Salam 2008

His Highness His Majesty His Highness
Shaikh Khalifa Bin Salman King Hamad Bin Isa Shaikh Salman Bin Hamad
Al Khalifa Al Khalifa Al Khalifa
The Prime Minister of the The King of the The Crown Prince &
Kingdom of Bahrain Kingdom of Bahrain Deputy Supreme Commander
AL SALAM BANK - BAHRAIN

Contents
CONTENTS
Corporate Overview 4
Annual Highlights 5
Board of Directors 6
Shari’a Supervisory Board 10
Executive Management Team 12
Board of Directors’ Report to the shareholders 16
CEO Message 21
Management Review of Operations & Activities 22
Corporate Governance 26
Risk Management and Compliance 30
Corporate Social Responsibility 34
Shari’a Supervisory Board Report to the shareholders 37
Independent Auditors’ Report 38
Financial Statements 40
Notes to the Financial Statements 45
2 AL SALAM BANK - BAHRAIN

Our Mission
Our Vision
OUR VISION
To become a global force in the

Islamic financial services industry by
providing innovative, tailor-made Shari’a
compliant products and services and
build a reputation as a “Trusted Bank”
whilst enhancing shareholder value.
OUR MISSION
• Become the one-stop-shop for

providing differentiated Islamic
financial products and services to
specific target segments.
• Build a strong global presence and
premier brand image as an Islamic
financial shaper.
• Achieve high returns for investors
and shareholders based upon their
specific risk appetites.
AL SALAM BANK - BAHRAIN 3

CORPORATE OVERVIEW
Headquartered in the Kingdom The Bank’s high-caliber management

of Bahrain, Al Salam Bank-Bahrain team comprises highly qualified
(B.S.C.) is a dynamic, diversified and and internationally experienced
differentiated Islamic bank. professionals with proven expertise
in key areas of banking, finance
Key factors that contribute to the Bank’s
and related fields. Management
distinct market differentiation include:
and staff are supported by a world-
• Strong paid-up capital base class Information Technology (IT)
• Pre-eminent founding shareholders infrastructure and the latest ‘smart’
• High-caliber management team working environment.
• State-of-the-art IT infrastructure
Al Salam Bank-Bahrain is committed
• Universal business model covering
to adopting internationally recognized
deposits, financing and investment
banking standards and best practices
products and services
and operates with the highest levels of
• Innovative, tailor-made Shari’a-
integrity, transparency and trust.
compliant solutions
• Firm commitment to corporate and The Bank is equally committed to its
social responsibility role as a concerned corporate citizen,
actively seeking ways to contribute and
Incorporated on 19 January 2006 in
add value to the social and economic
the Kingdom of Bahrain with a paid-
well-being of the local communities in
up capital of BD120 million (US$318
which it invests and operates.
million), Al Salam Bank-Bahrain B.S.C.
commenced commercial operations on
17 April 2006. The Bank operates under
Islamic principles in accordance with
regulatory requirements for Islamic banks
set by the Central Bank of Bahrain.
Dyanamic
Diversified
Defferentiated

ANNUAL HIGHLIGHTS
KEY FINANCIAL INDICATORS
Total Operating Income (million) Net Profit (million)
2008
BD37.6 2008 BD25.5
(US$99.7) (US$67.6)
2007 BD32.7 2007 BD23.1

(US$86.7) (US$61.3)
2006 BD20.4 2006 BD16.4

(US$54.3) (US$43.6)
Earnings Per Share Total Assets (million)
2008 21.3 Fils 2008 BD554

(US$1,470)
2007 19.3 Fils 2007 BD398

(US$1,056)
2006 15.1 Fils 2006 BD188.1

(US$500)
Cost to Income Ratio Total Equity (million)
2008 31.3% 2008 BD172.5

(US$457.6)
2007 28.9% 2007 BD159.5

(US$425.1)
2006 19.6% 2006 BD136.5

(US$363)

BOARD OF DIRECTORS
In spite of extremely
adverse market
conditions, the Bank
managed to post 40%
growth in total assets
compared to the level
at 31 December 2007
and a 10% increase in
net income for the year
compared to 2007.

BOARD OF DIRECTORS
H. E. MOHAMED ALI RASHID ALABBAR
Chairman
Mohamed Ali Alabbar is the founding Noor Investment Group, an affiliate

member and Chairman of Emaar of Dubai Group, focused on Shari’a
Properties PJSC, the Dubai-based compliant financial services. A graduate
global property developer. Mr. Alabbar in Finance and Business Administration
is Chairman of The Advisory Council, a from Seattle University in the United
high-level Dubai Government economic States, Mr. Alabbar works closely
advisory board, and serves on the with regional NGOs, and is especially
board of directors of the Investment committed to the cause of educational
Corporation of Dubai (ICD), the reform and social housing. A keen
investment arm of the Government of sportsman, he is Chairman of the UAE
Dubai. He is also a Board Member of Golf Association.
HUSSEIN MOHAMMED AL MEEZA

Vice Chairman, Chairman of the Executive Committee
Hussein Al Meeza is one of the brightest Company, Vice Chairman of Al Salam

names in the UAE›s financial and banking Bank-Sudan, Vice Chairman of the
sectors, particularly in the area of Islamic Board & the Chairman of the Executive
finance and insurance. Having graduated Committee of Al Salam Bank-Algeria,
from the Beirut Arab University in Chairman of Gulf Jet, Board Member
1975, Al Meeza started his professional of Emaar Industries & Investments,
career at the Dubai Islamic Bank (DIB). Member of the Islamic Finance Advisory
His outstanding career success was Council-Dubai International Financial
crowned in December 2006 when the Centre (DIFC), Board Member of the
International Conference of Islamic Banking Committee and Islamic Financial
Bankers chose him as the 2006 Best Association and Chairman of the
Islamic Banking Personality. Al Meeza founding committee of Islamic Insurance
is currently CEO, Managing Director and Re-Insurance Companies.
of Aman Insurance and Re-Insurance
Essam bin Abdulkadir Al Muhaideb

Board Member
Essam Al Muhaideb is the Group Development Co, Dubai Contracting

Managing Director of A.K. Al Muhaideb Company (DCC), Gulf Union Insurance
& Sons Group and Board member in Company, Al Massa International Inc-
several organizations having interests Canada, Dnata Kuwait, Saudi Fisheries
in banking & insurance, FMCG & retail, company, Aziziah Panda United Co,
building & construction, industrial, Savola Foods Co , Al Latifia Trading
real estate apart from educational, & Contracting Co. Moreover, he is
charitable and benevolent organizations a member of some charitable and
amongst which are Emaar Middle non profitable organizations such as
East, United Sugar Company, Amwal King Fahad University of Petroleum
Al Khaleej, Saudi Tabreed Company, & Minerals Endowment Fund, Prince
Synthomer Middle East, Nestle Sultan Ladies’ Fund.
Co, Damas Co , Al Oula Real Estate

continued
BOARD OF DIRECTORS
HABIB AHMED KASSEM
Board Member
Mr. Habib Kassem is the Chairman of

Almahd Investment Company, Bahrain
Ferro Alloys, Bahrain Electricity Supply
& Transmission Company, Capital
Growth Management and Quality
Wire Products Company. He is also the
Chairman of Almahd Day Boarding
School. Mr. Kassem was Minister of
Commerce and Agriculture, Kingdom of
Bahrain from 1976 to 1995, and Member
of the GCC Consultative Council for the
Supreme Council from 1997-2007.
MOHAMMED BIN OMEIR YUSSEF AL MEHAIRI

Board Member
Mr. Mohammed Bin Omeir is currently

the Chief Executive Officer of Bin Omeir
Holding Group. He is also a Board
member of Dubai Islamic Insurance
and Re-Insurance Company (Aman), Al
Salam Bank-Sudan and Al Salam Bank-
Algeria.
SALEH SAEED AHMED LOOTAH

Board Member
Mr. Saleh Saeed Lootah is currently PJSC (Dubai); Board Member of

the Group Executive Director of S.S. Amlak International, Riyadh (KSA) and
Lootah Group, Dubai. Mr. Lootah is Board Member of Dubai Insurance &
also Executive Committee Member of Reinsurance Company. He is also the
Dubai Council for Economic Affairs; Vice Chairman of Dubai Co-operative
Vice Chairman of Awqaf & Minors’ Society (Al Islami Foods) and member of
Affairs Foundation, Govt. of Dubai; the Board of Trustees of Dubai Medical
Board Member and Chairman of Credit College for Girls & Dubai Pharmacy
Committee at Dubai Islamic Bank; College.
Board Member of Amlak Finance

BOARD OF DIRECTORS
SALEM RASHED SAEED AL MOHANNADI
Board Member
Mr. Salem Al Mohannadi is currently Abu Dhabi Investment company, Arab

the Executive Director for Finance Investment Company-Riyadh, Arab
and Administration Department at Jordan investment Bank-Amman and
Abu Dhabi Investment Authority, Arab International Investment Bank-
Chairman of Tunis and Emirates Bank, Cairo.
Vice Chairman of Abu Dhabi Holding
Company. He is also Board member
of Al Salam Bank – Sudan, Al Salam
Bank-Algeria, Emaar Properties, Dubai
Islamic Bank, Abu Dhabi Islamic Bank,
YOUSIF ABDULLA TAQI

Board Member, Chief Executive Officer
A Certified Public Accountant (CPA), and international financial institutions.

Mr. Taqi has been active in the banking During his career with Ernst & Young,
and financial services industry since Mr. Taqi was promoted to Partner,
1983. During his career, Mr. Taqi worked responsible for providing auditing and
in leading positions for a number of consultancy services to the Islamic
institutions in the Kingdom of Bahrain. financial firms. He is currently the
Prior to joining Al Salam Bank–Bahrain, Chairman of Manara Developments
he was Deputy General Manager of Company B.S.C. (c), Amar Holding
Kuwait Finance House (Bahrain), and Company B.S.C. (c) and ASB Biodiesel
was responsible for establishing Kuwait (Hong Kong) Limited, affiliates of ASBB,
Finance House Malaysia. Before this, and also a board member of Al Salam
Mr. Taqi spent 20 years with Ernst & Bank-Algeria and Aluminum Bahrain
Young, during which time he provided (ALBA)
professional services for many regional
KHALID AHMED ABDULLA AL ASHAR

Secretary to the Board
Mr. Khalid Al Ashar enjoys a vast He enjoys a long experience in the

experience that extends to 27 years. In field of establishing Islamic banks and
addition to his previous work within the contributed in the establishment of the
public sector, Mr. Al Ashar held a number Liquidity Management Center. Mr. Al
of positions in the banking sector. He Ashar holds a BSc in Commerce and
previously worked in the Operations Business Administration from Beirut Arab
Department at the Bank of Bahrain and University.
Kuwait and Arab Banking Corporation.
He also held the position of Director of
Human Resources and Administration
at the Liquidity Management Centre.

SHARI’A
SUPERVISORY BOARD
DR. HUSSAIN HAMID HASSAN
Chairman
Dr Hassan holds a Ph.D. from the Institutions. In addition, Dr. Hassan is

Faculty of Shari’a, Al Azhar University, Chairman of the Assembly of Muslim
Cairo, Egypt and a Masters in Jurists, Washington, USA, a member
Comparative Jurisprudence and of the European Isla mic Board for
Diploma in Comparative Law (both of Research & Consultation, Dublin, Ireland
which are the equivalent of a Ph.D.) and an Expert at the Union of Islamic
from the International Institute of Banks, Jeddah, Kingdom of Saudi
Comparative Law, University of New Arabia.
York, USA. He also holds a Masters in
Comparative Juries, 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
DR. ALI MOHIUDDIN AL QURRA DAGHI

Member
Dr. Al Qurra Daghi holds a Ph.D. in Organisation of Islamic Conference,

Shari’a and Law, and a Masters in Shari’a the European Muslim Council for Efta
and Comparative Fiqh from Al Azhar and Researches, the International Union
University, Cairo, Egypt. He also holds a of Muslim Scholars and the Academic
BSc. in Islamic Shari’a from Baghdad Advisory Committee of the Islamic
University, Iraq, a certificate of Studies Centre, Oxford University,
traditional Islamic Studies under the UK. He published several research
guidance of eminent scholars in Iraq papers tackling various types of Islamic
and is a graduate of the Islamic Institute Finance, Islamic Fiqh, Zakah and Islamic
in Iraq. He is currently Professor of Economy.
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

SHARI’A
SUPERVISORY BOARD
SHAIKH ADNAN ABDULLA AL QATTAN
Member
Shaikh Adnan Al Qattan holds Masters Kingdom of Bahrain and President of

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

Member & Secretary to the Board
Dr. Zoeir holds Ph.D. in Islamic

Economy, Masters 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 experience with Egypt
Central Bank. Dr. Zoeir was also the
Head of Shari’a compliance at Dubai
Islamic Bank.

