Diyyar Al-Muharraq B.S.C. (c) • Global Banking Corporation B.S.C. (c)
• Bahrain Bay Development B.S.C. (c) • Binaa Al Bahrain B.S.C. (c)
• Investcorp Bank B.S.C. • LAMA Real Estate W.L.L.

12 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 Board of Directors (continued)

Mr. Mohamed Shukri Ghanem

Director

Independent and non-executive

Term started: 24 February 2015
Experience: more than 17 years

Mr. Mohamed Ghanem brings over 17 years of extensive experience in the regional financing
market and in global energy issues including business development, project financing as
well as the origination of advisory assignments relating to oil, oil field, natural gas and
power generation segments. Mr. Ghanem is the Chief Executive Officer and Board Member
of First Energy Bank in Bahrain, prior to joining First Energy Bank, Mr. Ghanem worked at
Arab Banking Corporation (BSC) (“ABC”) and GED Handles G.m.b.H., Vienna. Mr. Ghanem
is a board member of the following entities: Chairman of MENAdrill Investment Company;
Chairman of ADCAN Pharma LLC – UAE; Chairman of Medisal Pharmaceuticals Industry
LLC – UAE; Vice Chairman of Alizz Islamic Bank – Oman, and Chairman of the Executive
Committee of the Bank; Board member of Al Salam Bank – Bahrain, and member of
Executive Committee of First Energy Bank. Mr. Ghanem holds a Bachelor of Arts in Business
from Webster University (School of Business and Technology) in Vienna as well as an MBA
from Glamorgan University.

Mr. Khalid Salem Al-Halyan

Director

Independent and non-executive

Term started: 24 February 2015
Experience: more than 32 years

Mr. Khalid Salem Al-Halyan has more than 30 years senior

level experience in several industries and is currently the group Chief Audit Executive at
Dubai Aviation City Corporation (DACC). He started his career at the UAE Central Bank
and moved to the Department of Economic Development (DED) in Dubai before joining the
aviation industry in 1996; initially to establish the new Dubai Airport Free Zone (DAFZA) and
head up the Finance Department, before moving on to establish the Group Internal Audit
& Risk Assessment (GIARA) function at DACC. He has been involved in establishing DED,
Emaar Properties, the UAE Internal Audit Association, the UAE Golf Association and worked
on restructuring projects for DUBAL, Dubai World Trade Centre, Dubai Civil Aviation, UAE
Central Bank Banking Supervision, and realized the construction of a new facility for the
Al Noor Special Needs Centre in Dubai. Mr. Al-Halyan currently serves as Vice President of
the UAE Internal Audit Association (affiliated to the Institute of Internal Auditors (IIA), USA),
Chairman of Al Noor Special Needs Centre in Dubai and Mr. Al-Halyan is also the Advisor
to Amlak Real Estate and Chairman of Emaar South, Dubai. He holds an MBA degree from
Bradford University in the UK and BBA from UAE University, Al Ain.

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 13

 Board of Directors (continued)

Mr. Yousif Abdulla Taqi

Director and Group Chief Executive Officer

Executive
Director since: 05 May 2008
Term started: 24 February 2015
Experience: more than 30 years

A Certified Public Accountant (CPA), Mr. Yousif Abdulla Taqi has been active in the banking
and financial service industry since 1983. Mr. Taqi is a veteran banker with more than 30
years of experience in leading positions for a number of institutions in the Kingdom of
Bahrain. Prior to joining Al Salam Bank-Bahrain, he was Deputy General Manager of Kuwait
Finance House (Bahrain), where he was responsible for establishing Kuwait Finance House
Malaysia. Prior to this, Mr. Taqi worked with Ernst & Young, during which time he provided
professional services for many regional and international financial institutions. During his
career with Ernst & Young, he was promoted as Partner, responsible for providing auditing
and consultancy services to the Islamic financial firms.

Mr. Taqi is the Director and Group Chief Executive Officer of Al Salam Bank-Bahrain. He is
also the Chairman of Manara Developments Company B.S.C. (c), Amar Holding Company
B.S.C. (c), affiliates of Al Salam Bank-Bahrain, Board member of the Housing Bank (Bahrain),
Aluminium Bahrain (ALBA), and the Deputy Chairman of King Faisal Corniche Development
Company.

14 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 DYNAMIC
TRANSFORMATION

Converting the two acquired Banks - Bahraini

Saudi Bank & BMI Bank - from Conventional
Banking to Shari’a-compliant Banking in a
record time to strengthen the growth of Islamic
Banking in the Kingdom of Bahrain.

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 15

 FATWA & SHARI’A
SUPERVISORY
BOARD
Dr. Hussein Hamid Hassan
Chairman

Dr. Hussein Hamid Hassan holds a PhD from the Faculty of

Shari’a, Al Azhar University, Cairo, Egypt; and a Master’s in
Comparative Jurisprudence and Diploma in Comparative
Law (both of which are the equivalent of a PhD) from the
International Institute of Comparative Law, University of New
York, USA. He also holds a Masters in Comparative Juries,
and Diplomas in Shari’a and Private Law, from the University
of Cairo; and an LLB in Shari’a from Al Azhar University.
He is the Chairman and member of the Shari’a Supervisory Board in many of the Islamic
Financial Institutions. In addition, Dr. Hassan is Chairman of the Assembly of Muslim Jurists,
Washington, USA; a member of the European Islamic Board for Research & Consultation,
Dublin, Ireland; and an Expert at the Union of Islamic Banks, Jeddah, Kingdom of Saudi
Arabia.

Dr. Ali Mohuddin Al’Qurra Daghi

Member

Dr. Ali Daghi holds a PhD in Shari’a and Law, and a Master’s
in Shari’a and Comparative Fiqh, from Al Azhar University,
Cairo, Egypt. He also holds a BSc. in Islamic Shari’a from
Baghdad University, Iraq; a certificate of traditional Islamic
Studies under the guidance of eminent scholars in Iraq; and
is a graduate of the Islamic Institute in Iraq. He is currently
Professor of Jurisprudence in the faculty of Shari’a law and
Islamic Studies at the University of Qatar. He sits on the
Boards of Shari’a Supervisory Boards for several banks and financial institutions. Dr. Al’Qurra
Daghi is also a member of the Islamic Fiqh Academy, the Organisation of Islamic Conference,
the European Muslim Council for Efta and Researches, the International Union of Muslim
Scholars, and the Academic Advisory Committee of the Islamic Studies Centre, Oxford
University, UK. He also has published several research papers tackling various types of
Islamic Finance, Islamic Fiqh, Zakah and Islamic Economy.

16 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 Fatwa & Shari’a Supervisory Board (continued)

Shaikh Adnan Abdulla Al Qattan

Member

Shaikh Adnan Al Qattan holds Master’s degree in the Quran

and Hadith from the University of Um Al-Qura, Makka,
Kingdom of Saudi Arabia; and Bachelor’s degree in Islamic
Shari’a from the Islamic University, Madeena, Saudi Arabia.
Shaikh Al Qattan is also a Judge in the Shari’a Supreme
Court, Ministry of Justice – Kingdom of Bahrain. Shaikh
Al Qattan is a Member of Shari’a Supervisory Boards
for several Islamic banks and he is also Chairman of Al
Sanabil Orphans Protection Society, Chairman of the Board of Trustees of the Royal Charity
Establishment under the Royal Court - Kingdom of Bahrain, and President of the Kingdom
of Bahrain Hajj Mission. In addition, he is a Friday sermon orator at Al-Fatih Grand Mosque.
Shaikh Al Qattan contributed to drafting the Personal Status Law for the Ministry of Justice
and is a regular participant in Islamic committees, courses, seminars and conferences.

Dr. Mohamed Abdulhakim Zoeir

Member

Dr. Mohamed Zoeir holds PhD in Islamic Economy; Master’s

degree in Islamic Shari’a (Economy); Bachelor’s degree in
Management Sciences; and a Higher Diploma in Islamic
Studies. He is Member of the Fatwa Board in a number of
Islamic financial institutions and has 18 years of experience
with Egypt Central Bank. Dr. Zoeir was also the Head of
Shari’a compliance in Dubai Islamic Bank.

Dr. Mohammed Burhan Arbouna

Member & Secretary to the Board
Group Head of Shari’a Compliance

Dr. Mohammed Burhan Arbouna holds a PhD in laws

with specialization in Islamic banking and finance from
International Islamic University Malaysia, and Master’s
in Comparative Laws. He also holds BA degree in Shari’a
and Higher Diploma in Education from Islamic University,
Medina. He is an expert in Islamic banking and finance since
1997. Before joining Al Salam Bank- Bahrain, Dr. Arbouna
was the Shari’a Head and Shari’a Board member in the Seera Investment Bank B.S.C
Bahrain. Prior to that, he worked as the Head of Shari’a department in the Kuwait Finance
House-Bahrain. Also, Dr. Arbouna worked as Shari’a researcher and consultant for the
Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) – Bahrain. Dr.
Arbouna lectures on Islamic banking and finance and gives consultancy on orientation and
professional programs for a number of professional and educational institutions. Dr. Arbouna
is a member of Islamic Money Market Framework (IMMF) steering committee initiated by
Central Bank of Bahrain for management of liquidity among Islamic banks.

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 17

 EXECUTIVE
MANAGEMENT
TEAM
Mr. Yousif Abdulla Taqi
Director and Group Chief Executive Officer

Experience: more than 30 years

A Certified Public Accountant (CPA), Mr. Yousif Abdulla Taqi

has been active in the banking and financial service industry
since 1983. Mr. Taqi is a veteran banker with more than 30
years of experience in leading positions for a number of
institutions in the Kingdom of Bahrain. Prior to joining Al
Salam Bank-Bahrain, he was Deputy General Manager of
Kuwait Finance House (Bahrain), where he was responsible for establishing Kuwait Finance
House Malaysia. Prior to this, Mr. Taqi worked with Ernst & Young, during which time he
provided professional services for many regional and international financial institutions.
During his career with Ernst & Young, he was promoted as Partner, responsible for providing
auditing and consultancy services to the Islamic financial firms. Mr. Taqi is the Director and
Group Chief Executive Officer of Al Salam Bank-Bahrain. He is also the Chairman of Manara
Developments Company B.S.C. (c), Amar Holding Company B.S.C. (c), affiliates of Al Salam
Bank-Bahrain, Board member of the Housing Bank (Bahrain), Aluminium Bahrain (ALBA),
and the Deputy Chairman of King Faisal Corniche Development Company.

18 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 Executive Management Team (continued)

Mr. Anwar Mohammed Murad

Deputy Group CEO - Banking

Experience: more than 23 years

Mr. Anwar Murad has over 23 years of experience in

the areas of Private Banking, Treasury, Market Risk
Management and Retail Banking. Mr. Murad currently
holds the position of Deputy Group CEO of Banking and
prior to this, he had served as Executive Vice President -
Head of Private Banking at Al Salam Bank-Bahrain since
May 2006. His responsibilities were to establish the Private Banking and Retail Banking
divisions for Al Salam Bank. In addition to the standard banking products, he managed to
structure and launch many Shari’a-compliant products. Prior to joining Al Salam Bank, he
was the Head of Private Banking at BMI Bank, Bahrain. Earlier, Mr. Murad was the Regional
Market Risk Manager for the MENA region at ABN AMRO Bank and also headed the Treasury
Operations in Bahrain. From 1994 to 1998 he had various positions with Citibank in Bahrain
as Authorized Signer, Money Market and Debt Derivatives followed by Assistant Manager,
Global Consumer Banking. Mr. Murad has extensive knowledge and experience in Treasury
and Investment products starting from Money Market, Foreign Exchange, Debt Derivatives
and Structured Products.

Mr. Abdulkarim Turki

Acting Chief Operating Officer

Experience: more than 36 years

Mr. Abdulkarim Turki is a well-rounded banker with more

than 36 years’ experience in Treasury, Operations, Audit,
Internal Controls and Risk Management. He joined Al Salam
Bank-Bahrain in 2006 as Senior Vice President, Head of
operations. He was heavily involved in the incorporation
and structuring of the Bank and the Operation Department.
He was appointed as a key member in the Selection and Implementation Committee of the
Bank’s core banking system in addition to being a member in other Bank’s committees such
as Basel II, Bank Asset Liability Committee (ALCO) and the Public Relations Committee
(PRC). Prior to joining the Bank, he held the position of Vice President - Head of Treasury
Support Operations at Citibank Bahrain, where he gained his experience through the
occupation of several managerial positions heading different departments and units. He
was also involved in the launch of Citi Islamic Investment Banking as he was responsible
for formulating all operational procedures, devising the chart of accounts and products
accounting. Mr. Turki holds an MBA in Investment & Finance from University of Hull, UK.

20 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 Executive Management Team (continued)

Dr. Mohammed Burhan Arbouna

Group Head of Shari’a Compliance

Experience: more than 17 years

Dr. Mohammed Burhan Arbouna holds a PhD in laws

with specialization in Islamic banking and finance from
International Islamic University Malaysia, and Masters in
Comparative Laws. He also holds BA degree in Shari’a
and Higher Diploma in Education from Islamic University,
Medina. He is an expert in Islamic banking and finance since
1997. Before joining Al Salam Bank- Bahrain, Dr. Arbouna was the Shari’a Head and Shari’a
Board member in the Seera Investment Bank B.S.C Bahrain. Prior to that, he worked as the
Head of Shari’a department in the Kuwait Finance House-Bahrain. Also, Dr. Arbouna worked
as Shari’a researcher and consultant for the Accounting and Auditing Organization for Islamic
Financial Institutions (AAOIFI) – Bahrain. Dr. Arbouna lectures on Islamic banking and finance
and gives consultancy on orientation and professional programs for a number of professional
and educational institutions. Dr. Arbouna is a member of Islamic Money Market Framework
(IMMF) steering committee initiated by Central Bank of Bahrain for management of liquidity
among Islamic banks.

Mr. Isa Hasan Maseeh

Group Chief Risk Officer

Experience: more than 18 years

Mr. Isa Maseeh is a risk professional with more than 18

years of experience in the financial sector. His exposure
spans across commercial and investment banking sectors
in Bahrain. Mr. Maseeh joined ASBB as Group Chief Risk
Officer in 2015 with the primary objective of consolidating
the risk activities across the Bank. Prior to joining ASBB,
he was the Chief Risk Officer at BMI Bank. Earlier, Mr. Maseeh held various senior risk
management positions with Islamic and conventional banks including Gulf Finance House
and United Gulf Bank. Having had the opportunity to work across different segments of the
financial industry and be actively involved in the setup of financial institutions, Mr. Maseeh
has managed to develop a well-rounded knowledge and experience base in banking. Mr.
Maseeh holds an MBA (Hons) from DePaul University, USA and a bachelor’s degree in finance
from Concordia University, Canada. He also holds the Chartered Financial Analyst (CFA) and
Professional Risk Manager (PRM) designations.

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 21

 Executive Management Team (continued)

Mr. Hussain Abdulhaq

Head of Treasury and Capital Markets

Experience: more than 15 years

Mr. Hussain Abdulhaq is an experienced Treasurer in the

area of Islamic banking and Capital markets. He spent
most of his 15 years career as treasury specialist where
he was involved in different areas, like Islamic liquidity
management, Islamic capital markets instruments,
development of Islamic complaint investment products and
hedging instruments. He joined Al Salam Bank in 2007 as a senior member in the treasury
team and he was involved in establishing the different functions and business lines of the unit
as well as in charge for the ALCO function. Hussain lead the treasury integration process of
Al Salam Bank and Bahrain Saudi Bank in 2010 and handling the same responsibility with
BMI Bank. Prior joining Al Salam Bank, He worked for Kuwait Finance House (Bahrain),
a leading Islamic Financial institution in the region, for more than 5 years where he was
in charge of the dealing room activities. Mr. Abdulhaq holds an MBA degree in Banking &
Finance with a first honor from University of Bahrain and he is also a Chartered Financial
Analyst (CFA).

Mr. Essa Abdulla Bohijji

Group Chief Auditor

Experience: more than 16 years

Mr. Essa Bohijji has more than 16 years of consulting and

industry experience in the financial services, commercial
entities, governmental bodies, and internal audit. Prior to
joining Al Salam Bank Bahrain, Mr. Bohijji was the Chief
Auditor and Board Secretary of an Islamic Investment Bank
in Bahrain. Mr. Bohijji had also spent seven years with Ernst
& Young where he worked in the Audit and Assurance Services Group before shifting to the
Business Advisory Services that was responsible for Internal Audit and Risk Management
assignments and left as a Senior Manager. Mr. Bohijji currently serves as a Board member
of BMI Bank, a Board and Audit Committee member of Al Salam Bank Algeria, an interim
Board member in BMIO Bank in Seychelles, and a non-executive Audit Committee member
in Manara Developments B.S.C. (c). In addition to that, Mr. Bohijji served from year 2009 as
a Board and Audit Committee Member for Bahraini Saudi Bank prior to the full merger with
Al Salam Bank Bahrain in late 2012. Mr. Bohijji is a qualified Certified Public Accountant,
licensed from the state of New Hampshire and is a member of the American Institute of
Certified Public Accountants. He also holds a B.Sc. in Accounting from University of Bahrain.

22 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 Executive Management Team (continued)

Mrs. Muna Al Balooshi

Group Head of Human Resources and Administration

Experience: more than 18 years

Mrs. Muna Al Balooshi joined Al Salam Bank-Bahrain in 2006

as Group Head of Human Resources. She had a major role in
the Bank’s two acquisitions of the Bahraini Saudi Bank and
BMI Bank in regard to the merger of the Bank’s resources
with those two banks. Mrs. Al Balooshi has an excellent
knowledge of HR policies and Labor Law regulations due to
her long experience as she was the Head of Human Resources at the Court of HRH the Crown
Prince from 2001 till 2006 and prior to that she was working in HR department at KPMG. She
has full responsibility of the Human Resources division and forming the division strategy as
well as assisting directors in top confidential tasks. Mrs. Muna holds an MBA degree from
De Paul University – Chicago and she’s a CIPD Associate.

Mr. Qassim Taqawi

Group Head of Legal

Experience: more than 13 years

Mr. Qassim Taqawi is a veteran legal counsel with more than

13 years of experience in the field of Investment Banking,
Islamic Banking, Retail Banking, Finance, Company Law,
Labor Law, Real Estate and Construction. During his career,
Mr. Taqawi has handled and attained regional exposure in
legal matters covering the GCC, USA, Europe and MENA
region. Following the merger with Al Salam Bank-Bahrain, Mr. Taqawi was appointed in
his current position at Al Salam Bank as the Group Head of Legal handling the group’s
legal affairs. Since 2003, Mr. Taqawi has held a number of senior executive positions in the
region with various Banking & Financial Institutions. In addition to his current executive
responsibilities, Mr. Taqawi serves as a member in management committees including
Investment Committee and Remedial Committee. Mr. Taqawi holds a Bachelor degree (LLB)
in law and is a registered lawyer with the Ministry of Justice & Islamic Affairs in the Kingdom
of Bahrain.

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 23

 Executive Management Team (continued)

Mr. Talal Abdul Aziz Al Mulla

Chief Investments Officer

Experience: more than 17 years

A Certified Public Accountant (CPA), Mr. Talal Al Mulla has

been active in the banking and financial services industry
since 1999. Mr. Al Mulla worked with Ernst & Young Bahrain
being responsible for audit and consulting assignments for
major financial institutions in the region. He joined Al Salam
Bank setting up the Internal Audit function in 2006. In 2009,
Mr. Al Mulla moved to the Investment Department where he has been sourcing and managing
investment opportunities to the Bank. He also sits on the Board of Directors of a number
affiliates and subsidiary companies in which the bank has invested.

Mr. Ahmed Abdulla Saif

Group Head of Strategic Acquisition and
Investment Management

Experience: more than 10 years

Mr. Ahmed Saif brings more than a decade of experience in

the banking sector. Prior to joining Al Salam Bank-Bahrain
in 2008 as an Associate in the Investment Team, he worked
with DBS Singapore as an Investment Analyst. Over the last
8 years, Ahmed has added immense value to the Bank. In
2012 he was the Head of the Investment Middle Office Department, and in 2016 he took the
reigns of the Investment Management Team. Ahmed sits on the Board of a number of ASBB
affiliate and subsidiary companies, including, among others, NS Real Estate Holding, Darari
Investment Company, SAMA Investment Company. Ahmed holds an MSc in Finance and
Financial Law with Honors from SOAS University of London, UK, and a BSc with Honors in
Commerce, majoring in Finance & Economics from DePaul University, USA.

24 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 Executive Management Team (continued)

Mr. Arif Mohammed Janahi

Head of Corporate Banking

Experience: more than 22 years

Mr. Arif Janahi is a well-nurtured commercial banker

with more than 22 years of experience in Operations and
Corporate Banking. He started his career with a well-
known conventional bank before expanding his exposure
with another conventional commercial bank where he was
responsible to promote Corporate Banking products and
services in the local market and the GCC. In 2006, Mr. Janahi joined Al Salam Bank–Bahrain
as Head of Corporate Banking where he was responsible to establish the Department in
liaison with the concerned committees and other departments in Al Salam Bank. Throughout
the last 20 years of banking, Mr. Janahi gained a good experience in both conventional and
Islamic banking backed by strong market network, knowledge of banking products, and
credit assessment. Mr. Janahi holds an MBA from the University of Hull, UK.

Mr. Ali Habib Qassim

Acting Head of Private Banking

Experience: more than 17 years

Mr. Ali Habib Qassim is a professional banker with more than

17 years of experience in many areas including corporate,
Investment and Private Banking. He started his career with
corporate banking where he was responsible to market the
corporate banking products and services in local markets
moving to handling financial institutions and government
relationships. In 2011, Mr. Qassim moved to Al Salam Bank-Bahrain to handle private
banking clients and developing new products, locally and throughout GCC capitalizing on his
investment experience. Mr. Qassim holds a Master Degree of Science from Emerson College,
Boston. USA.

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 25

 Executive Management Team (continued)

Mr. Mohammed Yaqoob Buhijji

Acting Head of Retail Banking

Experience: more than 13 years

Mr. Mohammed Buhijji has over 13 years of consultancy and

banking experience. Prior to joining Al Salam Bank-Bahrain,
Mr. Buhijji worked with Ernst & Young in the Business
Risk Services being responsible of audit and consultancy
services for major financial institutions and governmental
bodies within Bahrain and abroad. In 2006, Mr. Buhijji joined
Al Salam Bank’s Internal Audit with the responsibility to set-up the Internal Audit function
and Bank’s various departments policies and procedures during the establishment of the
Bank. Mr. Buhijji moved to Retail Banking in 2009 establishing key milestones by developing
products, services, core banking system and policies. He had also played an essential role
in the Bank’s two acquisitions of the Bahraini Saudi Bank and BMI Bank integration and
conversion phases. Mr. Buhijji served as a member in the Integration Steering Committee
and also appointed in several management committees to lead the conversion of the bank’s
policies, products and core banking systems. Mr. Buhijji holds an MBA degree from University
of Strathclyde Business School in UK, Glasgow and Bachelors degree in Accounting. He also
attended two Management Executive Programs in Harvard Business School in USA and Ivey
Business School in Canada.

Mr. Khalid Jalili

Acting Head of Finance

Experience: more than 17 years

Mr. Khalid Jalili has more than 17 years of experience in

the field of accounting and finance. He joined Al Salam
Bank-Bahrain in 2009 as the Head of Strategic Support
department. Subsequent to the Bank’s first business
acquisition of Bahraini Saudi Bank B.S.C., he was appointed
as the Acting Chief Financial Officer and was a member in
the Acquisition Steering Committee and ALCO committee. Prior to joining Al Salam Bank, he
had spent seven years working in the financial controls at Gulf International Bank B.S.C., a
wholesale bank based in the Kingdom of Bahrain. Mr. Jalili started his career in the Audit and
Assurance unit at Ernst & Young with the responsibility to carry out audit of different business
sectors. Mr. Jalili holds a Bachelor degree in Accounting from University of Bahrain.

26 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 REGIONAL
GROWTH
Al Salam Bank-Bahrain, in line with its cision to
become a regional force in the Islamic financial
service industry, expanded its geographical
presence through its affiliate banks in Singapore,
Algeria, Kenya and Seychelles.

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 27

 BOARD OF
DIRECTORS’
REPORT TO THE
SHAREHOLDERS
The Directors of Al Salam Bank-Bahrain B.S.C (“the Bank”) have pleasure in submitting their
report to the shareholders accompanied by consolidated financial statements of the Bank
for the year ended 31 December 2016. The consolidated financial statements comprise the
financial statements of the Bank and its subsidiary, BMI Bank B.S.C (c) (together known as
“the Group”).

A lower growth rate in the OECD advanced attributable to a continued focus on the
economies, due to persistently low core banking business. Cost control
commodity prices, weak global trade, and measures during the year witnessed
lesser capital flows continued to hamper operating expenses of the Group decreasing
the global economic growth in 2016, marginally. As of 31 December 2016, total
while persistent low oil prices remained a assets of the Group stood at BD 1,681.3
negative economic force on Bahrain and million (2015: BD 1,656.6 million).
the region. The multiple downgrades of
Al Salam Bank-Bahrain (ASBB) has
Bahrain sovereign rating, as a result of the
witnessed substantial asset growth over
sharp drop in oil prices and a growing fiscal
the last 5 years, having completed two
debt, has created a challenging business
business acquisitions, first with Bahraini
environment for the banking sector.
Saudi Bank in 2009, and the second with
Despite these obstacles, Bahrain’s BMI Bank B.S.C in 2014. In 2016, BMI
economy has remained resilient. Fiscal Offshore Bank Seychelles (“BMIO”) was
consolidation efforts and the activation of handed over to shareholders after being
a large infrastructure pipeline resulted in placed under administration by the Central
the non-oil sector, including the banking Bank of Seychelles (“CBS”) in November
sector, performing reasonably well in 2014. Following CBS handover, BMIO was
2016, underscoring the tangible resilience restructured and rebranded with Seychelles
of Islamic banks and their offering of Pension Fund (“SPF”) becoming a strategic
innovative products and services that are partner and 30% minority shares. CBS
geared to revive investment, and restore approved the rebranding of the entity as
confidence in the Bahrain economy. Al Salam Bank-Seychelles (“ASBS” or
the “Bank”) as suggested by the Group.
Under these circumstances, the Group is
Seychelles is set to be the launching
pleased to report positive results again this
pad to regional markets, and will aim to
year, posting a net profit attributable to
expand by penetrating the banking sector
shareholders of BD 16.2 million for the year
of neighboring countries and create a
ended 31 December 2016, an increase of
bridge between the Gulf Cooperation
31% on the previous year, (2015: BD 12.3
Council countries and the Indian Ocean Rim
million), taking into consideration provisions
countries.
of BD 21.6 million for asset impairment,

28 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 Board Of Directors’ Report To The Shareholders (continued)

... the Group is pleased to report positive

results again this year, posting a net profit
attributable to shareholders of BD 16.2 million for
the year ended 31 December 2016, an increase of 31%
on the previous year, (2015: BD 12.3 million), taking
into consideration recognition of provision of asset
impairment of BD 21.6 million for asset impairment...

