A broader spectrum with strategic focus on diversified sectors...A broader spectrum with strategic...

A broader spectrum with

strategic focus ondiversified sectors

2018 ANNUAL REPORT

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FIRST ENERGY BANK • 2018 ANNUAL REPORT 1

CONTENTS Vision & Mission 01

About First Energy Bank 03

Board of Directors 04

Shari’a Supervisory Board 08

Chairman’s Letter to Shareholders 10

Management Team 12

Financial Highlights 16

Business Activities 18

Investment Portfolio 20

Corporate Governance 23

Financial Statements 39

Risk and Capital Management 87

Remuneration Disclosures 115

VISION:

To become one of the leading and most relevant Islamic Banks in the MENA region and internationally.

MISSION:To create and capture value from diversified sectors with high professional standards and a commitment to delivering adequate returns to shareholders.

2 FIRST ENERGY BANK • 2018 ANNUAL REPORT


First Energy Bank B.S.C.(c) (“FEB” or the “Bank”) is licensed as Islamic Wholesale bank by the Central Bank of Bahrain

(CBB) and headquartered in Manama, Kingdom of Bahrain. FEB operates in accordance with Islamic Shari’a principles as

a financial partner in project development, joint ventures, mergers and acquisitions and the purchase of assets and asset

portfolios.

The Bank established a wholly-owned subsidiary, FEB Capital Ltd, in Dubai International Finance Centre (DIFC) to offer

Advisory and Consultancy services. It also served to optimize the bank’s geographical footprint. FEB has also successfully

launched its real estate infrastructure and development platform, FEB AQAR, to manage and capture opportunities

within the real estate sectors. This will greatly enhance the Bank’s Shari’a compliant activities and capacities.

The Bank was established in June 2008, with an authorized share capital of US$2 billion, and a paid up capital of US$1

billion. On 6th December, 2018, the shareholders approved Capital Re-Organization whereby the Bank’s paid up capital

was reduced from US$ 1 billion to US$ 600 million. The Bank’s shareholders include a range of organizations from the

Kingdom of Bahrain, the United Arab Emirates, Libya, the Kingdom of Saudi Arabia, and other countries in the region.

The Bank due to a paradigm shift in the overall opportunities available in the Global oil and gas sector, which was the core

operating sector of the Bank, has changed its strategic focus and intends to remain robust, pro-active and opportunistic in

the market by sourcing potential opportunities in healthcare and defensive sectors, both regionally and globally. The Bank

believes that such sectors have huge demand and massive opportunities available to capitalize and generate adequate

returns for the shareholders.

On the Bank’s existing lines of business private equity, treasury, real estate, investment banking, capital markets/asset

management and Islamic financial debt structured products, the Bank has added Advisory to enhance its revenue

streams. The Bank’s subsidiary, based in Dubai, has resources and core competencies to provide such services to various

client across the above mentioned sectors. With the above lines of business, the Bank offers unique and specialized

opportunities to its shareholders and investors to capitalize on available market opportunities.

ABOUT FIRST ENERGY BANK


Khaleefa Butti Bin Omair Chairman

Matar M. Al Blooshi Board Member

Dr. Faisel Ahmed GergabVice Chairman

Mohammed Salem Al Shamsi Board Member

Dr. Ali Mahmoud Hassen Board Member

Ammar Ali Mohamed JaberBoard Member

Abdulla Ahmed Al SuwaidiBoard Member

Mayssoun HabraBoard Member

Dr. Saif AbugulalBoard Member

Adel Abdulaziz Al JabrBoard Member

Abdulla Abdulkarim ShowaiterBoard Member

| BOARD OF DIRECTORS |


MR. KHALEEFA BUTTI BIN OMAIR Chairman

Mr. Khaleefa Butti Bin Omair, is the founder and Chairman of

KBBO Group, a leading investment group with a diverse portfolio

of interests operating in the UAE and spanning across the MENA,

European, and US regions. The Group’s investment portfolio and

operational verticals include leading companies in the field of

healthcare, education, retail, financial services and technology,

amongst others.

Mr. Khaleefa Butti Bin Omair, is a recognised UAE business leader

with over 17 years of experience in entrepreneurship and financial

investments. He began his career at the Abu Dhabi National

Oil Company (ADNOC), where he gained extensive experience

in the field of finance. In 2006, as the co-founder of Brokerage

House Securities LLC, he was appointed Chairman and CEO. He

later went on to found One Financial Markets, an FCA-regulated

brokerage firm in the United Kingdom that offers global presence

with local expertise through its wholly owned and affiliate offices

throughout the Middle East, Europe, South America and Central

and South-East Asia.

In addition to his role as Chairman of First Energy Bank, Mr.

Khaleefa Butti Bin Omair is also the Chairman of Al Salam Bank-

Bahrain, Executive Vice Chairman of NMC Health, where he led

its successful IPO and premium listing on the London Stock

Exchange in 2012. Additional responsibilities include serving as

the Chairman of Travelex Group Limited, Infinite Investment and

also the Executive Vice Chairman of Centurion Investment.

Spending his early school years in the UK, he went on to complete

his studies in the US, earning a degree in Finance from Suffolk

University, Boston.

DR. FAISEL AHMED GERGABVice Chairman

Dr. Faisel Gergab was appointed as the Chairman of the board of the

Libya Post, Telecommunications & Information Holding Company

(LPTIC) in March 2013. Dr. Gergab had the overall responsibility for

managing the ICT sector in Libya. LPTIC’s portfolio includes the two

mobile operators (Libayan & Al Madar), four fixed line operators

(Hatif Libya, Al Jeel, Libya International Telecoms Company and

Libya Telecoms & Technology Company), the real estate operator

(Al Bouniya) and the Libyan Post Company.