BOARD OF DIRECTORS’
REPORT TO THE SHAREHOLDERS
The second full

year of commercial
operations for the
year ended 31
December 2008
had been very
In the name of Allah, the Beneficent, the 31 December 2007 and a 10% increase
successful with the Merciful, Prayers and Peace Be Upon in net income for the year compared to
Bank’s total assets the Last Apostle and Messenger, our 2007. Whilst business climate was
Prophet Mohammed. favourable in the first half of 2008, the
reaching BD554 global financial crisis in the second half
The Directors of Al-Salam Bank-Bahrain of the year prevented business growth
million (US$1,470 BSC (“the Bank”) have pleasure in and dampened business sentiment and
million) and net submitting their report on the lowered investor confidence.
accompanying financial statements to
profit reaching a the shareholders for the year ended 31 Due to global and regional economic
record of BD25.5 December 2008. slowdown, the Bank had been extremely
cautious in expanding the financing
million (US$67.6 The second full year of commercial portfolio and has been booking assets
million). operations for the year ended 31 which are less sensitive to downturn.
December 2008 had been very Consistent with this philosophy,
successful with the Bank’s total assets investments in ASB China Fund are very
reaching BD554 million (US$1,470 well diversified with minority stakes in
million) and net profit reaching a record food, agricultural, industrial and
of BD25.5 million (US$67.6 million) for pharmaceutical sectors dominating the
2008. This is your Bank’s third profitable portfolio. In addition, hospitality &
fiscal year since its inception in April tourism was our focus in the region with
2006 despite global financial meltdown the Bank acquiring leasehold interests in
from the second half of 2008. two hotel towers overlooking the
El-Haram in Mecca. One of the
The last quarter of 2008 saw credit and transactions was structured and majority
liquidity crunch due to the global of the equity interest placed with
financial crisis and fears of a deep investors during the last quarter of 2008
recession. However, in spite of despite extremely difficult market
extremely adverse market conditions, conditions.
the Bank managed to post 40% growth
in total assets compared to the level at

During the year, the Bank also As a demonstration of the Board’s
successfully placed the majority commitment to offer un-paralleled
stake in the bio-diesel private equity client service the Bank expanded its
transaction to its investors. The online delivery channel launched on
The Bank was project is an environmental friendly a limited scale in 2007 and rolled out
initiative and aims to produce bio- Al-Salam charge card with enhanced
extremely successful diesel from multi-feedstock, including security features to protect customers
grease trap waste, waste cooking against fraud. We wish to note that
in growing the oil and palm fatty acids. During the the management is after quality and
financial institutions first half of 2008, the Bank raised is conscious of being at the cutting
over US$250 million from investors edge in its product and service
relationship network as equity participation for the light deliveries rather than going after
and managed to industrial project in Hidd, Bahrain. quantity.
In this regard the Bank embarked
draw over BD225 on establishing a tie-up with Emaar On the treasury front, the Bank was
million in interbank Industrial Company, Dubai. The extremely successful in growing the
project aims at developing a light financial institutions relationship
lines by end of 30 industrial park and to complement it, network and managed to draw over
business park, warehousing facilities, BD225 million in interbank lines by
June 2008. At this commercial and residential layouts end of 30 June 2008. At this date, the
date, the Bank was a have been planned. Bank was a net lender to the Banking
system to the tune of BD165 million
net lender to the In October 2008 the Bank opened due to sustained growth in customer
Banking system to a retail branch at the Bahrain City deposits. When the symptoms of
Centre, its second retail branch, in financial meltdown were evident, the
the tune of BD165 Al-Seef district in furtherance of its Bank proactively managed to curtail
million due to retail banking activities in line with interbank activity and build healthy
the Bank’s plan to establish one or liquidity reserves with Central Bank of
sustained growth in two new branches per annum in Bahrain (CBB). This is demonstrated
Bahrain. The customer base of the by huge liquid funds and investments
customer deposits. Bank has expanded commensurate in CBB sukuk to the tune of BD111
with the market size in Bahrain and million or 20% of the total assets at 31
the Bank is just a few years away from December 2008. We are proud that to
gaining the critical mass to compete date your Bank continues to be a net
in the market place. To rapidly grow lender to the banking system.
retail banking activities and gain
the critical mass required to achieve
economies of scale, the Board is also
considering non-organic growth,
including acquisition of suitable retail
operations or financing companies in
line with its commitment to establish
a large and viable commercial bank
amongst Islamic banks in Bahrain.

continued
On the real estate sector front, risk management framework, we are
anticipating strict regulations from confident that your Bank is poised to
CBB, the Bank tightened its investment outperform peers in the medium to
in and financing to real estate sector, long term and establish itself as a model
We are confident that and limited its exposure to 30% of the for an universal Islamic bank.
total assets. Given that there is a huge
your Bank is poised to shortage of dwelling units in Bahrain for In the Extraordinary General Assembly
the middle class, the Bank is committed Meeting held on 10 September 2007,
outperform peers in to undertaking a role with the support the shareholders resolved to seek cross
the medium to long of the Government of Bahrain in listing of the Bank’s stock on other stock
developing affordable housing solutions exchanges. Following this, management
term and establish in the coming years. The Board and implemented the resolution and listed
itself as a model for an management are conscious of the need the Bank’s shares on Dubai Financial
to check the Bank’s concentration to Market with effect from 26 March 2008.
universal Islamic bank. the real estate sector and hence new
businesses in this sector are being
undertaken on a selective basis to take
advantage of market opportunities.
The Directors believe that 2009 would

be very challenging year for the banking
sector as a whole and your Bank would
be no exception to these challenges.
At the same time, to take advantage of
the current attractive asset valuations,
the Bank has established onshore
investment advisory offices in London
and Singapore to source opportunities
for our investors. With a strong and
growing deposit base and a robust

Financially, the year 2008 had seen a
reasonable growth in net profit from
BD23.1 million in 2007 to BD25.5
million in 2008, representing a return
on equity of 16.1% (2007: 17.1%). The
gross operating income amounted to
BD37.6 million (2007: BD32.7 million)
and the operating expenses were
BD11.8 million (2007: BD9.5 million). The
cost-to-income ratio for the year was
31.3% (2007: 28.9%) with the increase
attributable to expanding presence in
London and Singapore. The earnings
per share (EPS) for the year amounted
to 21.3 fils (2007: 19.3 fils). The directors
have recommended cash dividend of
10 fils per share or 10% of the paid-up
capital subject to shareholders’ approval
in the annual general meeting.
Retained earnings and appropriation of net income:
BD’000
Balance at beginning of the year 459
Net profit for the year – 2008 25,543
Transfer to statutory reserve (2,554)
Transfer from investment reserve 2,050
Zakah (823)
Charitable contributions (100)
Proposed dividends (12,000)
Balance at end of the year 12,575

continued
Directors’ and Executive Management interest:
As required by the central bank of Bahrain rulebook set out below are the interest of
Directors and Senior Managers in the shares of Al Salam Bank-Bahrain B.S.C and the
distribution of the sharholding as of 31 December 2008.

31 December
2008
Directors’ Shares 129,582,840
Senior Managers’ Shares 9,782,879
139,365,719
Directors remuneration, fees and expenses for attendance at Board meetings for 2008
amounted to BD320,000.
2008 % of total
No. Of outstanding
No. Of Shares Shareholders Shares
Percentage of shares held
Less than 0.5% 548,096,823 22,810 45.7%
0.5% to less than 1% 168,646,473 19 14.1%
1% up to less than 5% 342,290,441 14 28.5%
Over 5% 140,966,263 1 11.7%
Total 1,200,000,000 22,844 100.00%
The Directors would like to express their appreciation to the leadership and ministries
of the Kingdom of Bahrain, the Central bank of Bahrain, 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 2009.
22 February 2009 Mohamed Ali Rashid Alabbar

Manama, Kingdom of Bahrain Chairman

MESSAGE FROM THE
CHIEF EXECUTIVE OFFICER
I’m pleased to share with you our maintain high quality financing portfolio,
impressive achievements for the murabaha facilities increased by BD39.9
year ended 31 December 2008, million to BD72.5 million in 2008 (BD32.6
the third financial year for the Bank million in 2007).
since inception. Despite extremely
challenging economic conditions Our Wealth Management team, through
in the second half of the year, the introduction of innovative investment
Bank achieved a 10% annual growth products raised BD113 million of
in profitability amounting to BD25.5 investor funds during the year towards
million from BD23.1 million in 2007. several investment opportunities which
were offered by the Bank. Furthermore,
In these adverse market conditions, the our Investment teams based in
management continues to be proactive Singapore, Bahrain and London have
in adopting prudent approaches in identified several attractive investment
managing liquidity and booking of assets. opportunities which are currently being
evaluated.
In these adverse The interbank activity was significantly
curtailed to mitigate credit risk while on In recognition of the increased customer
market conditions, the other hand placement and reserves base and our objective to provide
with the Central Bank of Bahrain were improved facilities to customers, a new
the management increased. As a result, the Bank reported retail branch “business centre” was
continues to be a liquidity ratio of 50% as of December
31, 2008 (123% in 2007).
opened in Bahrain City Centre. In the
medium term, we plan to expand the
proactive in number of branches within the Kingdom
The Balance sheet continued to in order to reach and serve our valued
adopting prudent strengthen with the increase in equity customer base.
by BD13 million to BD172.5 million
approaches in (BD159.5 million in 2007). The total Our view is that 2009 will continue to
assets also increased by BD156.8 million bring challenges to both Islamic and
managing liquidity to BD554.5 million in 2008 (BD397.7 conventional financial institutions as the
and booking of million in 2007). These results are
strong evidence of the Bank’s success in
economic crisis and its impact become
evident. Therefore, management has
assets. achieving its strategic plans. re-visited its business plan considering
the difficult operating environment.
We recognize the need to be closer We are working tirelessly in pursuing
to our key target markets in order to new opportunities and putting in place
select, manage and extract value for new initiatives to ensure that the Bank
our investors. As a result, in line with continues to enhance shareholder value.
our 3 year strategy, two new regional
offices were established in Singapore As a socially responsible institution
and London covering Asia Pacific and and in recognition of the need to uplift
Europe respectively. the community we operate in, a total
in excess of BD1 million has been
Our core businesses lines, Banking and allocated for Zakah, charity and other
Investment groups experienced a very social development initiatives across the
successful year. Customer deposits Kingdom.
increased by BD179.6 million to
BD292.2 million in 2008 (BD112.6 million
in 2007). While being extremely cautious
in providing financing, in order to Yousif Taqi

MANAGEMENT REVIEW
OF OPERATIONS & ACTIVITIES
Operating environment Capital adequacy
Al Salam Bank - Bahrain completed The Bank’s capital adequacy ratio
its third fiscal period in 2008, a year stood at a very impressive 24.7% (48.7%
that will be remembered as the most in 2007) as of end of the fiscal year
The Bank’s strategy extraordinary period in the recent against a regulatory requirement of 12%
is built on providing history during which the world economy stipulated by CBB under the new Basel
experienced a collapse of the credit II framework that came into effect from
investments, markets leading to a global recession. 1 January 2008.
products and In these tough market conditions, the

Bank has been pursuing an extremely
Financial Position
services that drive cautious approach to building assets
by focusing its efforts in the markets The balance sheet as of end of the fiscal
customer satisfaction that we are familiar with. Anticipating year grew by 40% to BD554.5 million
(BD397.7 million in 2007). The equity
and trust with the tight liquidity and credit environment,
increased to BD172.5 million (BD159.5
the asset liability management function
aim to increase our of the Bank made conscious efforts million in 2007) reflecting the strength of
to ensure that adequate liquidity is the balance sheet. Customer deposits
growing customer maintained at all times. increased by 159% to BD292.2 million
(BD112.6 million in 2007) providing the
base. Given the strong liquidity position,
necessary liquidity.
impressive profitability and financial
strength together with our brand The Bank’s liquidity ratio (cash and short
name, the Bank has positioned itself term funds, less interbank liabilities, to
to weather the difficult current market customer liabilities) stood at a healthy
conditions. Our financial strength, 50% (123% in 2007) at end of the fiscal
placement capability and local presence year.
in our target markets will enable us to
pursue attractive private equity assets
with acceptable risk profile consistent Assets under management
with our commitment to offer attractive The customer base comprises a
investment products to our clients. significant proportion of high net worth
individuals and ultra high net worth
individuals. Our wealth management
Performance team has built a strong relationship
The Bank recorded its third consecutive with these investors over the short
profitable year since 2006 and achieved history of the Bank by demonstrating
a net profit of BD25.5 million (BD23.1 our professional approach, unique and
million in 2007) despite extremely attractive investment opportunities and
adverse market conditions experienced personalized service. The assets under
in the second half of the fiscal year. The management in a fiduciary capacity as
net operating income grew by 15% to of end of the fiscal year amounted to
BD37.6 million (BD32.7 million in 2007). BD119.6 million (BD6.6 million in 2007)
reflecting a significant growth under
tough market conditions.

MANAGEMENT REVIEW
Organisation assets as we aim to create a quality Furthermore, the bank also installed
portfolio, sustainable client base and a three additional automated teller
Following careful study and
strong local and regional presence. machines (ATMs) at various strategic
independent advice, the bank decided
locations in the Kingdom with a view to
to re-organise its investment group into In addition to the traditional retail,
enhancing customer convenience. We
3 regional offices (MENA, Europe and corporate and private banking
are planning to continue installing more
Asia Pacific) each focusing on a specific services, the banking group also
ATM machines in various parts of the
region or markets. Each regional office offers tailored products to the wealth
Kingdom’s five governorates.
has investment sourcing and post management market segment.
acquisition mandates as part of their Our wealth management products
responsibilities. are offered to investors through a
Investments
dedicated placement team who provide
We believe that local presence is vital In line with our strategy since inception,
personalized services. The placement
to exploit the private equity markets we are actively pursuing attractive
and relationship professionals meet the
that present attractive and undervalued investment opportunities in three
investors frequently and assess their
investment opportunities as a result regions mainly MENA, Asia Pacific
appetite and risk profile prior to offering
from the credit crisis that is experienced and Europe. Our continuous efforts
any customized solutions. During the
worldwide. to provide unique Shari’ah compliant
year investors who participated in
As a result, Al Salam Asia Pacific based several investment products structured investment opportunities to our
in Singapore and Al Salam Europe by the Bank across real estate, customers require us to follow a diligent
based in London were established hospitality and private equity, acquired process in selecting, acquiring and
during the year. We have attracted top assets amounting to BD113 million managing investments in our target
talent with regional expertise in to our (BD6.6 million in 2007). markets. To this end we have put in
investment teams and coupled with place a robust investment process with
In re-iterating our commitment to
our strong placement capability, we are multiple layers of controls involving
provide a one-stop-shop for our valued
now positioning ourselves in the target several distinct and independent
customers for their financial needs, the
markets in order to benefit from the functions within and outside the Bank.
bank inaugurated its second branch
eventual economic recovery. The primary responsibility of the
at Bahrain City Centre shopping mall
In addition to our primary listing on the during the year. In addition to full investment teams is to identify
Bahrain Stock Exchange, the Bank’s commercial banking services offered high quality private equity and real
shares were also listed on the Dubai to customers, the branch also provides estate assets through their regional
Financial Market during the fiscal year. a Business Centre, a first in the local experience. These teams are dedicated
The dual listing enabled a large number banking community. to source, evaluate, acquire and
of the Bank’s shareholders who are based enhance value of these assets and seek
The Bank also successfully launched the
in the United Arab Emirates to have easy potential exits.
internet banking services that provide
access to their holdings in the Bank. All potential investment opportunities
non-stop retail banking facilities,
In May 2008, the Board of Directors another first among the Islamic banking are analysed by the investment
appointed the Chief Executive Officer community in Bahrain. This was also a teams if they meet the basic
Mr. Yousif Taqi as a Director of the major milestone of our dedication to investment guidelines set out by
Board in recognition of his strategic improve customer convenience and the Banks’ Investment Committee.
vision and valuable contribution made banking experience. The opportunities that satisfy these
to the success of the bank. guidelines are then subjected to an
During the year we also announced
independent Middle Office review, a
the launch of Platinum and Gold
risk assessment, a legal review and a
charge cards to our individual and
Banking Group corporate clients. These cards are
conceptual Shari’ah Board approval.
The selected opportunities are
Since inception, the bank has been offered in Bahraini dinars or US
presented for Investment Committee
striving to provide best in class retail dollars and incorporate state of the
approval. The Investment Committee
and commercial banking products and art security features to mitigate risk of
comprises of Executive Management
services to our clients. We have been fraud and theft.
from all business areas of the Bank.
selective in our approach to building