Throughout 2016, the Group remained Going forward, the Directors and
focused on maximizing and safeguarding management of Al Salam Bank-Bahrain
shareholder value through sustained growth will leverage the Bank’s enhanced
in core banking activities, investment in infrastructure, resources and improved
profit-yielding sovereign securities, and the strength across core businesses in order
availing of alternative sources of funding at to achieve even better results in 2017. We
competitive costs. The financing portfolio will continue to invest in our business,
grew by 4.1% to BD 706 million during the recognizing the need for excellent customer
reporting period. service, a wide range of customer centric
products, and a strong network to support
The Group continued to adopt a cautious
future growth, whilst supporting the
approach in selecting investments in line
growth and stability of the Islamic Financial
with the Bank’s risk appetite. Aligned with a
services industry in Bahrain and across
focus on stable, income generating assets,
the globe. Your Bank is well positioned to
the Group successfully acquired a stake in
achieve its vision of becoming one of the
USD 130 million (approx.) Multifamily Real
largest Islamic financial institutions in the
Estate portfolio of prime US properties in
region.
Texas and North Carolina that have strong
rental growth and high occupancy levels.
The Group has a robust pipeline of stabilized
assets in the United Kingdom and United
States.

Retained earnings and appropriation of net income BD’000

Balance at beginning of the year 46,803
Net profit for the year – 2016 16,219
Transfer to statutory reserve (1,622)
Proposed dividends (10,705)

Balance at end of the year 50,695

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 29

 Board Of Directors’ Report To The Shareholders (continued)

Directors’ and senior management interest:

As required by the Central Bank of Bahrain rulebook set out below are the interests of
directors and senior managers in the shares of Al Salam Bank-Bahrain B.S.C. and the
distribution of the shareholdings as of 31 December 2016.

31st December 2016

Directors’ shares 1,691,721
Senior managers’ shares 119,331

Total 1,811,052

Directors’ remuneration for 2016 amounted to BD 389,000 (2015: BD 365,000).

2016

% of total
No. of outstanding
No. of shares shareholders shares
Percentage of shares held
Less than 1% 951,702,125 22,928 44.45
1% up to less than 5% 744,960,451 15 34.80
More than 5% 444,268,176 2 20.75

Total 2,140,930,752 22,945 100.00

Shareholders holding over 5% Nationality Holding

Bank Muscat S.A.O.G. Oman 14.74%
Overseas Investment S.P.C. Bahrain 6.01%

The Directors take this opportunity to express their appreciation to the leadership led by His
Majesty King Hamad bin Isa Al Khalifa, HRH the Prime Minister Prince Khalifa bin Salman Al
Khalifa and HRH the Crown Prince, Deputy Supreme Commander and First Deputy Premier
Prince Salman bin Hamad Al Khalifa, the Ministry of Finance, the Ministry of Industry,
Commerce and Tourism, the Central Bank of Bahrain, the Bahrain Bourse, correspondents,
customers, shareholders and employees of the Bank for their support and collective
contribution since the establishment of the Bank and we look forward to their continued
support in the fiscal year 2017.

Shaikha Hessa bint Khalifa bin Hamad Al-Khalifa

Chairperson

15 February 2017
Manama, Kingdom of Bahrain

30 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 DIFFERENTIATED
THROUGH
INNOVATION
Al Salam Bank-Bahrain has won the International
Real Estate Financing Summit – Middle East
(IREF ME 2009) “Award of Excellence for
Outstanding Achievement in Islamic Real Estate
Product Innovation” for Milton Gate Acquisition.
The landmark building is located in the financial
district of the City of London in the close proximity
of other prestigious financial institutions.

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 31

 MESSAGE FROM
THE CEO
2016 was a year characterized by stability and unity. Following the merger of Al Salam Bank-
Bahrain and BMI Bank in 2014, and as a result the major restructuring of the business in
2015, the year witnessed the coming together of people, processes and procedures to form a
single, stronger entity.

Considering the continued challenges posed now includes quality, Shari’a-compliant

by consistently unfavourable global and insurance products.
regional market conditions, Al Salam Bank-
Key to the Group’s success remains the
Bahrain B.S.C. (“Bank”,”Group”) performed
loyalty of our customers. As such, in 2016
well in 2016, underscoring the Group’s
new products were introduced to show our
ability to remain flexible and adapt.
genuine appreciation. These include the
A continued focus on the core banking Danat Al Salam Savings Scheme and a tie up
business, comprising corporate, commercial with Gulf Air that provides the Group’s credit
and retail banking resulted in an impressive card users with Air Mile rewards.
7% increase in gross operating income
Challenging market conditions ensured
to BD 63 million, compared to BD 58.9
the Group continued to adopt a cautious
million in 2015. The net profit attributable to
approach in selecting investments in line
shareholders of the Bank for the year was
with the Board’s risk appetite. Aligned with
BD 16.2 million (2015: BD 12.3 million) after
a focus on stable, income generating assets,
taking into consideration asset provisions of
the Group successfully acquired a stake in
BD 21.6 million (2015: BD 22.9 million).
USD 130 million (approx.) Multifamily Real
Throughout 2016, the Group remained Estate portfolio of prime US properties in
focused on maximizing stakeholder and Texas and North Carolina that have strong
shareholder value whilst offering clients rental growth and high occupancy levels.
a diverse range of Shari’a-compliant
Going forward, the Investment business
innovative products and financial solutions.
remains cautiously optimistic with a strong
Aligned with this focus, the Group leveraged
pipeline of stabilized assets in the UK and
state of the art technology to launch a new
US, and a proven track record of placement
e-statement service that offers even more
capability within the GCC.
convenience to our valuable customers.
A second full-service branch was also The Private Banking business witnessed an
opened in the Muharraq Governorate, exceptional year, increasing the customer
further expanding our growing branch and base by 8%, successfully exiting a number
ATM network, while the implementation of investments, and launching investment
of our new product development strategy opportunities that offer higher returns.
within the retail segment resulted in the
offering of an extended product range that Corporate Social Responsibility (CSR)

32 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 Message From The CEO (continued)

remains at the heart of the Group’s

operations. Testament to this value is the
signing of strategic agreements that support Throughout
the Ministry of Housing in its provision of
affordable housing to the citizens of the
2016, the Group
Kingdom of Bahrain. remained focused
In addition to supporting this endeavor, on maximizing
the Group also supported the Ministry of stakeholder and
Health in the provision of quality healthcare shareholder value
solutions.
whilst offering clients a
An important part of the Group’s CSR
diverse range of Shari’a-
programme is its mission to support the
elevation of the Islamic Banking industry. compliant innovative
In this regard, the Group lent its support products and financial
to the Bahrain Institute of Banking and
solutions.
Finance (BIBF) for the development of an
Islamic finance e-Learning platform that
will revolve around the Standards issued by
the Accounting and Auditing Organization for Al Khalifa and HRH the Crown Prince,
Islamic Financial Institutions (AAOIFI). Deputy Supreme Commander and First
Deputy Premier Prince Salman bin Hamad
Overall the Group maintained a moderate
Al Khalifa for their steadfast leadership
approach to banking practices and relied on
and support. I am also grateful to the
its core competencies in financing activities.
Board of Directors, Ministry of Industry,
The emphasis was on adherence to prudent
Commerce and Tourism, Central Bank of
risk management practices in granting
Bahrain, Bahrain Bourse for their continued
new financing facilities and acquiring
support and guidance. I thank our valuable
investments.
shareholders and loyal customers whose
The capital adequacy continued to reflect a ongoing support is a key element of the
healthy ratio of 21.55% as of the end of the Bank’s future success. Finally, I express my
fiscal year (2015: 20.05%) with the Central sincere gratitude to the team at Al Salam
Bank of Bahrain minimum requirement of Bank Bahrain B.S.C for their hard work
12.5%. and dedication which has always been the
bedrock for our success and I look forward
As we move towards 2017, the Board of for their continued support in 2017.
Directors and Executive Management are
confident that the Group is well placed to
navigate the challenges the years ahead
are sure to bring. The Bank is in the final
stages of fully integrating all of its internal Yousif Abdulla Taqi
processes and procedures, and a strong, Director & Group CEO
unified corporate culture is emerging.

On behalf of all the shareholders and

the Board of Directors, I would like to
take this opportunity to express my deep
appreciation to the wise leadership of the
Kingdom of Bahrain led by His Majesty
King Hamad bin Isa Al Khalifa, HRH the
Prime Minister Prince Khalifa bin Salman

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 33

 ALWAYS REACHING
OUT TO YOU
Al Salam Bank-Bahrain offers its valued clients
with comprehensive range of innovative and unique
Shari’a-compliant financial products and services
through its growing network of branches and
ATMs across Bahrain utilizing the state-of-the-art
technologies.

34 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

MANAGEMENT
REVIEW OF
OPERATIONS AND
ACTIVITY
OPERATING ENVIRONMENT BUSINESS ENVIRONMENT
The global economy entered its sixth year Low oil prices continued to negatively
of stagnation, with sluggish growth in impact Bahrain and the region. As a result,
advanced economies, weak global trade, several rating agencies downgraded the
and lessening capital flows, especially in credit ratings of Saudi Arabia, Oman and
the emerging markets. Modest positive Bahrain during the year. Although Bahrain’s
signals however did emerge, such as more downgraded by Moody’s to Ba2 from
advanced technologies, improved labor force Ba1 reflected growing concern over the
skills, and greater productivity, although Kingdom’s ability to turn around massive
those potentially favorable factors are deficits as a result of the sharp drop in
under pressure from ongoing political and oil prices, despite fiscal consolidation
economic uncertainties around the world. efforts, Bahrain’s economy remained
resilient and better diversified than
In advanced economies, a modest and
other regional economies. Ramped up
uneven recovery is expected to continue,
investment programmes and solid private
with a gradual further narrowing of output
sector expansion resulted in the non-oil
gaps. Global growth projections slowed
sector recording a healthy expansion. In
to 3.1 percent in 2016, reflecting a more
particular, the continued activation of a
subdued (reserved) outlook for advanced
large infrastructure pipeline, with ongoing
economies following the June U.K. vote
implementation of investments in strategic
in favor of leaving the European Union
infrastructure projects partially funded
(Brexit), unsubstantiated expected growth
by the GCC Development Fund, supported
in the United States, and China’s high debt
Bahrain’s economy.
and production capacity issues. These
developments have put further downward
FINANCIAL PERFORMANCE
pressure on global interest rates, as
Against a backdrop of global and regional
monetary policy is now expected to remain
economic and political uncertainty, the
accommodative for a longer period of time
Group underscored its ability to remain
despite the few interest rates hikes already
dynamic and adaptive, posting positive
announced in the United States.
financial results again in 2016. The Group
In emerging markets and developing recorded a net profit attributable to
economies, the challenges are diverse. The shareholders of the Bank for the year of
slowdown and rebalancing of the Chinese BD 16.2 million as of 31 December 2016, an
economy, lower commodity prices, and increase of 31% on the previous year, (BD
strains in some large emerging market 12.3 million 2015), taking into consideration
economies continued to weigh on growth recognition of provision of asset impairment
prospects and will remain as we move into of BD 21.6 million.
2017 where capital flow to these economies
is expected to be limited.
Al Salam Bank-Bahrain B.S.C. Annual Report 2016 35
 Management Review of Operations and Activity (continued)

These encouraging results are attributable mechanism to closely monitor past due
to a steady increase in the core banking facilities.
business comprised of corporate,
commercial and retail banking activities. BANKING ACTIVITIES
The Group reported a 7% increase in gross Retail Banking
operating income from BD 58.9 million to The Retail Banking business remained
BD 63 million in 2016. The Group deployed active in 2016. Underscoring the Group’s
liquidity in high profit yielding sovereign continued commitment to the provision
Sukuk to the value of BD 358.3 million (2015: of dynamic and diversified products and
BD 350.5 million). The Group remained services, innovative savings schemes,
selective in financing in order to enhance new services that leverage cutting edge
asset quality with total assets of the technology, and initiatives and promotions
Group standing at BD 1,681.3 million at 31 that reward customers for their unwavering
December 2016 (BD 1,656.6 million at 31 loyalty and patronage were introduced. A
December 2015). second full-service branch was also opened
in Muharraq Governorate, bringing the
Throughout the reporting period the Group
Bank’s network serving Al Salam Bank and
maintained its focus on maximizing and
BMI Bank (a subsidiary of Al Salam Bank-
safeguarding shareholder value through
Bahrain) customers to 10 branches and 35
sustained growth in core banking activities,
ATMs across the Kingdom.
investment in profit-yielding sovereign
securities, and the availing of alternative Aligned with a product development
sources of funding at competitive costs. As strategy that not only ensures products
the Group moves into 2017, maintaining satisfy customers’ needs but also rewards
a healthy level of liquidity and reducing them for their financial commitment to the
exposure to Real Estate while expanding Bank, a fully Shari’a-compliant savings
core banking activities domestically and scheme was launched. “Danat Al Salam”
within MENA region, remains a strategic offers customers attractive returns and
focus. opportunities to win valuable monthly
and quarterly prizes while giving them
CAPITAL ADEQUACY the flexibility to make regular financial
Al Salam Bank-Bahrain B.S.C. continues to contributions. Additional initiatives to
enjoy strong financial solvency and liquidity. reward customer loyalty included the launch
In accordance with the Basel III capital of a special Credit Card Summer Promotion,
adequacy guidelines, the Bank’s capital and a tie-up with national carrier Gulf
adequacy continued to reflect a healthy Air, whereby customers can earn Gulf Air
ratio of 21.55% as of the end of the fiscal Falconflyer miles, which can be redeemed
year against the Central Bank of Bahrain for a number of benefits, when using any of
minimum requirement of 12.5%. the Bank’s suite of Visa credit cards.

ASSET QUALITY Further adding to the Bank’s existing

The Bank continues to maintain a diversified retail product portfolio, the Bank
conservative approach in selecting new signed a strategic agreement with one of
assets for financing and investments. As the leading insurers, “Takaful International”,
at the end of the fiscal year, 72% of the to facilitate the offering of a suite of Sharia
financing portfolio has been classified under compliant insurance products to customers.
the “satisfactory” category. Total provisions The Bank emphasized its commitment to
for financing portfolio was at BD 46.7 million constantly deliver an enhanced customer
(2015: BD 29.6 million). Additionally, the experience. The period witnessed the launch
Bank has set up a dedicated Asset Remedial of a credit card payment gateway service
and Collection Unit and put in place a robust channel in partnership with Benefit, offering

36 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 Management Review of Operations and Activity (continued)

customers a safe and secure environment position through a cautious approach to the
when paying their credit card bills without selection and booking of quality assets.
the need to visit a branch. Further
The Bank signed two strategic agreements
leveraging state-of-the-art technology
with Eagle Hills and Diyar Al Muharraq that
to enhance customer service, the Bank
makes Al Salam Bank-Bahrain amongst
launched a new e-Statement service in 2016
the first to form a real estate development
that offers added convenience and a higher
escrow account model in the Kingdom of
level of security, through a free-of-cost
Bahrain for the Marassi Al Bahrain and
electronic statement ensuring customers do
Deerat Al Oyoun projects.
not have to wait for the statement to arrive
via the post. In addition to building the corporate
customer base, and maintaining the quality
Highlighting the Bank’s ongoing dedication
of the assets portfolio, Corporate Banking
to corporate social responsibility, a number
acted as an agent for a new BD 138 million
of activities took place in 2016 geared at
syndicated facility for developing over 2,000
facilitating the provision of quality housing
social housing units. The Group continued
to all citizens of Bahrain. The Bank signed
to lend its backing to Tamkeen, increasing
a strategic agreement with Eskan Bank that
the Group’s support by an additional BD 10
allow Bahraini citizens to take advantage of
million. To date, the Group have supported
Mazaya Social Housing financing program
more than 120 Bahraini Small & Medium
from Al Salam Bank when buying units
Enterprises (SME’s) through the scheme.
in the Danaat Al Riffa and Danaat Al Seef
developments. The Bank also signed an
Private Banking
agreement under the scheme with Diyar
Although 2016 presented challenging
Al Muharraq to finance ‘Deerat Al Oyoun’
market conditions, the Private Banking
Social Housing Project end users. In
Department witnessed an exceptional year,
addition, the Bank launched ‘Dari Property
both in terms of financial performance
promotion’ open to all beneficiaries of the
and in the offering of elevated services
“Mazaya” social housing scheme to offer
and innovative products to its exclusive
a range of benefits, including competitive
clientele. During the reporting period the
profit rates, low down payment, monthly
department maintained an unwavering
installments as low as rent, and cash back
focus on service excellence and as a result
rewards for beneficiaries buying properties
the customer base increased by 8% with
in two key projects of Manara Developments
deposits remaining stable and increasing
namely: Kenaz Al Bahrain project in Al
marginally by 1.7%, with funds allocated to
Qadam and Wahati project in Muharraq.
bank investment products representing an
increase in excess of 7%. The department
Corporate Banking
also successfully exited a number of
With a balanced and diversified portfolio,
investments, and launched a USD 20
the Corporate Banking business navigated
million Multi Family Real Estate investment
the challenges of 2016. Post- merger
offering providing clients with investment
consolidation and the forging of new
opportunities that offer higher returns. In
international partnerships assisted the
addition, a BD10 million sovereign Sukuk
Bank in overcoming the regional liquidity
was sold and a BD 40 million Sukuk was
challenges and growing competition for
launched to fund subsidiary real estate
quality assets.
projects. Total placements for the year
Throughout the year the focus remained on exceeded USD 130 million.
building stronger relationships, enhancing
The Department launched its new Visa
the division’s core banking role, and
Infinite, a credit card designed to meet the
maintaining the Bank’s leading market
requirements of a select group of high-

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 37

 Management Review of Operations and Activity (continued)

net-worth individuals. The card offers The Division widened the counterparties list
unparalleled services and features, such introducing their products to new banks and
as easy access to a diverse selection of regions with the IIFM standard document
privileges specially tailored for affluent implementation facilitating an expanded
travelers, with over 500+ premium airport client base.
lounge access, free Gulf Air Falconflyer
The Group continued to invest in high
loyalty miles, multi-trip travel insurance
quality Sukuk while growing the Fixed
coverage of up to USD 1 million, 24 hours
income portfolio through direct and indirect
concierge services amongst other benefits.
exposures to regional sovereign and
Throughout 2016 the strategic focus corporate papers. The Total Fixed income
remained on lowering the cost of funding, portfolio was maintained above USD 1
booking long term strong assets, providing billion, representing one of the largest
robust investment opportunities and forging assets classes held by the Bank.
value added partnerships to facilitate the
In collaboration with the private banking
offering of innovative products and bespoke
team, the division also introduced several
services to the Bank’s valued clients.
tranches of leverage products that
primarily invest in Central Bank of Bahrain
Investments
(CBB) papers. Furthermore, the division
Challenging market conditions ensured
introduced the first of its kind FX trading
the Group continued to adopt a cautious
platform to enable customers to trade in
approach in selecting investments in line
currencies and take advantages of a most
with the Bank’s risk appetite. Aligned with
liquid and dynamic financial market.
a focus on stable, income generating
assets, the Group successfully acquired a In terms of liquidity, the Group enhanced
majority stake in USD 130 million (approx.) the level of liquidity during the year,
Multifamily Real Estate Portfolio consisting substantially improving on 2016 through
of seven properties located in Texas (four) several long term financing transactions
and North Carolina (three) that have strong executed by the Treasury (Islamic
rental growth prospects and high occupancy Repo) through partnership with leading
levels. international banks. Going forward, the
fully integrated BMI and Al Salam Treasury
Going forward, the Investment department
divisions, will continue to enhance liquidity,
remains cautiously optimistic with a strong
and have put in place measures in readiness
pipeline of stabilized assets in the UK and
for Basel III liquidity measures (HQLA) and
US supported by a proven track record of
is well positioned for further asset growth.
placement capability within the GCC.

Operations
Treasury & Capital Markets
2016 witnessed widespread operational
Although 2016 presented serious market
improvements that substantially enhanced
challenges, the Treasury division managed
the Group’s operational effectiveness.
to successfully grow its assets and
efficiently manage its liabilities. Treasury During the year, consolidating the Core
witnessed substantial growth in FX, with Banking System remained a top priority
almost 60% growth achieved attributable to and major milestones were achieved, with
a wider customer base, synergies between a unified system on track for launch mid-
Al Salam Bank and BMI treasury units, and 2017.
a more dynamic repose to market changes
and opportunities through FX trading As per CBB requirements, a number of new
activities. systems were also launched in 2016. These
included Compliance and AML systems,
and the EFTS settlement system. The RTGS

38 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 Management Review of Operations and Activity (continued)

system underwent a number of upgrades acquisition of BMI Bank and consolidating

and will also be launched in 2017. risk reporting frameworks. The risk policies
and procedures have been integrated with
The division continues to leverage state of
a uniform approach adopted at the Group
the art technology to automate processes
level. The Bank’s stress testing framework
and enhance quality, control and feedback
has also been further enhanced in light
measures while accomplishing higher levels
of the developments in the operating
of efficiency. Going forward Operations
environment.
division will remain dedicated to further
reducing turnover time and the delivery of As we move into the new year, ongoing
superior customer service for the benefit of efforts to enhance the overall risk
all stakeholders. management framework will continue,
with a particular emphasis on the further
Information Technology development of internal resources and
2016 witnessed the achievement of major general risk awareness amongst members
milestones for the Information Technology of staff. The risk appetite framework will
Department as it worked to provide the continue to be revisited in order to ensure
Group with state of the art technology alignment with the Bank’s strategy and
that supports operational effectiveness. overall risk exposure. Stress testing and
Integration of the Group’s network systems, ICAAP frameworks will also be reviewed
including the unification of processes with an emphasis on validation of the stress
procedures continued to be a major focus testing scenarios currently carried out by
during 2016 to ensure the delivery of the Bank.
enhanced efficiency and convenience to the
Group’s customers with a fully integrated Know Your Customer
system earmarked for launch in 2017. Appropriate due diligence is rigorously
conducted to ensure that the financial
The Department remains a key player
activities of the Group’s customers are
in the delivery of the Group’s mission to
performed in accordance with the guidelines
provide innovative products and services
issued by the regulatory authorities. The
with superior convenience and customer
Group strictly adheres to the Financial
service excellence by leveraging cutting
Crimes Module of the Central Bank of
edge technology. The achievements in 2016
Bahrain’s rulebook. The module contains
ensure that the Department is on track to
Bahrain’s current anti-money laundering
deliver projects that support this mission in
legislation, developed under the directives
2017.
of the Financial Action Task Force, which is
the international organization responsible
Corporate Governance and Risk
for developing global anti-money laundering
Management
policies.
Effective Corporate Governance and Risk
Management remained a top priority for In 2016 the Group was unceasing in its
the Group in 2016. Compliance with Central mission to enhance its world-class systems.
Bank of Bahrain and other regulatory Aligned with these efforts, the Group
guidelines is a fundamental element of the partnered with three reputable automated
Group’s operating environment and as such Anti-Money Laundering software providers
multiple internal awareness sessions were and Fund Transfer Screening Systems.
held covering topics such as Risk Appetite, These systems are set to further support the
ICAAP, Operational Risk and Information Group in monitoring financial activities and
Security. understanding our customers.

During the year, the focus was on redefining

the risk appetite of the Bank following its

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 39

 Management Review of Operations and Activity (continued)

Human Capital
Attracting, developing and retaining talent,
whilst nurturing an effective and cohesive
corporate culture remained a key focus
for the Group. In particular, providing
training and development opportunities for
a growing staff population is a fundamental
element towards maintaining a corporate
culture of performance excellence.

Aligned with this focus, 6,318 hours were

dedicated to training during the reporting
period. Numerous in house training
sessions were held on topics such as Cyber
Security, VAT, IFRS9, Basel III, Online AML
& Online Training Library, while a number
of staff achieved professional qualifications
such as CIMA, PRM (Professional Risk
Manager), ADIF, (Advance Diploma in
Islamic Finance), and PMP. In addition,
the Bank participated in BIBF’s Project
Management Convention to offer Bank staff
high caliber trainers and a comprehensive
range of project management programmes
and workshops.

The Bank is committed to good corporate

citizenship. Underscoring this pledge, 30
young Bahrainis were hosted as part of the
Annual Summer Internship Programme.
The programme, which has been running
for the last 10 years, has hosted over 240
students from University of Bahrain as
well as at other local and international
universities to date. Further underscoring
our dedication to Bahrain’s youth and
bridging the gap between education and the
workforce, the Bank continued its support
of INJAZ Bahrain, a prominent Bahraini
Youth Leadership program. More than 20
Students were offered an insight into the
world of Islamic banking as part of the “Job
Shadow” Programme where 29 ASBB staff
volunteered their time to share their career
experience and expertise, as the Bank
played host for the ICamp Coordinators
meeting.

40 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 STRIVING
FOR THE UNIQUE

Launch of Al Salam Asia REIT Fund, the world’s

first Asian REIT fund that invests along Shari’a
principles.

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 41

 CORPORATE
GOVERNANCE
REPORT
CORPORATE GOVERNANCE PRACTICE
The Bank aspires to the highest standards of ethical conduct: doing what it says; reporting
results with accuracy and transparency and maintaining full compliance with the laws,
rules and regulations that govern the Bank’s business. Since 2010 when the new Corporate
Governance Code was introduced by the Central Bank of Bahrain, the Bank has been
implementing several measures to enhance its compliance with the corporate governance
rules. A separate section on the status of compliance with the corporate governance rules
and High Level Controls Module is included in this report.