Dr. Gergab has around 21 years work experience, he began his

career in 1997 as a research fellow at the University of Surrey

where he received his PhD in Asset Integrity.

Dr. Gergab was an Oil & Gas Executive with many years of

experience in upstream, midstream and downstream projects.

Graduated from Oxford University with a BSc in Civil Engineering.

He later obtained an MSc and PhD in managing asset integrity

from the University of Surrey, UK where he is Chartered member

of the Institute of Civil Engineers and PMI Certified Senior Project

Manager. He has also published several publications on durability

of offshore and onshore facilities.

Dr. Gergab started his career in London as the Head of the Oil and

Gas division in an international engineering consultant and later

joined Shell where he held Senior Project Management positions

for flagship capital offshore and onshore projects in Europe, Middle

East and Africa.

Dr. Faisel Gergab was appointed by the National Transitional

Council’s Executive Office as the Program Manager for the

Libya Stabilization Team (LST), a role he held from March to

November 2011.

MATAR M. AL BLOOSHIBoard Member

Mr. Matar Mohamed Al Blooshi has over 23 years of experience

in the financial and fund management industries. Beginning his

career in 1992 with the Central Bank of the United Arab Emirates

as a Dealer in the Treasury department, he joined Abu Dhabi

Investment Company as a Portfolio Manager in 1995. In 1998,

he joined First Gulf Bank as the Head of Treasury & Investment,

moving to National Bank of Abu Dhabi in 2001 as Head of Foreign

Exchange and Commodities. In February 2005, Mr. Matar Al

Blooshi became the Head of Domestic Capital Market Group and

the General Manager of Abu Dhabi Financial Services (a subsidiary

of National Bank of Abu Dhabi) and was given the title of Senior

Manager, Asset Management Group in October 2006.

Mr. Matar Al Blooshi is Chief Investment Officer at Das Holding

LLC, a member of the Board of Directors of Al Salam Bank-Bahrain,

Etisalat Misr and Chairman of Maalem Holdings in Bahrain.

Mr. Matar Al Blooshi holds a BA in Banking & Financial Management

from University of Arkansas, US.


Board of Directors (continued)

DR. ALI MAHMOUD HASSEN MOHAMMEDBoard Member

Dr. Ali has over 17 years of experience in financial and business administration. He started his career in October 2002 with Aljufra University as a member of teaching staff in Faculty of Economics. In January 2012, Dr. Ali became the Dean of Faculty of Business Administration in University of Sirt. In 2012 he joined The Libyan Academy as a Head of the Doctoral program. At the end of the same year, he became the CEO of the Libyan company for finance and leasing, a subsidiary of the Economic and Social Development Fund. In 2013 he held many important posts such as Board Member of the Libyan Investment Authority and the Libyan Academy.

Dr. Ali holds a Bachelor of Business Administration from University of Tripoli, Libya (1998), Master of Financial Planning from Planning Institute of Higher Studies, Tripoli, Libya (2002), and PhD in Financial Management from The Arab Academy for Financial Sciences, Amman Jordan (2009).

MOHAMMED SALEM AL SHAMSIBoard Member

Mr. Al Shamsi, a national of the United Arab Emirates, with over 20 years of experience in Leadership & Management.

Mr. Al Shamsi joined Al Ain Distribution Company (AADC) in 1999 after obtaining his BSc.in Management from United States. Prior to moving to AADC, he had previously worked as a procurement officer in Abu Dhabi National Oil Company (ADNOC) and held several positions, as follows: Chief of the Procurement Division, Customer Service Department Manager, Director of Customer Service Directorate, Deputy General Director and General Director.

Outside AADC, he is a Board Chairman of Arabian Power Company (PJSC) and a Board member of the First Energy Bank.

Currently Mr. Al Shamsi is the Consultant of AADC since January 2016.

AMMAR ALI MOHAMED JABERBoard Member

Mr. Ammar Ali, a national of the United Arab Emirates, with over 12 years experience. Mr. Ammar has been a key member of the Global Markets and Treasury Department at Emirates NDB since he joined in 2007. He has intensive experience across all areas of Global Markets and Treasury, having played an essential role on the Foreign Exchange, Interest Rate Derivatives, Principal Investments, Global Funding, and Assets and Liability Management Desks.

Mr. Ammar is currently the Head of Treasury and Markets at Emirates Islamic Bank from December 2016 till present. Since November 2018, Ammar has been named as the Head of Emirates Islamic Financial Brokerage company.

Besides his existing Board seat in FEB, Ammar is a Board member in Al Mehrab Real Estate K.S.C.

Mr. Ammar is a graduate of Dubai Mem’s College, and completed his MBA from the Canadian University, graduating with highest distinction of Summa cum laude. He is also holder of International Treasury Management Certificate from the New York Institute of Finance.

ABDULLA ABDULKARIM SHOWAITERBoard Member

Mr. Abdullah Showaiter is a Bahrani Banker with more than 41 years of banking experience. He held several leadership positions in a number of prestigious banking institutions (Emirates Islamic Bank, Dubai Islamic Bank, First Gulf Bank, Bank of Bahrain and Kuwait). Mr. Showaiter is currently a Board Member in numerous financial institutions and companies such as Khaleeji Commercial Bank, Arab Drilling Workover Company-Libya (ADWOC), Bukhater Investment Company and consultant to Ajman Bank.