continued
MANAGEMENT REVIEW
Private Equity The development of the ASB Biodiesel Corporate Governance and
In the current difficult economic
plant in the Tseung Kwan O industrial Risk Management
area of Hong Kong achieved the critical
environment, the Bank has shifted During the year, the Bank tied up with
milestone of obtaining an environmental
its focus on value preservation of a third party award winning integrated
eved existing private equity investments.
permit from the Government of Hong
risk solution provider to the financial
Kong. The state of the art 100,000
wth in The investment teams are working
MT plant will use waste cooking oil,
services industry. We are determined
together with the operating companies to adopt best in class risk management
grease trap waste, non pork animal
bank in offering advice and assistance in new
fat and palm oil fatty acid to produce
and compliance practices and maintain
initiatives to ensure the values of our a higher level of corporate Governance.
ently investments remain intact.
environmentally friendly biodiesel,
a sustainable, alternative energy for
uidity During the year, two investment conventional diesel engines. The plant
Know Your Customer
opportunities were acquired in the is expected to be operational in 2010. As part of our continuous effort to
ment, hospitality industry in Saudi Arabia. The provide innovative products and
Our US$ 50 million capital commitment
w key close proximity of these investments to
in ASB China Fund was successfully
services to our customers, the banking
El-Haram in Mecca makes them highly group places significant emphasis
deployed across diversified asset
local, sorted after by pilgrims who perform
classes in China. The underlying
on understanding customer needs.
their annual religious rituals and present Understanding their business activities
l and a very attractive investment opportunity
investment portfolio of the Fund
and sources of wealth is considered
comprises of significant minority stakes
for potential investors. to be an integral part of this process
ional in agri business, food, pharmaceutical,
of meeting and exceeding customer
The opportunities comprise a 19 year logistics, galvanized steel and industrial
tions sublease of two residential towers within machinery. An independent valuation
expectations.
the Burj Al Safwa development with a of the fund shows an upside of at least The Bank complies with Financial
consolidated floor area of 29,000 square 20% as of 31 December 2008. Crimes Module of Central Bank of
meters. Bahrain’s rule book. This module
contains Bahrain’s current anti money
Our ability to successfully place one of
Real Estate laundering legislation developed under
these assets with our investors within a
The Bank acquired a development the directives of the Financial Action
period of one month is a testimony of
property in Hidd industrial area closer Task Force which is the international
investor appetite for such high quality
to the Bahrain International Airport organization responsible for developing
private equity assets and reflects our
and Khalifa bin Salman Port through a global anti money laundering policies.
placement capability during these
difficult economic conditions. The JV partnership by raising BD94 million
remaining investment was warehoused from a group of investors. The area
to be placed in 2009 fiscal year. is earmarked to set up environment-
friendly light industries and Amaar
The Bank’s investment in a 1999
Holdings Company; a joint-venture
built Boeing 777-200ER aircraft
company established for this purpose
leased to Malaysian Airline Systems
will develop the infrastructure for the
Berhad continues to meet investor
industrial area and create a suitable and
expectations. The investment provides
attractive environment for local, regional
a cash yield of 9.5% per annum to
and international investors.
investors paid on a quarterly basis.

MANAGEMENT REVIEW
Social responsibility Establishment of Al Salam University High level of employee performance
Fund managed by the Royal is underpinning our impressive track
We recognize and value our social
Charity Organisation emphasizes record over a short period of time. We
responsibility and understand the
our commitment to community are proud of our 80% (87% in 2007) of
need to develop the society we serve
development through which university Bahrainis in a total of 124 (120 in 2007)
and operate. We pride ourselves in
scholarships are granted to children of employees.
taking an active role in various human
needy families, orphans or handicapped
resource development and charitable The Bank recognizes that in order to
in order to fulfill their aspirations and
initiatives under the patronage of His motivate and retain the best talent, it
create a responsible society.
Majesty King Hamad bin Isa Al Khalifa, is necessary to provide competitive
the King of the Kingdom of Bahrain, In appreciation of the University of compensation based on individual and
His Highness the Prime Minister Shaikh Bahrain’s contribution to the financial overall performance of the Bank. Annual
Khalifa bin Salman Al Khalifa, His services industry of the Kingdom, the performance reviews are conducted
Highness the Crown Prince and Deputy Bank has undertaken the construction to formalize individual strengths and
Supreme Commander Shaikh Salman of Al Salam Bank Centre for Financial training requirements identified through
bin Hamad Al Khalifa. Studies. continuous interaction. In order to
provide various training opportunities
We believe that providing advice and The Bank participated in the summer
to employees to acquire and maintain
guidance to students, jobseekers and action program of the Crown Prince
a high level of competency, the Bank
their parents through various social International Scholarship Program
invested BHD110,000 (BHD81,000 in
forums such as Career Expo 2008 is launched under the patronage and
2007) in 2008. The employees across the
an important feature in our effort to guidance of His Highness Shaikh Salman
Bank received 3,343 hours (3,120 hours
increase the awareness of demands and Bin Hamad Al Khalifa, the Crown Prince
in 2007) of formal training through in-
skills required by the banking industry. and Deputy Supreme Commander of
house and externally arranged training
the Kingdom of Bahrain. The program
As in the past, the Bank continues its programs.
aims to provide the participants with
summer internship program where
a real life challenge where they will The management maintains an opened
selected under graduates from the
work with a current business scenario dialogue with employees to encourage
University of Bahrain are given an
to research and improve performance transparency. Regular employee events
opportunity to learn principles of
using their ideas and experience. The including an annual gathering to review
Islamic Banking. These students have
program was conducted over a period the Bank’s performance and discuss
the opportunity to work with our top
of eight weeks throughout the summer. future strategy forms part of the social
quartile industry professionals over
calendar. Workshops are organized
a period of two months to enhance The Board of Directors recommended
to improve efficiency and increase
their knowledge and banking skills BD100,000 in donations for the current
productivity at workplace. These social
demanded by the industry. fiscal year to support charitable,
events encourage interaction among
educational, medical, and scientific
employees and foster their relationships
programs.
outside working hours.
The Board also recommended
BD822,525 as contribution to Zakah for
the current fiscal year.
Human capital
Since its inception, the Bank has been
able to attract and retain the best
industry professionals in the region. Our
human resource strategy is focused on
building a high performance talent pool
with a diversified level of experience.

CORPORATE GOVERNANCE
The Board is committed to establishing together with the Bank’s Memorandum
the highest standards in Corporate and Articles of Association and the
Governance. To this end, it has Charters of various Board Committees,
established various committees in line provides the authority and practices for
The roles and with industry best practice and has also governance of the Bank.
directed the Executive Management
responsibilities to establish various management The Board provides central leadership
committees with relevant members. to the Bank. It has established and
of the Board of The Board Charter imposes the highest defined the objectives and strategies
Directors, their level of ethical conduct; doing what that direct the ongoing activities of
it proclaims to be its responsibility; the Bank to enable it to achieve its
independence, reporting results with accuracy and objectives. The roles and responsibilities
code of transparency in a timely manner; and of the Board of Directors, their
ensuring full compliance with the by- independence, code of conduct and
conduct and laws, and the rules and regulations that ethics are described in the Board
ethics are govern the Bank’s business. The Board Charter.

has adopted a Board Charter, which
described in
The Bank is organized as follows:
the Board
Charter. SHAREHOLDERS
External Auditors Shari’a Supervisory Board
Board of Directors
Executive Committee
Renumeration Committee
Audit Committee
Chief Executive Officer
Management Committees
• Risk / Credit Internal Audit Department
• Investment
• Asset Liability Shari’a Department
• Information Technology
BUSINESS GROUPS SUPPORT GROUPS
Banking Risk & Compliance
HR, Operations, IT &

Investment Support Services
Treasury & Financial Markets Finance & Strategic

Development
Trust Services Legal

BOARD COMMITTEES also, acts as a liaison between the
Consistent with the industry’s best External auditors and the Board and
practice, the Board has established between the Regulators and the Board.
three Committees with defined roles
The Board Charter and responsibilities. The Standing Remuneration Committee
Committees of the Board are the The role is to provide a formal and
imposes the Executive Committee, the Audit transparent procedure for developing
a compensation policy for the
highest level of Committee, and the Remuneration
Chief Executive Officer, Executive
Committee.
ethical conduct; Management and the rest of the
Executive Committee employees, ensures that compensation
doing what it Has delegated authority within the offered is competitive, in line with the
proclaims to be its overall Board authority. Provides market/peer group and consistent
direction to the Executive Management with the responsibilities assigned to
responsibility; on all business matters and assumes employees. The Committee approves
reporting results the role of the Board to address matters policies covering hiring, compensation
arising between Board meetings. and training. In addition, the Committee
with accuracy and The Committee is responsible for recommends to the Board special
compensation plans, including annual
transparency in a business matters concerning credit
performance bonus and short/long
and market risks, strategy review and
timely manner recommendation to the Board. term incentives, to attract, motivate and
retain key employees.
Audit Committee
Has responsibility to assist the Board in
discharging its oversight duties relating
to matters such as risk and compliance,
including the integrity of the Bank’s
financial statements, financial reporting
process and systems, internal controls
and financial controls. The Committee

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

Credit/Risk Committee 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, 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.
Asset Liability Committee This Committee’s primary responsibility

is to review the trading and liquidity
policy for the overall management of the
balance sheet and its associated risks.
Investment Committee 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. In addition, the
Committee is responsible to oversee
the performance of the fund managers
and recommend exit strategies to
maximize return to its investors.
Technology Steering Committee TSC oversees the information

technology function of the Bank. It
recommends the annual IT budget and
plans, drawn up in accordance with the
approved strategy for the Bank, to the
CEO for submission to the Board of
Directors for their approval. It supervises
the implementation of the approved
IT annual plan within set deadlines and
budgetary allocations.

Code of Conduct The Bank conducts itself in accordance
with the highest standards of ethical
behavior. A Code of Business Conduct
has been developed to govern the
The roles and personal and professional conduct of all

stakeholders.
responsibilities of
Compliance The Bank has in place comprehensive
the Board of policies and procedures to ensure full
Directors, their compliance with the relevant rules
and regulations of the Central Bank
independence, of Bahrain and the Bahrain Stock
code of conduct Exchange, including anti-money
laundering, prudential and insider
and ethics are trading reporting.
described in the
Communications The Bank conducts all communications
Board Charter. with its stakeholders in a professional,
honest, transparent, understandable,
accurate and timely manner. Main
communications channels include
annual reports, corporate brochure and
website, and regular announcements
in the appropriate local, regional and
international media and the internet.

RISK MANAGEMENT AND
COMPLIANCE
At Al Salam Bank - Bahrain we RISK MANAGEMENT
appreciate the fact that we are in the
business of taking risks and our success
FRAMEWORK
The risk management framework
is largely dependent on how efficiently
defines the risk culture of Al Salam
...we view risk we identify, measure, control and
Bank – Bahrain and sets the tone
manage these risks. Hence, we view
management as a risk management as a core competency
throughout the Bank to practice the
right risk behavior consistently to ensure
from a strategic point of view and the
core competency Basel II Accord as a catalyst to the
that there is always a balance between
business profits and risk appetite.
from a strategic successful implementation of the pillars
of risk management.
point of view and The risk management framework
achieves this through the definition
the Basel II The fundamental principle underlying
of the Bank’s key risk management
our risk management framework is
Accord as a ensuring that accepted risks are within
principles covering credit, market,
operational, strategic and reputation
catalyst to the Board approved risk appetite and the
risks, the role and responsibilities of
returns are commensurate with the
successful risks taken. The objective is creating
the Board, Risk Management group
and Executive Management towards
shareholder value through protecting
implementation the Bank against unforeseen losses,
risk management, the risk assessment
methodology based on likelihood and
of the pillars of ensuring maximization of earnings
consequences, the major risk policies,
potential and opportunities vis-à-vis
risk management. the Bank’s risk appetite and ensuring
procedures and risk limits, the risk
management information systems and
earnings stability.
reports, the internal control framework
and the Bank’s approach to capital
With this in mind, the Bank’s
management.
establishment plan gave priority to
the development of an effective and
The effectiveness of the risk
practical risk management framework
management framework is
and independent risk management
independently assessed and reviewed
and compliance function in line with
through Internal audits, External audits
best risk management practice locally
and Central Bank of Bahrain supervision.
and internationally, the requirements of
In addition, business and support
Central Bank of Bahrain and the Basel II
groups carry out periodic control risk
Accord.
self assessments.
As a result, the risk management

framework creates an alignment
between business and risk management
objectives.