SHAREHOLDERS
Major Shareholders as of 31 December 2016

Country of
Name No. of shares % Holding
origin
Bank Muscat (S.A.O.G.) Oman 315,494,795 14.74
Overseas Investment S.P.C. Bahrain 128,773,381 6.01
Al Rushd Investments W.L.L. UAE 105,000,000 4.90
Tasameem Real Estate Company L.L.C. UAE 102,264,615 4.78
D S L Yachts W.L.L. UAE 77,450,000 3.62
First Energy Bank B.S.C. Bahrain 73,884,098 3.45
Royal Court Affairs, Sultanate of Oman Oman 70,825,359 3.31
Securities and Investment Company B.S.C. (c) Bahrain 63,385,798 2.96
Gimbal Holding Company S.P.C. Bahrain 40,553,633 1.89
National Bank of Abu Dhabi PJSC UAE 38,500,000 1.80
Aabar Investments PJSC UAE 38,000,000 1.77
Sayed Hussain Ali Alawy AlQatary Bahrain 27,720,321 1.29
Al Sueban Company Bahrain 26,250,000 1.23
Global Express Company W.L.L. Bahrain 25,000,000 1.17
Abdulla Salem Abdulla Salem Al Hussaini UAE 23,352,634 1.09

42 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 Corporate Governance Report (continued)

Shareholding – 31 December 2016

No. of % of outstanding
Category No. of shares shareholders shares
Less than 1% 951,702,125 22,928 44.45
1% to less than 5% 744,960,451 15 34.80
5% to less than 10% 128,773,381 1 6.01
10% to less than 20% 315,494,795 1 14.74
20% up to less than 50% - - -
50% and above - - -

Total 2,140,930,752 22,945 100.00

The outstanding ordinary share ownership of the Bank is distributed as follows:

Ownership
Nationality No. of shares percentage
Bahraini
Government - -
Institutions 414,899,009 19.38
Individuals 131,706,474 6.15
GCC
Government 76,005,223 3.56
Institutions 857,795,440 40.06
Individuals 461,088,768 21.54
Other
Institutions 99,659,181 4.65
Individuals 99,776,657 4.66

Total 2,140,930,752 100.00

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 43

 Corporate Governance Report (continued)

BOARD OF DIRECTORS and “independent non-executive” directors

The Board of Directors provides central is as per definitions stipulated by the
leadership to the Bank, establishes its Central Bank of Bahrain.
objectives and develop the strategies that
direct the ongoing activities of the Bank Mandate of the Board of Directors and
to achieve these objectives. Directors Directors’ Roles and Responsibilities
determine the future of the Bank through The principal role of the Board of
the protection of its assets and reputation. Directors (the Board), is to oversee the
They will consider how their decisions implementation of the Bank’s strategic
relate to “stakeholders” and the regulatory initiatives and its functioning within
framework. Directors shall apply skill and the agreed framework, in accordance
care in exercising their duties to the Bank with relevant statutory and regulatory
and are subject to fiduciary duties. Directors structures. The Board is also responsible
shall be accountable to the shareholders of for the consolidated financial statements
the Bank for the Bank’s performance and of the Group. The Board ensures the
can be removed from office by them. adequacy of financial and operational
systems and internal control, as well as the
The primary responsibility of the Board is to
implementation of corporate ethics and the
provide effective governance over the Bank’s
code of conduct. The Board has delegated
affairs for the benefit of its shareholders,
responsibility for overall management of the
and to balance the interests of its diverse
Bank to the Chief Executive Officer.
constituencies including its customers,
correspondents, employees, suppliers and The Board reserves a formal schedule of
local community. In all actions taken by matters for its decision to ensure that the
the Board, the directors are expected to direction and control of the Bank rests with
exercise their business judgment in what the Board. This includes strategic planning,
they reasonably believe to be in the best performance reviews, material acquisition
interests of the Bank. In discharging that and disposal of assets, capital expenditure,
obligation, directors may rely on the honesty authority levels, appointment of auditors
and professional integrity of the Bank’s and review of the financial statements
senior executives and external advisors and and financing activities including annual
auditors. operating plan and budget, ensuring
regulatory compliance and reviewing
Board Composition the adequacy and integrity of internal
The Board consists of members of high- controls. All policies pertaining to the
level professional skills and expertise. Bank’s operations and functioning are to be
Furthermore, in compliance with the approved by the Board.
corporate governance requirements, the
Each Director holds the position for
Board Committees consist of Members
three years, after which he must present
with adequate professional background and
himself to the Annual General Meeting
experience. The Board periodically reviews
of shareholders for re-appointment. The
its composition and the contribution of
majority of ASBB Directors (including
Directors and Committees.
the Chairman and/or Vice Chairman) are
The appointment of Directors is subject required to attend the Board meetings in
to prior screening by the Remuneration, order to ensure a quorum.
Nomination and Corporate Governance
Committee and the Board of Directors
as well as approval by the Shareholders
and the Central Bank of Bahrain. The
classification of “executive”, “nonexecutive”

44 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 Corporate Governance Report (continued)

Board Elections System e. Has abused his membership by

Article 26 of the Bank’s Articles of performing acts that may constitute
Association provides the following: a competition with the Company or
caused actual harm to the Company.
1. The Bank shall be administered by a
Independence of Directors
Board of Directors consisting of not
An independent director is a director whom
more than fourteen members and not
the Board has specifically determined, has
less than five members. The Board’s
no material relationship which could affect
term shall be three years which may be
his independence of judgment, taking into
renewed.
account all known facts. The Directors have
2. Each shareholder owning 10% or more disclosed their independence by signing the
of the capital may appoint whoever Directors Annual Declaration whereby they
represents him on the Board to the have declared that during 2016 that they
same percentage of the number of the have met all the conditions stipulated under
Board members. His right to vote shall Appendix A of the Corporate Governance
be forfeited for the percentage he has Code.
exercised to appoint his representative.
In 2016, the members of the Board were:
If a percentage is left after exercising
his right to nominate, he may use such Independent and Non-executive Directors
percentage to vote.
1. H.H. Shaikha Hessa bint Khalifa
3. Other members of the Board shall be Al Khalifa - Chairperson
elected by the General Assembly by 2. H.E. Shaikh Khalid Bin Mustahail Al
secret ballot. Mashani - Vice Chairman
3. Mr. Hussein Mohammed Al Meeza
The Board of Directors shall elect, by
4. Mr. Salman Saleh Al Mahmeed
secret ballot, a Chairman and one or more
5. Mr. Essam Bin Abdulkadir Al Muhaidib
Vice Chairman every three years. The
Vice Chairman shall act for the Chairman 6. Mr. Mohamed Shukri Ghanem
during his absence or if there is any barrier 7. Mr. Khalid Salem Al-Halyan
preventing him. 8. Mr. Sulaiman bin Mohamed Al Yahyai
Article 29 of the Article of Association 9. Mr. Hisham Saleh Al Saie
covers the “Termination of Membership
Executive and Non-independent Directors
in the Board of Directors”. It provides the
1. Mr. Yousif Abdulla Taqi
following:
All current Directors were elected for a
A Director shall lose his office on the Board
three-year term on 24 February 2015.
in the event that he:

a. Fails to attend four consecutive Induction and Orientation for New Directors
meetings of the Board in one year When the new Board of Directors was
without an acceptable excuse, and the elected on 24 February 2015, all directors
Board of Directors decides to terminate were provided with information related to
his membership; the Corporate Governance guidelines, the
b. Resigns his office by virtue of a written Board and Committee Charter, Committee
request; and the Code of Conduct policies and other
documents.
c. Forfeits any of the provisions set forth in
Article 26 of the Articles of Association;
d. Is elected or appointed contrary to the
provisions of the Law; and

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 45

 Corporate Governance Report (continued)

Evaluation of Board Performance Remuneration of Directors

Members of the Board of Directors have Remuneration of the Directors as provided
been requested to assess their self- by Article 36 of the Articles of Association
performance, how the Board of Directors’ states the following:
operate, evaluate the performance of
“The General Assembly shall specify the
each committee in light of the purposes
remuneration of the members of the Board
and responsibilities delegated to it, their
of Directors. However, such remunerations
attendance and their involvement in the
must not exceed in total 10% of the net
decision making process. Below is a
profits after deducting statutory reserve
summary of the evaluation results:
and the distribution of dividends of not
• The directors self-assessment results less than 5% of the paid capital among
were either above expectation or the shareholders. The General Assembly
satisfactory in most areas, including may decide to pay annual bonuses to the
directors’ skills and experience, Chairman and members of the Board of
understanding of the Bank’s business Directors in the years when the Company
and Board operations. does not make profits or in the years
when it does not distribute profits to the
• Board members have identified certain
shareholders, subject to the approval of
objectives moving forward such as
the Minister of Industry, Commerce and
enhancing the organic growth of the
Tourism.
Bank, building a strong succession
plan, emphasize on diversified revenue The Board, based upon the recommendation
stream, sourcing quality investments in of the Remuneration and Nomination
addition to the focusing on the strategic Committee and subject to the laws and
plans of the Bank. regulations, determines the form and
amount of director compensation subject
• The performance results of the
to final approval of the shareholders at the
Chairperson, Committee chairs and
Annual General Assembly meeting. The
the performance of different Board
Remuneration and Nomination Committee
committees were mostly above
shall conduct an annual review of directors’
expectation.
compensation.”
• Committee chairs and members have
Per the Directors’ Appointment Agreement,
identified different objectives moving
the structure and level for the compensation
forward; including but not limited to:
for the Board of Directors consist of the
1. Guide Management to accomplish following:
the Board’s objectives and adhere to
1. Annual remuneration subject to the
policies and long term goals.
annual financial performance of the
2. Avoiding troublesome potential Bank and as per the statutory limitation
investments. of the law.

3. Assist Management in focusing on 2. The total amount payable to each

profitable investments. Board member with respect to Board
and Committee meetings attendance
4. Resolving long outstanding and shall be taken into consideration when
legacy matters. determining each member’s annual
remuneration.
3. The remuneration of the Board of
Directors will be approved by the
shareholders at the Annual General
Assembly.
46 Al Salam Bank-Bahrain B.S.C. Annual Report 2016
 Corporate Governance Report (continued)

In addition to the above, Directors who are employees of the Bank shall not receive any
compensation for their services as directors. Directors who are not employees of the Bank
may not enter into any consulting arrangements with the Bank without the prior approval of
the Board. Directors who serve on the Audit Committee shall not directly or indirectly provide
or receive compensation for providing accounting, consulting, legal, investment banking or
financial advisory services to the Bank.

The Board Charter

The Board has adopted a Charter which provides the authority and practices for governance
of the Bank. The Charter was approved by the Board with the beginning of its term in 2012
and includes general information on the composition of the Board of Directors’, classification
of Directors’, Board related Committees, Board of Directors’ roles and responsibilities, Board
of Directors’ code of conduct, Board remuneration and evaluation process, insider dealing,
conflict of interest and other Board related information.

Conflict of Interest
The Bank has a documented procedure for dealing with situations involving “conflict of
interest” of Directors. In the event of Board or its Committees considering any issues
involving “conflict of interest” of Directors, the decisions are taken by the full Board/
Committees. The concerned Director abstains from the discussion/ voting process. These
events are recorded in Board/ Committees proceedings. The Directors are required to inform
the entire Board of (potential) conflicts of interest in their activities with, and commitments
to, other organizations as they arise and abstain from voting on the matter. This disclosure
includes all material facts in the case of a contract or transaction involving the Director.

Code of Conduct
The Board has an approved Code of Conduct for ASBB Directors. The Board has also
approved a Code of Ethics for the Executive Management and staff that include
“whistleblowing” procedures. The responsibility for monitoring these codes lies with the
Board of Directors. The Directors’ “Code of Conduct” is published on the Bank’s website. The
directors’ adherence to this Code of Conduct is periodically reviewed.

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 47

 Corporate Governance Report (continued)

Board Meetings and Attendances

The Board of Directors meets at the summons of its Chairperson or her Deputy (in event
of his absence or disability) or if requested to do so by at least two Directors. According to
the Bahrain Commercial Companies Law and the Bank’s Articles of Associations, the Board
meets at least four times a year. A meeting of the Board of Directors shall be valid if attended
by half of the members in person. During 2016, five Board meetings were held at the Bank’s
premises as follows:

Board Meetings in 2016 - Minimum Four Meetings Per Annum

Members 9 Feb 25 Apr 20 Jun 31 Oct 5 Dec

H.H. Shaikha Hessa bint Khalifa √ √ √ √ √

Al Khalifa

Shaikh Khalid bin Mustahail √ √ √ √ √

Al Mashani
Mr. Hussein Mohamed Al Meeza √ √ √ √ √
Mr. Salman Saleh Al Mahmeed √ √ √ √ √
Mr. Essam Abdulkadir Al Muhaidib √ √ √ √ √
Mr. Sulaiman Mohammed Al Yahyai √ √ √ √ √
Mr. Mohamed Shukri Ghanem √ √ √ √ √
Mr. Hisham Saleh Al Saie √ √ √ √ √
Mr. Khalid Salim Al Halyan √ √ √ √ √
Mr. Yousif Abdulla Taqi √ √ √ √ √
* As per the CBB Rulebook , volume 2, the full Board should meet once every quarter. The Board of ASBB did
not hold a meeting for Q3 2016, however the Audit and Risk committee met during September.

Directors’ Interests
Directors’ shares ownership in two-year comparison as on 31 December:

No. of shares
Members 2016 2015
H.H. Shaikha Hessa Al-Khalifa 100,000 100,000
Mr. Essam Bin Abdulkadir Al Muhaideb 100,000 100,000
Al Muhaideb Holding 4,314,522 4,314,522
Mr. Hussain Al-Meeza 462,819 462,819
Top Enterprise W.L.L 925,000 925,000
Mr. Salman Saleh Al Mahmeed 100,000 100,000
Mr. Yousif Abdulla Taqi 818,734 818,734
H.E. Shaikh Khalid bin Mustahail Al Mashani 0 0
Mr. Sulaiman Al Yahyai 0 0
Mr. Hisham Al Saie 0 0
Mr. Mohammed Ghanem 0 0
Mr. Khalid Al Halyan 10,000 10,000

48 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 Corporate Governance Report (continued)

Related Entities
The following shareholder is related to Mr. Hussein Al Meeza:
• Top Enterprises L.L.C. owns 925,000 shares

The following shareholder is related to Mr. Essam Al Muhaideb:

• Al Muhaideb Holding owns 4,314,522 shares

Approval Process for Related Parties’ Transactions

The Bank has a due process for dealing with transactions involving related parties. Any
such transaction will require the unanimous approval of the Board of Directors. The nature
and extent of transactions with related parties are disclosed in the consolidated financial
statements under note 31 - related party transaction.

Material Transactions that require Board Approval

While any transaction above BD 5 million and up to BD 10 million requires the approval of the
Executive Committee of the Board of Directors, any transaction above BD 10 million requires
the approval of the Board of Directors of the Bank. In addition, when acquiring 20% of a
company Board approval is required regardless of the amount.

Directorships held by Directors on Other Boards

The High Level Controls Module provides that no director should hold more than three
directorships in Bahrain public companies. All members of the Board of Directors met this
requirement.

Board Committees
The Board level committees are formed, and the Board of Directors appoints their members,
at the beginning of each Board term. They are considered the high level link between the
Board and the Executive Management. The objective of these committees is to assist the
Board in supervising the operations of the Bank. The Committee reviews issues that are
submitted by the management to the Board and makes recommendations to the Board for
their final review.

Below are certain information relating to the work of certain Board Committees during the
year 2016, summary of the dates of Committee meetings held, Directors’ attendance and a
summary of the main responsibilities of each Committee.

The full texts for the Terms of Reference for Board Committees (Executive Committee, Audit
and Risk Committee, and Remuneration, Nomination and Corporate Governance Committee)
are published on the Bank’s website.

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 49

 Corporate Governance Report (continued)

Executive Committee
Committee Meetings in 2016 - Minimum four meetings per annum.

Six Committee meetings were held during 2016 as follows:

Members 21 Jan 24 Mar 20 Apr 30 May 18 Oct 4 Dec

Mr. Hussein Mohamed Al Meeza √ √ √ √ √ √

(Chairman)
Mr. Essam Abdulkadir Al Muhaidib - √ √ √ √ -
Mr. Sulaiman Mohammed Al Yahyai √ √ √ - √ √
Mr. Mohamed Shukri Ghanem √ √ - √ √ √
Mr. Yousif Abdulla Taqi √ √ √ √ √ √
Mr. Hisham Saleh Al Saie* √ N/A N/A N/A N/A N/A

*Member of the committee during the previous term.

Summary of responsibilities: Deputizing the Board on matters pending decisions

between Board meetings, considering and reviewing management’s operational reports
and regulatory and strategic developments, reviewing and approving credit and market
risk proposals in excess of the authority limits of the relevant committees, reviewing
management’s recovery procedures for problem loans and requirements for provisioning.

Audit and Risk Committee

Committee Meetings in 2016 - Minimum four meetings per annum.

Four Committee meetings were held during 2016 as follows:

Members 8 Feb 24 Apr 25 Sep 30 Oct

Mr. Salman Al Mahmeed (Chairman) √ √ √ √

H.E. Shaikh Khalid bin Mustahil Al Masheni √ √ √ √
Mr. Khalid Salim Al Halyan √ √ √ √

Summary of responsibilities: Reviews the internal audit program and internal control
system, considers major findings of internal audit review, investigations and management’s
response, ensures coordination among internal and External Auditors, monitors trading
activities of key persons and ensures prohibition of the abuse of inside information and
disclosure requirements and reviews the periodic risk reports.

50 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 Corporate Governance Report (continued)

Remuneration, Nomination and Corporate Governance Committee

Committee Meetings in 2016 - Minimum two meetings per annum.

Two meetings were convened during 2016:

Members 3 Apr 4 Dec

H.H. Sh. Hessa bint Khalifa Al Khalifa (Chairman) √ √

Mr. Khalid Salim Al Halyan √ √
Mr. Hisham Saleh Al Saie   √ √

Summary of responsibilities: Make specific recommendations to the Board of Directors’

on both remuneration policy and individual remuneration packages for the Chief Executive
Officer and other senior managers. Evaluate senior management’s performance in light of
the Bank’s corporate goals. Make recommendations to the Board from time to time as to the
changes the committee believes to be desirable to the size of the Board or any committee of
the Board.
Oversees and monitors the implementation of the governance policy framework. Reviews on
an annual basis the Bank’s compliance with the respective Corporate Governance rules and
regulations as well as the Board’s and subcommittees’ charters. Reviews on an annual basis
the Shari’a Supervisory Board’s compliance with its approved charter.

SHARI’A SUPERVISORY BOARD

Al Salam Bank-Bahrain is guided by a Shari’a Supervisory Board consisting of five

distinguished scholars. The Board reviews the Bank’s activities to ensure that all products
and investment transactions comply fully with the rules and principles of Islamic Shari’a.

The Board meets at least 4 times a year. Its members are remunerated by annual retainer fee
and sitting fees per meeting attended, with travel expenses reimbursed as appropriate. Its
members are not paid any performance-related remuneration.

EXECUTIVE MANAGEMENT

The Board delegates the authority for management of the Bank to the Group Chief Executive
Officer. The Group CEO and Executive Management are responsible for implementation
of decisions and strategies approved by the Board of Directors and the Shari’a Fatwa and
Supervisory Board.

Senior Managers’ Interests

The number of shares held by the senior managers, in two-year comparison, as on 31
December is as follows:

Shares
Members
2016 2015
Dr. Mohammed Arbouna 336 336
Mr. Essa Bohijji 118,995 96,495

Total 119,331 96,831

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 51

 Corporate Governance Report (continued)

Management Committees
The Chief Executive Officer is supported by a number of management committees each
having a specific mandate to give focus to areas of business, risk and strategy. The various
committees and their roles and responsibilities are:

Committee Roles and responsibilities

Recommending the risk policy and framework to the Board.

Its Primary role is the selection and implementation of risk
management systems, portfolio monitoring, stress testing,
Credit/Risk Committee risk reporting to Board, Board Committees, Regulators and
Executive Management. In addition to these responsibilities,
individual credit transaction approval and monitoring is an
integral part of the responsibilities.

This Committee’s primary responsibility is to review the

Asset Liability Committee trading and liquidity policy for the overall management of the
balance sheet and its associated risks.

The role of the Committee is to review and approve all

transactions related to corporate and real estate investments
and monitoring their performance on an ongoing basis.
Investment Committee In addition, the Committee is responsible to oversee the
performance of the fund managers and recommend exit
strategies to maximize return to its investors.

TSC oversees the overall Information Technology (IT) function

of the bank. The committee members consist of senior
Technology Steering management, business heads and chaired by the Chief
Committee (TSC) Operating Officer. The committee reviews major IT projects
and sets their priority. It supervises the implementation of
the approved IT annual plan are met within set deadlines and
budgetary allocations.

Executive Management Compensation customers are performed in accordance

The performance bonus of the Chief with the guidelines issued by the regulatory
Executive Officer is recommended by authorities.
the Remuneration and Nomination
The Bank continuously endeavors to
Committee and approved by the Board. The
enhance the Compliance and Anti Money
performance bonus of senior management
Laundering systems and in that process,
is recommended by the Chief Executive
agreements have been signed with leading
Officer for review and endorsement by the
companies to automate the process of
Remuneration and Nomination Committee
monitoring. The implementation would
subject to Board approval.
further increase the effectiveness of
monitoring the client activities and further
COMPLIANCE
enable the Group to understand its
The Bank has in place comprehensive customers and their financial activities.
policies and procedures to ensure full The Bank adheres to the Financial Crimes
compliance with the relevant rules and Module of Central Bank of Bahrain’s
regulations of the respective regulators. rulebook. The module contains Bahrain’s
Due diligence is performed to ensure current anti-money laundering legislation,
that the financial activities of the Bank’s developed under the directives of the
Financial Action Task Force, which is the

52 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 Corporate Governance Report (continued)

international organization responsible for EMPLOYEE RELATIONS

developing global anti-money laundering
Al Salam Bank is committed to promoting
policies.
a diverse and inclusive environment,
REMUNERATION AND APPOINTMENT OF and encourages understanding of the
THE EXTERNAL AUDITORS individuality and creativity that each
employee uniquely brings to the Bank.
During the Annual General Assembly Employees are hired and placed on the
Meeting held on 29 February 2016, the basis of ability and merit. Evaluation of
shareholders approved the appointment employees is maintained on a fair and
of Ernst & Young as external auditors consistent basis.
for the year ending 31 December 2016 In line with the Bank’s policy of being on
and authorized the Board of Directors to equal opportunity firm and as part of Central
determine their remuneration. Bank of Bahrain’s Rulebook and Corporate
Governance requirements, the Bank shall
INTERNAL CONTROL not employ relatives of employees up to the
4th degree.
Internal control is an active process that is
continually operating at all levels within the Existing employees must alert the Human
Bank. Resources of any relatives or relationship
of other employees or candidates being
The Bank has established an appropriate
interviewed. Failure to do so and the
culture to facilitate an effective internal
employee will subject to disciplinary
control process and for monitoring its
action pursuant to the Law No. 36 of 2012
effectiveness on a periodic basis. Every
Promulgation of the Labour Law in the
employee of the Bank participate in the
Privet Sector and the Bank’s Disciplinary
internal control process and contribute
Guidelines.
effectively by identifying risk at an earlier
stage and implementing mitigating controls
at optimum cost. Residual risk is properly
communicated to the senior management
and corrective actions are taken.

KEY PERSONS POLICY

The Bank has established a Key Persons’

Policy to ensure that Key Persons are aware
of the legal and administrative requirements
regarding holding and trading of the Bank’s
shares, with the primary objective of
preventing abuse of inside information. Key
Persons are defined to include the Directors,
Executive Management, designated
employees and any person or firm
connected to the identified Key Persons.
The ownership of the Key Persons’ Policy is
entrusted to the Board’s Audit Committee.

The Key Persons’ Policy is posted on the

Bank’s website.

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 53

 Corporate Governance Report (continued)

COMMUNICATION POLICY Bank reinforces clarity by adhering to a

well-defined visual identity in its external
The Bank recognizes that active
communications.
communication with different stakeholders
and the general public is an integral part of The Bank’s formal communication material
good business and administration. In order is provided in both Arabic and English
to reach its overall goals for communication, languages. The Bank maintains a Legal
the Bank follows a set of guiding principles Policy published on its website: www.
such as efficiency, transparency, clarity and alsalambahrain.com that includes terms
cultural awareness. and conditions on the use of information
published on the site.
The Bank uses modern communication
technologies in a timely manner to convey The annual reports and quarterly financial
messages to its target groups. The Bank statements, Board Charter and Corporate
shall reply without unnecessary delay, Governance report are published on the
to information requests by the media Bank’s website. Shareholders have easy
and the public. The Bank strives in its access to various types of forms including
communication to be as transparent and proxies used for the Annual General
open as possible while taking into account Meeting. In addition, forms are also
bank confidentiality. This contributes to available online to file complaints or make
maintaining a high level of accountability. inquiries which are duly dealt with. The
The Bank also proactively develops contacts Bank regularly communicates with its staff
with its target groups and identifies through internal communications to provide
topics of possible mutual interest. The updates of the Bank’s various activities.

Consumer / Investor Awareness Programmes and Tools

To fulfill its goals for external communications, promoting its products and communicating
with its stakeholders, ASBB employs a variety of communications tools. The most important
of them are listed below:

Seminars, bilateral contacts, website, newsletter, media

Customers campaigns, corporate presentations, speeches, publications,
brochures, leaflets, Radio and TV advertising, SMS etc.

Publications, road shows (mostly bilateral contacts), Internet,

Investors media, investor presentations, wire services, brochures,
leaflets, advertising etc.

Regulatory & Institutional contacts, seminars, visits, bilateral contacts,

Governmental Internet, newsletter, media, publications (in particular the
Authorities Annual Report), brochures, leaflets, etc.

Press releases, interviews, speeches, background seminars,

Media Communications etc.

General Public Media, other key target groups as multipliers.

Communications

54 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 Corporate Governance Report (continued)

WHISTLE BLOWING POLICY

The Bank has a whistle blowing policy with designated officials to whom the employee can
approach. The policy provides adequate protection to employees for any reports in good faith.

The Board’s Audit Committee oversees the implementation of this policy.