ADEL ABDULAZIZ AL JABRBoard Member

Mr. Adel Al Jabr holds a Master’s degree in Business Administration from the University of Leicester – UK. He graduated as an Electrical Engineer from the King Fahd University of Petroleum and Minerals -KSA in 1990. After graduating, Mr. Al Jabr worked for Saudi Aramco, in which he progressed through various departments over 18 years until he reached the position of Financial Planning Director of the Information Technology department.

Mr. Al Jabr is currently a member of the Board of Directors of Al Jabr Holding Company, a group of Saudi local & MENA region leading companies in the automobile field (Kia), real estate, food and beverages, household appliances and laundries. He is also the General Manager of Al Jabr General Contracting Company, a leading company in the field of electronic and mechanical business in KSA. Mr. Al Jabr is also the General Manager of Golden Chip, a leading company in the field of smart cards and plastic cards industry in Saudi Arabia and the MENA region. Mr. Al Jabr has more than 28 years of work experience.

ABDULLA AHMED AL SUWAIDIBoard Member

Mr. Al Suwaidi, a national of the United Arab Emirates, with over 17 years’ experience in Economics, Energy & Social Affairs. He started his career in February 2002 with Zakum Development Company (ZADCO) as Contracts & Procurements Engineer in the


commercial department. In November 2004 he joined Mubadala Development Company, Abu Dhabi as Assets Management Analyst in the Corporate & Finance Affairs.

Currently Mr. Al Al Suwaidi is the Director of Economic and Energy Affairs in the Executive Affairs Authority in Abu Dhabi.

Mr. Al Suwaidi holds a Certified Valuation Analyst (CVA), IACVA, 2007 & Bachelor of Sciences, International Economics from Suffolk University, Boston, MA, USA (2001) and a Master of Strategic and Security Studies from The National Defense College, Abu Dhabi, UAE (2016-2017).

MAYSSOUN HABRABoard Member

Mrs. Mayssoun Habra is the Founding Partner and Chief Executive Officer of Y Asset Management LLP, a multi-family office and a consultancy business based in London, that was setup in 2016 to provide wealth management services to UHNWIs, mainly from the Middle East.

With more than 20 years of work experience, Mrs. Mayssoun is a Chartered Fellow of the Institute for Securities & Investment (CISI) and has served in executive roles in large banking groups, most recently at Societe Generale Private Banking Hambros in the United Kingdom including Director, Group Head of Middle East, and has built a successful business that earned her a great reputation in the financial industry.

Mrs. Mayssoun received the Outstanding Young Private Banker award by Private Banker International in 2014 in recognition of her client centricity, well informed advice and quality service.

Prior to joining Societe Generale Private Banking Hambros in 2008, Mrs. Mayssoun Habra worked and held senior executive positions at National Bank of Dubai and Emirates NBD Bank in London from 1999 to 2008.

Mrs. Mayssoun Habra is a philanthropist and works actively with several international programs and charities for the advancement of education and quality of life improvement. Mayssoun is also a Board member, a Director and an Investment Advisor to prominent and well known international businesses in the UAE, UK, USA and Morocco.

A long-time advocate for women empowerment, Mrs. Mayssoun sits on the advisory Board of London Arabia, an organisation that promotes and rewards the exceptional work of women from all over the Arab world. She was awarded Arab Women of The Year in an annual ceremony in London.

DR. SAIF ABUGULALBoard Member

An accomplished leader in integrating European businesses into the emerging Middle East market, Dr. Saif Abugulal, Ph.D., has driven client revenue and profitability in the oil and gas sector for over 12 years. A Certified Project Manager with a doctorate degree in Government and International Affairs – focused specifically on the Middle East – Dr. Abugulal specializes in launching, expanding, and growing European businesses in the Middle East, with expertise in high-level business development, project management, supply chain management, logistics, and procurement. In the highly relationship-driven Middle East business culture, Dr. Abugulal leverages a vast Middle East social-business network with deep, respected family roots and a network of global business relationships.

Dr. Abugulal’s early career began at the University of Newcastle Upon-Tyne in the UK, where he delivered lectures and tutored students on Oil and Security, Middle East Politics, as well as Market and International Relations. He then transitioned to a consulting role with Laureate Education, Inc., aiding clients in over 95 countries in business development solutions.

In 2005, Dr. Abugulal was hired at Saudi Aramco Overseas Company BV, which owns, operates, and develops all energy resources based in Saudi Arabia. He progressed quickly through project management and leadership roles, driving efficient management of oil and gas projects, logistics, supply chain, expediting and procurement. He drove record 95% on-time delivery (OTD) and on-time Technical & Inventory refinery shutdowns (T&Is).

In 2014, Dr. Abugulal joined Stahl-Electromach as the General Manager for Saudi Arabia, where he spearheaded the company expansion into the new Saudi Arabia market and established the Stahl-Electromach brand as a new Saudi entity.

Dr. Abugulal also established, manages, and continues to grow Key2MiddleEast Ltd., a consulting business that connects European companies with opportunities to expand their efforts in the Middle East.

Dr. Abugulal also currently serves as General Manager for the Middle East for GIS International, a leading global procurement service provider for multinational, multisite companies.

Dr. Abugulal completed his Ph.D. at the University of Durham in the UK. He has a Master’s degree in Middle Eastern Studies from the University of Durham and a Bachelor’s degree in International Relations from Webster University in the U.S.

Dr. Abugulal completed an English Language Certificate from the University of East Anglia in the UK and an English Language Diploma from the British Academy of English.