RISK MANAGEMENT AND
COMPLIANCE
RISK MANAGEMENT & CORPORATE GOVERNANCE FRAMEWORK
Board Committee
Senior Management Committees

Shari'a Supervisory Board
Risk Management & Compliance Function
The objective is Board & Senior

Management
Comprehensive
Internal Control
Compliance &
Anti-Money
Oversight Framework Laundering
creating Risk Assessment Methodology
shareholder value Risk Policies,

Procedures
Risk Management
Systems
Capital Management
& Risk Adjusted
& Limits Pricing
through
Internal Audit, External Audit, Central Bank of Bahrain
protecting the
Bank against CAPITAL MANAGEMENT business and support Heads and it is
The cornerstone of risk management their responsibility to ensure that these
unforeseen framework is the optimization of risk- risks are managed in accordance with
losses, ensuring reward relationship against the capital the risk management framework.
available through a focused and well
maximization of monitored capital management process Risk Management assists business and
support heads in identifying concerns
earnings potential involving Risk Management, Finance
and Business groups. and risks, identifying risk owners,
and opportunities evaluating risks as to likelihood and
consequences, assessing options for
vis-à-vis the CORPORATE accommodating the risks, prioritizing
Bank’s risk GOVERNANCE risk management efforts, developing
The risk management framework is risk management plans, authorizing
appetite and supported by an efficient Corporate implementation of risk management
ensuring earnings Governance Framework discussed on plans and tracking risk management
pages 26 to 29. efforts.
stability.
RISKS OWNERSHIP
The implementation of the risk
management framework bank-
wide is the responsibility of the
Risk Management & Compliance
Departments. Ownership of the various
risks across the Bank lies with the

continued
RISK MANAGEMENT AND

COMPLIANCE
RISK MANAGEMENT AND COMPLIANCE ORGANIZATION
Al Salam Bank- Bahrain Risk Management and Compliance Departments are under
the supervision of an independent Chief Operating Officer with direct reporting line
to the Chief Executive Officer.
Board Approved Policies, Procedures and Limits
Credit Risk Market Risk Operational Risk Capital Compliance & Anti-
Management Management Management Management Money Laundering
• Exposures and limits • Positioning and Limits • Control Self • Basel II Compliance • Compliance Monitoring
Monitoring Monitoring Assessments • Risk Adjusted Pricing • Anti-money
• Portfolio Management • Risk Measurement • Key Risk Indicators • Reporting to Board Laundering control
• Timely Reporting to Methodology Monitoring Excutive Committee • Training and Awareness
Credit Committee • Timely reporting to • Risk & Loss Events • Scenario Analysis • AML System Controls
• Internal rating ALCO Database
Methodology • IT Security
• Periodic Stress testing Managements
and Scenario Anlysis • Business Continuity
Planning
• Outsourcing risk
Management

RISK MANAGEMENT AND
continued
COMPLIANCE
COMPLIANCE & ANTI-MONEY LAUNDERING UNIT
The Bank has established an and US Department of the Treasury -
independent and focused unit to OFAC, in addition to those designated
coordinate the implementation of by the Central Bank of Bahrain.
The compliance compliance and Anti-Money Laundering The compliance program also ensures
program also and Anti-Terrorist Financing program. that all applicable Central Bank of
The program covers policies and Bahrain regulations are complied with
ensures that all procedures for managing compliance and/or non-compliance is detected
with regulations, anti-money laundering, and addressed in a timely manner. The
applicable
disclosure standards on material and program includes compliance with
Central Bank of sensitive information and insider regulations set by Ministry of Industry
trading. & Commerce and Bahrain Stock
Bahrain Exchange.
regulations are In line with its commitment to combat
money laundering and terrorist
complied with financing, Al Salam Bank - Bahrain
and/or non- through it’s Anti-Money Laundering
policies ensures that adequate
compliance is preventive and detective internal
controls and systems operate effectively.
detected and
The policies govern the guidelines
addressed in a and procedures for client acceptance,
maintenance and monitoring in line
timely manner. with the Central Bank of Bahrain and
International standards such as FATF
40 + 9 recommendations and Basel
Committee papers.
All inward and outward electronic

transfers are screened against identified
sanction lists issued by certain
regulatory bodies including the UN
Security Council Sanctions Committees

CORPORATE SOCIAL
RESPONSIBILITY
Since its inception, social responsibility promote greater cooperation whereby
formed a priority for Al Salam Bank– asset managers shared their asset
Bahrain. The Bank adopts a very management experience and consider
in 2008, the Bank balanced policy to contribute to the opportunities for future tie-ups or
social and economic well-being of the collaboration.
carried out its communities in which it operates. The
Summer Internship Bank focused on several educational The Bank adopts a policy that
initiatives such as the donations supports training and employment.
Program, for the towards the Crown Prince International Bahrainis accounted for 80 per cent
third consecutive Scholarship Program and to the Royal of all employees at the end of 2008.
Charity Organization in support of Also in 2008, the Bank carried out its
year, with more university scholarships for distinguished Summer Internship Program, for the
students, as well as funding the third consecutive year, with more than
than 20 Bahraini
construction of “Al Salam Center for 20 Bahraini university students who
university students Financial Studies” at the University of were enrolled into the Bank’s training
Bahrain. plan aimed at enhancing students’
were enrolled into knowledge of Islamic banking Industry.
the Bank’s training The Bank had several effective
sponsorships and participations in During the year, the Bank has allocated
plan aimed at local and international conferences part of its profit to aid various aspects
enhancing and events such as the “the 7th of the social activities and enhance
Annual Islamic Finance Summit IFIS – the quality of life for everyone,
students’ Euromoney” held in London which was through its support for charitable,
a great opportunity to promote the educational, medical, scientific, cultural,
knowledge of
Bank’s position within the Islamic finance social, sporting and environmental
Islamic banking industry and at the same time explore organizations.
the abundant opportunities in other
Industry. parts of the world.
The Bank also sponsored the First

Women Form, The Stock Exchange
Challenge held and organized by the
University of Bahrain, The International
conference on Business Globalization
in the 21st Century organized by the
University of Bahrain and the Bahrain
& Singapore Asset Management
Networking Event, which was a
networking platform for Singapore and
Bahrain-based fund managers aiming to

FINANCIAL STATEMENTS
Al Salam Bank - Bahrain

completed its third fiscal
period in 2008 successfully,
a year that will be
remembered as the most
extraordinary period in the
recent history due to the
collapse of the credit and
liquidity markets globally.
The Bank recorded its
third consecutive
profitable year since 2006
and achieved a net profit
of BD25.5 million (BD23.1
million in 2007) despite
extremely adverse market
conditions experienced in
the second half of the
fiscal year.
SHARI’ATHE
SUPERVISORY BOARD
FOR THE YEAR ENDED 31 DECEMBER 2008
Firstly:
The Board supervised the Bank’s activities and transactions carried out during the year and carried out its role by
guiding the various departments to comply with the principles of Islamic Shari’a and with specific Fatwas in respect
to these activities and transactions. The Board has conducted various meetings with the Bank’s Management and
acknowledged that they have been complying with the principles of Islamic Shari’a and the Board’s Fatwas.
The Board has studied the transactions submitted by the Bank during the year, approved its contracts, and responded
to related questions and queries. The Board issued suitable decisions and Fatwas to the Bank for execution.
Secondly:
The Board has reviewed the contracts and agreement templates and requested management adherence to those
templates. Furthermore, the Board sees that a training plan for the employees on the new Shari’a agreements should
be set for immediate implementation.
Thirdly: The Budget

The Board has reviewed the financial statements and the related notes and disclosures. The Board believes that:
1. These financial statements fairly represent the Bank’s assets and revenues. The accuracy of the information and
documents is the responsibility of the Bank’s Administration.
2. The Bank maintains three separate pools i.e. one each for Wakala deposits, Mudaraba deposits, and shareholders
equity. The Board has advised the Bank to invest the Mudaraba deposits and the shareholders equity in one pool.
It is the Board’s opinion that the balance sheet and income statement as well as the distribution of profits to the
depositors and shareholders are presented accordingly.
The Board sees that the Wakala contracts should stay within its framework without committing the Bank to the Wakala
deposits by reverse Murabaha which has been banned by the Fiqh Council of the Muslim World League.
Fourthly: Zakah
Since the amended Article no. (62) of the Memorandum of Association which states that “part of the dividends can
be reserved as the Zakah of the Shareholders who entrust the Bank to deduct this Zakah. These amounts should be
deposited in a fund to be called (Zakah Fund) and be disbursed by the Chief Executive Officer towards Shari’a-compliant
sides that are endorsed by the bank’s Supervisory Board,” thus, the Shari’a Board sees that the text of the amended
Article (62) of the Memorandum of Association to be submitted for amendment in order to either entrust the Bank to pay
the Shareholders’ Zakah explicitly or that the shareholders pay their Zakah by themselves where the Board would do the
calculation and inform the shareholders of it. This is due to that the text of the amended Article 62 of the Memorandum
of Association is not clear.
Based on the internal Shari’a audit reports, reviewed transactions and recommendations implemented by management,
the Board confirms that the Bank’s transactions executed during the year do not contradict Islamic Shari’a principles.
Dr. Hussain Hamid Hassan Dr. Ali Mohiuddin Al Qurra Daghi

Chairman Member
Shaikh Adnan Abdullah Al Qattan Dr. Mohamed Abdul Hakim Zoeir

Member Member & Board Secretary

INDEPENDENT
AUDITORS’ REPORT
TO THE SHAREHOLDERS
P.O. Box 140 We have audited the accompanying financial statements of Al-Salam Bank Bahrain
14th Floor, The Tower B.S.C. (“the Bank”), which comprise the balance sheet as at 31 December 2008
Bahrain Commercial Complex and the statements of income, changes in equity and cash flows for the year ended
Manama 31 December 2008, and a summary of significant accounting policies and other
Kingdom of Bahrain explanatory notes.
Phone: 17 535455 Board of Directors’ Responsibility for the

Fax: 17 535405 Financial Statements
manama.bh@eyi.com The Board of Directors is responsible for the preparation and fair presentation of
www.ey.com/me these financial statements in accordance with International Financial Reporting
C.R. No. 6700 Standards and Financial Accounting Standards issued by Accounting and Auditing
Organization for Islamic Financial Institutions. This responsibility includes: designing,
implementing and maintaining internal controls relevant to the preparation and fair
presentation of financial statements that are free from material misstatement, whether
due to fraud or error; selecting and applying appropriate accounting policies; and
making accounting estimates that are reasonable in the circumstances. In addition
the Board of Directors are responsible for the Bank’s undertaking to operate in
accordance with Islamic Shari’a Rules and Principles.
Auditors’ Responsibility
Our responsibility is to express an opinion on these financial statements based on our
audit. We conducted our audit in accordance with International Standards on Auditing
and Auditing Standards for Islamic Financial Institutions. Those standards require
that we comply with ethical requirements and plan and perform the audit to obtain
reasonable assurance as to whether the financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence about the
amounts and disclosures in the financial statements. The procedures selected
depend on the auditors’ judgement, including the assessment of the risks of material
misstatement of the financial statements, whether due to fraud or error. In making
those risk assessments, the auditor considers internal controls relevant to the entity’s
preparation and fair presentation of the financial statements in order to design audit
procedures that are appropriate for the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the entity’s internal controls. An audit
also includes evaluating the appropriateness of accounting policies used and the
reasonableness of accounting estimates made by management, as well as evaluating
the overall presentation of the financial statements.

INDEPENDENT
AUDITORS’ REPORT
TO THE SHAREHOLDERS
We believe that the audit evidence we have obtained is sufficient and appropriate to
provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements present fairly, in all material respects, the
financial position of the Bank as of 31 December 2008 and of its financial performance
and its cash flows for the year ended 31 December 2008 in accordance with Financial
Accounting Standards issued by the Accounting and Auditing Organization for Islamic
Financial Institutions and the Islamic Shari’a Rules and Principles as determined by the
Shari’a Supervisory Board of the Bank.
In addition, in our opinion, the financial statements present fairly, in all material
respects, the financial position of the Bank as of 31 December 2008 and of Vits
financial performance and its cash flows for the year ended in accordance with
International Financial Reporting Standards.
Other Regulatory Matters

We confirm that, in our opinion, proper accounting records have been kept by the
Bank and the financial statements, and the contents of the Report of the Board of
Directors relating to these financial statements, are in agreement therewith. We
further report, to the best of our knowledge and belief, that no violations of the
Bahrain Commercial Companies Law, nor of the Central Bank of Bahrain and Financial
Institutions Law, nor of the memorandum and articles of association of the Bank have
occurred during the year ended 31 December 2008 that might have had a material
adverse effect on the business of the Bank or on its financial position, and that the
Bank has complied with the terms of its banking licence.
24 January 2009
Manama, Kingdom of Bahrain

BALANCE SHEET
31 December 2008
31 December 31 December
2008 2007
N ote BD BD
ASSETS
Cash and balances with Central Bank of Bahrain 4 83,533,981 15,173,663
Central Bank of Bahrain Sukuk 31,095,000 20,380,000
Murabaha with banks 5 87,167,449 224,450,893
Murabaha financing 72,483,745 32,641,599
Ijarah Muntahia Bittamleek 6 41,530,784 10,435,863
Non-trading investments 7 116,929,500 62,735,696
Investment in an associate 8 8,011,913 8,193,142
Investment properties 1,177,528 1,177,528
Receivables and prepayments 9 21,032,829 10,505,046
Premises and equipment 2,583,796 2,979,252
Assets held-for-sale 88,934,033 9,024,000
TOTAL ASSETS 554,480,558 397,696,682

LIABILITIES, UNRESTRICTED INVESTMENT ACCOUNTS AND EQUITY

LIABILITIES
Murabaha from banks 32,880,685 96,983,041
Murabaha from non-banks 289,004,770 106,908,709
Customers’ current accounts 3,231,303 5,688,686
Other liabilities 10 10,755,559 8,875,784
Total liabilities, excluding unrestricted investment accounts 335,872,317 218,456,220
UNRESTRICTED INVESTMENT ACCOUNTS 11 46,124,760 19,769,585
Total liabilities, including unrestricted investment accounts 381,997,077 238,225,805
EQUITY
Share capital 12 120,000,000 120,000,000
Reserves and retained earnings 12 39,660,956 38,941,790
Proposed appropriations 12 12,822,525 529,087
172,483,481 159,470,877
TOTAL LIABILITIES, UNRESTRICTED INVESTMENTS
ACCOUNTS AND EQUITY 554,480,558 397,696,682
These financial statements have been authorised for issue in accordance with a resolution of the Board of Directors on 24
January 2009.
Mohamed Ali Rashid Alabbar Hussein Mohammed Al Meeza Yousif Taqi

Chairman Vice Chariman Director & Chief Executive Officer
The attached notes 1 to 28 form part of these financial statements.