The directors have adopted the following code of conduct in respect of their behavior:

• To act with honesty, integrity and in • Not to agree to the business of the Bank
good faith, with due diligence and care, being carried out, or cause or allow the
in the best interest of the Bank and its business to be carried out, in a manner
stakeholders; likely to create a substantial risk of
serious loss to the Bank’s creditors;
• To act only within the scope of their
responsibilities; • To treat fairly and with respect all of the
Bank’s employees and customers with
• To have a proper understanding of
whom they interact;
the affairs of the Bank and to devote
sufficient time to their responsibilities; • Not to enter into competition with the
Bank;
• To keep confidential Board discussions
and deliberations; • Not to demand or accept substantial gifts
from the Bank for himself/herself or his/
• Not to make improper use of information
her associates;
gained through the position as a director;
• Not to take advantage of business
• Not to take undue advantage of the
opportunities to which the Bank is
position of director;
entitled for himself/ herself or his/her
• To ensure his/her personal financial associates;
affairs will never cause reputational loss
• Report to the Board any potential conflict
to the Bank;
of interest, and
• To maintain sufficient/detailed knowledge
• Absent themselves from any discussions
of the Bank’s business and performance
or decision-making that involves a
to make informed decisions;
subject in which they are incapable
• To be independent in judgment and of providing objective advice or which
actions and to take all reasonable steps involves a subject of proposed conflict of
to be satisfied as to the soundness of all interest.
decisions of the Board;

• Not to agree to the Bank incurring an

obligation unless he/she believes at
the time, on reasonable grounds, that
the Bank will be able to discharge the
obligations when it is required to do so;

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 55

 Corporate Governance Report (continued)

ORGANIZATIONAL STRUCTURE

SHAREHOLDERS

Fatwa and Shari’a

Supervisory Board

Board Of Directors

Executive Committee

Remuneration, Nomination
& Corporate Governance
Committee

Audit and Risk Committee

Group Chief Executive Officer

Board Secretary Internal Audit

Shari’a Compliance Compliance

Human Resources Risk

& Administration

Deputy Group CEO Banking First Deputy Group CEO Deputy Group CEO
Strategic Development

Private Banking Acting Chief Operating Officer Treasury & Capital Markets

Corporate Banking Information Technology Strategic Acquisition &

Investment Management
Operations
Retail Banking Investments
Internal Control

Corporate Communications FIG & International Banking

Remedial & Collections

Finance

Legal

Credit Administration

56 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 Corporate Governance Report (continued)

CHANGES IN MANAGEMENT AND PENALTIES

REPORTING LINES DURING 2016
For ASBB (Solo)
Direct Reports to the Group CEO During 2016: An amount of BD 5.8 thousand
• Dr. Anwar Al Sada – First Deputy Group was paid as penalty to the Central Bank of
CEO Bahrain (CBB) for the failure to comply with
CBB requirements relating to Paragraphs
• Mukundan Raghavachari – Deputy Group
BR-1.3.1 and BR-2.2.4 of Volume 2 of the
CEO - Strategic Development
CBB Rulebook to submit the following
• Anwar Murad – Deputy Group CEO -
reports to CBB before the respective
Banking
deadline dates:
• Seema Al Kooheji – Board Secretary
(Indirect) 1. Details of the total remuneration.

2. Progress report on private placements

Direct Reports to First Deputy Group CEO
on education experts.
• Abdulkarim Turki – Acting Chief
Operating Officer The Bank was required to pay a net of
BD 4,000 for the late compliance of
• Elias Murad – Group Head of Credit
Electronic Fund Transfer System (EFTS).
Administration
• Qassim Taqawi – Group Head of Legal
For BMI (Solo)
• Khalid Jalili – Acting Head of Finance During 2016: An amount of BD 200 was paid
as penalty to the Central Bank of Bahrain
Direct Reports to Deputy Group CEO - (CBB) for the failure to comply with CBB
Banking requirements relating to Paragraphs BR-
• Ali Qassim – Acting Head of Private 3.1.7A which requires the Bank to submit
Banking details of their large exposure within 20
• Arif Janahi – Head of Corporate Banking calendar days.
• Mohammed Buhijji – Acting Head of Hence, the total regulatory penalties of the
Retail Banking Group amounted to BD 10,000.

Direct Reports to Deputy Group CEO -

Strategic Development
• Ahmed Saif – Group Head of Strategic
Acquisition & Investment Management
• Talal Al Mulla – Chief Investments
Officer
• Hussain Abdulhaq – Head of Treasury &
Capital Markets
• Sadiq Shaikh – Head of FIG &
International Banking
• Harish Venkatakrishnan – Head of
Investment Administration

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 57

 A MISSION TO
DELIVER
COMPREHENSIVE SERVICES

Staying true to the values of Al Salam Bank-

Bahrain, the Bank invested in a range of
investment portfolio in diverse sectors such
as logistics, alternative energy, education,
hospitality and real estate development of major
international residential and office projects in
strategic countries varying from USA to Europe
and Asia.

58 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

REMUNERATION
POLICY
This document has been prepared in accordance with CBB remuneration disclosure
requirements for Islamic Banks under High Level Controls Module. These requirements are
in addition to the disclosures published in the Annual Report.

CORE REMUNERATION POLICY • Variable pay will be determined based on

The fundamental principles underlying achievement of targets at the Bank level,
our remuneration policy which has been unit level and individual level;
approved by the Board of Directors and the
• Variable pay scheme is designed in a
shareholders of the bank are:
manner that supports sound risk and
• The composition of salary, benefits and compliance management. In order to
incentives is designed to align employee achieve that goal:
and shareholder interests;
− Performance metrics for applicable
• Remuneration determination takes into business units are risk-adjusted
account both financial and non-financial where appropriate;
factors over both the short and longer-
− Individual award determinations
term;
include consideration of adherence to
• Emphasis is on performance evaluations compliance-related goals.
that reflect individual performance,
• The remuneration package of employees
including adherence to the Bank’s risk
in Control and Support functions are
and compliance policies in determining
designed in such a way that they can
the total remuneration for a position;
function independent of the business
• The Bank has set a fixed remuneration of units they support. Independence from
the employees at such a level to reward the business for these employees is
the employees for an agreed level of assured through:
performance and the variable pay or
− Setting total remuneration to ensure
bonus will be awarded purely at the
that variable pay is not significant
discretion of the Board’s Remuneration,
enough to encourage inappropriate
Nomination and Corporate Governance
behaviours while remaining
Committee (RNC) in recognition of the
competitive with the market;
employees exceptional effort in any given
performance period; − Remuneration decisions are based on
their respective functions and not the
• The Bank shall have a well-defined
business units they support;
variable pay scheme in place, to
support the RNC, should they decide − Performance measures and targets
to pay variable pay or bonus in any are aligned to the Bank and individual
performance period; objectives that are specific to the
function;
Al Salam Bank-Bahrain B.S.C. Annual Report 2016 59
 Remuneration Policy (continued)

− Respective function’s performance The Bank does not provide for any form of
as opposed to other business unit’s severance pay, other than as required by
performance is a key component the Labour Law for the Private Sector (Law
for calculating individual incentive No.36 of 2012 of the Kingdom of Bahrain), to
payments. its employees.
• Both qualitative and quantitative
measures will be used to evaluate an
individual’s performance across the
Bank.

The Bank reviews the salaries and benefits

periodically, with an objective of being
competitive in the market places, based
on salary surveys and market information
gathered through secondary sources.

REGULATORY ALIGNMENT
The Bank reviewed and revised the remuneration policy and especially its variable pay policy
to meet the requirements of the CBB Guidelines on remuneration with the help of external
consultants. Key regulatory areas and the Bank’s response are summarized below:

Regulatory Area Bank’s practice

The composition of RNC is as required by the CBB remuneration

guidelines and is chaired by an Independent Director. The RNC charter
has been revised in line with the requirements of the CBB guidelines and
the Committee will be responsible for the design, implementation and
Governance supervision of the remuneration policy. The aggregate fees / compensation
paid to RNC members for 2016 amounted to BD 22,500 (2015: BD 20,000).
The Committee utilized the services of an external consultant to redesign
and implement the revised remuneration policy aligned to the CBB
guidelines on remuneration.

The Bank has set the Fixed Remuneration of the employees at such a
level to reward the employees for an agreed level of performance and the
variable pay or bonus is being paid purely at the discretion of the RNC in
recognition of the employees exceptional effort in any given performance
period. Should the RNC decide to award Variable Pay, it will be determined
based on risk adjusted targets set at the Business unit level aggregated
Risk focused to the Bank level. The variable pay for the CEO, senior management in
remuneration policy
Business units and the Material Risk takers would be higher as compared
to the fixed pay subject to achieving the risk adjusted targets both at the
business unit and the bank level. For staff in Control and Support functions,
the pay mix is structured as more fixed and lesser variable. Further
the variable pay, for staff in Control and Support Functions, is based on
their units target and individual performance and not linked to bank’s
performance.

The bonus or variable pay computation process is designed in such a

way to ensure that it does not impact the Capital and Liquidity as there
are validation checks prior to approval of the RNC. The validation checks
Capital and Liquidity
are the bonus pool as compared to the realized profit, impact on capital
adequacy computed as per Basle III guidelines and as compared to the
total fixed pay.

60 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 Remuneration Policy (continued)

Regulatory Area Bank’s practice

The Bonus for the CEO, his deputies and Material Risk Takers and
Approved Persons as per CBB and those whose total remuneration
exceeds the regulatory threshold has a deferral element and share - linked
payment. Phantom or Shadow shares are offered to such staff.
The deferral arrangements are as follows:
CEO, his deputies and top 5 Executive Management members(in terms of
total remuneration) in Business units:
• 40% of the variable pay will be paid in cash at the end of the
performance period; and
• The balance 60% will be deferred over a period of 3 years with 10%
being cash deferral and 50% being phantom or shadow shares and the
Deferral and share entire deferred variable pay will vest equally over a 3 – year period.
linked instruments
For all other employees in Business units and Approved Persons in
Control and Support Functions and whose total remuneration exceeds the
regulatory threshold:
• 50% of the variable pay will be paid in cash at the end of the
performance period; and
• 10% in the form of phantom or shadow shares at the end of the
performance period and the phantom or shadow shares subject to a
minimum share retention period of 6 months from the award date.
• The balance 40% will be deferred over a period of 3 years and paid in
the form of phantom or shadow shares and vests equally over the 3
year period and the phantom or shadow shares subject to a minimum
share retention period of 6 months from the award date.

The Bank has introduced claw - back and malus clauses whereby the
RNC has the right to invoke these clauses under certain pre-defined
Claw back and Malus
circumstances where in the bank can claw-back the vested as well as the
unvested bonus paid or payable to a staff.

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 61

 Remuneration Policy (continued)

REMUNERATION COMPONENTS

It is the Bank’s intent to have a transparent, structured and comprehensive remuneration

policy that covers all types of compensation and benefits provided to employees.

The remuneration policy provides a standardized framework for remuneration covering

employees at all levels of the Bank.

Remuneration offered by the Bank shall reflect the Bank’s objective of attracting and
retaining the desired level of talent from the banking sector.

Remuneration will be at a level, which will be commensurate with other Banks of similar
activity in Bahrain, and will allow for changes in the cost of living index. The compensation
package shall comprise of basic salary and benefits and discretionary variable pay. The
following table summarizes the total remuneration:

Element of Pay Salary and Benefits

Rationale To attract and retain the desired level of talent.

Reviewed annually.
Benchmarked to the local market and the compensation package offered to
employee is based on the job content and complexity.
Summary
The Bank offers a composite fixed pay i.e. it is not split as Basic and
Allowances but is paid as one lump sum. The benefits are aligned to the local
market practice.

62 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 Remuneration Policy (continued)

Element of Pay Variable Pay/Bonus

To incentivize the achievement of annual targets set at the bank level and at the
Business unit levels and thereby also make sure that senior management get
Rationale substantial portion as variable pay which is linked to performance.

The Variable pay is deferred to ensure that the management’s interests are aligned to
the shareholder value and to align time horizon of risk.

The Bonus pool is determined based on the bottom up approach i.e. by setting base
multiples of monthly salary per level and aggregating the multiples per unit and then
on to the bank level.

The basis of payment of bonus would be as follows:

CEO and Senior Management Base multiple * Bank score * Individual score

Business units Base multiple * Bank score * Unit score * Individual score

Control & Support units Base multiple * Unit score * Individual score

Computation of Variable Pay - Business Units

Beginning of the financial year:

Targets are set for the Business units and are aggregated to the Bank level target.
In setting targets certain bank wide risk parameters which include capital, liquidity,
profit and qualitative measure such as reputation risk and the bank and unit specific
KPIs shall be considered. For achieving this target, total Bonus pool is set based on
monthly multiples of salary across the bank. The Key feature is that bonus is self-
funding and the different levels of targets are not just % increase in profits but profits
adjusted for additional bonus. This Bonus Pool is subject to additional checks for its
impact on the capital adequacy, as a proportion of net profit and realized profit and as
a proportion of the total fixed pay in any given financial year.

At the end of the financial year:

The actual results are evaluated against targets, considering the risk parameters
matrix and adjustments if any to the unit score or the banks score as appropriate are
Summary made and the bonus pool is revised accordingly.

The actual bonus pool is approved by the RNC and the individual Bonus payments are
as per the scoring matrix.
Computation of Variable Pay – Control and Support Units
The Unit targets as set out and agreed with the RNC in the beginning of each
evaluation period will be the base for Variable pay to be paid. Except in the case of
bank making a loss, the variable pay for the staff in the Control and Support unit,
would be payable based on the Unit targets and the individual performance.

Base Multiples are set for each employee level in each Control and Support unit. The
achievement of unit target is assigned a weight of 1 and scored based on the level of
actual results achieved.

The individual performance score is based on the individual rating and the score is set
to vary between 0 up to a maximum of 1.

The Summary of the Variable pay process is:

Links reward to bank, business unit and individual performance.

Target setting process considers risk parameters which are both quantitative and
qualitative such as reputation.

Aligned to time horizon of risk the bonus has a deferral element and a share linkage
to align the employee’s interest with that of the shareholders.

Bonus can be lesser or nil if the bank or business units do not achieve the risk
adjusted targets or make losses. Post risk assessment is carried out to ensure that
in case of material losses or realization of less than expected income which can be
attributed to employee’s actions the claw back or malus as appropriate is invoked.

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 63

 Remuneration Policy (continued)

DETAILS OF REMUNERATION

(a) Board of Directors

Amounts in BD 2016 2015

Attendance fee and travel expenses 255,178 199,250

Remuneration paid 389,000 73,000

ASBB subsidiaries’ Board remuneration, attendance fees

and expenses - -

(b) Employees

31 December 2016 Amounts in BD thousands

Variable Upfront Variable deferred
No. of Non- Non-
Fixed Cash Cash Total
staff cash cash
Approved person business line 10 1,529 453 98 98 390 2,568

Approved person control & 13 753 181 15 - 58 1,007

support

Other material risk takers 11 429 114 3 - 14 560

Other employess - Bahrain 297 6,545 866 - - - 7,411

operations

Other employees - overseas 2 78 12 - - - 90

333 9,334 1,626 116 98 462 11,636

31 December 2015 Amounts in BD thousands

Variable Upfront Variable deferred
No. of Non- Non-
Fixed Cash Cash Total
staff cash cash
Approved person business line 10 1,657 282 - 71 353 2,363

Approved person control & 11 665 70 14 - 56 805

support

Other material risk takers 12 464 16 3 - 13 496

Other employess - Bahrain 319 7,714 1,100 - - - 8,814

operations

Other employees - overseas 2 78 12 - - - 90

354 10,578 1,480 17 71 422 12,568

64 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 Remuneration Policy (continued)

Fixed remuneration includes all compensation and benefits that are due to employees based
on contractual arrangements.

Severance payments during the payment amounted to BD 934,000 (2015: BD 1,490,000) and
the highest severance payment during the year amounted to BD 116,000 (2015: BD 94,000).

Included in the above, remuneration received by approved person and material risk takers
from SPVs / project companies managed by the Bank amounted to BD 113,000 (2015:
BD 94,000).

Deferred Performance Bonus Awards

No. of Shares
31 December 2016 Cash shares value Others Total
BD ‘000 BD ‘000 BD ‘000 BD ‘000

Awards
Balance as of 1 January 2016 124 - - - 124
Awarded during the year - for 2016 98 3,039,474 462 - 560

Awarded during the year for prior

year - 2015 - 2,827,136 422 - 422

Awarded during the year for prior

year - 2014 - 2,127,228 305 - 305

Exercised / sold / paid during the

year (19) (425,446) (63) - (82)

Risk Adjustment - - - - -

Balance as of 31 December 2016 203 7,568,392 1,126 - 1,329

No. of Shares
31 December 2015 Cash shares value Others Total
BD ‘000 BD ‘000 BD ‘000 BD ‘000

Awards
Opening balance 53 - - - 53
Awarded during the year 71 - - - 71

Exercised / sold / paid during the - - - - -

year

Risk Adjustment - -

Closing balance 124 - - - 124

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 65

 A DYNAMIC
APPROACH TO REACH
EXCELLENCE
Martinique Villas by-the-sea in one of Malaysia’s
Penang Island’s largest seafront residential
developments comprised of 73 luxurious
waterfront seaside villas, a project jointly
owned by Al Salam Bank-Bahrain and two other
strategic partners, has been named as the Best
Villa Development in Malaysia at the inaugural
South East Asia Property Awards 2011.

66 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

RISK
MANAGEMENT
& COMPLIANCE
At Al Salam Bank-Bahrain, our success RISK MANAGEMENT FRAMEWORK
is largely dependent on how efficiently we The risk management framework defines
identify, measure, control and manage risks. the risk culture of Al Salam Bank–Bahrain
Hence, we view risk management as a core and sets the tone throughout the Group to
competency from a strategic point of view practice the right risk behavior consistently
and the Basel Accord as a catalyst to the to ensure that there is always a balance
successful implementation of the pillars of between business profits and risk appetite.
risk management in line with industry best
practice. The risk management framework achieves
this through the definition of the Group’s
The fundamental principle underlying our key risk management principles covering
risk management framework is ensuring credit, market, operational, information
that accepted risks are within the Board security, strategic and reputation risks.
approved risk appetite and the returns are Moreover, the framework further covers the
commensurate with the risks taken. The roles and responsibilities of the Board, risk
objective is creating shareholder value management group and senior management
through protecting the Group against towards risk management. The individual
unforeseen losses, ensuring maximization components of the framework capture the
of earnings potential and opportunities vis- risk assessment methodology adopted, risk
à-vis the Group’s risk appetite and ensuring limits, the risk management information
earnings stability. systems and reports, as well as the Group’s
approach to capital management.
With this in mind, the Bank has focused
its efforts on establishing effective and The effectiveness of the risk management
practical risk management and compliance framework is independently assessed
frameworks taking into consideration and reviewed through internal audits,
local and international best practices, the external audits and Central Bank of Bahrain
requirements of the Central Bank of Bahrain supervision. In addition, business and
and the Basel Accord. support groups carry out periodic risk
control self-assessments.

As a result, the risk management

framework creates an alignment between
business and risk management objectives.

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 67

 Risk Management & Compliance (continued)

CAPITAL MANAGEMENT
The cornerstone of risk management framework is the optimization of risk-reward
relationship against the capital available through a focused and well monitored capital
management process involving risk management, finance and business groups.

Risk Management & Corporate Governance Frameworks

Board Committees

Risk Management & Compliance Functions

Fatwa and Shari’a Supervisory Board

Senior Management Committees

Board & Senior Comprehensive Comliance &
Management Internal Control Anti-Money
Oversight Framework Laundering

Risk Assessment Methodology

Risk Policies, Risk Management Capital

Procedures & Limits Systems Management

Internal Audit, External Audit, Central Bank of Bahrain

68 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 Risk Management & Compliance (continued)

CORPORATE GOVERNANCE COMPLIANCE & ANTI-MONEY LAUNDERING

The risk management framework is DEPARTMENT
supported by an efficient Corporate The Bank has established an independent
Governance Framework discussed on pages and dedicated unit to coordinate the
42 to 57. implementation of compliance and Anti-
Money Laundering and Anti-Terrorist
RISK OWNERSHIP Financing program. The program covers
The implementation of the risk management policies and procedures for managing
framework Group-wide is the responsibility compliance with regulations, anti-money
of the Risk Management Department laundering, disclosure standards on
under the supervision of the Group Chief material and sensitive information and
Executive Officer and Board Audit and Risk insider trading. In line with its commitment
Committee. Ownership of the various risks to combat money laundering and terrorist
across the Group lies with the business financing, Al Salam Bank- Bahrain through
and support heads, being the first line of its Anti-Money Laundering policies
defense, and it is their responsibility to ensures that adequate preventive and
ensure that these risks are managed in detective internal controls and systems
accordance with the risk management operate effectively. The policies govern
framework. the guidelines and procedures for client
acceptance, maintenance and monitoring
Risk Management assists business and
in line with the Central Bank of Bahrain
support heads in identifying concerns and
and International standards such as FATF
risks, identifying risk owners, evaluating
recommendations and Basel Committee
risks as to likelihood and consequences,
papers.
assessing options for mitigating the
risks, prioritizing risk management All inward and outward electronic transfers
efforts, developing risk management are screened against identified sanction
plans, authorizing implementation of risk lists issued by certain regulatory bodies
management plans and tracking risk including the UN Security Council Sanctions
management efforts. Committees and US Department of the
Treasury - OFAC, in addition to those
designated by the Central Bank of Bahrain.

The compliance program also ensures

that all applicable Central Bank of Bahrain
regulations are complied with and/ or non-
compliance is detected and addressed in
a timely manner. The program includes
compliance with regulations set by Ministry
of Industry & Commerce and Bahrain
Bourse.

The Bank has formulated appropriate

policies and have suitably updated its core
banking systems for compliance to Foreign
Account Tax Compliance Act (FATCA)
requirements as required by the regulators.

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 69

 CORPORATE
SOCIAL
RESPONSIBILITY
The Bank is committed to fulfilling its obligations as a good corporate citizen in the
communities in which it operates. We endeavor to support the Bahrain Government in its
efforts to enhance the quality of life of the people of the Kingdom of Bahrain.

Al Salam Bank-Bahrain underscore During the year, charitable donations

this commitment to our community by were made to medical facilities and other
supporting initiatives that add value to the charities that care for the less fortunate
Island’s housing, education and health and supported cultural initiatives in order to
infrastructure, as well as encouraging preserve the traditions of the Kingdom for
future economic growth and prosperity generations.
through supporting entrepreneurship and
the development of our youth.

70 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

FINANCIAL
STATEMENTS

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 71

 FATWA AND SHARI’A
SUPERVISORY BOARD
REPORT TO THE
SHAREHOLDERS
The Shari’a Fatwa and Supervisory Board (“the Board”) has reviewed the Bank’s transactions
during the year, as well as the Consolidated Statement of Financial Position, Consolidated
Income Statement, Consolidated Statement of Cash Flows and Changes in Owner’s Equity
for the year ended 31 December 2016. The Board met with the Bank’s management and
submitted its annual report as follows:

Firstly:
1. The Board has supervised the Banks’ activities and transactions during the year,
and carried out its role by advising the various departments to adhere to the Shari’a
principles and the Board’s legal opinions in respect to those activities and transactions.
The Board held, for this purpose, several meetings with the Banks’ management. The
Board hereby confirms the Bank’s management keenness to adhere to the Shari’a
principles and the Board’s legal opinions.

2. The Board has studied the transactions presented to it during the year, and approved
the contracts and documents relating to those transactions. The Board responded to
questions and queries and issued appropriate decisions and legal opinions relevant
to the transactions. The decisions and legal opinions were circulated to the pertinent
departments for execution.

Secondly:
The Board reviewed what it requested of documents and files, and received the data which
helped it to perform the supervisory and audit work.

Thirdly:
The Board has reviewed samples of contracts and agreements that were presented and
requested the Management to adhere to them.

Fourthly: Balance Sheet

The Board has reviewed the Consolidated Statement of Financial Position and appended data
and notes and made its observations on them.

In line with the available information and disclosures that are presented by the Banks’
management, the consolidated statement of financial position reviewed by the Board
represents the Banks’ assets, liabilities, equity of investment accountholders, and owner’s
equity. The accuracy of the information and data provided are the responsibility of the Banks’
management.

72 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 Fatwa and Shari’a Supervisory Board Report to the Shareholders (continued)

The Board believes that the consolidated financial statements for the year ended 31
December 2016 along with the distribution of profit to depositors and dividends to
shareholders had been prepared in conformity with the Islamic Shari’a regulations.

Fifthly: Zakah
Since the Articles of Association of the Bank does not require the Bank to pay Zakah
on behalf of the Shareholders, thus, the Board has calculated the Zakah due on the
shareholders in order to inform them, and which is disclosed in the notes to the consolidated
financial statements.

Sixthly: Conversion of BMI Bank

The Bank acquired the full stake in BMI Bank with the aim of converting it to a Shari’a-
compliant bank. This conversion took effect as of 1st January 2016, and BMI Bank started
exercising its business in a Shari’a-compliant manner.

Seventhly: Prohibited Income

According to the Board’s decision that the start of calculation and discharge of prohibited
income is from the date of complete conversion of BMI Bank which was set at 1st January
2016, transactions that was not converted after this date due to court cases or for any other
reason are disclosed in the notes to the consolidated financial statements with the bank’s
commitment to channel the prohibited income to Charity.

Eighthly:
The Shari’a Board decided to ward off the Shari’a non-compliant income from the
transactions executed during the year and have it spent on Charity.

The Board hereby emphasizes that management has the primary responsibility to comply
with the Rules and Principles of Shari’a in all activities and transactions of the Bank. The
Board confirms that the executed transactions that are submitted by management of the
Bank for the Board’s review during the year were generally in compliance with Rules and
Principles of Shari’a. The management has shown utmost interest and willingness to fully
comply with the recommendations of the Board.

Board Members

Dr. Hussein Hamed Hassan

Chairman

Dr. Ali Al Qura Daghi Shaikh Adnan Al Qattan

Board Member Board Member

Dr. Mohammed Zoeir Dr. Mohammed Arbouna

Board Member Board Member & Secretary

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 73

 Ernst & Young Tel: +973 1753 5455
P.O. Box 140 Fax: +973 1753 5405
14th Floor, South Tower manama@bh.ey.com
Bahrain World Trade Centre ey.com/mena
Manama C.R. No. 6700
Kingdom of Bahrain

INDEPENDENT AUDITORS’
REPORT TO THE
SHAREHOLDERS
REPORT ON THE CONSOLIDATED FINANCIAL STATEMENTS
We have audited the accompanying consolidated statement of financial position of Al Salam
Bank-Bahrain B.S.C. [“the Bank”] and its subsidiaries [together “the Group”] as of 31
December 2016, and the related consolidated statements of income, cash flows and changes
in equity for the year then ended. These consolidated financial statements and the Group’s
undertaking to operate in accordance with Islamic Shari’a Rules and Principles are the
responsibility of the Bank’s Board of Directors. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.

We conducted our audit in accordance with Auditing Standards for Islamic Financial
Institutions issued by the Accounting and Auditing Organisation for Islamic Financial
Institutions [“AAOIFI”]. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by the Bank’s Board
of Directors, as well as evaluating the overall consolidated financial statements presentation.
We believe that our audit provides a reasonable basis for our opinion.

Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects,
the consolidated financial position of the Group as of 31 December 2016, the results of its
operations, its cash flows and changes in equity for the year then ended in accordance with
the Financial Accounting Standards issued by AAOIFI.

Other Matters
As required by the Bahrain Commercial Companies Law and the Central Bank of Bahrain
(CBB) Rule Book (Volume 2), we report that:

a) the Bank has maintained proper accounting records and the consolidated financial
statements are in agreement therewith; and

b) the financial information contained in the report of the Board of Directors is consistent
with the consolidated financial statements.