His Eminence Shaikh Dr. Nedham Yaqoobi Chairman

Shaikh Dr. Nedham Mohamed Saleh Abdulrahman Yaqoobi is a well-known Shari’a Scholar and is recognized internationally. He is a member of the Shari’a council of the Accounting and Auditing Organization for Islamic Financial Institution (AAOIFI) as well as a member of the Central Shari’a Supervisory Board of the Central Bank of Bahrain. He has contributed significantly to the creation of many AAOIFI Shari’a Standards and participated in numerous of Islamic finance and banking conferences around the world.

Shaikh Dr. Yaqoobi is on the Shari’a Supervisory Board of many regional and international Islamic financial institutions / Takaful companies (with the capacity of chairman or member) such as Bahrain Islamic Bank, Ithmaar Bank, Khaleeji Commercial Bank, GFH Financial Group B.S.C., Abu Dhabi Islamic Bank amongst many others.

Shaikh Dr. Yaqoobi has a BA in Economics & Comparative Religions from McGill University-Canada and is also a PhD holder. He has authored several books and delivered numerous lectures on Islamic Finance.

His Eminence is one of the pioneers in Islamic banking and he is a well-known Shari’a scholar in all fields of Islamic Banking and Fiqh Al Mu’amalat. In 2007, the King of Bahrain, His Majesty King Hamad Bin Isa Al Khalifa, awarded Sheikh Yaqoobi the Order of Merit in recognition of his services in Bahrain and abroad. Shaikh Dr. Yaqoobi has also received the Euromoney’s award for Innovation in Shari’a Supervision, as well as the Malaysian Islamic Banking award.

His Eminence Shaikh Dr. Mohamed ElgariMember

Shaikh Dr. Mohamed Ali Bin Ibrahim Elgari is a former Professor of Islamic Economics at King Abdulaziz University, Jeddah, Saudi Arabia and Former Director of the Center for Research in Islamic Economics, at the same university.

Shaikh Dr. Elgari is Chairman and member of numerous Shari’a Supervisory Boards of Islamic banks and Takaful companies worldwide. He is also an Expert at the Islamic Jurisprudence Academy of the OIC and the Islamic Jurisprudence Academy of the Islamic World League. And he is a member of the Board of Trustees of the Accounting and Auditing Organization for Islamic Financial Institution (AAOIFI) and the Shari’a Council of the International Shariah Research Academy for Islamic Finance (ISRA), as well as a member of the Central Shari’a Supervisory Board of the Central Bank of Bahrain.

Shaikh Dr. Elgari has participated in various conferences and seminars, both locally and overseas. Extensive research in the field of Islamic economics and finance has led to a number of his works being published in recognized journals and presented at relevant conferences.

Shaikh Dr. Elgari holds a PhD in Economics from University of California, and he is an author of several books and research papers on Islamic Economics and Islamic Banking. Shaikh Dr. Elgari is the recipient of the Islamic Development Bank prize in Islamic Banking and Finance, KLIFF Islamic Finance Award for Most Outstanding Contribution to Islamic Finance (Individual) and Euromoney’s Award for Outstanding Contribution to Islamic Finance.

His Eminence Shaikh Dr. Osama BaharMember

Shaikh Dr. Osama Mohamed Saad Bahar is a prominent, highly-respected Shari’a scholar from the Kingdom of Bahrain.

Shaikh Dr. Bahar is currently the Head of Shari’a Coordination and Implementation at First Energy Bank, following earlier senior positions at Islamic banks in Bahrain, including Head of Shari’a Compliance at Al Salam Bank, Shamil Bank (currently Ithmaar Bank) and Shari’a Compliance Officer at Bank ABC Islamic.

Shaikh Dr. Bahar is also a member of the Shari’a Supervisory Board of International Investment Bank, Ithmaar Bank, Alizz Islamic Bank, Family Bank and Solidarity Bahrain amongst others. Additionally, he is the Shari’a Advisor of Bahrain Bourse and Global Banking Corporation.

Shaikh Dr. Bahar was awarded his PhD degree from Lahaye University in the Netherlands, his Masters Degree from Al Imam Al Ouzai University in Lebanon and his Bachelors degree in Islamic Shari’a from Emir Abdelkader University of Islamic Sciences in Algeria.

| SHARI’A SUPERVISORY BOARD |

First Energy Bank is guided by a Shari’a Supervisory Board consisting of three distinguished scholars. They review the Bank’s activities to ensure that all products and investment transactions comply fully with the rules and principles of Islamic Shari’a.


Dear Shareholders,

In the name of Allah, the beneficent, the merciful, prayers and peace upon the last apostle and messenger, our prophet Mohammed and his companions.

On behalf of the Board of Directors, it is my privilege to present the annual report of First Energy Bank B.S.C. (“FEB”) for the year ended 31 December 2018.

Despite the market challenges during the year and intensified market volatility, FEB posted a positive overall performance as measured by its financial results.

Looking at the year, our focus has continued on maximizing the performance and prospects for the Bank’s existing investments, securing profitable exits and undertaking new opportunities to generate income and create long term value for our stakeholders.

During 2018, we renewed our focus on strengthening the Bank’s institutional capability, in order to support the realisation of our strategy and continued business growth. This involved the strategic alignment of people, products, processes and systems across the organisation. Building a solid and sustainable financial institution remains a key strategic objective of the Bank. The Board and the management team remain fully committed to generate sustainable returns for shareholders over the upcoming periods.