STATEMENT OF
Year ended 31 December 2008
INCOME
2008 2007
BD BD
Income from financing contracts 11,763,159 11,429,773

Gain on disposal of assets held-for-sale 30,266,556 11,017,492
Gains on investments designated as fair value
through profit or loss 5,259,691 11,079,352
Other operating income (Note 13) 2,300,596 4,950,608
Total operating income 49,590,002 38,477,225
Less: Profit on unrestricted investment accounts (219,939) (245,414)
Less: Profit on Murabaha contracts (11,768,805) (5,519,638)
Net operating income 37,601,258 32,712,173
Staff costs 6,854,616 5,312,083
Premises and equipment cost 582,745 423,905
Depreciation 902,526 745,138
Other operating expenses 3,438,451 2,981,195
11,778,338 9,462,321
OPERATING PROFIT 25,822,920 23,249,852

Share of loss from an associate (Note 8) (280,239) (100,858)
NET PROFIT FOR THE YEAR 25,542,681 23,148,994
WEIGHTED AVERAGE NUMBER OF SHARES

OUTSTANDING (NOTE 12) 1,200,000,000 1,199,935,900
BASIC EARNINGS PER SHARE (FILS) 21.3 19.3


STATEMENT OF
CASH FLOWS
2008 2007
BD BD
OPERATING ACTIVITIES
Net profit for the year 25,542,681 23,148,994
Adjustments:
Depreciation 902,526 745,138
Share of loss from an associate 280,239 100,858
Unrealised losses (gains) on investments designated as fair value
through profit or loss 2,050,309 (11,079,352)
Operating income before changes in operating assets and liabilities 28,775,755 12,915,638
Changes in operating assets and liabilties:

Mandatory reserve with Central Bank of Bahrain (7,241,000) (4,710,000)
Central Bank of Bahrain Sukuk (10,715,000) (20,380,000)
Murabaha and Mudaraba with Banks with original
maturities of 90 days or more (1,240,065) 14,439,734
Murabaha financing (39,842,146) (9,678,332)
Ijarah Muntahia Bittamleek (31,094,920) (53,434)
Non-trading investments, net (56,244,113) (10,215,813)
Receivables and prepayments (10,527,784) (1,720,592)
Customers’ current accounts (2,457,383) 14,874
Murabaha from banks (64,102,356) 73,335,736
Murabaha from non-banks 182,096,061 86,796,742
Other liabilities 1,250,688 6,630,779
Assets held-for-sale (79,910,033) (17,845,885)
Net cash (used in) from operating activities (91,252,296) 129,529,447
INVESTING ACTIVITIES
Investment in an associate - (6,299,358)
Purchase of premises and equipment (507,070) (1,697,506)
Net cash (used in) investing activities (507,070) (7,996,864)
42 AL SALAM BANK BAHRAIN

STATEMENT OF
CASH FLOWS
2008 2007
BD BD
FINANCING ACTIVITIES
Proceeds from sale of treasury stock - 20,294
Unrestricted investment accounts 26,355,176 19,769,585
Dividends (12,000,000) -
Net cash from financing activities 14,355,176 19,789,879
NET CHANGE IN CASH AND CASH EQUIVALENTS (77,404,190) 141,322,462
Cash and cash equivalents at 1 January 233,608,190 92,285,728

CASH AND CASH EQUIVALENTS AT 31 DECEMBER 156,204,000 233,608,190
Cash and cash equivalents comprise of:

Cash and other balances with Central Bank of Bahrain 67,263,285 1,814,814
Balances with other banks 3,389,696 7,718,849
Murabaha with banks with original maturities of less than 90 days 85,551,019 224,074,527
156,204,000 233,608,190
AL SALAM BANK BAHRAIN 43

STATEMENT OF
CHANGES IN Year ended 31 December 2008
EQUITY
Foreign
exchange
Share Treasury Statutory Retained Investment translation Proposed Total
capital stock reserve earnings reserve reserve appropriations equity
BD BD BD BD BD BD BD BD
Balance as of
1 January 2008 120,000,000 - 3,959,869 12,458,881 22,523,040 - 529,087 159,470,877
Zakah on 2008 earnings - - - (822,525) - - - (822,525)
Charitable donations - - - (100,000) - - - (100,000)
Changes on investment
in an associate - - - - - 99,010 - 99,010
(Expenses) income recognised
directly in equity - - - (922,525) - 99,010 - (823,515)
Net profit for the year - - - 25,542,681 - - - 25,542,681
- - - 24,620,156 - 99,010 - 24,719,166
Transfer from investment reserve - - - 2,050,309 (2,050,309) - - -
Transfer to statutory reserve - - 2,554,268 (2,554,268) - - - -
Zakah paid - - - - - - (529,087) (529,087)
Zakah contribution - - - - - - 822,525 822,525
Dividends paid for 2007 - - - (12,000,000) - - - (12,000,000)
Proposed dividends for 2008 - - - (12,000,000) - - 12,000,000 -
- - 2,554,268 116,197 (2,050,309) 99,010 12,293,438 13,012,604
Balance at
31 December 2008 120,000,000 - 6,514,137 12,575,078 20,472,731 99,010 12,822,525 172,483,481
Balance as of
1 January 2007 120,000,000 (17,203) 1,641,879 3,333,225 11,443,688 - - 136,401,589
Zakah on 2007 earnings - - - (529,087) - - - (529,087)

Charitable donations - - - (100,000) - - - (100,000)
Expenses recognised
directly in equity - - - (629,087) - - - (629,087)
Net profit for the year - - - 23,148,994 - - - 23,148,994
- - - 22,519,907 - - - 22,519,907
Transfer to investment reserve - - - (11,079,352) 11,079,352 - - -
Transfer to statutory reserve - - 2,314,899 (2,314,899) - - - -
Zakah contribution - - - - - - 529,087 529,087
Sale of treasury stock - 17,203 3,091 - - - - 20,294
- 17,203 2,317,990 9,125,656 11,079,352 - 529,087 23,069,288
Balance at
31 December 2007 120,000,000 - 3,959,869 12,458,881 22,523,040 - 529,087 159,470,877

NOTES TO THE
31 December 2008
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 was registered with Ministry of Industry and Commerce under Commercial Registration
Number 59308 on 19 January 2006. The Bank is regulated and supervised by the Central Bank of Bahrain (CBB) and has a
retail Islamic banking licence 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, Building 22, Avenue 58,
Block 436, Al Seef District, Kingdom of Bahrain.

The Bank operates through its registered office, two retail branches in Al-Seef district and its investment advisory offices
in London and Singapore. The Bank has a 20% stake in Al-Salam Bank Algeria, a commercial bank incorporated in Algeria
with a paid up capital of US$ 100 million equivalent in local currency.

The Bank offers a full range of Shari’a-compliant banking services and products. The activities of the Bank include
accepting money placements/deposits, 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 Banking Services as defined in the licensing framework.

2 ACCOUNTING POLICIES
2.1 BASIS OF PREPARATION

The financial statements are prepared on a historical cost basis, except for investments held at fair value through
profit or loss and investment properties that have been measured at fair value. These financial statements
incorporate all assets, liabilities and off balance financial instruments held by the Bank, and its investment advisory
offices. Investment in Al Salam Bank-Algeria is equity accounted as per IAS 28, Investment in Associates (Note 8).

These financial statements are presented in Bahraini dinars, being the functional and presentation currency of the Bank.
Statement of compliance
The financial statements of the Bank are prepared in accordance with the Financial Accounting Standards (FAS)
issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and in conformity
with the Bahrain Commercial Companies Law and International Financial Reporting Standards issued by
International Accounting Standards Board and the Central Bank of Bahrain and Financial Institutions Law.

Future changes in accounting policies
IFRS 8 Operating Segments

The application of IFRS 8 which will be effective for the year ending 31 December 2009 will result in amended and
additional disclosures relating to operating segments.
IAS 1 Presentation of Financial Statements (Revised)

The application of IAS 1 (Revised) which will be effective for the year ending 31 December 2009 will result in
amendments to the presentation of the financial statements.
The implementation of these standards will not have any significant impact on the Bank’s financial statements.


continued
NOTES TO THE
31 December 2008
2 ACCOUNTING POLICIES (continued)
2.2 SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES

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

Judgements are made in the classification of fair value through profit or loss, assets held for sale or held-to-
maturity investments based on management’s intention at acquisition of the financial asset. As fully described
below, judgements are also made in determination of the objective evidence that a financial asset is impaired.

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

The Bank treats available-for-sale 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. In addition, the
Bank evaluates other factors, including normal volatility in share price for quoted equities and the future cash flows
and the discount factors for unquoted equities.

Estimation uncertainty
The key assumptions concerning the future and other key sources of estimating uncertainty at the balance sheet
date, 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 losses on financial contracts
The Bank reviews its financial contracts on a regular basis to assess whether a provision for impairment should be
recorded in the statement of income. In particular, considerable judgement 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.


NOTES TO THE
31 December 2008
2.2 SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES (continued)

Collective impairment provisions on financial contracts
In addition to specific provisions against individually significant financial contracts the Bank also considers the
need for a collective impairment provision against financial contracts which although not 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 Bank, of the financial contract since it was granted
(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.

Valuation of unquoted equity investments
Valuation of unquoted equity investments 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;
• the expected cash flows discounted at current rates applicable for items with similar terms and risk
characteristics; or
• other valuation models.
The Bank 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.
The principal accounting policies applied in the preparation of these financial statements are set out below:
Financial contracts
Financial contracts consist of cash and balances with banks and the Central Bank of Bahrain, Murabaha receivables
(net of deferred profit), Mudaraba and Ijarah Muntahia Bittamleek. Balances relating to these contracts are stated
net of provisions for impairment.
Murabaha receivables
Murabaha receivables are stated net of provision for impairment and deferred profits.
Ijarah Muntahia Bittamleek

Ijarah Muntahia Bittamleek assets comprises assets under lease, comprising aircraft, land and buildings, under
terms that would transfer ownership of the assets to third parties at the end of the respective lease period.
Depreciation is provided on a straight-line basis on all Ijarah Muntahia Bittamleek assets other than land (which is
deemed to have an indefinite life), at rates calculated to write off the cost of each asset over the period of the lease.


continued
NOTES TO THE
31 December 2008
2.3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Non-trading investments
These are classified as held-to-maturity, available-for-sale 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 and loss is charged to statement of income.
Following the initial recognition of investments, the subsequent period-end reporting values are determined as follows:
Investments held-to-maturity
Investments which have fixed or determinable payments and fixed maturity which are intended to be held-to-
maturity, are carried at amortised cost, less provision for impairment in value.
Investments available-for-sale
After initial recognition, investments which are classified “available-for-sale” are normally remeasured at fair value,
unless the fair value cannot be reliably determined, in which case they are measured at cost less impairment.
Fair value changes are reported as a separate component of equity 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 “cumulative changes in fair value” within equity, is included in the statement of income for the year.
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 Bank’s risk management policy and its investment strategy. These include
all private equity investments including those in joint ventures and associates. In accordance with AAOIFI, such
investments would classify as “available for sale investments”.
Investments at fair value through profit or loss are recorded in the balance sheet at fair value. Changes in fair value
are recorded as “Gains on investments designated at fair value through profit or loss” in the statement of income.

Investment in associates
The Bank’s investments in its associates are accounted for under the equity method of accounting. An associate is
an entity over which the Bank has significant influence and which is neither a subsidiary nor a joint venture.
Under the equity method, the investment in the associate is carried in the balance sheet at cost plus post-
acquisition changes in the Bank’s share of net assets of the associate. Losses in excess of the cost of the
investment in an associate are recognised when the Bank 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 income statement
reflects the Bank’s share of results of operations of the associate. Where there has been a change recognised
directly in the equity of the associate, the Bank recognises its share of any changes and discloses this, when
applicable, in the statement of changes in equity.

NOTES TO THE
31 December 2008
2.3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The reporting dates of the associate and the Bank are identical and the associates accounting policy conform to
those used by the Bank for like transactions and events in similar transactions.

After application of the equity method, the Bank determines whether it is necessary to recognise an additional
impairment loss on its investment in associates. The Bank determines at each balance sheet date whether there
is any objective evidence that the investment in associates are impaired. If this is the case the Bank 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 income statement.

Profit and losses resulting from transactions between the Bank and the associates are eliminated to the extent of
the interest in associates.
Investment properties
Investment properties are those held to earn rentals and/or for capital appreciation. These are initially recorded at
cost, including acquisition charges associated with the property.
Subsequent to initial recognition, all investment properties are remeasured at fair value and changes in fair
value are recognised in the statement of income as gain or loss in investment properties. The fair value of the
investment properties is determined either based on valuations made by independent valuers or using internal
models with consistent assumptions.
Investment reserve
Unrealised gains resulting from revaluation of “investments carried at fair value through profit or loss” and
“investment properties” recorded in the statement of income are appropriated to an investment revaluation
reserve in equity and are not available for distribution to the shareholders. Upon disposal of such assets, the
related cumulative gains are transferred to retained earnings and become available for distribution.
Subsidiaries or associates acquired with a view to sell

A subsidiary or an associate acquired with a view to subsequent disposal within 12 months are classified as “held-
for-sale” when the sale is highly probable. Related assets and liabilities of the subsidiary are shown separately
on the balance sheet as “Assets held-for-sale” and “Liabilities relating to assets 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.
Any impairment loss is recognised in the statement of income for any initial and subsequent write down of these
assets to fair value, less costs to sell. A gain for any subsequent increase in the fair value, less costs to sell, is
recognised to the extent that it is not in excess of the cumulative impairment loss that was recognised.

continued
NOTES TO THE
31 December 2008
Premises and equipment

Premises and equipment are stated at cost less accumulated depreciation. 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 hardware and software 3 to 5 years

- Furniture and office equipments 3 to 5 years
- Motor vehicle 5 years
- Leasehold Improvements Over the lease period
Impairment and uncollectability of financial assets

An assessment is made at each balance sheet date to determine whether there is objective evidence that
a specific financial asset may be impaired. If such evidence exists, any impairment loss, is recognised in the
statement of income.
Impairment is determined as follows:

(a) for assets carried at amortised cost, impairment is based on estimated cash flows based on the original
effective profit rate;
(b) for assets carried at fair value, impairment is the difference between cost and fair value; and
(c) 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 available for sale equity investments reversal of impairment losses are recorded as increases in cumulative
changes in fair value through equity.