74 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 Independent Auditors’ Report To The Shareholders (continued)

We are not aware of any violations of the Bahrain Commercial Companies Law, the Central
Bank of Bahrain and Financial Institutions Law, the CBB Rule Book (Volume 2 and applicable
provisions of Volume 6) and CBB directives, regulations and associated resolutions, rules and
procedures of the Bahrain Bourse or the terms of the Bank’s memorandum and articles of
association during the year ended 31 December 2016 that might have had a material adverse
effect on the business of the Bank or on its consolidated financial position. Satisfactory
explanations and information have been provided to us by management in response to all
our requests. The Bank has also complied with the Islamic Shari’a Rules and Principles as
determined by the Shari’a Supervisory Board of the Bank.

Partner’s Registration No. 115

15 February 2017
Manama, Kingdom of Bahrain

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 75

 Financial Statements

CONSOLIDATED STATEMENT OF
FINANCIAL POSITION
31 December 2016

2016 2015
Note BD’000 BD’000

ASSETS
Cash and balances with banks and Central Bank 5 131,990 152,572
Sovereign Sukuk 358,269 350,474
Murabaha and Wakala receivables from banks 6 182,452 103,345
Corporate Sukuk 7 28,934 50,472
Murabaha financing 8 232,556 245,168
Mudaraba financing 9 238,313 239,031
Ijarah Muntahia Bittamleek 10 188,485 155,217
Musharaka 12,304 7,154
Assets under conversion 12 34,465 32,032
Non-trading investments 13 122,073 123,514
Investments in real estate 14 51,863 68,786
Development properties 15 17,781 49,021
Investment in associates 16 10,561 9,994
Other assets 17 25,436 43,892
Goodwill 18 25,971 25,971
Assets classified as held-for-sale 19 19,840 -
TOTAL ASSETS 1,681,293 1,656,643

LIABILITIES, EQUITY OF INVESTMENT ACCOUNTHOLDERS AND

OWNERS’ EQUITY
LIABILITIES
Murabaha and Wakala payables to banks 132,032 120,795
Murabaha and Wakala payables to non-banks 723,439 842,570
Current Accounts 279,609 224,366
Liabilities under conversion 12 217 2,327
Term financing 20 91,837 35,986
Other liabilities 21 49,043 48,246
Liabilities relating to assets classified as held-for-sale 19 11,421 -
TOTAL LIABILITIES 1,287,598 1,274,290

EQUITY OF INVESTMENT ACCOUNTHOLDERS 22 68,796 62,351

OWNERS’ EQUITY
Share capital 23 214,093 214,093
Treasury stock 23 (1,646) -
Reserves and retained earnings 100,213 94,140
Proposed appropriations 23 10,705 10,705
Total equity attributable to shareholders of the Bank 323,365 318,938
Non-controlling interest 1,534 1,064
TOTAL OWNERS’ EQUITY 324,899 320,002

TOTAL LIABILITIES, EQUITY OF INVESTMENT ACCOUNTHOLDERS AND

OWNERS’ EQUITY 1,681,293 1,656,643

Shaikha Hessa bint Khalifa Al Khalifa Yousif Taqi

Chairperson of the Board Director & Group CEO

The attached notes 1 to 46 form part of these consolidated financial statements.

76 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 Financial Statements (continued)

CONSOLIDATED STATEMENT OF INCOME

Year Ended 31 December 2016

2016 2015
Note BD’000 BD’000

OPERATING INCOME
Income from financing contracts 26 38,850 44,530
Income from Sukuk 15,930 17,242
Gains on sale of investments and Sukuk 27 15,153 8,334
Income from investments 28 1,819 3,249
Fair value changes on investments 2,477 399
Dividend income 891 820
Foreign exchange gains 2,146 870
Fees, commission and other income - net 29 7,929 9,184
85,195 84,628
Profit on murabaha and wakala payables to banks (1,910) (931)
Profit on wakala payables to non-banks (18,046) (23,805)
Profit on term financing (2,120) (839)
Return on equity of investment accountholders before
Group’s share as a Mudarib 22 (216) (282)
Group’s share as a Mudarib 22 97 127
(119) (155)
Total operating income 63,000 58,898

OPERATING EXPENSES
Staff cost 11,523 12,474
Premises and equipment cost 2,021 2,752
Depreciation 3,060 2,254
Other operating expenses 9,454 8,874
Total operating expenses 26,058 26,354

PROFIT BEFORE PROVISIONS AND RESULTS OF ASSOCIATES 36,942 32,544

Provision for impairment - net 11 (21,573) (22,851)
Share of profit from associates 16 727 855
NET PROFIT FOR THE YEAR 16,096 10,548

ATTRIBUTABLE TO:
- Shareholders of the Bank 16,219 12,346
- Non-controlling interest (123) (1,798)
16,096 10,548

Weighted average number of shares (in ‘000) 25 2,140,820 2,140,931

Basic and diluted earnings per share (fils) 7.6 5.8

Shaikha Hessa bint Khalifa Al Khalifa Yousif Taqi

Chairperson of the Board Director & Group CEO

The attached notes 1 to 46 form part of these consolidated financial statements.

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 77

 Financial Statements (continued)

CONSOLIDATED STATEMENT OF
CASH FLOWS
Year ended 31 December 2016

2016 2015
Note BD’000 BD’000

OPERATING ACTIVITIES
Net profit for the year 16,096 10,548
Adjustments:
Depreciation 3,060 1,821
Amortisation of premium on Sukuk - net 1,630 1,945
Fair value changes on investments (2,441) (481)
Provision for financing and investments - net 21,573 22,851
Share of profit from associates (727) (855)
Operating income before changes in operating assets and liabilities 39,191 35,829

Changes in operating assets and liabilities:

Mandatory reserve with Central Bank 2,727 10,109
Murabaha and Wakala receivables from banks with original maturities of
90 days or more - 8,976

Murabaha financing 3,756 41,797

Mudaraba financing 182 (4,886)
Ijarah Muntahia Bitteamleek (32,893) 11,033
Musharaka financing (5,150) 4,272
Assets under conversion (8,576) 140,870
Other assets 16,665 (20,187)
Assets and liabilities classified as held-for-sale (8,419) -
Murabaha and Wakala payables to banks 11,237 (471)
Wakala from non-banks (119,131) (245,716)
Current accounts 46,062 (2,282)
Liabilities under conversion (2,110) (64,855)
Other liabilities 248 2,729
Net cash used in operating activities (56,211) (82,782)

INVESTING ACTIVITIES
Net cash flow arising on acquisition of a subsidiary 3 8,723 -
Cash paid on acquisition of a subsidiary 3 (726) -
Sovereign sukuk (8,994) (156,993)
Corporate Sukuk 21,107 22,883
Non-trading investments 807 21,546
Investments in real estate 16,904 (2,088)
Development properties 31,240 10,241
Purchase of premises and equipment (1,664) (237)
Net movements in non-controlling interest 120 (6,800)
Net cash from / (used in) investing activities 67,517 (111,448)

FINANCING ACTIVITIES
Term financing 55,851 15,564
Equity of investment accountholders 6,445 5,994
Dividends paid (10,705) (10,705)
Dividends paid to non-controlling interest - (566)
Purchase of treasury stock (1,646) -
Term financing paid - (915)
Net cash from financing activities 49,945 9,372

NET CHANGE IN CASH AND CASH EQUIVALENTS 61,251 (184,858)

Cash and cash equivalents at 1 January 223,677 408,535
CASH AND CASH EQUIVALENTS AT 31 DECEMBER 284,928 223,677

Cash and cash equivalents comprise of:

Cash and other balances with Central Bank of Bahrain 5 72,356 81,448
Balances with other banks 5 30,120 38,884
Murabaha and Wakala receivables from banks with original maturities of less
than 90 days 182,452 103,345

284,928 223,677
The attached notes 1 to 46 form part of these consolidated financial statements.

78 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 Attributable to shareholders of the Bank Amounts in BD ‘000s
Reserves

Real Foreign
Changes estate exchange Share Non- Total
Share Treasury Statutory Retained in fair fair value translation premium Total Proposed controlling owners’
Capital stock reserve earnings value reserve reserve reserve reserves appropriations Total interest equity

Balance as of 1 January 2016 214,093 - 13,716 46,803 (148) 24,253 (2,693) 12,209 94,140 10,705 318,938 1,064 320,002
Net profit for the year - - - 16,219 - - - - 16,219 - 16,219 (123) 16,096
Net changes in fair value - - - - 593 (19) - - 574 - 574 - 574
Foreign currency re-translation - - - - - - (15) - (15) - (15) 11 (4)
Dividend paid - - - - - - - - - (10,705) (10,705) - (10,705)
Proposed dividend for the
year 2016 - - - (10,705) - - - - (10,705) 10,705 - - -
Purchase of treasury stock - (1,646) - - - - - - - - (1,464) - (1,646)
Movements in non-controlling
interest due to ASBS acquisition - - - - - - - - - - - 582 582

Transfer to statutory reserve - - 1,622 (1,622) - - - - - - - - -

Year ended 31 December 2016

Balance at 31 December 2016 214,093 (1,646) 15,338 50,695 445 24,234 (2,708) 12,209 100,213 10,705 323,365 1,534 324,899

Balance as of 1 January 2015 214,093 - 12,481 46,497 1,287 22,704 (1,401) 12,209 93,777 10,705 318,575 10,228 328,803
Net profit for the year - - - 12,346 - - - - 12,346 - 12,346 (1,798) 10,548
Net changes in fair value - - - - (1,435) 1,549 - - 114 - 114 - 114
Foreign currency re-translation - - - - - - (1,292) - (1,292) - (1,292) (180) (1,472)
Dividend paid - - - - - - - - - (10,705) (10,705) - (10,705)
CHANGES IN OWNERS’ EQUITY

Proposed dividend the year 2015 - - - (10,705) - - - - (10,705) 10,705 - - -

CONSOLIDATED STATEMENT OF

Dividend relating to subsidiaries - - - - - - - - - - - (566) (566)

Net movements in - - - - - - - - - - - (6,620) (6,620)
non-controlling interest
Transfer to statutory reserve - - 1,235 (1,235) - - - - - - - - -
Charitable donations - - - (100) - - - - (100) - (100) - (100)
Balance at 31 December 2015 214,093 - 13,716 46,803 (148) 24,253 (2,693) 12,209 94,140 10,705 318,938 1,064 320,002

Al Salam Bank-Bahrain B.S.C. Annual Report 2016

Financial Statements (continued)

The attached notes 1 to 46 form part of these consolidated financial statements.

79
 NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS
31 December 2016

1 INCORPORATION AND PRINCIPAL ACTIVITIES

Al Salam Bank-Bahrain B.S.C. (“the Bank”) was incorporated in the Kingdom of Bahrain
under the Bahrain Commercial Companies Law No. 21/2001 and is registered with Ministry
of Industry and Commerce (“MOIC”) under Commercial Registration Number 59308 on 19
January 2006. The Bank is regulated and supervised by the Central Bank of Bahrain (“the
CBB”) and has an Islamic retail banking license and is operating under Islamic principles,
and in accordance with all the relevant regulatory guidelines for Islamic banks issued by the
CBB. The Bank’s registered office is P.O. Box 18282, Bahrain World Trade Center East Tower,
King Faisal Highway, Manama 316, Kingdom of Bahrain.

On 30 March 2014, the Bank acquired 100% stake in BMI Bank B.S.C.(c) (“BMI”), a closed
shareholding company in the Kingdom of Bahrain, through exchange of shares. During
January 2015, the Shari’a Supervisory Board approved BMI Bank to be an Islamic bank
effective 1 January 2015. BMI Bank›s operations are in compliance with Shari’a principles
effective 1 January 2015. The consolidated financial statements of BMI are prepared
in accordance with International Financial Reporting Standards (IFRS) issued by the
International Accounting Standards Board (IASB) as BMI still holds a conventional retail
banking license issued by the CBB.

During the year, the Bank acquired 70% stake in Al Salam Bank Seychelles Limited
(“ASBS”), (previously “BMIO”) an offshore bank in Seychelles as explained in note 3. ASBS
operates under an offshore banking license issued by the Central Bank of Seychelles. All
legal formalities in relation to the share allotment have been completed and the process of
converting ASBS into fully compliant Islamic operations is in progress.

On 29 November 2016, the shareholders of BMI resolved to approve the transfer of business
of BMI to the Bank. The merger notice period will end on 11 April 2017. Subsequent to
merger date, the Bank will take over all the rights and assume the obligations of BMI at their
carrying values.

The Bank and its subsidiaries operate through ten branches in the Kingdom of Bahrain and
Seychelles and offer a full range of Shari’a-compliant banking services and products. The
activities of the Bank includes managing profit sharing investment accounts, offering Islamic
financing contracts, dealing in Shari’a-compliant financial instruments as principal / agent,
managing Shari›a-compliant financial instruments and other activities permitted for under
the CBB’s Regulated Islamic Banking Services as defined in the licensing framework. The
Bank’s ordinary shares are listed in the Bahrain Bourse and Dubai Financial Market.

In addition to BMI and ASBS, the other principal subsidiaries are as follows:

% holding
Name of entity Nature of entity
2016 2015
Al Salam Leasing Two Ltd (“ASL II”) Aircraft under lease 76 76
Auslog Holding Trust Investment in real estate 90 90

The Bank together with its subsidiaries is referred to as “the Group”.

These consolidated financial statements have been authorised for issue in accordance with a
resolution of the Board of Directors dated 15 February 2017.

80 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 Notes To The Consolidated Financial Statements (continued)

2 ACCOUNTING POLICIES
2.1 BASIS OF PREPARATION
The consolidated financial statements are prepared on a historical cost basis, except
for investments held at fair value through profit or loss, fair value through equity and
investments in real estates which are held at fair value. These consolidated financial
statements incorporate all assets, liabilities and off balance sheet financial instruments held
by the Group.

These consolidated financial statements are presented in Bahraini Dinars, being the
functional and presentation currency of the Group, rounded to the nearest thousand
[BD ‘000], except where otherwise indicated.

2.1.a Statement of compliance

The consolidated financial statements of the Group are prepared in accordance with the
Financial Accounting Standards (FAS) issued by the Accounting and Auditing Organisation
for Islamic Financial Institutions (“AAOIFI”), the Islamic Shari’a rules and principles as
determined by the Shari’a Supervisory Board of the Group and in conformity with the Bahrain
Commercial Companies Law and the CBB and Financial Institutions Law. Matters for which
no AAOIFI standards exist, the Group uses the relevant International Financial Reporting
Standards (“IFRS”).

The Group presents its consolidated statement of financial position broadly in order
of liquidity. An analysis regarding recovery or settlement within 12 months after the
consolidated statement of financial position date (current) and more than 12 months after the
consolidated statement of financial position date (non-current) is presented in Note 36.

2.1.b Basis of consolidation

The consolidated financial statements comprise the financial statements of the Bank and
its subsidiaries as at 31 December 2016. The financial statements of the subsidiaries are
prepared for the same reporting year as the Bank, using consistent accounting policies. All
intra-group balances, transactions, income and expenses and unrealised gains and losses
resulting from intra-group transactions are eliminated in full.

Subsidiaries are fully consolidated from the date on which control is transferred to the Group
and continue to be consolidated until the date when such control ceases. Control is achieved
where the Group has the power to govern the financial and operating policies of an entity with
the objective of obtaining benefits from its operations. The results of subsidiaries acquired
or disposed of during the year, if any, are included in the consolidated statement of income
from the date of acquisition or up to the date of disposal, as appropriate. A change in the
Group’s ownership of a subsidiary, without a loss of control, is accounted for as an equity
transaction.

Share of minority stakeholder’s interest (non-controlling interest) represents the portion

of profit or loss and net assets not held by the Group and are presented separately in the
consolidated statement of income and within owners’ equity in the consolidated statement of
financial position, separately from the equity attributable to shareholders of the parent.

2.2 SIGNIFICANT ACCOUNTING JUDGMENTS AND ESTIMATES

The preparation of the consolidated financial statements requires management to make
judgments and estimates that affect the reported amount of financial assets and liabilities
and disclosure of contingent liabilities. These judgments and estimates also affect the
revenues and expenses and the resultant provisions as well as fair value changes reported in
equity.

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 81

 Notes To The Consolidated Financial Statements (continued)

2 ACCOUNTING POLICIES (continued)

2.2 SIGNIFICANT ACCOUNTING JUDGMENTS AND ESTIMATES (continued)

Classification of investments
Management decides upon acquisition of an investment whether it should be classified as
fair value through profit or loss, fair value through equity or held-to-maturity.

Estimation uncertainty
The key assumptions concerning the future and other key sources of estimating uncertainty
at the date of the consolidated statement of financial position, that have a significant risk of
causing a material adjustment to the carrying amounts of assets and liabilities within the
next financial year are discussed below:

Impairment of goodwill
Impairment exists when carrying value of an asset or cash generating unit (CGU) exceeds its
recoverable amount, which is the higher of its fair value less costs of disposal and its value in
use.

The recoverable amount of each cash-generating unit’s goodwill is based on value-in-use

calculations using cash flow projections from financial budgets approved by management,
extrapolated for five years projection using nominal projected Gross Domestic Product
growth rate.

The methodology and assumptions used for estimating future cash flows are reviewed
regularly to reduce any differences between loss estimates and actual loss experience.

Collective impairment provisions on financial contracts

In addition to specific provisions against individually significant financial contracts, the Group
also considers the need for a collective impairment provision against financial contracts
which although have not been specifically identified as requiring a specific provision, have
a greater risk of default than when originally granted. This collective provision is based on
any deterioration in the status, as determined by the Group, of the financial contracts since
they were granted (or acquired). The amount of the provision is based on the historical loss
pattern for other contracts within each grade and is adjusted to reflect current economic
changes.

Impairment losses on financial contracts

The Group reviews its financial contracts on a regular basis to assess whether a provision
for impairment should be recorded in the consolidated statement of income. In particular,
considerable judgment by management is required in the estimation of the amount and
timing of future cash flows when determining the level of provisions required. Such estimates
are necessarily based on assumptions about several factors involving varying degrees of
judgment and uncertainty, and actual results may differ resulting in future changes to such
provisions. During the last interim period of the year, the Group re-assessed its previous
estimates and made provisions for financing facilities and other assets.

Impairment of fair value through equity investments

The Group treats fair value through equity investments as impaired when there has been
a significant or prolonged decline in the fair value below its cost or where other objective
evidence of impairment exists. The determination of significant or prolonged decline and
other objective evidence involves judgment. In addition, the Group evaluates other factors,
including normal volatility in share price for quoted equities and the future cash flows and the
present value calculation factors for unquoted equities.

82 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 Notes To The Consolidated Financial Statements (continued)

2 ACCOUNTING POLICIES (continued)

2.2 SIGNIFICANT ACCOUNTING JUDGMENTS AND ESTIMATES (continued)

Valuation of unquoted private equity and real estate investments

Valuation of above investments involves judgment and is normally based on one of the
following:
• valuation by independent external valuers;
• recent arm’s length market transactions;
• current fair value of another instrument that is substantially the same;
• present value of expected cash flows at current rates applicable for items with similar
terms and risk characteristics; or
• other valuation models.
The Group calibrates the valuation techniques periodically and tests these for validity using
either prices from observable current market transactions in the same instrument or other
available observable market data.

Going concern
The Group has made an assessment of the Group’s ability to continue on a going concern
and is satisfied that the Group has the resources to continue in business for the foreseeable
future. Furthermore, the management is not aware of any material uncertainties that may
cast significant doubt upon the Group’s ability to continue as a going concern. Therefore, the
consolidated financial statements continue to be prepared on the going concern basis.

Control over special purpose entities

The Group sponsors the formation of special purpose entities (SPEs) primarily for the
purpose of allowing clients to hold investments. The Group does not consolidate SPEs that
it does not have the power to control. In determining whether the Group has the power to
control an SPE, judgments are made about the objectives of the SPEs activities, and Group’s
exposures to the risk and rewards, as well as its ability to make operational decisions of the
SPEs.

2.3 SIGNIFICANT ACCOUNTING POLICIES

2.3.1 New standards, interpretations and amendments
These consolidated financial statements have been prepared using accounting policies,
which are consistent with those used in the preparation of the annual consolidated financial
statements for the year ended 31 December 2015, except for amendments to FAS 27 which
have been issued by AAOIFI and are effective 1 January 2016.

Amendments to FAS 27 – Equity method in separate financial statements

These amendments allow entities to use the equity method to account for investments in
subsidiaries, joint ventures and associates in their separate financial statements. Entities
already applying IFRS and electing to change to the equity method in their separate financial
statements have to apply that change retrospectively. These amendments do not have any
impact on the Group’s consolidated financial statements.

The Group has not early adapted any other standard, interpretation or amendment that has
been issued but is not yet effective.

2.3.2 Summary of significant accounting policies

a) Financial contracts
Financial contracts consist of balances with banks and the Central Bank, Sovereign Sukuk,
Corporate Sukuk, Murabaha financing (net of deferred profit), Mudaraba, Musharaka and

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 83

 Notes To The Consolidated Financial Statements (continued)

2 ACCOUNTING POLICIES (continued)

2.3 SIGNIFICANT ACCOUNTING POLICIES (continued)
2.3.2 Summary of significant accounting policies (continued)
a) Financial contracts (continued)

Ijarah Muntahia Bittamleek. Balances relating to these contracts are stated net of provisions
for impairment.

b) Sovereign Sukuk and Corporate Sukuk

These are quoted / unquoted securities and are classified as investments at amortised cost in
accordance with FAS 25 issued by AAOIFI.

c) Murabaha receivables
Murabaha is a contract whereby one party (“Seller”) sells an asset to the other party
(“Purchaser”) at cost plus profit and on a deferred payment basis, after the Seller has
purchased the asset based on the Purchaser’s promise to purchase the same on such
Murabaha basis. The sale price comprises the cost of the asset and an agreed profit
margin. The sale price (cost plus the profit amount) is paid by the Purchaser to the Seller on
installment basis over the agreed finance tenure. Under the Murabaha contract, the Group
may act either as a Seller or a Purchaser, as the case may be.

The Group considers the promise to purchase made by the Purchaser in a Murabaha
transaction in favour of the Seller to be binding.

Murabaha receivables are stated at cost, net of deferred profits and / or provision for
impairment, if any, and amounts settled.

d) Mudaraba financing
Mudaraba is a contract between two parties whereby one party is a fund provider (Rab Al
Mal) who would provide a certain amount of funds (Mudaraba Capital), to the other party
(Mudarib). Mudarib would then invest the Mudaraba Capital in a specific enterprise or activity
deploying its experience and expertise for a specific pre-agreed share in the resultant profit.
The Rab Al Mal is not involved in the management of the Mudaraba activity. The Mudarib
would bear the loss in case of its default, negligence or violation of any of the terms and
conditions of the Mudaraba contract; otherwise the loss would be borne by the Rab Al Mal.
Under the Mudaraba contract, the Group may act either as Mudarib or as Rab Al Mal, as the
case may be.

Mudaraba financing are recognized at fair value of the Mudaraba assets net of provision for
impairment, if any, and Mudaraba capital amounts settled. If the valuation of the Mudaraba
assets results in difference between fair value and book value, such difference is recognized
as profit or loss to the Group.

e) Ijarah Muntahia Bittamleek

Ijara Muntahia Bittamleek is an agreement whereby the Group (as Lessor) leases an asset to
the customer (as Lessee) after purchasing / acquiring the specified asset, either from a third
party seller or from the customer itself, according to the customer’s request and promise to
lease against certain rental payments for a specific lease term / periods, payable on fixed or
variable rental basis.

The Ijara agreement specifies the leased asset, duration of the lease term, as well as,
the basis for rental calculation, the timing of rental payment and responsibilities of both
parties during the lease term. The customer (Lessee) provides the Group (Lessor) with an
undertaking to renew the lease periods and pay the relevant rental payment amounts as per
the agreed schedule and applicable formula throughout the lease term.

84 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 Notes To The Consolidated Financial Statements (continued)

2 ACCOUNTING POLICIES (continued)

2.3 SIGNIFICANT ACCOUNTING POLICIES (continued)
2.3.2 Summary of significant accounting policies (continued)
e) Ijarah Muntahia Bittamleek (continued)

“The Group (Lessor) retains the ownership of the assets throughout the lease term. At the
end of the lease term, upon fulfillment of all the obligations by the customer (Lessee) under
the Ijara agreement, the Group (Lessor) will sell the leased asset to the customer (Lessee)
for a nominal value based on sale undertaking given by the Group (Lessor). Leased assets are
usually residential properties, commercial real estate or aircrafts.“

Depreciation is provided on a systematic basis on all Ijarah Muntahia Bittamleek assets other
than land (which is deemed to have an indefinite useful life), at rates calculated to write off
the cost of each asset over the shorter of either the lease term or economic life of the asset.

f) Musharaka
Musharaka is used to provide venture capital or project finance. The Group and customer
contribute towards the capital of the Musharaka. Usually a special purpose company or
a partnership is established as a vehicle to undertake the Musharaka. Profits are shared
according to a pre-agreed profit distribution ratio but losses are borne by the partners
according to the capital contributions of each partner. Capital contributions may be in cash or
in kind, as valued at the time of entering into the Musharaka.

Musharaka is stated at cost, less any impairment.

g) Assets and liabilities under conversion

Assets under conversion:
Due from Banks and financial institutions
At amortised cost less any amounts written off and provision for impairment, if any.

Loans and advances

At amortised cost less any amounts written off and provision for impairment, if any.

Non-trading investments
These are classified as fair value through equity investments and are fair valued based on
criteria set out in Note 2.3.2 h. Any changes in fair values subsequent to acquisition date are
recognized in total comprehensive income (note 30).

Liabilities under conversion:

These are remeasured at amortised cost.

h) Non-trading investments
These are classified as fair value through equity or fair value through profit or loss.

All investments are initially recognised at cost, being the fair value of the consideration
given including acquisition costs associated with the investment. Acquisition cost relating to
investments designated as fair value through profit or loss is charged to consolidated income
statement.

Following the initial recognition of investments, the subsequent period-end reporting values
are determined as follows:

Fair value through equity investments

After initial recognition, equity investments which are classified as investments at fair value
through equity are disclosed as “Fair value through equity investments”. These are normally
remeasured at fair value, unless the fair value cannot be reliably determined, in which case
they are measured at cost less impairment, if any. Fair value changes are reported in equity

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 85

 Notes To The Consolidated Financial Statements (continued)

2 ACCOUNTING POLICIES (continued)

2.3 SIGNIFICANT ACCOUNTING POLICIES (continued)
2.3.2 Summary of significant accounting policies (continued)
h) Non-trading investments (continued)

until the investment is derecognised or the investment is determined to be impaired. On

derecognition or impairment, the cumulative gain or loss previously reported as “changes in
fair value” within equity, is included in the consolidated income statement.