The Board approved a revised strategy for the Bank to strengthen the financial position and accordingly as part of the revised strategy, the Bank carried out a Capital Re-organisation exercise and reduced its paid up capital from US$ 1 billion to US$ 600 million by adjusting the accumulated losses of US$ 280.355 million with the paid up share capital and transferring its investment in Menadrill amounting to US$ 119.645 million to a Trust. Inspite of such measures, the Bank for the year 2018, reported a net profit of US$ 12.2 million compared to a net profit of US$ 20.1 million in 2017. Additionally, the Bank as part of conservative measures also took provisions on few of its investments amounting to US$ 8.7 million during 2018. All of the above is part of the revised strategy of the Bank to strengthen the financial position and have an organic growth for the Bank.

FEB’s balance sheet remains robust. The Bank’s Basel III total capital adequacy ratio at the end of the year was 64.9% and Tier 1 ratio was 64.41%. Liquidity also remained strong. At the end of the year, FEB had a liquidity ratio of 48%.

We believe that with our revised strategy we will further enhance the Bank’s core function specially its revenue streams as the Bank has also added advisory transactions to its lines of business. We have an active pipeline of opportunities available to us, including those to generate strong and steady streams of income for the Bank. Our efforts will continue to be concentrated in our core sectors, where our track record and reach have continued to grow.

I would like to express my sincere appreciation for the solid confidence and support of our shareholders, the continued encouragement and cooperation of our counterparties, and the ongoing advice and guidance of the regulatory and supervisory bodies in the various jurisdictions where FEB operates, especially the Central Bank of Bahrain. I also take this opportunity to pay special tribute to the commitment and professionalism of our management and staff.

Yours truly,

Khaleefa Butti Bin Omair Chairman of the Board of Directors

| CHAIRMAN’S LETTER TO SHAREHOLDERS |


Mr. Mohamed Ghanem brings over 19 years of extensive experience in the fields of Investment Banking. He contributes to the business development as well as the origination of investment and advisory business.

In addition to his role as Chief Executive Officer of First Energy Bank he is Vice Chairman of Alizz Islamic Bank, Advisor to the Board of Al Salam Bank Bahrain and Chairman of the Executive Management Committee of FEB.

Prior to joining First Energy Bank, Mr. Ghanem worked at Arab Banking Corporation (BSC) (“ABC”) and GED Handles G.m.b.H., Vienna. Mr. Ghanem was a Board Member of Al Salam Bank-Bahrain and Chairman of MENAdrill Investment Company.

Mr. Ghanem holds a Bachelor of Arts in Business from Webster University (School of Business and Technology) in Vienna as well as an MBA from Glamorgan University.

MOHAMED SHUKRI GHANEM - Chief Executive Officer

| MANAGEMENT TEAM |


ANDY HARIMAN - Chief Investment Officer

Andy Hariman joined First Energy Bank as Chief Investment Officer in 2016, following careers in both Oil & Gas upstream and in investment banking,

where he brings a particular focus on investments and the energy sector throughout North America, Europe, Middle East, Africa and Asia.

Mr. Hariman is a member of FEB’s Executive Management Committee, Information Technology & Security Steering Committee (ITSSC) and the Asset

and Liability Committee (ALCO).

Prior to his appointment at FEB, Mr. Hariman was Co-founder and Managing Director of Carlingford, a London based natural resources merchant

banking firm managing debt, equity and M&A transactions for private and public oil & gas companies, completing over $2 billion worth of transactions

during his tenure. Mr. Hariman previously served as Executive Director at Nomura International in London in their Fixed Income division, covering

natural resources clients throughout the EMEA region. Prior to his career in investment banking, Mr. Hariman worked for one of Canada’s largest

Independent Oil & Gas companies, Nexen Inc. (now CNOOC) for twelve years in various senior executive management roles based in North America,

as well as being Nexen’s Head of Risk Management in Europe and its Finance Director in the Middle East.

Mr. Hariman is a Canadian and British citizen. He holds the CFA charter and earned his International MBA from the Kellogg School of Management,

Northwestern University and his Bachelor of Commerce from the University of Alberta, Canada.

AHMED MOUTI - Advisor to the CEO

Ahmed Mouti is a senior oil and gas executive who offers more than 22 years of accomplishment-laden industry experience. He has held several senior leadership positions in the USA, Europe, and the Middle East covering oil, gas, chemicals, trading, and financial derivatives with many international companies including Royal Dutch Shell, Koch Petroleum International, and El Junah Capital LLC. with a proven track record of leadership and building and managing international oil and gas business organizations.

Prior to joining First Energy Bank in 2017, Mr. Ahmed led the energy investment and advisory services, as President and Managing Partner, at El Junah Capital, LLC. in the USA. He served as the Chairman of the Shell Companies in Kuwait, Managing Director of Kuwait Shell Limited, and Director of Shell Kuwait Exploration and Production Company. He was also Royal Dutch Shell Group Corporate Strategy Advisor advising the Chief Executive Officer and the Executive Committee in London where he provided reviews, analysis, challenge, context, and guidance to Group level strategy development and communication.

His industry roles included General Manager of Business Development for Shell’s Upstream Americas, Head of Strategy, MENA, Senior Upstream Advisor, MENA, Caspian & South Asia, for Shell International Exploration & Production International, and Director of Market Analytics, Vice President, Marketing and Origination, and Vice President, European Operations for the Houston-based Shell Chemical Risk Management Company.