In addition, a collective provision is made to cover impairment for specific banks of assets where there is a
measurable decrease in estimated future cash flows.

Offsetting
Financial assets and financial liabilities can only be offset with the net amount being reported in the balance sheet
when there is a legally enforceable right to set off the recognised amounts and the Bank intends to either settle on
a net basis, or intends to realise the asset and settle the liability simultaneously.
Employees’ end of service benefits

The Bank 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 completion of a minimum service period. The
expected costs of these benefits are accrued over the period of employment.
For national employees, the Bank makes contributions to General Organisation for Social Insurance calculated
as a percentage of the employees’ salaries. The Bank’s obligations are limited to these contributions, which are
expensed when due.

NOTES TO THE
31 December 2008
Revenue recognition
Murabaha
Where the income is quantifiable and contractually determined at the commencement of the contract, income
is recognised on a time-apportioned basis over the period of the contract based on the principal amounts
outstanding. Where the income from a contract is not quantifiable, it is recognised when realised. Accrual of
income is suspended when the Bank believes that the recovery of these amounts may be doubtful or normally
when the repayments are overdue by 90 days, whichever is earlier.
Mudaraba
Income on Mudaraba transactions are recognised when the right to receive is established or these are declared by
the Mudarib, whichever is earlier.
Dividends
Revenue is recognised when the Bank’s right to receive the payment is established.
Ijarah
Ijarah Muntahia Bittamleek income is recognised on a time-proportionate basis over the lease term.
Fees and commission income

The Bank earns fee and commission income from a diverse range of services it provides its customers. Fee income
can be divided into the following main categories:
Fee income on financing transactions: Fee earned on financing transactions include up-front fees and early
maturity fees are recognised when earned. To the extent the fees are deemed yield enhancement they are
recognised over the period of the financing contracts.
Fee income from transaction services: Fee arising from corporate finance, corporate advisory, arranging the sale
of assets and wealth management are recognised when earned relating to underlying transaction or on a time
proportionate basis when the fee is linked to time.
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 balance sheet date.
For investments where there is no quoted market price, a reasonable estimate of fair value is determined by
reference to 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 Bank at current profit rates for
contracts with similar terms and risk characteristics.
For investments having fixed or determinable payments fair value is based on the net present value of estimated future
cash flows determined by the Bank using current profit rates for investments with similar terms and risk characteristics.

continued
NOTES TO THE
31 December 2008
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 balance sheet date are retranslated at market rates
of exchange prevailing at that date. Gains and losses arising on translation are recognised in the statement of
income. 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 “available-for-sale” are included in equity until the related assets are sold or derecognised at
which time they are recognised in the statement of income. Translation gains on assets and liabilities classified as
“fair value through profit or loss” are directly recognised in the statement of income.
Trade and settlement date accounting

Purchases and sales of financial assets are recognised on the trade date, i.e. the date that the Bank commits to
purchase or sell the asset.
Derecognition of financial assets

A financial asset (in whole or part) is derecognised either when the Bank has transferred substantially all the risk
and rewards of ownership or when it has neither transferred nor retained substantially all the risks and rewards and
when it no longer has control over the asset or a proportion of the asset.
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 lender 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 statement of income.

Fiduciary assets
Assets held in a fiduciary capacity are not treated as assets of the Bank.

Dividends on ordinary shares
Dividends on ordinary shares are recognised as a liability and deducted from equity when they are approved by
the Bank’s shareholders. Dividends for the year that are approved after the balance sheet date are included in the
equity and are disclosed as an event after the balance sheet date.
Unrestricted investment account holders (URIA)

All unrestricted investment accounts are carried at cost plus accrued profits less amounts repaid. Income to
unrestricted investment account holders is allocated on the basis of their average daily balances in proportion to
shareholders’ balances.

NOTES TO THE
31 December 2008
Zakah
In accordance with the Articles of Association, the Bank is required to pay Zakah on all realised retained
earnings and reserves on behalf of the shareholders, excluding paid-up capital and share premium which are the
responsibility of the shareholders. The Bank is obligated to calculate and notify individual shareholders of their
share of Zakah payable. The Bank’s Shari’a Supervisory Board approves these calculations. Zakah is treated as an
appropriation from the retained earnings.
Cash and cash equivalents

Cash and cash equivalents comprise cash and balances with banks with maturities of less than 90 days from the
date of acquisition.
3 CLASSIFICATION OF FINANCIAL INSTRUMENTS BY MEASUREMENT BASIS
As at 31 December 2008, financial instruments have been classified for the purpose of measurement under International
Accounting Standard 39: Financial Instruments: Recognition and Measurement as follows:
Financial
assets at Financial Financial
fair value assets at liabilities at
through profit cost/ cost/
or loss amortised cost amortised cost Total
BD BD BD BD
ASSETS
Cash and balances with Central Bank of Bahrain - 83,533,981 - 83,533,981
Central Bank of Bahrain Sukuk - 31,095,000 - 31,095,000
Murabaha with banks - 87,167,449 - 87,167,449
Murabaha financing - 72,483,745 - 72,483,745
Ijarah Muntahia Bittamleek - 41,530,784 - 41,530,784
Non-trading investments 116,929,500 - - 116,929,500
Receivables - 20,439,688 - 20,439,688
Assets held-for-sale - 88,934,033 - 88,934,033
116,929,500 425,184,680 - 542,114,180
LIABILITIES AND UNRESTRICTED
INVESTMENT ACCOUNTS
Murabaha from banks - - 32,880,685 32,880,685
Murabaha from non-banks - - 289,004,770 289,004,770
Customers’ current accounts - - 3,231,303 3,231,303
UNRESTRICTED INVESTMENT ACCOUNTS - - 46,124,760 46,124,760

- - 371,241,518 371,241,518

continued
NOTES TO THE
31 December 2008
3 CLASSIFICATION OF FINANCIAL INSTRUMENTS BY MEASUREMENT BASIS (continued)
As at 31 December 2007, financial instruments were classified as follows:

Financial
assets at Financial Financial
fair value assets at liabilities at
through profit cost/ cost/
or loss amortised cost amortised cost Total
BD BD BD BD
ASSETS
Cash and balances with Central Bank of Bahrain - 15,173,663 - 15,173,663
Central Bank of Bahrain Sukuk - 20,380,000 - 20,380,000
Murabaha with banks - 224,450,893 - 224,450,893
Murabaha financing - 32,641,599 - 32,641,599
Ijarah Muntahia Bittamleek - 10,435,863 - 10,435,863
Non-trading investments 62,735,696 - - 62,735,696
Receivables - 10,156,438 - 10,156,438
Assets held-for-sale - 9,024,000 - 9,024,000
62,735,696 322,262,456 - 384,998,152

INVESTMENT ACCOUNTS
Murabaha from banks - - 96,983,041 96,983,041
Murabaha from non-banks - - 106,908,709 106,908,709
Customers’ current accounts - - 5,688,686 5,688,686

UNRESTRICTED INVESTMENT
ACCOUNTS - - 19,769,585 19,769,585
- - 229,350,021 229,350,021
4 CASH AND BALANCES WITH CENTRAL BANK OF BAHRAIN
2008 2007
BD BD
Mandatory reserve with Central Bank of Bahrain 12,881,000 5,640,000
Cash and other balances with Central Bank of Bahrain 67,263,285 1,814,814
Balances with other banks 3,389,696 7,718,849
83,533,981 15,173,663
5 MURABAHA WITH BANKS
31 December 2008
Up to 3 months to
3 months 6 months Total
BD BD BD
GCC 82,376,388 - 82,376,388
Europe 4,791,061 - 4,791,061
87,167,449 - 87,167,449

NOTES TO THE
31 December 2008
5 MURABAHA WITH BANKS (continued)
31 December 2007
Up to 3 months to
3 months 6 months Total
BD BD BD
GCC 199,822,903 376,366 200,199,269
Europe 24,251,624 - 24,251,624
224,074,527 376,366 224,450,893
6 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 lease agreements stipulate that the lessor undertakes to transfer the leased
assets to the lessee upon receiving the final rental payment.
2008 2007
BD BD
Movement in Ijarah Muntahia Bittamleek assets is as follows:
At 1 January 10,435,863 10,382,429

Additions during the year 33,418,897 1,193,780
Ijarah assets’ depreciation - net (2,323,976) (1,140,346)
At 31 December 41,530,784 10,435,863
2008 2007
BD BD
The future minimum lease receivable payments in aggregate are as follows:
Due within one year 9,915,774 738,954

Due in one to five years 26,505,879 8,561,766
Due after five years 5,109,131 1,135,143
41,530,784 10,435,863
2008 2007
BD BD
Ijarah Muntahia Bittamleek are divided into the following asset classes:
Aviation 3,836,702 4,307,337

Land and buildings 37,694,082 6,128,526
41,530,784 10,435,863

Income recognised on Ijarah assets, included under income from financing contracts, during the year amounted to
BD1,605,266 (2007: BD905,497). The accumulated depreciation on assets subject to Ijarah amounted to BD3,464,322 (31
December 2007: BD1,140,346).


continued
NOTES TO THE
31 December 2008
7 NON-TRADING INVESTMENTS
2008 2007
BD BD
Quoted 4,045,637 11,403,476

Unquoted based on valuation techniques:
- Market observable input 97,509,445 35,027,745
- Non-market observable input 15,374,418 16,304,475
116,929,500 62,735,696
These represent investments designated as fair value through profit or loss and are carried at fair value.
Certain of these investments are recorded at fair value using valuation techniques as current market transactions or
observable market data are not available. Their fair value is determined using a valuation model that has been tested
against the prices of actual market transactions and using the Bank’s best estimate of the most appropriate model inputs.

8 INVESTMENT IN AN ASSOCIATE
During 2007 the Bank had acquired a 20% stake in Al Salam Bank Algeria (ASBA), a bank incorporated in Algeria. Al Salam
Bank Algeria is not listed on any stock exchange. The following table illustrates the summarised financial information of
the Bank’s investment in ASBA:
2008 2007
BD BD
Associate’s balance sheet:
Total assets 39,514,495 41,395,705
Total liabilities 3,224,932 1,593,828
Net assets 36,289,563 39,801,877
Total revenue 9,090 -

Total expenses 1,410,287 504,290

Net loss for the year 1,401,197 504,290
Bank’s share of associate’s loss: 280,239 100,858
9 RECEIVABLES AND PREPAYMENTS

2008 2007
BD BD
Profit receivable on Murabaha financing 611,123 670,766

Profit receivable on Ijarah assets 278,838 205,689
Profit receivable on Sukuk 323,905 351,123
Prepayments 593,141 348,608
Other receivables 19,225,822 8,928,860
21,032,829 10,505,046
Other receivables include subscription receivables of BD8,515,761 relating to sale of certain held-for-sale assets. At 31
December 2007, other receivables included advances of BD4,154,051 for acquisition of investments.

NOTES TO THE
31 December 2008
10 OTHER LIABILITIES
2008 2007
BD BD
Profit payable 2,614,170 1,176,903

Accounts payable and accruals 8,024,884 7,561,307
End of service benefits 116,505 137,574
10,755,559 8,875,784
11 UNRESTRICTED INVESTMENT ACCOUNTS
Unrestricted investment account holders’ funds are commingled with the Bank’s funds and invested in short-term highly
liquid Commodity Murabaha financing with banks. According to the terms of acceptance of the unrestricted investment
accounts, 100% of the funds are invested after deducting a mandatory reserve. Unrestricted investment accounts have no
restriction on cash withdrawal. The Mudarib fee ranges between 40% and 50%.
12 EQUITY
2008 2007
BD BD
12.1 SHARE CAPITAL
Authorised:
1,200,000,000 ordinary shares of BD0.100 each 120,000,000 120,000,000
Issued and fully paid:

1,200,000,000 ordinary shares of BD0.100 each, issued against cash 120,000,000 120,000,000

12.2 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 Bank 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 and following the approval of the Central Bank of Bahrain.
12.3 INVESTMENT RESERVE

During the year BD2,050,309 was transferred from the investment reserve to retained earnings (2007: gains of
BD11,079,352 were transferred from retained earnings to the investment reserve). The reserve represents unrealised gains
and losses from revaluation of investments and investment properties carried at fair value though profit or loss, and is not
available for distribution under the Bank’s Shari’a policies until transferred back to retained earnings upon disposal of the
assets and realisation of the gains.