Impairment losses on fair value through equity Investments are not reversed through the
consolidated income statement and increases in their fair value after impairment are
recognised directly in owners’ equity.

Investments carried at fair value through profit or loss

Investments in this category are designated as such on initial recognition if these investments
are evaluated on a fair value basis in accordance with the Group’s risk management policy
and its investment strategy. These include all private equity investments including those in
joint ventures and associates which are not strategic in nature.

Investments at fair value through profit or loss are recorded in the consolidated statement
of financial position at fair value. Changes in fair value are recorded as “Fair value changes
on Investments” in the consolidated income statement. Gain on sale of these investments is
included in “Gain on sale of Investments and Sukuk” in the consolidated income statement.
Income earned on these investments is included in “Income from Investments” in the
consolidated income statement.

i) Investments in associates
The Group’s investments in associates, that are acquired for strategic purposes, are
accounted for under the equity method of accounting. Other equity investments in associates
are accounted for as fair value through profit or loss by availing the scope exemption
under FAS 24, Investments in Associates. An associate is an entity over which the Group
has significant influence and which is neither a subsidiary nor a joint venture. An entity is
considered as an associate if the Group has more than 20% ownership of the entity or the
Group has significant influence through any other mode.

Under the equity method, investment in associate is carried in the consolidated statement
of financial position at cost plus post-acquisition changes in the Group’s share of net assets
of the associate. Losses in excess of the cost of the investment in associates are recognised
when the Group has incurred obligations on its behalf. Goodwill relating to an associate is
included in the carrying amount of the investment and is not amortised. The consolidated
income statement reflects the Group’s share of results of operations of the associate.
Where there has been a change recognised directly in the equity of the associate, the Group
recognises its share of any changes and discloses this, when applicable, in the consolidated
statement of changes in equity.

The reporting dates of the associate and the Group are identical and the associates
accounting policy conform to those used by the Group for like transactions and events in
similar transactions.

After application of the equity method, the Group determines whether it is necessary
to recognise an additional impairment loss on its investment in associates. The Group
determines at each reporting date whether there is any objective evidence that the
investment in associates are impaired. If this is the case, the Group calculates the amount
of impairment as the difference between the recoverable amount of the associate and its
carrying value and recognises the amount in the consolidated income statement.

86 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 Notes To The Consolidated Financial Statements (continued)

2 ACCOUNTING POLICIES (continued)

2.3 SIGNIFICANT ACCOUNTING POLICIES (continued)
2.3.2 Summary of significant accounting policies (continued)
i) Investments in associates (continued)

Profit and losses resulting from transactions between the Group and the associates are
eliminated to the extent of the interest in associates.

Foreign exchange translation gains / losses arising out of the above investment in the
associate are included in the consolidated statement of changes in equity.

j) Investments in real estate

Properties held for rental, or for capital appreciation purposes, or both, are classified as
investments in real estate. In accordance with FAS 26, the investment in real estate is initially
recognized at cost and subsequently measured based on intention whether the investments
in real estate is held-for-use or held for sale. The Group has adopted the fair value model
for its investments in real estate. Under the fair value model any unrealized gains are
recognized directly in owners’ equity. Any unrealized losses are adjusted in equity to the
extent of the available credit balance. Where unrealized losses exceed the available balance
in owners’ equity, these are recognized in the consolidated income statement. In case there
are unrealized losses relating to investments in real estate that have been recognized in the
consolidated income statement in a previous financial period, the unrealized gains relating to
the current financial period is recognized to the extent of crediting back such previous losses
in the consolidated income statement. Investments in real estate held-for-sale is carried
at lower of its carrying value and expected fair value less costs to sell. Investments in real
estate carried at fair value shall continue to be measured at fair value.

k) Development properties
Properties acquired exclusively for development are classified as development properties and
are measured at the lower of cost or net realisable value.

l) Premises and equipment

Premises and equipment are stated at cost less accumulated depreciation and any
impairment in value. Depreciation is provided on a straight-line basis over the estimated
useful lives of all premises and equipment, other than freehold land and capital work-in-
progress.

- Computer equipment 3 to 5 years

- Furniture and office equipment 3 to 5 years

- Motor vehicle 4 to 5 years

- Leasehold improvements Over the lease period

- Computer software 10 years

m) Subsidiaries acquired with a view to sell

A subsidiary acquired with a view to subsequent disposal within twelve months is classified
as “held-for-sale” when the sale is highly probable. Related assets and liabilities of the
subsidiary are shown separately on the consolidated statement of financial position as
“Assets held-for-sale” and “Liabilities relating to assets classified as held-for-sale”. Assets
that are classified as held-for-sale are measured at the lower of carrying amount and fair
value less costs to sell. Any resulting impairment loss reduces the carrying amount of the
assets. Assets that are classified as held-for-sale are not depreciated.

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 87

 Notes To The Consolidated Financial Statements (continued)

2 ACCOUNTING POLICIES (continued)

2.3 SIGNIFICANT ACCOUNTING POLICIES (continued)
2.3.2 Summary of significant accounting policies (continued)

n) Business combinations and goodwill

Business combinations are accounted for using the acquisition method. The cost of an
acquisition is measured as the aggregate of the consideration transferred measured at
acquisition date fair value and the amount of any non-controlling interests in the acquiree.
For each business combination, the Group elects whether to measure the non-controlling
interests in the acquiree at fair value or at the proportionate share of the acquiree’s
identifiable net assets.

In a business combination achieved in stages, the group remeasures its previously held
equity interest in the acquiree at its acquisition date fair value and recognizes the resulting
gain or loss, if any, in the consolidated income statement or total comprehensive income as
appropriate.

When the Group acquires a business, it assesses the financial assets and liabilities assumed
for appropriate classification and designation in accordance with the contractual terms,
economic circumstances and pertinent conditions as at the acquisition date.

In a business combination in which the Bank and the acquiree exchange only equity interests,
the acquisition-date fair value of the acquiree’s equity interests is used to determine the
amount of goodwill.

Investments acquired but do not meet the definition of business combination are recorded
as financing assets or investment in properties as appropriate. When such investments are
acquired, the Group allocates the cost of acquisition between the individual identifiable assets
and liabilities based on their relative fair values at the date of acquisition. Cost of such assets
is the sum of all consideration given and any non-controlling interest recognised. If the
non-controlling interest has a present ownership interest and is entitled to a proportionate
share of net assets upon liquidation, the Group recognises the non-controlling interest at its
proportionate share of net assets.

Goodwill is initially measured at cost, being the excess of the aggregate of the consideration
transferred and the amount recognised for non-controlling interests, and any previous
interest held, over the net identifiable assets acquired and liabilities assumed. If the fair
value of the net assets acquired is in excess of the aggregate consideration transferred,
the Group re-assesses whether it has correctly identified all of the assets acquired and all
of the liabilities assumed and reviews the procedures used to measure the amounts to be
recognised at the acquisition date. If the re-assessment still results in an excess of the fair
value of net assets acquired over the aggregate consideration transferred, then the gain is
recognised in consolidated income statement.

After initial recognition, goodwill is measured at cost less any accumulated impairment
losses. Goodwill is tested for impairment at least annually. Any impairment is recognised
immediately in the consolidated income statement. Goodwill is allocated to each of the
Group’s cash-generating units that are expected to benefit from the combination, irrespective
of whether other assets or liabilities of the acquiree are assigned to those units.

Impairment exists when carrying value of an asset or cash generating unit (CGU) exceeds its
recoverable amount, which is the higher of its fair value less costs of disposal and its value in
use.

88 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 Notes To The Consolidated Financial Statements (continued)

2 ACCOUNTING POLICIES (continued)

2.3 SIGNIFICANT ACCOUNTING POLICIES (continued)
2.3.2 Summary of significant accounting policies (continued)
n) Business combinations and goodwill (continued)

The methodology and assumptions used for estimating future cash flows are reviewed
regularly to reduce any differences between loss estimates and actual loss experience.

Impairment of goodwill is determined by assessing the recoverable amount of the cash

generating unit (or group of cash-generating units), to which the goodwill relates. Where the
recoverable amount of the cash generating unit (or group of cash-generating units) is less
than the carrying amount, an impairment loss is recognised immediately in the consolidated
statement of income.

For the purpose of impairment testing, goodwill acquired in a business combination is, from
the acquisition date, allocated to each of the Group’s cash-generating units, or groups of
cash-generating units, that are expected to benefit from the synergies of the combination,
irrespective of whether other assets or liabilities of the Group are assigned to those units or
groups of units. Each unit or group of units to which the goodwill is allocated:

- represents the lowest level within the Group at which the goodwill is monitored for
internal management purposes; and

- is not larger than a segment based on either the Group’s primary or the Group’s
geographic segment reporting format.

o) Impairment and uncollectability of financial assets

An assessment is made at each reporting date to determine whether there is objective
evidence that a specific financial asset may be impaired. If such evidence exists, impairment
loss, if any, is recognised in the consolidated income statement.

Impairment is determined as follows:

(i) for assets carried at amortised cost, impairment is based on estimated cash flows
based on the original effective profit rate;

(ii) for assets carried at fair value, impairment is the difference between cost and fair
value; and

(iii) for assets carried at cost, impairment is based on present value of anticipated cash
flows based on the current market rate of return for a similar financial asset.

For fair value through equity investments, reversal of impairment losses are recorded as
increases in cumulative changes in fair value through equity.
p) Offsetting
Financial assets and financial liabilities can only be offset with the net amount being reported
in the consolidated statement of financial position when there is a religious or legally
enforceable right to set off the recognised amounts and the Group intends to either settle on
a net basis, or intends to realise the asset and settle the liability simultaneously.

q) Provisions
Provisions are recognised when the Group has a present obligation (legal or constructive)
arising from a past event and the costs to settle the obligation are both probable and able to
be reliably measured.

r) Employees’ end of service benefits

The Group provides end of service benefits to its expatriate employees. Entitlement to
these benefits is based upon the employees’ final salary and length of service, subject to
Al Salam Bank-Bahrain B.S.C. Annual Report 2016 89
 Notes To The Consolidated Financial Statements (continued)

2 ACCOUNTING POLICIES (continued)

2.3 SIGNIFICANT ACCOUNTING POLICIES (continued)
2.3.2 Summary of significant accounting policies (continued)
r) Employees’ end of service benefits (continued)

completion of a minimum service period. The expected costs of these benefits are accrued
over the period of employment.

For Bahraini employees, the Group makes contributions to Social Insurance Organisation
calculated as a certain percentage of the employees’ salaries. The Group’s obligations are
limited to these contributions, which are expensed when due.

s) Revenue recognition
Murabaha receivables
As the income is quantifiable and contractually determined at the commencement of the
contract, income is recognized on a straight-line basis over the deferred period. Recognition
of income is suspended when the Group believes that the recovery of these amounts may be
doubtful or when the payments of Murabaha installments are overdue by 90 days, whichever
is earlier.

Sukuk
Income on Sukuk is recognized on a time-proportionate basis based on underlying rate of
return of the respective type of sukuk. Recognition of income is suspended when the Group
believes that the recovery of these amounts may be doubtful or when the payments are
overdue by 90 days, whichever is earlier.

Mudaraba
Income on Mudaraba transactions are recognised when the right to receive payment is
established or these are declared by the Mudarib, whichever is earlier. In case of losses in
Mudaraba, the Group’s share of loss is recognised to the extent that such losses are being
deducted from its share of the Mudaraba capital.

Dividend
Dividend income is recognised when the Group’s right to receive the payment is
established.

Ijarah Muntahia Bittamleek

Ijarah Muntahia Bittamleek income is recognised on a time-proportionate basis over the
lease term. Income related to non-performing Ijarah Muntahia Bittamleek is suspended.
Accrual of income is suspended when the Group believes that the recovery of these amounts
may be doubtful or normally when the rental payments are overdue by 90 days, whichever is
earlier.

Musharaka
Income on Musharaka is recognized when the right to receive payment is established or on
distributions. In case of losses in Musharaka, the Group’s share of loss is recognized to the
extent that such losses are being deducted from its share of the Musharaka capital.

Fees and commission income

The Group earns fee and commission income from a diverse range of services it provides to
its’ customers. Fee income can be divided into the following main categories:

Fee income on financing transactions: Fee earned on financing transactions including

up-front fees and early settlement fees are recognised when earned. To the extent the
fees are deemed yield enhancement they are recognised over the period of the financing
contracts.

90 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 Notes To The Consolidated Financial Statements (continued)

2 ACCOUNTING POLICIES (continued)

2.3 SIGNIFICANT ACCOUNTING POLICIES (continued)
2.3.2 Summary of significant accounting policies (continued)
s) Revenue recognition (continued)

Fee income from transaction services: Fee arising from corporate finance, corporate
advisory, arranging the sale of assets and wealth management are recognised when
earned or on a time proportionate basis when the fee is linked to time. Other fee income is
recognised when services are rendered.

t) Fair value of financial assets

For investments that are traded in organised financial markets, fair value is determined by
reference to the prevailing market bid price on the reporting date.

For investments where there is no quoted market price, a reasonable estimate of fair value
is determined by reference to valuation by independent external valuers or based on recent
arm’s length market transactions. Alternatively, the estimate would also be based on current
market value of another instrument, which is substantially the same, or is based on the
assessment of future cash flows. The cash equivalent values are determined by the Group
by calculating the present value of future cash flows at current profit rates for contracts with
similar terms and risk characteristics.

For assets having fixed or determinable payments, fair value is based on the net present
value of estimated future cash flows determined by the Group using current profit rates for
instruments with similar terms and risk characteristics.

u) Foreign currencies
Foreign currency transactions are recorded at rates of exchange prevailing at the dates of
the transactions. Monetary assets and liabilities in foreign currencies at the consolidated
statement of financial position date are retranslated at market rates of exchange prevailing at
that date. Gains and losses arising on translation are recognised in the consolidated income
statement. Non-monetary assets that are measured in terms of historical cost in foreign
currencies are recorded at rates of exchange prevailing at the value dates of the transactions.
Translation gains or losses on non-monetary items classified as “fair value through equity”
and investment in associates are included in consolidated statement of changes in equity
until the related assets are sold or derecognised at which time they are recognised in
the consolidated income statement. Translation gains on non-monetary assets classified
as “fair value through profit or loss” are directly recognised in the consolidated income
statement.

v) Translation of foreign operations

Assets and liabilities of foreign subsidiaries whose functional currency is not Bahraini Dinars
are translated into Bahraini Dinars at the rates of exchange prevailing at the reporting
date. Income and expense items are translated at average exchange rates prevailing for the
reporting period. Any exchange differences arising on translation are included in “foreign
exchange translation reserve” forming part of other comprehensive income except to the
extent that the translation difference is allocated to the non-controlling interest. On disposal
of foreign operations, exchange differences relating thereto and previously recognised in
other comprehensive income are recognised in the consolidated income statement.

w) Repossessed assets
Repossessed assets are assets acquired in settlement of dues. These assets are carried
at the lower of carrying amount and fair value less costs to sell and reported within ‘other
assets’. The Group’s policy is to determine whether a repossessed asset can be best used
for its internal operations or should be sold. Assets determined to be useful for the internal

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 91

 Notes To The Consolidated Financial Statements (continued)

2 ACCOUNTING POLICIES (continued)

2.3 SIGNIFICANT ACCOUNTING POLICIES (continued)
2.3.2 Summary of significant accounting policies (continued)
w) Repossessed assets (continued)

operations are transferred to their relevant asset category at the lower of their repossessed
value or the carrying value of the original secured asset. Assets for which selling is
determined to be a better option are transferred to assets held for sale at their fair value or
fair value less cost to sell for non-financial assets at the repossession date in line with the
Group’s policy.

x) Trade and settlement date accounting

Purchases and sales of financial assets and liabilities are recognised on the trade date, i.e.
the date that the Group contracts to purchase or sell the asset or liability.

y) Derecognition of financial assets

Financial assets are derecognised when the rights to receive cash flows from the financial
assets have expired or where the Group has transferred substantially all risk and rewards of
ownership.

Continuing involvement that takes the form of a guarantee over the transferred asset is
measured at the lower of the original carrying amount of the asset and the maximum amount
of consideration that the Group could be required to pay.

z) Derecognition of financial liabilities

A financial liability is derecognised when the obligation under the liability is discharged
or cancelled or expires. Where an existing financial liability is replaced by another from
the same source on substantially different terms, or the terms of an existing liability are
substantially modified, such an exchange or modification is treated as a derecognition of the
original liability and the recognition of a new liability, and the difference in the respective
carrying amounts is recognised in the consolidated statement of income.

aa) Fiduciary assets

Assets held in a fiduciary capacity are not treated as assets of the Group and are accordingly
not included in the consolidated statement of financial position.

ab) Dividend on ordinary shares

Dividend on ordinary shares is recognised as a liability and deducted from equity when it
is approved by the Group’s shareholders. Dividend for the year that is approved after the
reporting date is included in the equity and is disclosed as an event after the balance sheet
date.

ac) Equity of investment account holders

All equity of investment accountholders are carried at cost plus profit and related reserves
less amounts settled.

Share of income for equity of investment accountholder is calculated based on the income
generated by the assets funded by such investment accounts after deducting Mudarib share
(as Mudarib and Rabalmal). Operating expenses are charged to shareholders’ funds and are
not included in the calculation.

The basis applied by the Group in arriving at the equity of investment accountholders’ share
of income is total investment income less shareholders’ income. Portion of the income
generated from equity of investment accountholders is transferred to profit equalization
reserve, mudarib share and investment risk reserve and the remaining is distributed to the
equity of investment accountholders.

92 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 Notes To The Consolidated Financial Statements (continued)

2 ACCOUNTING POLICIES (continued)

2.3 SIGNIFICANT ACCOUNTING POLICIES (continued)
2.3.2 Summary of significant accounting policies (continued)

ad) Treasury Stock

Own equity instruments that are reacquired, are recognised at cost and deducted from equity.
No gain or loss is recognised in profit or loss on the purchase, sale, issue or cancellation
of the Bank’s own equity instruments. Any difference between the carrying amount and the
consideration, if reissued, is recognised in share premium in consolidated statement of
changes in equity.

ae) Zakah
In accordance with the Articles of Association of the Group, the responsibility to pay Zakah is
on the shareholders of the Bank.

af) Cash and cash equivalents

Cash and cash equivalents comprise of cash and balances with the CBB and Murabaha
receivables from banks with original maturities of less than 90 days.

ag) Wakala payables

The Group accepts funds from banks and customers under Wakala arrangement in which
a return is payable to customers as agreed in the agreement. There is no restriction on the
Group for the use of funds received under Wakala agreement.

ah) Jointly financed and self financed

Investments, financing and receivables that are jointly funded by the Group and the equity
of investment accountholders are classified under the caption “jointly financed” in the
consolidated financial statements. Investments, financing and receivables that are funded
solely by the Group are classified under “self financed”.

The equity of investment accountholders is used to finance the assets of the Group as
appropriate.

ai) Investment risk reserve

This is the amount appropriated by the Group out of the income of investment account
holders, after allocating the Mudarib share, in order to compensate future losses for
investment account holders.

aj) Earnings prohibited by Shari’a

The Group is committed to contributing to charity any income generated from non-Islamic
sources. Accordingly, any earning prohibited by Shari’a is credited to charity funds to be used
for social welfare purposes.

ak) Profit on Murabaha and Wakala payables to banks and non-banks

Profit on these is accrued on a time-apportioned basis over the period of the contract based
on the principal amounts outstanding.

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 93

 Notes To The Consolidated Financial Statements (continued)

3 BUSINESS COMBINATION
The Group had an existing ownership of 50% in BMI Offshore Bank Seychelles Limited
(“BMIO”) and it was accounted for as an investment in joint venture. Subsequent to the
approval of the Bank’s Board of Directors, the Group increased its stake in BMIO from 50%
to 70% on 27 June 2016. On 27 June 2016, the share allotment was completed and a total of
3,384 fully paid up shares were allotted out of 4,834 shares representing 70% of the share
capital which included a portion of shares earlier held by the Group (1,450 shares). Also,
BMIO rebranded its name to Al Salam Bank-Seychelles (“ASBS”).

The fair value of the assets and liabilities are as follows:

2016
BD ‘000
ASSETS
Cash and cash equivalents 13,816
Loans and advances 2,566
Other assets 70
16,452
LESS:LIABILITIES
Deposits from customers (13,633)
Other liabilities (879)
(14,512)
NET ASSETS 1,940
GOODWILL ARISING ON ACQUISITION
Total consideration for acquisition* 1,358
Fair value of non-controlling interest at the dates of acquisition 582
1,940
Fair value of net asset identified at the date of acquisition 1,940
GOODWILL -
NET CASH FLOW ARISING ON ACQUISITION 8,723

* This includes a cash consideration of BD 726 thousands.

From the date of acquisition, ASBS has contributed BD 176 thousands to the net profit of the Group. If the
business combination had occurred at the beginning of the year, the operating income and net profit of the
Group for 2016 would have been BD 424 thousands and BD 180 thousands respectively.

94 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 Notes To The Consolidated Financial Statements (continued)

4 CLASSIFICATION OF ASSETS, LIABILITIES AND EQUITY OF INVESTMENT

ACCOUNTHOLDERS

31 DECEMBER 2016
At fair
value At fair
through value At
profit or through amortised
loss equity cost / others Total
BD ‘000 BD ‘000 BD ‘000 BD ‘000
ASSETS
Cash and balances with banks and Central Bank - - 131,990 131,990
Sovereign Sukuk - - 358,269 358,269
Murabaha and Wakala receivables from banks - - 182,452 182,452
Corporate Sukuk - - 28,934 28,934
Murabaha financing - - 232,556 232,556
Mudaraba financing - - 238,313 238,313
Ijarah Muntahia Bittamleek - - 188,485 188,485
Musharaka - - 12,304 12,304
Assets under conversion - 41 34,424 34,465
Non-trading investments 115,403 6,670 - 122,073
Investments in real estate - 51,863 - 51,863
Development properties - - 17,781 17,781
Investment in associates - - 10,561 10,561
Other assets - 1,449 23,987 25,436
Goodwill - - 25,971 25,971
Assets held-for-sale - 19,636 204 19,840

115,403 79,659 1,486,231 1,681,293

At fair
value At fair
through value At
profit or through amortised
loss equity cost / others Total
BD ‘000 BD ‘000 BD ‘000 BD ‘000
LIABILITIES AND EQUITY OF INVESTMENT
ACCOUNTHOLDERS
Murabaha and Wakala payables to banks - - 132,032 132,032
Murabaha and Wakala payables to non-banks - - 723,439 723,439
Current accounts - - 279,609 279,609
Liabilities under conversion - - 217 217
Term financing - - 91,837 91,837
Other liabilities - - 49,043 49,043
Equity of investment accountholders - - 68,796 68,796
Liabilities relating to assets classified as held-for-sale - - 11,421 11,421

- - 1,356,394 1,356,394

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 95

 Notes To The Consolidated Financial Statements (continued)

4 CLASSIFICATION OF ASSETS, LIABILITIES AND EQUITY OF INVESTMENT ACCOUNTHOLDERS (continued)

31 DECEMBER 2015

At fair value
through At fair value
profit or through At amortised
loss equity cost / others Total
BD ‘000 BD ‘000 BD ‘000 BD ‘000
ASSETS
Cash and balances with banks and Central Bank - - 152,572 152,572
Sovereign Sukuk - - 350,474 350,474
Murabaha and Wakala receivables from banks - - 103,345 103,345
Corporate Sukuk - - 50,472 50,472
Murabaha financing - - 245,168 245,168
Mudaraba financing - - 239,031 239,031
Ijarah Muntahia Bittamleek - - 155,217 155,217
Musharaka - - 7,154 7,154
Assets under conversion - 41 31,991 32,032
Non-trading investments 115,008 8,506 - 123,514
Investments in real estate - 68,786 - 68,786
Development properties - - 49,021 49,021
Investment in associates - - 9,994 9,994
Other assets - 2,037 41,855 43,892
Goodwill - - 25,971 25,971

115,008 79,370 1,462,265 1,656,643

At fair value
through At fair value
profit or through At amortised
loss equity cost / others Total
BD ‘000 BD ‘000 BD ‘000 BD ‘000
LIABILITIES AND EQUITY OF INVESTMENT
ACCOUNTHOLDERS
Murabaha and Wakala payables to banks - - 120,795 120,795
Murabaha and Wakala payables to non-banks - - 842,570 842,570
Current accounts - - 224,366 224,366
Liabilities under conversion - - 2,327 2,327
Term financing - - 35,986 35,986
Other liabilities - - 48,246 48,246
Equity of investment accountholders - - 62,351 62,351

- - 1,336,641 1,336,641

96 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 Notes To The Consolidated Financial Statements (continued)

5 CASH AND BALANCES WITH BANKS AND CENTRAL BANK

2016 2015
BD ‘000 BD ‘000
Mandatory reserve with Central Bank* 29,514 32,240
Cash and other balances with Central Bank 72,356 81,448
Balances with other Banks 30,120 38,884
131,990 152,572

* This balance is not available for use in the day-to-day operations of the Group.

6 MURABAHA AND WAKALA RECEIVABLES FROM BANKS

Jointly financed assets 68,796 62,351

Self financed assets 113,656 40,994
182,452 103,345

At 31 December 2016, deferred profits on Murabaha receivables from banks amounted to BD 60 thousands
(2015: BD 12 thousands).

The entire exposure of Murabaha and Wakala receivables from Banks at 31 December 2016 and 31 December
2015 are with financial entities based in GCC countries.

7 CORPORATE SUKUK

2016 2015
BD ‘000 BD ‘000
Investment grade 17,865 31,833
Non-investment grade 3,843 10,330
Un-rated Sukuk 7,226 8,309
28,934 50,472

8 MURABAHA FINANCING

Murabaha financing - gross 255,326 254,169

Less:
Specific provision (17,638) (4,452)
Collective provision (5,132) (4,549)
232,556 245,168

Murabaha financing is reported net of deferred profits of BD 39,249 thousands (2015: BD 50,310 thousands).

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 97

 Notes To The Consolidated Financial Statements (continued)

9 MUDARABA FINANCING

2016 2015
BD ‘000 BD ‘000
Mudaraba financing - gross 248,652 248,354
Less:
Specific provison (10,339) (9,323)
238,313 239,031

10 IJARAH MUNTAHIA BITTAMLEEK

This represents net investments in assets leased for periods which either approximate or
cover major parts of the estimated useful lives of such assets. The majority of the lease
documentations provide that the lessor undertakes to transfer the leased assets to the lessee
at the end of the lease term upon the lessee fulfilling all its obligations under the lease
agreement.