Prior to joining Shell in 1998, Ahmed held various business and commercial roles with increasing responsibilities with Koch Petroleum International and other companies. He holds a Bachelor’s of Art degree in Political Science and International Affairs from the American University in Paris, an MBA and MIM in International Management and Finance from Thunderbird, School of Global Management. He is also an alumnus of The Prince of Wales’s Business & the Environment Programme at the University of Cambridge, the Oxford Energy Seminar at the University of Oxford, and the Executive Leadership Program at INSEAD in Singapore.

Mr. Ahmed was a member of the Advisory Board of Kuwait University College of Petroleum Engineering for 4 years where he established the Shell Gas Chair. He is frequently invited to participate in board meetings and round table discussions of several Think Tanks in the USA and in Europe. He is also a member of Mudara Institute of Directors in Dubai.

FAWAZ A. AL JOWDER - Chief Operating Officer

Prior to joining FEB, Fawaz was the Managing Director of Takamul Capital B.S.C in Bahrain. Prior to Takamul, he was the Chief Executive Officer of Abu Dhabi Investment House (ADIH) and previously contributed in the establishment of Kuwait Finance House-Bahrain under different departments. He joined FEB in 2014 and is primarily responsible for the Operation, Strategy of the bank and business line: day to day over-all operations, business development and Investors relations including the Bank’s shareholders. Beside his role as COO, he’s also the Managing Director of FEB AQAR the real estate arm of First Energy Bank.

Mr. Fawaz has over 17 years of experience in the retail banking, investment banking, investment placement, private equity (multisector) and real estate property development. He represented companies on several boards as the Chairman and board member of various multi - million dollar


companies including real estate development, private equity, healthcare, pharmaceutical and energy companies.

Fawaz holds a Bachelor of Science in Business Administration from The Citadel, Military College of South Carolina, USA and a diploma from the University of Bahrain.

MUZAFFAR HUSSAIN NAVEED ALLANA - Chief Financial Officer

Mr. Allana has over 14 years of experience in the banking industry, mainly in the fields of audit and financial controls.

His responsibilities include contributing to the Bank’s strategy planning, leading and directing the budget process, maintaining appropriate financial and accounting framework and establishing effective system of cost management and related internal controls.

Prior to joining FEB, Mr. Allana worked with EY & KPMG, ‘Big Four’ global auditing firms, in Assurance and Advisory departments and also worked with Central Bank of Bahrain “CBB” in the Islamic Supervision Directorate.

He is a member of the Institute of Chartered Accountants in England and Wales – ICAEW, UK, a fellow member of the Association of Chartered Certified Accountants – ACCA, UK and a member of the Chartered Institute of Internal Auditors – CIIA, UK. He also holds a Bachelor’s degree from Oxford Brookes University, UK.

MOHAMED ABDULSALAM ALANSARI - Head of Treasury, Capital Markets & Financial Institutions

Over 21 years as a financial professional experienced in International, Islamic and Investment Banking, covering Treasury and Capital Markets with a strong network of banking associations.

Prior to his Treasurer & Senior Management role at FEB, Mohamed was Executive Director of Investment Placement covering the MENA and Asia regions for Financial Institutions, High Net-worth Individuals and Sovereign Wealth Funds. During his brief tenor with Arcapita, Mohamed established strong relationships across the region and secured medium to long-term facilities. Mohamed started his career at Arab Banking Corporation where he was Proprietary Investment Portfolio Manager, handling the Bank’s USD5.5Billion proprietary Book of MBSs, global Equities, Fixed Income, FRNs, Sukuk, CDOs, CLNs, SIVs, structured products and Emerging Markets Portfolios. He further established strong relationships with clients from North Africa with total funds under management in excess of USD4.3Billion covering bonds and equities.

Mr. Mohamed brings to FEB an extensive finance and investment banking experience especially in Capital Markets, Islamic Finance and a strong global and regional banking network. As Head of Treasury, Capital Markets and Financial Institutions at FEB, he is responsible for all banking relationships, management of the overall cash-flow and liquidity of the Bank as well as establishing guidelines for risk taking and balance sheet funding in addressing the business growth. Mohamed is a member of FEB’s Executive Management Committee (EMC), the Staff Savings Committee (SSC), Information Technology & Security Steering Committee (ITSSC) and is the Chairman of the Asset and Liability Committee (ALCO).

Mohamed holds an MBA and BBA from University of Houston in Texas, USA.

FULYA PLAS - Head of Risk Management

Ms. Plas brings to First Energy Bank over 19 years of financial risk management experience in investment banking. Prior to joining First Energy Bank she was Head of Risk Management at Seera Investment Bank where she established and developed the risk management function. She worked in Ryada Capital in Kuwait and Industrial Development Bank of Turkey where she was responsible for market risk and had a leading role in Basel II implementation committee. Ms. Plas studied Mathematics in Istanbul Technical University and holds an MSc in Insurance and Risk Management degree from Cass Business School, London. She was GARP regional director for Bahrain between 2007 and 2017. She is a certified FRM holder.

MOHANNED MOHAMMED ALANSARI - Corporate Secretary & MLRO

Mr. Alansari has over 33 years of professional experince with 19 years in the Banking sector in the fields of Compliance, Corporate Governance, Anti Money-Laundering and Corporate Banking. Graduated from the University of Bahrain with a concentration in Management and worked in various sectors, including the hospitality industry and aviation. In 2008 Mr. Alansari joined First Energy Bank as Deputy MLRO and currently he is the Corporate Secretary and MLRO.