12.4 PROPOSED APPROPRIATIONS
The Board of Directors in its meeting on 24 January 2009 has resolved to recommend a dividend of 10 fils per share or
10% of the paid-up capital. For Zakah appropriations, see Note 26.
13 OTHER OPERATING INCOME

2008 2007
BD BD
Financing related fees and commissions 843,708 530,937

Transaction related fees 367,334 3,853,532
Fiduciary and other fees 840,504 311,875
Foreign exchange gains 249,050 254,264
2,300,596 4,950,608

continued
NOTES TO THE
31 December 2008
14 RELATED PARTY TRANSACTIONS
Related parties comprise major shareholders, directors of the Bank, 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 made on commercial terms.
The significant balances with related parties at 31 December 2008 were as follows:
2008
Associates Directors
and joint and related Senior
ventures entities management Total
BD BD BD BD
Assets:
Murabaha financing 7,040,472 3,693,308 60,985 10,794,765
Ijarah Muntahia Bittamleek 12,556,290 6,301,531 179,595 19,037,416
Receivables and prepayments 8,669,913 91,225 14,583 8,775,721

Liabilities:
Murabaha from non-banks 26,966,966 141,577 1,031,541 28,140,084
Customer current accounts - 180,255 49,004 229,259
Unrestricted investment accounts 3,242,180 100,680 44,142 3,387,002
The income and expenses in respect of related parties included in the financial statements are as follows:
Income:
Income from other Islamic financing contracts 605,768 419,558 15,731 1,041,057
Fees and commission income (Note 13) 40,905 - - 40,905
Expenses:
Profit paid on Murabaha from non-banks 966,272 3,828 29,269 999,369
Share of profits on unrestricted investment accounts - 192 4,879 5,071

NOTES TO THE
31 December 2008
14 RELATED PARTY TRANSACTIONS (continued)
2007
Associates Directors
and joint and related Senior
ventures entities management Total
BD BD BD BD
Assets:
Murabaha financing - 4,603,987 45,896 4,649,883
Ijarah Muntahia Bittamleek - 6,807,337 253,129 7,060,466
Receivables and prepayments 600 196,325 1,275 198,200
Liabilities
Murabaha from non-banks 1,453,500 568,410 576,490 2,598,400
Customer current accounts - 164,027 21,767 185,794
Unrestricted investment accounts - 50,315 608,454 658,769
The income and expenses in respect of related parties included in the financial statements are as follows:
Income:
Income from other Islamic financing contracts - 929,514 10,305 939,819
Fees and commission income (Note 13) - 19,250 938 20,188
Expenses:
Profit paid on Murabaha from non-banks 165,372 42,062 26,002 233,436
Share of profits on unrestricted investment accounts - 39 1,082 1,121
As of 31 December 2008, Murabaha financing and Ijarah Muntahia Bittamleek included BD3,693,309 (2007: 4,603,987)
of facilities provided to directors and their associates which are past due and on which profit is not being accrued. No
provisions have been made against these facilities since sufficient collaterals, including cash collateral, are held.
Directors are compensated in the form of fees for attending board and committee meetings. Directors’ remuneration,
allowances and expenses for attending board and committee meetings for the year ended 31 December 2008 amounted
to BD350,000 (31 December 2007: BD370,000 ).
Compensation of key management personnel, consisting solely of short-term benefits, paid during the year was
BD2,753,000 (2007: BD2,329,980).
15 COMMITMENTS
Undrawn financing commitments

The Bank has a contracted commitment to the extent of BD2,434,840 (2007: BD6,409,746) which remained undrawn as at
the year end. In addition, the Bank had an undrawn capital commitment of BD5,027,488 (2007: BD32,601,265) as at the
year end on account of investments. Commitments generally have fixed expiration dates, or other termination clauses.
Since commitment may expire without being drawn upon, the total contract amounts do not necessarily represent future
cash requirements.


continued
NOTES TO THE
31 December 2008
15 COMMITMENTS (continued)
Operating lease commitment - Bank as lessee

The Bank has entered into a five-year operating lease for its headquarters premises. Future minimal rentals payable under
the non-cancellable lease as at 31 December 2008 are as follows:
2008 2007
BD BD
Within 1 year 451,095 366,373
After one year but not more than five years 448,371 821,980
TOTAL 899,466 1,188,353
16 RISK MANAGEMENT

16.1 Introduction
Risk is inherent in the Bank’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 Bank’s continuing
profitability and each individual within the Bank is accountable for the risk exposures relating to his or her responsibilities.
The Bank is exposed to credit risk, liquidity risk and market risk, the latter being subdivided into trading and non-trading
risks. It is also subject to prepayment risk and operational risks.
The independent risk control process does not include business risks such as changes in the environment, technology
and industry. They are monitored through the Bank’s strategic planning process.
Risk management structure

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 the overall risk management approach and for approving the risk strategies and
principles.
Executive Committee
The Executive Committee has the responsibility to monitor the overall risk process within the Bank.

Shari’a Supervisory Board
The Bank’s Shari’a Supervisory Board is entrusted with the responsibility to ensure the Bank’s adherence to Shari’a rules
and principles in its transactions and activities.
Credit/ 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 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.
Asset and Liability Committee

The Asset and Liability Committee establishes policy and objectives for the asset and liability management of the
Bank’s balance sheet 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 Bank’s balance sheet 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.

NOTES TO THE
31 December 2008
16 RISK MANAGEMENT (continued)
16.1 Introduction (continued)
Board Audit Committee

The Audit Committee is appointed by the Board of Directors and consists of three members who are Directors, including
one non-Executive Director. The Board 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 Bank, the measurement system of risk assessment and relating these to the Bank’s capital, and the methods for
monitoring compliance with laws, regulations and supervisory and internal policies.
Internal Audit
Risk management processes throughout the Bank are audited by the internal audit function, that examines both the
adequacy of the procedures and the Bank’s compliance with the procedures. Internal Audit discusses the results of all
assessments with management, and reports its findings and recommendations to the Audit Committee.
Risk measurement and reporting systems

The Bank’s risks are measured using a method which reflects both the expected loss likely to arise in normal
circumstances and unexpected losses, which are an estimate of the ultimate actual loss based on statistical models. The
models make use of probabilities derived from historical experience, adjusted to reflect the economic environment. The
Bank also runs worse case scenarios that would arise in the event that extreme events which are unlikely to occur do, in
fact, occur.
Monitoring and controlling risks is primarily performed based on limits established by the Bank. These limits reflect the
business strategy and market environment of the Bank as well as the level of risk that the Bank is willing to accept, with
additional emphasis on selected industries. In addition, the Bank monitors and measures the overall risk bearing capacity
in relation to the aggregate risk exposure across all 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 the head of each
business division. The report includes aggregate credit exposure, credit metric forecasts, hold limit exceptions, liquidity
ratios and risk profile changes. On a monthly basis detailed reporting of industry, customer and geographic risks takes
place. Executive 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 and conclude on the risks of the Bank.
For all levels throughout the Bank, 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 the General
Manager and all other relevant members of the Bank on the utilisation of market limits, proprietary investments and
liquidity, plus any other risk developments.
Excessive risk concentration

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 Bank’s performance to developments affecting a particular industry or geographical location.
In order to avoid excessive concentrations of risk, the Bank’s policies and procedures include specific guidelines to focus
on maintaining a diversified portfolio. Identified concentrations of credit risks are controlled and managed accordingly.

continued
NOTES TO THE
31 December 2008
16.2 CREDIT RISK (continued)
Risk management
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 Bank attempts to controls 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 Bank 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 to credit risk for the components of the balance sheet. The maximum
exposure is shown gross, before the effect of mitigation through the use of master netting and collateral agreements.
Gross Net Gross Net

maximum maximum maximum maximum
exposure exposure exposure exposure
2008 2008 2007 2007
Note BD BD BD BD
ASSETS
Cash and balances with banks 3,389,696 3,389,696 7,718,849 7,718,849
Murabaha with banks 5 87,167,449 87,167,449 224,450,893 224,450,893
Murabaha financing 52,058,745 32,542,273 31,141,599 6,913,987
Ijarah Muntahia Bittamleek 6 37,688,214 14,163,658 10,435,863 -
Non-trading investments 7 116,929,500 95,261,108 62,735,696 62,735,696
Receivables 9 20,115,783 20,115,783 9,865,191 9,865,191
Assets held-for-sale 88,934,033 39,715,428 9,024,000 9,024,000
Total 406,283,420 292,355,395 355,372,091 320,708,616

Commitments 7,462,328 6,401,007 11,437,234 6,777,488
Total credit risk exposure 413,745,748 298,756,402 366,809,325 327,486,104
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.


NOTES TO THE
31 December 2008
Type of credit risk

Various contracts entered into by the Bank comprise Murabaha receivables, Mudaraba investments and Ijarah Muntahia
Bittamleek contracts. Murabaha receivables contracts cover land, buildings, commodities, motor vehicles and others.
Mudaraba investments consist of financing transactions entered through other Islamic banks and financial institutions.
The various financial instruments are:
Murabaha receivables
The Bank 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 repaid in installments 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 installments are settled and the lessee purchases the asset.
a) The credit quality of Murabaha with banks subject to credit risk is as follows:
31 December 2008
Past due or
Neither past due nor impaired individually
‘A’ Rated ‘B’ Rated Unrated impaired Total
BD BD BD BD BD
60,638,666 7,540,000
Murabaha with banks 18,988,783 - 87,167,449
60,638,666 7,540,000 18,988,783 - 87,167,449

31 December 2007
Past due or
Neither past due nor impaired individually
‘A’ Rated ‘B’ Rated Unrated impaired Total
BD BD BD BD BD
Murabaha with banks 135,572,893 51,822,000 37,056,000 - 224,450,893

135,572,893 51,822,000 37,056,000 - 224,450,893
The ratings referred to in the above tables are by one or more of the 4 international rating agencies (Standards & Poors,
Moody’s, Fitch and Capital Intelligence).


continued
NOTES TO THE
31 December 2008
b) The credit quality of Murabaha financing and Ijarah Muntahia Bittamleek subject to credit risk, based on internal credit
ratings, is as follows:
31 December 2008
Neither past due nor impaired
Substandard
Satisfactory Watch list but not impaired Past due Total
BD BD BD BD BD
Murabaha financing 66,756,279 - - 5,727,466 72,483,745

Ijarah Muntahia Bittamleek 41,507,924 - - 22,860 41,530,784
108,264,203 - - 5,750,326 114,014,529

31 December 2007
Neither past due nor impaired
Substandard
Satisfactory Watch list but not impaired Past due Total
BD BD BD BD BD
Murabaha financing 27,040,226 - - 5,601,373 32,641,599

Ijarah Muntahia Bittamleek 10,429,788 - - 6,075 10,435,863
37,470,014 - - 5,607,448 43,077,462
All internal risk ratings are tailored to the various categories and are derived in accordance with the Bank’s rating policy.
The attributable risk ratings are assessed and updated regularly.
c) Past due but not impaired Murabaha financing, and Ijarah Muntahia Bittamleek are analysed as follows:
31 December 2008
0-30 days 30-90 days > 90 days Total
BD BD BD BD
Murabaha financing - 2,034,158 3,693,308 5,727,466

Ijarah Muntahia Bittamleek 22,860 - - 22,860
22,860 2,034,158 3,693,308 5,750,326
31 December 2007
0-30 days 30-90 days > 90 days Total
BD BD BD BD
Murabaha financing 997,380 3,480,396 1,123,597 5,601,373

Ijarah Muntahia Bittamleek 252 - 5,823 6,075
997,632 3,480,396 1,129,420 5,607,448

NOTES TO THE
31 December 2008
All the past due but not impaired Murabaha and Ijarah financing are covered by collateral of BD8,901,056 (2007:
BD1,717,930), including cash collateral of BD3,292,000. In addition, the Bank is holding sovereign guarantee of
BD1,877,944 in respect of one of the facilities.
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 balance sheet plus commitments to customers disclosed in note 15 except
capital committments.
During the year BD2,350,000 of financing facilities to individuals were renegotiated. All renegotiated facilities are
performing and are fully secured.
At 31 December 2008, the amount of credit exposure in excess of 10% of the equity to individual counterparties was nil
(2007: nil).
17 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 Bank’s performance to developments affecting a particular industry or geographic location. The Bank 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 unrestricted investment accounts by geographic region and industry sector was
as follows:
Liabilities, Liabilities,
unrestricted unrestricted
investment investment
accounts accounts
Assets and equity Commitments Assets and equity Commitments
2008 2008 2008 2007 2007 2007
BD BD BD BD BD BD
Geographic region
GCC 502,539,276 357,555,010 2,465,607 355,982,172 223,511,805 6,409,746
Arab World 9,917,696 4,978,221 - 10,122,930 4,199,469 -
Europe 6,106,964 6,856,091 - 27,161,365 9,930,884 -
Asia/Pacific 32,222,098 12,600,551 2,278,578 3,570,847 576,258 26,344,625
America 1,709,064 7,204 - 779,299 7,389 -
Others 1,985,460 - 2,718,143 80,069 - 6,256,640
554,480,558 381,997,077 7,462,328 397,696,682 238,225,805 39,011,011

Equity - 172,483,481 - - 159,470,877 -
554,480,558 554,480,558 7,462,328 397,696,682 397,696,682 39,011,011

continued
NOTES TO THE
31 December 2008
17 CONCENTRATIONS (continued)
Liabilities, Liabilities,
unrestricted unrestricted
investment investment
accounts accounts
Assets and equity Commitments Assets and equity Commitments
2008 2008 2008 2007 2007 2007
BD BD BD BD BD BD
Industry sector
Trading and
manufacturing 12,752,030 423,602 48,789 5,217,109 71,317 1,750,000
Banks and financial
institutions 109,199,534 72,547,160 - 274,555,235 164,538,487 -
Real estate 167,869,248 68,098,462 4,242,721 56,991,542 6,152,146 8,537,265
Aviation 5,090,915 1,025,554 - 7,159,208 - -
Individuals 23,199,665 106,905,733 1,167,200 10,846,341 49,883,876 4,659,746
Government and
public sector 35,204,195 97,537,011 1,218,851 29,957,802 8,463,880 -
Others 101,164,971 35,459,555 784,767 12,969,445 9,116,099 24,064,000
554,480,558 381,997,077 7,462,328 397,696,682 238,225,805 39,011,011
Equity - 172,483,481 - - 159,470,877 -
554,480,558 554,480,558 7,462,328 397,696,682 397,696,682 39,011,011

18 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 Bank’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 Asset and Liability Committee of the Bank.
18.1 EQUITY PRICE RISK

Equity price risk arises from fluctuations in equity prices. The Board has set limits on the amount and type of investments
that may be accepted. This is monitored on an ongoing basis by the Bank’s Investment Committee.
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 assets held for sale) solely due to reasonably possible changes in equity prices, is as follows:
2008
Change in Effect on Change in Effect on
price net profit price net profit
% BD % BD
Quoted:
GCC 10 404,564 (10) (404,564)
Unquoted 10 11,288,386 (10) (11,288,386)
2007
price net profit price net profit
% BD % BD
Quoted:
GCC 10 1,026,589 (10) (1,026,589)
Unquoted 10 5,133,222 (10) (5,133,222)