2016 2015
BD ‘000 BD ‘000
Movements in Ijarah Muntahia Bittamleek assets are as follows:
At 1 January 155,217 141,052
Additions during the year - net 38,731 48,777
Ijarah assets depreciation (10,568) (15,939)
Transfer from / (to) other assets* 14,400 (17,729)
Specific provison (8,795) (444)
Collective provision (500) (500)
At 31 December 188,485 155,217

* On termination of lease, this asset was transferred to other assets. On release, the asset was reclassified as
Ijarah.

2016 2015
BD ‘000 BD ‘000
The future minimum lease receivable in aggregate are as follows:
Due within one year 4,304 10,494
Due in one to five years 79,273 62,881
Due after five years 104,908 81,842
188,485 155,217

Ijarah Muntahia Bittamleek is divided into the following asset

classes:
Land and buildings 181,685 155,217
Aircraft 6,800 -
188,485 155,217

The accumulated depreciation on Ijarah Muntahia Bittamleek assets amounted to BD 40,403 thousands
(2015: BD 31,236 thousands).

98 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 Notes To The Consolidated Financial Statements (continued)

11 MOVEMENTS IN PROVISION

2016

Financing Fair value

facilities & through equity
other assets investments Total
BD ‘000 BD ‘000 BD ‘000
Balance at the beginning of the year
Specific provision 24,513 5,471 29,984
Collective provision 5,049 - 5,049
Transfer
Specific provision 125 - 125
Collective provision (125) - (125)
Write offs (1,248) - (1,248)
Provsision for impairment
Charge for the year - specific 20,338 3,153 23,491
Charge for the year - collective 708 - 708
Recoveries during the year (2,626) - (2,626)
18,420 3,153 21,573
Balance at the end of the year
Specific provision 41,102 8,624 49,726
Collective provision 5,632 - 5,632

2015

Financing Fair value

facilities & through equity
other assets investments Total
BD ‘000 BD ‘000 BD ‘000
Balance at the beginning of the year
Specific provision 5,073 4,328 9,401
Collective provision 4,709 - 4,709
Transfer
Specific provision 160 - 160
Collective provision (160) - (160)
Write offs (1,928) - (1,928)
Provsision for impairment
Charge for the year - specific 21,802 1,143 22,945
Charge for the year - collective 500 - 500
Recoveries during the year (594) - (594)
21,708 1,143 22,851
Balance at the end of the year
Specific provision 24,513 5,471 29,984
Collective provision 5,049 - 5,049

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 99

 Notes To The Consolidated Financial Statements (continued)

12 ASSETS AND LIABILITIES UNDER CONVERSION

These represent interest bearing non-Shari’a compliant assets and liabilities of BMI and
ASBS. These assets and liabilities have been reported as separate line items on the face of
the consolidated statement of financial position. The details of the assets and liabilities under
conversion are as follows:

2016 2015
BD ‘000 BD ‘000
Assets
Loans and advances* 34,425 31,437
Non-trading investments - debt 24 24
Non-trading investment - fair value through equity ** 16 16
Other assets - 555
34,465 32,032
Liabilities
Other liabilities 217 2,327
217 2,327

* Increase of loans and advances arose from acquisition of a new subsidiary, ASBS Seychelles, during the
year (note 3). The Bank carries a specific provision against these loans and advances amounting to BD 4,031
thousands (2015: BD 2,503 thousands).
** The above fair value through equity investment is classified as Level 3 (2015: Level 3) in the fair value
hierarchy (note 13). During the year, there were no movements in the fair value of this investment.

13 NON-TRADING INVESTMENTS
Non-trading investments are classified as fair value through equity or fair value through
profit or loss.

Fair value hierarchy

The Group uses the following hierarchy for determining and disclosing the fair value of
financial instruments by valuation technique:

Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities;

Level 2: other techniques for which all inputs that have a significant effect on the recorded
fair value are observable, either directly or indirectly; or

Level 3: techniques that use inputs that have a significant effect on the recorded fair value
that are not based on observable market data.

100 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 Notes To The Consolidated Financial Statements (continued)

13 NON-TRADING INVESTMENTS (continued)

The following table shows an analysis of the financial instruments carried at fair value in the
consolidated statement of financial position:

Level 1 Level 2 Level 3 Total

31 December 2016 BD ‘000 BD ‘000 BD ‘000 BD ‘000

Financial assets at fair value through profit or loss 7,755 5,011 102,637 115,403
Financial assets at fair value through equity 3,968 - 2,702 6,670
11,723 5,011 105,339 122,073

Level 1 Level 2 Level 3 Total

31 December 2015 BD ‘000 BD ‘000 BD ‘000 BD ‘000

Financial assets at fair value through profit or loss 7,646 4,702 102,660 115,008
Financial assets at fair value through equity 4,774 - 3,732 8,506
12,420 4,702 106,392 123,514

During the year ended 31 December 2016, an amount of BD 1,793 (2015: BD Nil) was transferred from Level 1 to
Level 3 fair value measurements.

The movements in fair value of non-trading investments classified in level 3 of the fair value
hierarchy are as follows:

2016 2015
BD ‘000 BD ‘000

At 1 January 106,392 121,890

Additions during the year 414 -
Fair value changes (1,109) (2,426)
Repayments during the year - (408)
Disposals during the year (2,151) (12,664)
Transfer from level 1 to level 3 1,793 -
At 31 December 105,339 106,392

14 INVESTMENTS IN REAL ESTATE

Land 48,930 49,759

Buildings 2,933 19,027
51,863 68,786

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 101

 Notes To The Consolidated Financial Statements (continued)

14 INVESTMENTS IN REAL ESTATE (continued)

The movements in fair value of investments in real estate classified in level 3 of the fair value
hierarchy are as follows:

2016 2015
BD ‘000 BD ‘000

At 1 January 68,786 65,149

Additions during the year 2,732 3,836
Transfer to assets classified as held-for-sale (19,636) -
Fair value changes (19) (199)
At 31 December 51,863 68,786

15 DEVELOPMENT PROPERTIES
These represent properties acquired and held through investment vehicles exclusively for
development in the Kingdom of Bahrain and the United Kingdom. The carrying amounts
include land price and related construction costs.

16 INVESTMENT IN ASSOCIATES
The Group has a 14.4% (2015: 14.4%) stake in Al Salam Bank Algeria (ASBA), an unlisted
bank incorporated in Algeria. The Bank has representation on the board of ASBA through
which the Bank has a significant influence on ASBA.

The Group has a 20.94% (2015: 20.94%) stake in Gulf African Bank (“GAB”), a private Islamic
bank incorporated in Kenya.

The Group’s interest in ASBA and GAB is accounted for using the equity method in the
consolidated financial statements.

The following table illustrates summarised financial information of Group’s investments in

ASBA and GAB:

2016 2015
BD ‘000 BD ‘000

Associates' statement of financial position:

Total assets 280,648 234,168
Total liabilities 212,315 169,231
Net assets 68,333 64,937
Total revenue 20,157 20,484
Total expenses 14,772 16,411
Net profit for the year 5,385 4,073
Group’s share of associates’ net profit 727 855

102 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 Notes To The Consolidated Financial Statements (continued)

17 OTHER ASSETS

2016 2015
BD ‘000 BD ‘000

Assets under conversion (a)

Non-trading-investments - debt 236 236
Non-trading investments - fair value through equity (b) 1,449 2,036
1,685 2,272
Repossessed assets 4,863 4,007
Profit receivable 9,922 7,995
Premises and equipment 2,067 3,910
Prepayments 1,874 1,066
Rental receivable on Ijarah Muntahia Bittamleek assets 449 685
Other receivables and advances (c) 4,576 15,469
Aircraft [net of impairment of BD 7,600 thousands] (d) - 8,488
25,436 43,892

(a) These represent non-Shari’a compliant assets resulted from the acquisition of Bahraini
Saudi Bank B.S.C. (“ex-BSB”).

(b) The above fair value through equity investments are classified as Level 3 in the fair value
hierarchy (note 12). Movements in fair value through equity investments are as follows:

2016 2015
BD ‘000 BD ‘000

At 1 January 2,036 2,412

Fair value changes - 188
Repayments during the year (82) (69)
Disposals during the year (505) (334)
Provision - (161)
1,449 2,036

(c) This includes BD 1,912 thousands (2015: 10,865 thousands) relating to receivable from
sale of investments and advances to contractors. It also includes a specific provision against
credit card receivables amounting to BD 300 thousands (2015: 192 thousands).

(d) The lease of aircraft was terminated during 2015 and the aircraft was transferred to Ijarah
Muntahia Bittamleek during 2016 on release.

18 GOODWILL
After initial recognition, goodwill is measured at cost less any accumulated impairment
losses. Goodwill is tested for impairment at least annually. Any impairment is recognised
immediately in the consolidated income statement. Goodwill is allocated to each of the
Group’s cash-generating units that are expected to benefit from the combination, irrespective
of whether other assets or liabilities of the acquiree are assigned to those units.

Impairment exists when carrying value of an asset or cash generating unit (CGU) exceeds its
recoverable amount, which is the higher of its fair value less costs of disposal and its value in
use.

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 103

 Notes To The Consolidated Financial Statements (continued)

18 GOODWILL (continued)

The recoverable amount of each cash-generating unit’s goodwill is based on value-in-use

calculations using cash flow projections from financial forecasts approved by management,
extrapolated for five years projection using terminal growth rate of 3% and discount rate of
11%.

The methodology and assumptions used for estimating future cash flows are reviewed
regularly to reduce any differences between loss estimates and actual loss experience.

Management performed a sensitivity analysis to assess the changes to key assumptions that
could cause the carrying value of the CGU to exceed its recoverable amount. The discount
rate and earnings are considered as key assumptions. A 0.5% change in the discount rate and
a 0.25% change in earnings would impact the carrying value of goodwill by BD 1.5 million and
BD 6.7 million respectively.

19 ASSETS AND LIABILITIES CLASSIFIED AS HELD-FOR-SALE

The Group is in the process of selling the underling investment properties of Auslog Holding
Trust to a third party and accordingly, it has been classified as held-for-sale. The below table
illustrates the summarised consolidated financial information of Auslog Holding Trust:

2016
Consolidated statement of financial position BD ‘000

Assets
Cash and bank balances 139
Investment properties* 19,636
Other assets 65
Assets classified as held-for-sale 19,840
Liabilities
Term financing* 11,332
Other liabilities 89
Liabilities relating to assets classified as held-for-sale 11,421

* The property classified as held-for-sale is pledged against the term financings of BD 11,332 thousands.

104 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 Notes To The Consolidated Financial Statements (continued)

20 TERM FINANCING

Facility amount Collateral carring value

2016 2015 2016 2015
Collateral type BD ‘000 BD ‘000 BD ‘000 BD ‘000

Corporate and
Term financing 1 16,965 16,965 38,515 40,710
Sovereign Sukuk
Term financing 2 Sovereign Sukuk 37,700 - 72,912 -
Term financing 3 Sovereign Sukuk 30,180 - 52,918 -
Term financing 4 Aircraft 6,992 7,531 7,434 8,488
Term financing 5 Real estate - 11,490 - 19,027
91,837 35,986 171,779 68,225

21 OTHER LIABILITIES

2016 2015
BD ‘000 BD ‘000

Accounts payable and accruals 34,218 19,623

Profit payable 5,917 5,474
End of service benefits and other employee related accruals 4,144 6,387
Dividend payable 3,988 3,728
Advances received from customers for sale of properties 776 13,034
49,043 48,246

22 EQUITY OF INVESTMENT ACCOUNTHOLDERS

Equity of investment accountholders funds are commingled with the Group’s funds and used
to fund / invest in asset contracts and no priority is granted to any party for the purpose
of investments and distribution of profits. According to the terms of acceptance of the
unrestricted investment accounts, 100% of the funds are invested taking into consideration
the relevant weightage, if any. The Mudarib’s share of profit ranges between 40% and 50%.
Operating expenses are charged to shareholders’ funds and not included in the calculation.

The balances consists of savings accounts of BD 50,944 thousands (2015: BD 49,093

thousands) and call accounts of BD 17,852 thousands (2015: BD 13,258 thousands).

The average profit rate attributed to the equity of investment accountholders in 2016 was
0.27% (2015: 0.21%).

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 105

 Notes To The Consolidated Financial Statements (continued)

23 SHARE CAPITAL

2016 2015
BD ‘000 BD ‘000

Authorised:

2,500,000,000 ordinary shares (2015: 2,500,000,000 shares) of

250,000 250,000
BD 0.100 each

Issued and fully paid: ( BD 0.100 per share )

Number of shares 2,140,930,752 (2015: 2,140,930,752) 214,093 214,093

The Group purchased 15,032,732 shares of the Bank (2015: Nil) during the year which are held as treasury stock
as of 31 December 2016.

23.1 PROPOSED APPROPRIATION

The Board of Directors in its meeting on 15 February 2016 has resolved to recommend a cash
dividend of 5 fils per share or 5% (2015: 5 fils or 5%) of the paid-up capital subject to approval
at the forthcoming annual general meeting.

24 STATUTORY RESERVE
As required by Bahrain Commercial Companies Law and the Bank’s articles of association,
10% of the net profit for the year has been transferred to the statutory reserve. The Group
may resolve to discontinue such annual transfers when the reserve totals 50% of the paid up
share capital of the Bank. The reserve is not distributable except in such circumstances as
stipulated in the Bahrain Commercial Companies Law followed by the approval of the CBB.

25 EARNINGS PER SHARE

Basic earnings per share (EPS) is calculated by dividing the net profit for the year attributable
to shareholders of the Bank by the weighted average number of ordinary shares outstanding
during the year.

26 INCOME FROM FINANCING CONTRACTS

2016 2015
BD ‘000 BD ‘000

Murabaha financing 12,870 11,603

Mudaraba financing 13,069 13,104
Ijarah Muntahia Bittamleek* 10,030 10,569
Musharaka 591 558
Murabaha and Wakala receivables from banks 1,415 896
Income from assets under conversion ** 875 7,800
38,850 44,530

* Depreciation on Ijarah Muntahia Bitamleek amounted to BD 10,568 thousands (2015: BD 15,939 thousands).
** The Bank’s shareholders are advised, but not obliged, to contribute this income to charity at their discretion.

106 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 Notes To The Consolidated Financial Statements (continued)

27 GAINS ON SALE OF INVESTMENTS AND SUKUK

2016 2015
BD ‘000 BD ‘000

Gain on sale of:

Development properties* 12,130 2,469
Fair value through profit or loss investments 2,611 265
Sukuk 14 905
Available-for-sale investments - 3,555
Other investments 398 1,140
15,153 8,334

* Sales: BD 49,131 thousands (2015: BD 17,203 thousands) and cost: BD 37,001 thousands
(14,734 2015 thousands).

28 INCOME FROM INVESTMENTS

2016 2015
BD ‘000 BD ‘000

Rental income from investments in real estate 1,947 1,687

Income from assets classified as held-for-sale - 2,290
Loss from Fair value through profit or loss investments (128) (728)
1,819 3,249

29 FEES, COMMISSION AND OTHER INCOME - NET

2016 2015
BD ‘000 BD ‘000

Financing and transaction related fees and commission 5,953 4,336

Fiduciary and other fees 225 387
Other income 1,751 4,461
7,929 9,184

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 107

 Notes To The Consolidated Financial Statements (continued)

30 TOTAL COMPREHENSIVE INCOME

2016 2015
BD ‘000 BD ‘000

Net profit for the year 16,096 10,548

Items to be reclassified to consolidated income statement in
subsequent periods:
Unrealized gain reclassified to consolidated income statement on
(82) (965)
disposal of fair value through equity investments
Unrealised gain / (loss) on fair value through equity investments 675 (470)
Changes in fair value of investments in real estate (19) 1,549
Foreign currency re-translation (4) (1,472)
Other comprehensive income / (loss) for the year 570 (1,358)
Total comprehensive income for the year 16,666 9,190
Attributable to:
Equity holders of the Bank 16,778 11,168
Non-controlling interest (112) (1,978)
16,666 9,190

108 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 Notes To The Consolidated Financial Statements (continued)

31 RELATED PARTY TRANSACTIONS

Related parties comprise major shareholders, directors of the Bank, senior management,
close members of their families, entities owned or controlled by them and companies
affiliated by virtue of common ownership or directors with that of the Bank. The transactions
with these parties were approved by the Board of Directors. All the loans and advances to
related parties are performing and are free of any provision for possible credit losses.

The balances with related parties at 31 December 2016 were as follows:

2016

Associates Directors
and joint Major and related Senior
ventures shareholders entities management Total
BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000

Assets:
Cash and balances with banks and
- 181 - - 181
Central Bank
Murabaha and Wakala receivables
- 6,786 - - 6,786
from banks
Murabaha financing 25,172 - - 115 25,287
Mudaraba financing 1,885 - - - 1,885
Ijarah Muntahia Bittamleek - - 143 226 369
Musharaka financing - - 45 - 45
Other assets 947 2 61 24 1,034
Liabilities and equity of investment
accountholders:
Wakala payables to non-banks 4,235 10,505 48 1,134 15,922
Current accounts 343 9 793 132 1,277
Equity of investment accountholders - - 825 135 960
Other liabilities 60 - - 5 65
Contingent liabilities and
743 - - - 743
commitments

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 109

 Notes To The Consolidated Financial Statements (continued)

31 RELATED PARTY TRANSACTIONS (continued)

2015

Associates Directors
and joint Major and related Senior
ventures shareholders entities management Total
BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000

Assets:
Cash and balances with banks and
- - - - -
Central Bank
Murabaha and Wakala receivables
- 36 - - 36
from banks
Murabaha financing 32,799 - - 36 32,835
Mudaraba financing 1,885 - - - 1,885
Ijarah Muntahia Bittamleek - - - 187 187
Musharaka financing - - 55 - 55
Other assets 1,924 - 3,660 4 5,588
Liabilities and equity of investment
accountholders:
Murabaha and Wakala due to banks 1,508 - - - 1,508
Wakala payables to non-banks 2,235 23,400 637 653 26,925
Current accounts 2,216 4,010 163 50 6,439
Equity of investment accountholders - - 153 64 217
Other liabilities 911 191 3 3 1,108
Contingent liabilities and
743 - - - 743
commitments

110 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 Notes To The Consolidated Financial Statements (continued)

31 RELATED PARTY TRANSACTIONS (continued)

The income and expenses in respect of related parties included in the consolidated income
statement are as follows:

2016

Associates Directors
and joint Major and related Senior
ventures shareholders entities management Total
BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000

Income:
Income from financing contracts - 19 8 6 33
Other income - - - - -
Gain on sale of investments and Sukuk - - - - -
Expenses:
Profit on Murabaha and Wakala
- - - - -
payables to banks
Profit paid on Wakala from non-banks 27 380 1 22 430
Share of profits on equity of
- - 3 - 3
investment account holders
Other operating expenses - - 593 - 593
Provision for impairment 8,947 - - - 8,947

2015

Associates Directors
and joint Major and related Senior
ventures shareholders entities management Total
BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000

Income:
Income from financing contracts 54 - 4 5 63
Other income 80 - - 1 81
Gain on sale of investments and Sukuk 217 - 1,259 - 1,476
Expenses:
Profit on Murabaha and Wakala
3 - - - 3
payables to banks
Profit paid on Wakala from non-banks 144 2,720 13 16 2,893
Share of profits on equity of
- - 2 - 2
investment account holders
Other operating expenses 6 - 432 - 438
Provision for impairment 9,425 - - - 9,425

Directors› remuneration for 2016 amounted to BD 389 thousands (2015: BD 365 thousands).

Compensation of key management personnel, consisting of short-term benefits and non-cash remuneration, for
the year was BD 2,902 thousands (2015: BD 3,142 thousands).

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 111

 Notes To The Consolidated Financial Statements (continued)

32 CONTINGENT LIABILITIES AND COMMITMENTS

2016 2015
BD ‘000 BD ‘000

Contingent liabilities on behalf of customers

Guarantees 24,993 28,144
Letters of credit 20,788 9,594
Acceptances 3,607 2,275
49,388 40,013
Irrevocable unutilised commitments
Unutilised financing commitments 114,491 79,465
Unutilised non-funded commitments 23,308 37,023
Commitments towards development cost 2,951 6,981
140,750 123,469
Commitment relating to purchase of investment - 4,182
Capital expenditure commitments

Estimated capital expenditure contracted for at the consolidated

- 29
statement of financial position date but not provided for

190,138 167,693
Forward foreign exchange contracts - notional amount 20,280 14,448

Letters of credit, guarantees (including standby letters of credit) commit the Group to make
payments on behalf of customers contingent upon their failure to perform under the terms of
the contract.

Commitments generally have fixed expiration dates, or other termination clauses. Since
commitments may expire without being utilized, the total contract amounts do not
necessarily represent future cash requirements.

Operating lease commitment - Group as lessee

The Group has entered into various operating lease agreements for its premises. Future
minimal rentals payable under the non-cancellable leases are as follows:

2016 2015
BD ‘000 BD ‘000

Within 1 year 1,168 1,328

After one year but not more than five years 2,360 2,576
3,528 3,904

112 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 Notes To The Consolidated Financial Statements (continued)

33 RISK MANAGEMENT
33.1 INTRODUCTION
Risk is inherent in the Group’s activities but it is managed through a process of ongoing
identification, measurement and monitoring, subject to risk limits and other controls. This
process of risk management is critical to the Group’s continuing profitability and each
individual within the Group is accountable for the risk exposures relating to his or her
responsibilities. The Group is exposed to credit risk, liquidity risk, operational risk, and
market risk. It is also subject to early settlement risk and operational risks.

The Group’s risk function is independent of lines of business and the Group Chief Risk Officer
reports to the Group CEO with access to the Board Audit and Risk Committee.

The independent risk control process does not include business risks such as changes in
the environment, technology and industry, they are monitored through the Group’s strategic
planning process.

Risk
The Board of Directors is ultimately responsible for identifying and controlling risks; however,
there are separate independent bodies responsible for managing and monitoring risks.

Board of Directors
The Board of Directors is responsible for setting the overall risk management framework and
appetite encompassing the risk strategies and policies.

Executive Committee
The Executive Committee has the responsibility to review and recommend to the Board for
approval the overall risk process and policies within the Bank.

Shari’a Supervisory Board

The Group’s Shari’a Supervisory Board is entrusted with the responsibility to ensure the
Group’s adherence to Shari’a rules and principles in its transactions and activities.

Risk Committee
Credit / Risk committee recommends the risk policy and framework to the Board. Its primary
role is selection and implementation of risk management systems, portfolio monitoring,
stress testing, risk reporting to the Board, Board Committees, Regulators and Executive
management. In addition, individual credit transaction approval and monitoring is an integral
part of the responsibilities of Risk Committee.

Asset and Liability Committee

The Asset and Liability Committee establishes policy and objectives for the asset and liability
management of the Group’s financial position in terms of structure, distribution, risk and
return and its impact on profitability. It also monitors the cash flow, tenor and cost / yield
profiles of assets and liabilities and evaluates the Group’s financial position both from profit
rate sensitivity and liquidity points of view, making corrective adjustments based upon
perceived trends and market conditions, monitoring liquidity, monitoring foreign exchange
exposures and positions.

Audit Committee
The Audit and Risk Committee is appointed by the Board of Directors who are non-
executive directors of the Group. The Audit Committee assists the Board in carrying out its
responsibilities with respect to assessing the quality and integrity of financial reporting, the
audit thereof, the soundness of the internal controls of the Group, reviewing and monitoring
the overal risk framework and profile of the Group as well as its adherence to stipulated
policies and limits, and the methods for monitoring compliance with laws, regulations and
supervisory and internal policies.

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 113

 Notes To The Consolidated Financial Statements (continued)

33 RISK MANAGEMENT (continued)

33.1 INTRODUCTION (continued)

The Audit and Risk Committee reviews Group’s accounting and financial practices, risk
management reports, integrity of the Group’s financial and internal controls and consolidated
financial statements. It also reviews the Group’s compliance with legal requirements,
recommends the appointment, compensation and oversight of the Group’s external and
internal auditors.

Internal Audit
Risk management processes throughout the Group are audited by the internal audit function,
that examines both the adequacy of the procedures and the Group’s compliance with the
procedures. Internal Audit discusses the results of all assessments with management, and
reports its findings and recommendations to the Board Audit Committee.

Risk measurement and reporting systems

The Group’s risk management policies aim to identify, analyse and manage the risks faced by
the Group, to set appropriate risk limits and controls, and to continuously monitor risk levels
and adherence to limits. The Group’s risk management department is also responsible for
identifying risk characteristics inherent in new and existing products, activities and setting
exposure limits to mitigate these risks.

Monitoring and controlling risks is primarily performed based on limits established by the
Group. These limits reflect the business strategy and market environment of the Group
as well as the level of risk that the Group is willing to accept, with additional emphasis
on selected industries. In addition, the Group monitors and measures the overall risk
bearing capacity in relation to the aggregate risk exposure across respective risk types and
activities.

Information compiled from all the businesses is examined and processed in order to analyse,
control and identify early risks. This information is presented and explained to the Board
of Directors, the Risk Committee and Asset Liability Committee as may be applicable. The
reports includes aggregate credit quality and exposures, market risk exposures, operational
risk metrics, limit exceptions, liquidity ratios, stress testing, and risk profile changes. A
detailed report is produced on a quarterly basis with simplified reports produced on a
monthly basis. Senior management assesses the appropriateness of the allowance for credit
losses on a quarterly basis. The Board of Directors receives a comprehensive risk report once
a quarter which is designed to provide all the necessary information to assess the risks of the
Group.

For all levels throughout the Group, specifically tailored risk reports are prepared and
distributed in order to ensure that all business divisions have access to extensive, necessary
and up-to-date information. A daily briefing is given to all relevant members of the Group
on the utilisation of market limits, proprietary investments and liquidity, plus any other risk
developments.

Concentrations arise when a number of counterparties are engaged in similar business

activities, or activities in the same geographic region, or have similar economic features that
would cause their ability to meet contractual obligations to be similarly affected by changes
in economic, political or other conditions. Concentrations indicate the relative sensitivity of
the Group’s performance to developments affecting a particular industry or geographical
location.

114 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 Notes To The Consolidated Financial Statements (continued)

33 RISK MANAGEMENT (continued)

33.1 INTRODUCTION (continued)

In order to avoid excessive concentrations of risk, the Group’s policies and procedures include
specific guidelines to focus on maintaining a diversified portfolio. Identified concentrations of
credit risks are controlled and managed accordingly.