Management Team (continued)


HANA AHMED AL MURRAN - Head of Compliance

Hana brings to First Energy Bank over 16 years of regulatory, banking and finance experience. Prior to joining First Energy Bank, she was the Head of Compliance and AML at Ithmaar Bank where she established and developed the compliance function. Hana worked for over 12 years at the Central Bank of Bahrain (CBB) and the latest position occupied was the Head of Islamic Retail Banking Supervision where she was responsible for supervising Islamic Banks licensees. During her employment with the CBB, Hana was a member in several committees of the Islamic Financial Services Board (IFSB), an international standard-setting organization for the Islamic financial sector. She also chaired the AML and Compliance Committee of Bahrain Associate of Banks during the period between 2017 and 2018.

Ms. Hana holds a Master of Business Administration (MBA) form the University of Strathclyde Business School, United Kingdom. She also holds a BSc in Banking and Finance from the University of Bahrain. Hana is a Certified Anti-Money Laundering Specialist (CAMS), awarded by the Association of Certified Anti-Money Laundering Specialist (ACAMS).

NAFEESA ISMAIL - Head of LegalNafeesa Ismail brings a wealth of legal knowledge to First Energy Bank, with over 14 years of experience across various legal fields, ranging from Banking and Finance, Corporate and Investment Banking, Structured Trade and Commodity Finance, Structured Finance, Islamic Finance and Mergers and Acquisitions.

Ms. Nafeesa started her legal career at one of the leading law firms in South Africa (Webber Wentzel - associated with Linklaters) before joining one of the largest multinational banks in Africa - Standard Bank, where she was appointed to grow the Corporate and Investment Banking Division for Africa. At Standard Bank, Nafeesa held a senior management role overseeing legal transactions across 16 different jurisdictions in Africa, London and Dubai and was involved with managing complex, cross-border transactions.

Prior to joining First Energy Bank, Nafeesa held a senior legal manager position with BNP Paribas, based in their Bahrain office. At BNP Paribas, Nafeesa had overall responsibility for the BNP Paribas South African operations, as well as key involvement with their London and Middle-East operations, spanning across Saudi Arabia, United Arab Emirates, Kuwait, Bahrain and Qatar.

Nafeesa holds a Bachelors degree in Law (LLB) and is admitted as a qualified Attorney and Notary Public in the High Court of South Africa.

SH. DR. OSAMA BAHAR - Head of Shari’a Coordination and Implementation

Shaikh Dr. Osama Mohamed Saad Bahar is a prominent, highly-respected Shari’a scholar from Kingdom of Bahrain, with more than 25 years of experience in the field of Shari’a compliance and advisory.

Shaikh Dr. Bahar is currently the Head of Shari’a Coordination and Implementation at First Energy Bank, following earlier senior positions at Islamic banks in Bahrain, including Head of Shari’a Compliance at Al Salam Bank, Shamil Bank (currently Ithmaar Bank) and Shari’a Compliance Officer at Bank ABC.

Shaikh Dr. Bahar is also a member of the Shari’a Supervisory Board of International Investment Bank, Ithmaar Bank, Alizz Islamic Bank, Family Bank and Solidarity Bahrain amongst others. Additionally, he is the Shari’a Advisor of Bahrain Bourse and Global Banking Corporation.

Shaikh Dr. Bahar was awarded his PhD degree from Lahaye University in the Netherlands, his Masters Degree from Al Imam Al Ouzai University in Lebanon and his Bachelors degree in Islamic Shari’a from Emir Abdelkader University of Islamic Sciences in Algeria.

Ebrahim Ali - Head Human ResourcesMr. Ebrahim Ali is the head of Human Resources (HR). He is responsible for managing employment strategies, recruitment, development and retention in addition to career progression and performance management. Prior to his appointment with FEB in 2008, Mr. Ali was working with Ministry of Foreign Affairs where he served in Bahrain Embassies in various geographic locations as person in charge of Finance and Administration Department . Mr. Ali holds Masters Degree from University of Westminster in UK.


In 2018, FEB reported consolidated net profit of USD 12 million, as compared to USD 20 million in 2017 as the Bank exited its loss making investments for USD 6 million. Moreover, the bank also recorded a loss of USD 3 million on discontinued operations. Total assets decreased by USD 101 million to USD 826 million in 2018 from USD 927 million in 2017 due to transfer of Bank’s investment in Menadrill Investment Company to a Trust, owned by the Shareholders. The Bank continued to be highly liquid with liquid assets ratio of 48% as of reporting date. The Bank’s capital base remains very strong with capital adequacy ratio standing at 65% as at 31 December 2018.

Following are the key highlights of the financial results: Amounts in USD 000’s

2018 2017 2016 2015 2014

Gross income 40,441 48,191 14,588 6,925 88,172

Operating expenses (28,451) (19,497) (17,560) (24,061) (16,318)

Impairment reversal / (allowance) - net 2,921 - (91,298) (358,121) (55,591)

Net income / (loss) 12,299 20,143 (94,270) (375,257) 16,263

Total assets 825,766 926,937 1,072,506 1,050,338 1,359,609

Total equity 586,820 700,001 675,506 773,026 1,118,623

EPS (basic) in US cents 2.1 2.0 -9.5 -37.5 1.6

Return on average assets 1.4% 2.0% -8.9% -31.1% -1.2%

Return on average equity 1.9% 2.9% -13.0% -39.7% 1.4%

Net income margin 30.4% 41.8% -646.2% -5419.1% 18.4%

Total expenses to gross income ratio 63.1% 40.5% 746.2% 5519.1% 81.6%

Liquidity ratio 48% 44% 46% 46% 40%

Leverage ratio 71% 79% 65% 80% 136%

| FINANCIAL HIGHLIGHTS |


Our revised strategy is intended to enhance the core revenue streams of the Bank


First Energy Bank’s (FEB) business model is built around 6 core business lines: Private Equity, Structured / Islamic Financing, Investment Banking,

Capital Markets / Asset Management ,Treasury and Real Estate.