NOTES TO THE
31 December 2008
18 MARKET RISK (continued)
18.2 PROFIT RETURN RISK

The Bank has exposure to fluctuations in the profit rates on its assets and liabilities. The Bank recognises income on
certain financial assets on a time-apportioned basis. The Bank has set limits for profit return risk and these are monitored
on an ongoing basis by the Bank’s Asset Liability Committee (ALCO).
The Bank 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:
2008
rate net profit rate net profit
% BD % BD
US dollars 0.25 506,153 (0.25) (506,153)

Bahraini dinars 0.25 1,656,026 (0.25) (1,656,026)
2007
% BD % BD
US dollars 1 233,879 (1) (233,879)

Bahraini dinars 1 361,379 (1) (361,379)
18.3 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 Bank’s Asset Liability
Committee to ensure positions are maintained within established limits.
Substantial portion of the Bank’s assets and liabilities are denominated in Bahrain dinars or US dollars. The Bank had the
following significant net long positions in foreign currencies as of 31 December :
2008 2007
BD BD
US Dollars 17,090,387 12,150,234

Saudi Riyals 57,553,210 10,889,630
The effect on income solely due to reasonably possible immediate and sustained changes in exchange rates is as follows:
2008
% BD % BD
US dollars to Bahraini dinar 1 170,904 (1) (170,904)
2007
% BD % BD
US dollars to Bahraini dinar 1 121,502 (1) (121,502)

continued
NOTES TO THE
31 December 2008
19 LIQUIDITY RISK
Liquidity risk is the risk that the Bank 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 marketable securities. Liquidity position is monitored on an ongoing basis by the Bank’s
Asset Liability Committee.
The table below summarises the expected maturity profile of the Bank’s assets and liabilities at 31 December 2008 and 2007:
Up to 3 months 1 to 5 Over 5
3 months to 1 year years years Total
BD BD BD BD BD
ASSETS
Cash and balances with
Central Bank of Bahrain 83,533,981 - - - 83,533,981
Central Bank of Bahrain
Sukuk - 6,620,000 24,475,000 - 31,095,000
Murabaha with banks 87,167,449 - - - 87,167,449
Murabaha financing 29,807,777 16,005,000 26,555,359 115,609 72,483,745
Ijarah Muntahia Bittamleek 6,022,862 3,892,912 26,505,879 5,109,131 41,530,784
Non-trading investments - - 116,929,500 - 116,929,500
Investment in an associate - - - 8,011,913 8,011,913
Investment properties - - - 1,177,528 1,177,528
Receivables and prepayments 20,055,603 256,556 720,670 - 21,032,829
Premises and equipment - - 2,583,796 - 2,583,796
Assets held-for-sale - 19,715,428 69,218,605 - 88,934,033
226,587,672 46,489,896 266,988,809 14,414,181 554,480,558

INVESTMENT ACCOUNTS
Murabaha from banks - - 32,880,685 - 32,880,685

Murabaha from non-banks - 97,980,280 191,024,490 - 289,004,770
Customers’ current accounts - - 3,231,303 - 3,231,303
Other liabilities 10,182,013 573,360 186 - 10,755,559
Unrestricted investment accounts - - 46,124,760 - 46,124,760
10,182,013 98,553,640 273,261,424 - 381,997,077

NOTES TO THE
31 December 2008
19 LIQUIDITY RISK (continued)
31 December 2007
BD BD BD BD BD
ASSETS
Cash and balances with
Central Bank of Bahrain 15,173,663 - - - 15,173,663
Central Bank of Bahrain
Sukuk 1,560,000 - 18,820,000 - 20,380,000
Murabaha with banks 224,074,527 376,366 - - 224,450,893
Murabaha financing 13,862,210 5,524,705 13,134,684 120,000 32,641,599
Ijarah Muntahia Bittamleek 107,861 631,093 8,561,767 1,135,142 10,435,863
Non-trading investments - - 62,735,696 - 62,735,696
Investment in an associate - - - 8,171,142 8,171,142
Investment properties - 1,177,528 - - 1,177,528
Receivables and prepayments 9,632,557 56,096 810,216 6,177 10,505,046
Premises and equipment - - 2,979,252 - 2,979,252
Assets held-for-sale - 9,024,000 - - 9,024,000
264,410,818 16,789,788 107,041,615 9,432,461 397,674,682

INVESTMENT ACCOUNTS
Murabaha from banks - 64,102,356 32,880,685 - 96,983,041

Murabaha from non-banks - - 106,908,709 - 106,908,709
Customers’ current accounts - 5,688,686 - - 5,688,686
Other liabilities 8,625,257 51,683 176,844 - 8,853,784
Unrestricted
investment accounts - - 19,769,585 - 19,769,585
8,625,257 69,842,725 159,735,823 - 238,203,805

continued
NOTES TO THE
31 December 2008
19 LIQUIDITY RISK (continued)
The table below summarizes the maturity profile of the Bank’s financial liabilities at 31 December, 2008 and 2007 based on
contractual undiscounted repayment obligation:
31 December 2008
BD BD BD BD BD
LIABILITIES, UNRESTRICTED INVESTMENT

ACCOUNTS AND COMMITMENTS
Murabaha from banks 32,880,685 - - - 32,880,685
Murabaha from non-banks 218,957,897 68,928,893 1,117,980 - 289,004,770
Customers’ current accounts 3,231,303 - - - 3,231,303
Unrestricted investment accounts 46,124,760 - - - 46,124,760
Undrawn financing commitments - 2,434,840 - - 2,434,840
Undrawn investment commitments - 777,766 4,249,722 - 5,027,488
Profit due on financing contracts - 1,213,866 - - 1,213,866
301,194,645 73,355,365 5,367,702 - 379,917,712
31 December 2007
BD BD BD BD BD
LIABILITIES, UNRESTRICTED INVESTMENT

ACCOUNTS AND COMMITMENTS
Murabaha from banks 96,983,041 - - - 96,983,041
Murabaha from non-banks 101,975,729 4,932,980 - - 106,908,709
Customers’ current accounts 5,688,686 - - - 5,688,686
Unrestricted investment accounts - 19,769,585 - - 19,769,585
Undrawn financing commitments - 6,409,746 - - 6,409,746
Undrawn investment commitments - 25,510,000 7,091,265 - 32,601,265
Profit due on financing contracts - 1,227,578 - - 1,227,578
204,647,456 57,849,889 7,091,265 - 269,588,610

NOTES TO THE
31 December 2008
20 SEGMENT INFORMATION
Primary segment information
For management purposes, the Bank is organised into four major business segments:
Banking - principally managing Shari’a compliant profit sharing investment accounts, and offering Shari’a
compliant financing contracts and other Shari’a-compliant products. This segment comprises corporate
banking, retail banking and private banking and wealth management.
Treasury - principally handling Shari’a-compliant money market, trading and treasury services including short-
term commodity Murabaha.
Investments - principally the Banks’ proprietary portfolio and serving clients with a range of investment products,
funds and alternative investments.
Capital - manages the undeployed capital of the bank by investing it in high quality 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 Bank 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 for the year ended 31 December 2008 was as follows:
31 December 2008
Banking Treasury Investments Capital Total
BD BD BD BD BD
Operating income 12,358,078 1,363,925 11,360,600 12,518,655 37,601,258
Segment result 8,053,899 131,570 8,111,172 9,246,040 25,542,681
Other information
Segment assets 111,419,675 206,307,380 164,730,985 72,022,518 554,480,558
Segment liabilities, and equity 332,442,317 41,505,053 1,000,000 179,533,188 554,480,558
31 December 2007
Banking Treasury Investments Capital Total
BD BD BD BD BD
Operating income 11,832,171 866,524 11,184,478 8,829,000 32,712,173
Segment result 8,000,973 51,399 8,335,463 6,761,159 23,148,994
Other information
Segment assets 42,574,473 175,158,216 84,587,099 95,376,894 397,696,682
Segment liabilities, and equity 126,635,534 104,044,820 23,241,303 143,775,025 397,696,682

continued
NOTES TO THE
31 December 2008
20 SEGMENT INFORMATION (continued)
Secondary segment information

The Bank primarily operates in the GCC and derives substantially all its operating income and incurs all operating
expenses in the GCC.
21 FIDUCIARY ASSETS
Funds under management at the year-end amounted to [BD25,000,000] (2007: BD26,202,212). These assets are held in a
fiduciary capacity and are not included in the balance sheet.
22 SHARI’A SUPERVISORY BOARD
The Bank’s Shari’a Supervisory Board consists of four Islamic scholars who review the Bank’s compliance with general
Shari’a principles and specific fatwa’s, rulings and guidelines issued. 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.
23 FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Bank’s financial instruments are not significantly different from their carrying values as at 31
December 2008 and 2007.

24 EARNINGS AND EXPENSES PROHIBITED BY SHARI’A
During the year 2008, the Bank received income totaling BD2,767 (2007: BD151) from conventional financial institution on
current accounts balances. These funds were held as payable to charity as they are prohibited by Shari’a law.
25 SOCIAL RESPONSIBILITY
The Bank discharges its social responsibility through Zakah, charity fund expenditures and donations to the good faith
qard fund which is used for charitable purposes. During the period the Bank incurred an amount of BD536,084 (2007:
BD35,100) on account of charitable donations.
26 ZAKAH

The total Zakah payable as of 31 December 2008 amounted to BD1,437,774 of which BD822,525, representing the Zakah
on the statutory reserve, general reserve and retained earnings balances for the year 2008, is payable by the Bank. The
remaining Zakah balance amounting to BD615,249 (2007: 3,522,047) or 0.51 fils (2007: 2.94 fils) per share is due and
payable by the shareholders.


NOTES TO THE
31 December 2008
27 CAPITAL
The adequacy of the Bank’s capital is monitored using, primarily, the rules and ratios established by the Basel Committee
on Banking Supervision and adopted by the Central Bank of Bahrain. The primary objective of the Bank’s capital
management is to ensure that it complies with externally imposed capital requirements. The Bank complied in full with all
externally imposed capital requirements during the years ended 31 December 2008 and 31 December 2007.
The risk assets ratio calculations, in accordance with the ‘Basel II’ capital adequacy guidelines of the Central Bank of
Bahrain are as follows:
2008 2007
BD BD
Capital base (Tier 1) 107,989,000 126,809,000
Credit risk weighted exposures 393,251,000 208,682,000

Market risk weighted exposures 3,213,000 775,000
Operational risk weighted exposures 40,410,000 50,888,000
Total risk weighted exposure 436,874,000 260,345,000
Capital adequacy 24.7% 48.7%
Minimum requirement 12.0% 12.0%
28 COMPARATIVE FIGURES
Certain of the prior year’s figures have been reclassified to conform to the presentation adopted in the current period.
Such reclassifications have not resulted in any change to the previously reported net income or shareholders’ equity.

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His Highness His Majesty His Highness

AL SALAM BANK - BAHRAIN

Shari’a Supervisory Board 10

Executive Management Team 12

Board of Directors’ Report to the shareholders 16

Management Review of Operations & Activities 22

Risk Management and Compliance 30

Corporate Social Responsibility 34

Shari’a Supervisory Board Report to the shareholders 37

Independent Auditors’ Report 38

Notes to the Financial Statements 45

2 AL SALAM BANK - BAHRAIN

To become a global force in the

• Become the one-stop-shop for

AL SALAM BANK - BAHRAIN 3

Headquartered in the Kingdom The Bank’s high-caliber management

4 AL SALAM BANK - BAHRAIN

KEY FINANCIAL INDICATORS

Total Operating Income (million) Net Profit (million)

2007 BD32.7 2007 BD23.1

2006 BD20.4 2006 BD16.4

Earnings Per Share Total Assets (million)

2008 21.3 Fils 2008 BD554

2007 19.3 Fils 2007 BD398

2006 15.1 Fils 2006 BD188.1

Cost to Income Ratio Total Equity (million)

2008 31.3% 2008 BD172.5

2007 28.9% 2007 BD159.5

2006 19.6% 2006 BD136.5

AL SALAM BANK - BAHRAIN 5

6 AL SALAM BANK - BAHRAIN

Mohamed Ali Alabbar is the founding Noor Investment Group, an affiliate

HUSSEIN MOHAMMED AL MEEZA

Hussein Al Meeza is one of the brightest Company, Vice Chairman of Al Salam

Essam bin Abdulkadir Al Muhaideb

Essam Al Muhaideb is the Group Development Co, Dubai Contracting

AL SALAM BANK - BAHRAIN 7

Mr. Habib Kassem is the Chairman of

MOHAMMED BIN OMEIR YUSSEF AL MEHAIRI

Mr. Mohammed Bin Omeir is currently

SALEH SAEED AHMED LOOTAH

Mr. Saleh Saeed Lootah is currently PJSC (Dubai); Board Member of

8 AL SALAM BANK - BAHRAIN

Mr. Salem Al Mohannadi is currently Abu Dhabi Investment company, Arab

YOUSIF ABDULLA TAQI

A Certified Public Accountant (CPA), and international financial institutions.

KHALID AHMED ABDULLA AL ASHAR

Mr. Khalid Al Ashar enjoys a vast He enjoys a long experience in the

AL SALAM BANK - BAHRAIN 9

Dr Hassan holds a Ph.D. from the Institutions. In addition, Dr. Hassan is

DR. ALI MOHIUDDIN AL QURRA DAGHI

Dr. Al Qurra Daghi holds a Ph.D. in Organisation of Islamic Conference,

10 AL SALAM BANK - BAHRAIN

Shaikh Adnan Al Qattan holds Masters Kingdom of Bahrain and President of

DR. MOHAMED ABDUL HAKIM ZOEIR

Dr. Zoeir holds Ph.D. in Islamic

AL SALAM BANK - BAHRAIN 11

The second full

16 AL SALAM BANK - BAHRAIN