33.2 CREDIT RISK

Credit risk is the risk that one party to a financial contract will fail to discharge an obligation
and cause the other party to incur a financial loss. The Group attempts to control credit
risk by monitoring credit exposures, setting limits for transactions with counterparties, and
continually assessing the creditworthiness of counterparties.

In addition to monitoring credit limits, the Group manages the credit exposures by entering
into collateral arrangements with counterparties in appropriate circumstances and by
limiting the duration of the exposure.

Maximum exposure to credit risk without taking account of any collateral and other credit
enhancements.
The table below shows the maximum exposure (excluding sovereign exposures) to credit
risk for the components of the consolidated statement of financial position. The maximum
exposure is shown net of provision, before the effect of mitigation through the use of master
netting and collateral agreements.

Gross maximum Gross maximum

exposure 2016 exposure 2015
BD ‘000 BD ‘000

ASSETS
Balances with other banks 30,120 38,884
Murabaha receivables from banks 182,452 103,345
Corporate Sukuk 28,934 50,472
Murabaha and Mudaraba financing 409,816 389,628
Ijarah Muntahia Bittamleek 187,356 154,501
Musharaka financing 12,305 7,154
Assets under conversion 34,465 31,355
Other assets 9,918 23,955
Total 895,366 799,294
Contingent liabilities and commitments 156,720 167,693
Total credit risk exposure 1,052,086 966,987

Where financial instruments are recorded at fair value the amounts shown above represent
the current credit risk exposure but not the maximum risk exposure that could arise in the
future as a result of changes in values.

Type of credit risk

Various contracts entered into by the Group comprise Murabaha financing, Mudaraba
financing, Musharaka financing, Sukuk and Ijarah Muntahia Bittamleek contracts. Murabaha
financing contracts cover land, buildings, commodities, motor vehicles and others. Mudaraba
financing consist of financing transactions entered through other Islamic banks and financial
institutions. Mudaraba is a partnership agreement in which the Islamic bank acts as the
provider of funds (the Rabamal) while the recipient of the funds (the Mudarib or the manager)

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 115

 Notes To The Consolidated Financial Statements (continued)

33 RISK MANAGEMENT (continued)

33.2 CREDIT RISK (continued)

provides the professional, managerial and technical know-how towards carrying out the
venture, trade or service with an aim of earning profit. The various financial instruments
are:

Murabaha financing
The Group arranges Murabaha transactions by buying an asset (which represents the object
of the Murabaha) and then selling this asset to customers (beneficiary) after adding a margin
of profit over the cost. The sale price (cost plus profit margin) is paid in instalments over the
agreed period.

Ijarah Muntahia Bittamleek

The legal title of the leased asset under Ijarah Muntahia Bittamleek passes to the lessee at
the end of the Ijarah term, provided that all Ijarah instalments are settled.

a) The credit quality of balances with banks and Murabaha receivables from banks subject to
credit risk is as follows:

31 December 2016

Neither past due nor impaired Past due or

individually
‘A’ Rated ‘B’ Rated Unrated impaired Total
BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000

Balances with other banks 24,012 4,298 1,810 - 30,120

Murabaha and Wakala receivables
102,166 55,856 24,430 - 182,452
from banks
126,178 60,154 26,240 - 212,572

31 December 2015

Neither past due nor impaired Past due or

individually
‘A’ Rated ‘B’ Rated Unrated impaired Total
BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000

Balances with other banks 34,999 2,326 1,559 - 38,884

Murabaha and Wakala receivables
46,016 27,659 29,670 - 103,345
from banks
81,015 29,985 31,229 - 142,229

The ratings referred to in the above tables are by one or more of the four international rating
agencies (Standards & Poors, Moody’s, Fitch and Capital Intelligence). The unrated exposures
are with various high quality Middle East financial institutions, which are not rated by a credit
rating agency. In the opinion of the management, these are equivalent to “A” rated banks or
very secured and well managed institutions.

116 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 Notes To The Consolidated Financial Statements (continued)

33 RISK MANAGEMENT (continued)

33.2 CREDIT RISK (continued)

b) The credit quality of Corporate Sukuk, financing facilities and other assets subject to credit
risk, based on internal credit ratings, is as follows:

31 December 2016
Neither past due nor
Past due
impaired
Satisfactory Watch List Not impaired Impaired Total
BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000

Corporate Sukuk 28,934 - - - 28,934

Murabaha and Mudaraba financing 276,912 140 69,633 63,131 409,816
Ijarah Muntahia Bittamleek 155,919 2,126 20,855 8,456 187,356
Musharaka financing 7,213 - 4,941 151 12,305
Assets under conversion 13,101 - 1,093 20,271 34,465
Other assets 9,128 - 778 12 9,918
491,207 2,266 97,300 92,021 682,794

31 December 2015
Neither past due nor
Past due
impaired
Satisfactory Watch List Not impaired Impaired Total
BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000

Corporate Sukuk 49,829 - - 643 50,472

Murabaha and Mudaraba financing 282,768 11,254 56,489 39,117 389,628
Ijarah Muntahia Bittamleek 132,170 5,409 14,282 2,640 154,501
Musharaka financing 3,791 435 2,928 - 7,154
Assets under conversion 1,004 - 15,438 14,913 31,355
Other assets 22,641 104 1,203 7 23,955
492,203 17,202 90,340 57,320 657,065

In addition to the above, the financing facilities provided to the Government of Bahrain, its
related entities and GCC sovereign entities amounts to BD 62,184 thousands (2015: BD 95,964
thousands).

All internal risk ratings are tailored to the various categories and are derived in accordance
with the Group’s rating policy. The attributable risk ratings are assessed and updated
regularly.

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 117

 Notes To The Consolidated Financial Statements (continued)

33 RISK MANAGEMENT (continued)

33.2 CREDIT RISK (continued)

c) Aging analysis of past due but not impaired financing facilities are illustrated as follows:

31 December 2016

0-30 days 31-90 days › 90 days Total

BD ‘000 BD ‘000 BD ‘000 BD ‘000

Murabaha and Mudaraba financing 37,857 31,776 - 69,633

Ijarah Muntahia Bittamleek 17,204 3,651 - 20,855
Musharaka financing 4,538 403 - 4,941
Assets under conversion 370 723 - 1,093
Other assets 407 371 - 778
60,376 36,924 - 97,300

31 December 2015

0-30 days 31-90 days › 90 days Total

BD ‘000 BD ‘000 BD ‘000 BD ‘000

Murabaha and Mudaraba financing 19,447 17,836 19,206 56,489

Ijarah Muntahia Bittamleek 4,600 7,080 2,602 14,282
Musharaka financing 148 2,182 598 2,928
Assets under conversion 1,147 638 13,653 15,438
Other assets 545 4 654 1,203
25,887 27,740 36,713 90,340

All the past due but not impaired financing facilities are covered by collateral of BD 88,455
thousands (2015: BD 186,280 thousands). The utilisation of the collateral will be on customer
by customer basis and is limited to the customers’ total exposure.

The maximum credit risk, without taking into account the fair value of any collateral and
Shari’a-compliant netting agreements, is limited to the amounts on the consolidated
statement of financial position plus commitments to customers disclosed in Note 32 except
capital commitments.

During the year BD 17,803 thousands (2015: BD 57,899 thousands) of financing facilities were
renegotiated. Most of the renegotiated facilities are performing and are secured.

At 31 December 2016, the amount of credit exposure in excess of 15% of the Group’s
regulatory capital to individual counterparties was BD Nil (2015: BD Nil).

33.3 LEGAL RISK AND CLAIMS

Legal risk is the risk arising from the potential that unenforceable contracts, lawsuits or
adverse judgements can disrupt or otherwise negatively affect the operations of the Group.
The Group has developed controls and procedures to identify legal risks and believes that
losses will be minimised.

As at 31 December 2016, legal suits amounting to BD 4,925 thousands (2015: BD 6,285

thousands) were pending against the Group. Based on the opinion of the Group’s legal
counsel, the total estimated liability arising from these cases is not considered to be material
to the Group’s consolidated financial position as the Group also has filed counter cases
against these parties.

118 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 Notes To The Consolidated Financial Statements (continued)

34 CONCENTRATIONS
Concentrations arise when a number of counterparties are engaged in similar business
activities, or activities in the same geographic region, or have similar economic features that
would cause their ability to meet contractual obligations to be similarly affected by changes
in economic, political or other conditions. Concentrations indicate the relative sensitivity
of the Group’s performance to developments affecting a particular industry or geographic
location. The Group manages its credit risk exposure through diversification of financing
activities to avoid undue concentrations of risks with customers in specific locations or
businesses.

The distribution of assets, liabilities and equity of investment account holders by geographic
region and industry sector was as follows:

Liabilities, Liabilities,
equity of equity of
investment investment
account account
hoders and Contigent hoders and Contigent
owners’ liabilities and owners’ liabilities and
Assets equity Commitments Assets equity Commitments
2016 2016 2016 2015 2015 2015
BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000

Geographic region
GCC 1,492,594 1,192,331 188,540 1,470,200 1,266,869 172,134
Arab World 38,355 50,222 13,377 20,031 26,722 23
Europe 49,583 95,056 427 67,108 21,067 694
Asia Pacific 52,459 893 11,602 77,351 15,643 13,145
North America 9,535 314 - 10,923 1,302 -
Others 38,767 17,578 - 11,030 5,038 49
1,681,293 1,356,394 213,946 1,656,643 1,336,641 186,045
Owners’ equity - 324,899 - - 320,002 -
1,681,293 1,681,293 213,946 1,656,643 1,656,643 186,045

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 119

 Notes To The Consolidated Financial Statements (continued)

34 CONCENTRATIONS (continued)

Liabilities, Liabilities,
equity of equity of
investment investment
account account
hoders and Contigent hoders and Contigent
owners’ liabilities and owners’ liabilities and
Assets equity Commitments Assets equity Commitments
2016 2016 2016 2015 2015 2015
BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000

Industry sector

Government and public

525,865 148,798 33,417 537,925 107,008 28,168
sector

Banks and financial

362,504 310,634 40,390 303,063 273,763 19,359
institutions

Real estate 382,136 192,038 72,566 407,449 210,969 48,089

Trading and
100,405 64,371 23,395 122,415 103,745 48,678
manufacturing

Aviation 10,245 14,918 - 11,171 37,704 -

Individuals 200,220 461,909 8,412 179,001 499,008 1,456
Others 99,918 163,726 35,766 95,619 104,444 40,295
1,681,293 1,356,394 213,946 1,656,643 1,336,641 186,045
Owners’ equity - 324,899 - - 320,002 -
1,681,293 1,681,293 213,946 1,656,643 1,656,643 186,045

35 MARKET RISK
Market risk arises from fluctuations in global yields on financial instruments and foreign
exchange rates that could have an indirect effect on the Group’s assets value and equity
prices. The Board has set limits on the risk that may be accepted. This is monitored on a
regular basis by the Risk Committee as well as Asset and Liability Committee (ALCO) of the
Group.

35.1 EQUITY PRICE RISK

Equity price risk arises from fluctuations in equity prices. The Board has set limits on the
overall investment exposure of the Bank. This is monitored on an ongoing basis by the
Group’s Investment Committee and Risk Management.

The effect on income (as a result of changes in the fair values of non-trading investments
held at fair value through profit or loss and fair value through equity investments) solely due
to reasonably possible changes in equity prices, is as follows:

120 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 Notes To The Consolidated Financial Statements (continued)

35 MARKET RISK (continued)

35.1 EQUITY PRICE RISK (continued)

2016
10% increase 10% decrease
Effect on Effect on Effect on Effect on
net profit equity net profit equity
BD ‘000 BD ‘000 BD ‘000 BD ‘000

Quoted:
Bahrain - 166 (166) -
Saudi 776 - (776) -
Singapore - 231 (231) -
Unquoted 10,765 270 (10,765) (270)

2015
10% increase 10% decrease
Effect on Effect on Effect on Effect on
net profit equity net profit equity
BD ‘000 BD ‘000 BD ‘000 BD ‘000

Quoted:
Bahrain - 193 (193) -
Saudi 585 - (585) -
Singapore - 284 (284) -
Frankfurt 179 - (179) -
Unquoted 10,736 373 (10,736) (373)

35.2 PROFIT RETURN RISK

The Group has exposure to fluctuations in the profit rates on its assets and liabilities. The
Group recognises income on certain financial assets on a time-apportioned basis. The Group
has set limits for profit return risk and these are monitored on an ongoing basis by the
Group’s Risk Committee as well as Asset Liability Committee.

The Group manages exposures to the effects of various risks associated with fluctuations in
the prevailing levels of market profit rates on its financial position and cash flows.

The effect on income solely due to reasonably possible immediate and sustained changes in
profit return rates, affecting both floating rate assets and liabilities and fixed rate assets and
liabilities with maturities less than one year are as follows:

2016

Change in Effect on Change in Effect on

rate net profit rate net profit
% BD ‘000 % BD ‘000

Bahraini dinars 0.10 380 0.10 (380)

US dollars 0.10 193 0.10 (193)

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 121

 Notes To The Consolidated Financial Statements (continued)

35 MARKET RISK (continued)

35.2 PROFIT RETURN RISK (continued)

2015

Change in Effect on Change in Effect on

rate net profit rate net profit
% BD ‘000 % BD ‘000

Bahraini dinars 0.10 (237) (0.10) 237

US dollars 0.10 (191) (0.10) 191

35.3 CURRENCY RISK

Currency risk is the risk that the value of a financial instrument will fluctuate due to changes
in foreign exchange rates. The Board has set limits on positions by currency. Positions are
monitored on a periodic basis by the Risk Committee as well as Asset Liability Committee to
ensure positions are maintained within established limits.

Substantial portion of the Group’s assets and liabilities are denominated in Bahraini Dinars,
US dollars or Saudi Riyals. As the Bahraini Dinar and Saudi Riyals are pegged to the US
Dollars, positions in these currencies are not considered to represent significant currency
risk as of 31 December 2016 and 2015.

122 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 Notes To The Consolidated Financial Statements (continued)

36 LIQUIDITY RISK
Liquidity risk is the risk that the Group will be unable to meet its liabilities as they fall due.
Liquidity risk can be caused by market disruptions or credit downgrades which may impact
certain sources of funding. To mitigate this risk, management has diversified funding
sources and assets are managed with liquidity in mind, maintaining an adequate balance of
cash, cash equivalents and readily convertible marketable securities. Liquidity position is
monitored on an ongoing basis by the Risk Committee as well as Asset Liability Committee of
the Group.

The table below summarises the expected maturity profile of the Group’s assets and
liabilities as at 31 December 2016 and 2015:

31 December 2016
Upto 3 3 months to 1 to Over
months 1 year 5 years 5 years Total
BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000

ASSETS
Cash and blaances with banks and the
120,623 4,800 6,567 - 131,990
Central Bank
Sovereign Sukuk 3,091 23,371 140,624 191,183 358,269
Murabaha & Wakala receivables from
182,452 - - - 182,452
banks
Corporate Sukuk 8,731 3,910 16,293 - 28,934
Murabaha and Mudaraba financing 100,707 120,305 108,870 140,987 470,869
Ijarah Muntahia Bittamleek 2,689 1,615 79,273 104,908 188,485
Musharaka financing 66 - 8,811 3,427 12,304
Assets under conversion - - 27,688 6,777 34,465
Non-trading investments 1,947 - 120,126 - 122,073
Investments in real estates - - 48,930 2,933 51,863
Development properties 2,943 - 14,838 - 17,781
Investment in associates - - 7,531 3,030 10,561
Other assets 13,066 1,182 6,267 4,921 25,436
Goodwill - - - 25,971 25,971
Assets held-for-sale 19,840 - - - 19,840
456,155 155,183 585,818 484,137 1,681,293

LIABILITIES AND EQUITY OF

INVESTMENT ACCOUNTHOLDERS
Murabaha and Wakala payables to banks 46,058 17,206 68,768 - 132,032
Wakala payables to non-banks 52,871 101,250 569,318 - 723,439
Current accounts 279,609 - - - 279,609
Liabilities under conversion 217 - - - 217
Term financing 48,889 - 33,744 9,204 91,837
Other liabilities 34,761 1,877 12,405 - 49,043
Liabilities relating to assets classified as
11,421 - - - 11,421
held-for-sale
Equity of investment accountholders 40,286 8,146 20,364 - 68,796
514,112 128,479 704,599 9,204 1,356,394

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 123

 Notes To The Consolidated Financial Statements (continued)

36 LIQUIDITY RISK (continued)

31 December 2015
Upto 3 3 months to 1 to Over
months 1 year 5 years 5 years Total
BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000

ASSETS
Cash and blaances with banks and the
135,505 11,215 5,852 - 152,572
Central Bank
Sovereign Sukuk 721 60,805 91,176 197,772 350,474
Murabaha & Wakala receivables from
103,345 - - - 103,345
banks
Corporate Sukuk 675 16,566 23,553 9,678 50,472
Murabaha and Mudaraba financing 45,936 139,257 209,579 89,427 484,199
Ijarah Muntahia Bittamleek 4,272 6,222 62,881 81,842 155,217
Musharaka financing 1,951 819 2,793 1,591 7,154
Assets under conversion - - 22,163 9,869 32,032
Non-trading investments - - 123,157 357 123,514
Investments in real estates - - 68,786 - 68,786
Development properties - - 49,021 - 49,021
Investment in associates - - 7,525 2,469 9,994
Other assets 34,590 2,144 3,056 4,102 43,892
Goodwill - - - 25,971 25,971
326,995 237,028 669,542 423,078 1,656,643

LIABILITIES AND EQUITY OF

INVESTMENT ACCOUNTHOLDERS
Murabaha and Wakala payables to banks 91,067 13,437 16,291 - 120,795
Wakala payables to non-banks - 84,257 758,313 - 842,570
Current accounts 224,366 - - - 224,366
Liabilities under conversion 2,327 - - - 2,327
Term financing - 7,531 28,455 - 35,986
Other liabilities 19,995 20,329 7,922 - 48,246
Equity of investment accountholders 18,706 12,470 31,175 - 62,351
356,461 138,024 842,156 - 1,336,641

124 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 Notes To The Consolidated Financial Statements (continued)

36 LIQUIDITY RISK (continued)

The table below summarises the maturity profile of the Group’s financial liabilities at 31
December 2016 and 2015 based on contractual undiscounted payment obligation:

31 December 2016
On Upto 3 3 months 1 to Over
demand months to 1 year 5 years 5 years Total
BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000

LIABILITIES, EQUITY OF
INVESTMENT ACCOUNTHOLDERS,
COMMITMENTS AND
CONTINGENT LIABILITIES

Murabaha & Wakala payables to

- 124,635 7,397 - - 132,032
banks
Wakala payables to non-banks - 313,518 328,513 81,408 - 723,439
Current accounts 279,609 - - - - 279,609
Equity of investment
28,067 40,729 - - - 68,796
accountholders
Liabilities under conversion 217 - - - - 217
Term financing - 48,889 - 33,744 9,204 91,837
Unutilised commitments 8,999 12,122 46,577 44,729 25,372 137,799
Contingent liabilities 35,318 24,531 5,980 10,318 - 76,147
Other financial liabilities - 7,985 6,246 528 - 14,759
Profit on financial liabilities - 761 5,015 6,329 - 12,105
Liabilities relating to assets
- 11,421 - - - 11,421
classified as held-for-sale
352,210 584,591 399,727 177,056 34,576 1,548,160

31 December 2015
On Upto 3 3 months 1 to Over
demand months to 1 year 5 years 5 years Total
BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000

LIABILITIES, EQUITY OF
INVESTMENT ACCOUNTHOLDERS,
COMMITMENTS AND
CONTINGENT LIABILITIES

Murabaha & Wakala payables to

- 112,366 8,429 - - 120,795
banks
Wakala payables to non-banks - 384,898 427,200 30,472 - 842,570
Current accounts 224,366 - - - - 224,366
Equity of investment
27,986 34,365 - - - 62,351
accountholders
Liabilities under conversion - - 2,327 - - 2,327
Term financing - - 7,531 28,455 - 35,986
Unutilised commitments 9,319 23,370 67,062 9,063 7,674 116,488
Contingent liabilities 40,013 7,300 1,037 6,759 - 55,109
Other financial liabilities - 6,245 12,438 195 - 18,878
Profit on financial liabilities - 1,037 5,986 3,063 - 10,086
301,684 569,581 532,010 78,007 7,674 1,488,956

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 125

 Notes To The Consolidated Financial Statements (continued)

37 SEGMENT INFORMATION
PRIMARY SEGMENT INFORMATION
For management purposes, the Group is organised into four major business segments:

Principally managing Shari’a compliant profit sharing investment

accounts, and offering Shari’a compliant financing contracts and other
Banking
Shari›a-compliant products. This segment comprises corporate banking,
retail banking and private banking and wealth management.

Principally handling Shari’a compliant money market, trading and

Treasury
treasury services including short-term commodity Murabaha.

Principally the Group’s proprietary portfolio and serving clients with a

Investments
range of investment products, funds and alternative investments.

Manages the undeployed capital of the Group by investing it in high quality

Capital financial instruments, incurs all expenses in managing such investments
and accounts for the capital governance related expenses.

These segments are the basis on which the Group reports its primary segment information.
Transactions between segments are conducted at estimated market rates on an arm’s length
basis. Transfer charges are based on a pool rate which approximates the cost of funds.

Segment information is disclosed as follows:

31 December 2016

Banking Treasury Investments Capital Total

BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000

Operating income 27,951 13,369 20,319 1,361 63,000

Segment result (10,062) 11,957 14,723 (522) 16,096
Segment assets 706,572 678,896 236,338 59,487 1,681,293
Segment liabilities, and equity 1,021,629 317,079 50,312 292,273 1,681,293

Goodwill resulting from BMI acquisition is allocated to banking segment.

31 December 2015

Banking Treasury Investments Capital Total

BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000

Operating income 32,493 9,623 7,487 9,295 58,898

Segment result 8,998 6,532 (4,458) (524) 10,548
Segment assets 655,372 618,757 219,074 163,440 1,656,643
Segment liabilities, and equity 1,108,457 177,678 39,565 330,943 1,656,643

Goodwill resulting from BMI acquisition is allocated to banking segment.

Secondary segment information

The Group primarily operates in the GCC and derives substantially all its operating income
and incurs all operating expenses in the GCC.

126 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

 Notes To The Consolidated Financial Statements (continued)

38 FIDUCIARY ASSETS
Funds under management at the year-end amounted to BD 88,209 thousands (2015: BD
80,891 thousands). These assets are held in a fudiciary capicity, measured at cost and are not
included in the consolidated statement of financial position.

39 SHARI’A SUPERVISORY BOARD

The Bank’s Shari’a Supervisory Board consists of five Islamic scholars who review the Bank’s
compliance with general Shari’a principles and specific fatwa’s, rulings and guidelines issued
by the Bank’s Shari’a supervisory Board. Their review 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.

40 FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of Sovereign Sukuk is BD 355,767 thousands having a carrying value of BD
358,269 thousands and the fair value of Corporate Sukuk is BD 28,888 thousands having
a carrying value of BD 28,934 thousands. The estimated fair values of other financial
instruments are not materially different to their carrying values as of 31 December 2016 and
2015.

41 EARNINGS AND EXPENSES PROHIBITED BY SHARI’A

During the year, the Group received Sharia’ prohibited income totalling BD 412 thousands
(2015: BD 189 thousands). These include, income earned from the conventional financing
and investments due to acquiring BMI and BSB, penalty charges from customers and interest
on current account balances held with correspondent banks. These funds were allocated to
charitable contributions after deducting recovery expenses of these funds.

42 SOCIAL RESPONSIBILITY
The Group discharges its social responsibility through charity fund expenditures and
donations to individuals and organisations which are used for charitable purposes. During the
year, the Group paid an amount of BD 267 thousands (2015: BD 320 thousands) on account of
charitable donations.

43 ZAKAH
Pursuant to a resolution of the shareholders in an EGM held on 12 November 2009, it was
resolved to amend the articles of association of the Bank to inform the shareholders of their
obligation to pay Zakah on income and net worth. Consequently, Zakah is not recognized
in the consolidated income statement as an expense. The total Zakah payable by the
shareholders for 2016 has been determined by the Shari’a supervisory board as 2.5 fils (2015:
3.9 fils) per share.

Al Salam Bank-Bahrain B.S.C. Annual Report 2016 127

 Notes To The Consolidated Financial Statements (continued)

44 CAPITAL ADEQUACY
The primary objectives of the Group’s capital management policies are to ensure that the
Group complies with externally imposed capital requirements and that the Group maintains
strong credit ratings and healthy capital ratios in order to support its business and to
maximise shareholders’ value. Capital adequacy for each of the group companies is also
managed separately at individual company level. The Group does not have any significant
restrictions on its ability to access or use its assets and settle its liabilities other than any
restrictions that may result from the supervisory frameworks within which the banking
subsidiaries operate.

In order to maintain or adjust the capital structure, the Group may adjust the amount of
dividend payment to shareholders or issue capital securities. No changes were made in the
objectives, policies and processes from the previous years.

The regulatory capital and risk-weighted assets have been calculated in accordance with
Basel III as adopted by the CBB.

2016 2015
BD ‘000 BD ‘000

Common equity Tier 1 capital 273,576 268,714

Additional Tier 1 capital 5 -
Tier 2 capital 29,873 32,240
Total capital 303,454 300,954
Credit risk-weighted exposures 1,314,315 1,381,565
Market risk-weighted exposures 8,053 19,606
Operational risk-weighted exposures 85,710 99,967
Total risk-weighted assets 1,408,078 1,501,138
Investment risk reserve 2 -
Total Adjusted Risk Weighted Exposures 1,408,076 1,501,138
Total capital ratio 21.55% 20.05%
Minimum requirement 12.5% 12.5%

45 DEPOSIT PROTECTION SCHEME

Certain customers’ deposits of the Group are covered by deposit protection schemes
established by the Central Bank of Bahrain (CBB). Customers’ deposits held with the Bank
in the Kingdom of Bahrain are covered by the Regulation Protecting Deposits and Equity of
unrestricted investment accounts issued by the CBB in accordance with Resolution No.(34)
of 2010. This scheme covers eligible ‘natural persons’ (individuals) up to a maximum of BD
20,000 as set out by CBB requirements. A periodic contribution as mandated by the CBB is
paid by the Group under this scheme.

46 COMPARATIVE FIGURES
Certain of the prior year figures have been reclassified to conform to the current year
presentation. Such reclassifications did not affect previously reported net profit, total assets,
total liabilities and total equity of the Group.

128 Al Salam Bank-Bahrain B.S.C. Annual Report 2016

Al Salam Bank-Bahrain B.S.C.
Bahrain World Trade Center East Tower
P. O. Box 18282
Manama, Kingdom of Bahrain