PRIVATE EQUITYFEB activities include direct investments in private equity opportunities with a focus in the defensive sector, which includes healthcare and consumer

sectors. The investment strategy is based on two pillars:

• Identify and invest in regional entities and assets whereby FEB has a strong presence. FEB adds value through various activities including increased

capitalization, financial and operational restructuring, and effective market expansion utilizing the Bank’s extensive network and expertise in

these fields.

• Partner / co-invest with strong management and operational teams who have the ability to accelerate the growth and value of each investment.

FEB capitalizes on its effective network and banking capabilities to maximize the value of each investment, supporting both continued business

expansion and financial capacity.

STRUCTURED / ISLAMIC FINANCINGFEB’s Islamic finance team focuses on the origination, underwriting, and structuring of financing opportunities. Deriving from its fixed income

experience in this field from regional and global banking sectors, the team also focuses on providing “ring fenced” Shari’a compliant project and

structured finance to selected strategic transactions where risks are mitigated by these structures and returns are optimized.

INVESTMENT BANKINGFEB utilizes its strength in identifying and developing investment and transaction opportunities drawing on all its available resources, aligning itself

with strategic partners across various industries. FEB’s unique strength in this field comes from its strong and diversified shareholder base combined

with the management team’s experience in various industries, helping to support capital raising and Mergers and Acquisitions (M&A) transactions.

FEB’s ability to underwrite transactions across the capital structure further enhances our full investment banking activities.

CAPITAL MARKETS / ASSET MANAGEMENTThe Islamic capital market has been growing rapidly in the last decade through the increasing Shari’a compliant Sukuk, structured products and

hedging instruments mainly by sovereigns, quasi-sovereigns, internationals, supra-nationals and corporate institutions. Investors’ demand for Shari’a

compliant investment products has been increasing in recent years. FEB’s strategy is to provide innovative, diversified and well-managed products

that suit its clients’ needs and meets their return requirements. FEB’s Capitals Markets and Asset Management team are committed to develop

and execute long-term strategic and tactical plans to meet portfolio return objectives and continuously innovate and evaluate investing, yield

enhancement and financing solutions.

TREASURYThe Islamic banking treasury sector has become increasingly competitive and sophisticated over the years, with demand being fueled by clients and

investors expecting Islamic products, services and hedging tools comparable to the innovations provided by conventional banks. As such, FEB has laid

a solid foundation to cater for the fast growing demand of Islamic innovations offering a wide range of Shari’a compliant products managed by a

team of dedicated personnel to build a stable platform to cater for FEB’s clients and mandated business requirements.

REAL ESTATEFEB caters the market needs related to the real estate activities from its subsidiary FEB AQAR, managed and operated by professional with strong real

estate, project management and development experience. The Bank focuses on selected real estate investments with greater demand and ability to

generate adequate returns for the shareholders.

| BUSINESS ACTIVITIES |


A perspective of the Bank’s new headquarters premises within the proposed mixed use

building in Bahrain Financial Harbour through our wholly owned subsidiary FEB Aqar S.P.C.


OBA MAKARNAFEB has acquired 20% equity stake in Oba Makarna which is Turkey’s largest and leading pasta producer and world’s 2nd largest pasta producer in terms of production capacity. The company has over 50 years of experience in the pasta industry and offers 40 different types of packaged pasta products under company owned 13 brands and private labelled brands to 86 countries.

NMC HEALTHCARE LLC In December 2018, FEB syndicated a 3-year US$ 105 million Senior Murabaha Facility with NMC Healthcare LLC (NMC). FEB is acting as the Mandated Lead Arranger, Investment Agent and the Security Agent.

NMC is the largest private healthcare service provider in the United Arab Emirates based out of Abu Dhabi. The company owns and manages over 190 healthcare facilities in 19 countries catering to over 7 million patients a year and employing over 2,000 doctors. The company is also a leading UAE distributor of products and consumables across several key market segments with the majority in healthcare related products. The parent company, NMC Health PLC listed in London Stock Exchange and a member of the FTSE 100, has a market capitalization of approx. of US$ 7.3 billion.

NEOPHARMA LLCNeopharma is a leading pharmaceutical company based in Abu Dhabi. It commenced operations in 2003. From a single manufacturing unit, Neopharma today has become a global pharmaceutical company with more than 200 registered products supported by 6 manufacturing facilities spread across 3 continents.

FEB provided Structured Financing Facility to Neopharma LLC for a period of 5 years.

FEB-NOVUS AIRCRAFT HOLDING LTD – MALAYSIA AIRLINESIn 2012, FEB successfully closed a Purchase and Lease Transaction of A330-300 Aircraft to Malaysia Airlines, the flag carrier of Malaysia and one of the world’s leading airlines. FEB partnered with Novus Aviation Limited, a market leader in the aviation leasing industry, specialists in aircraft sourcing, trading, leasing, financing and remarketing. The Airbus A330-300 is a twin-engine, high capacity wide-body commercial aircraft fitted with two Pratt & Whitney PW 4170 engines. This transaction introduces diversification to the bank’s asset classes and is generating stable and sustained income.

FUJAIRAH NATIONAL CONSTRUCTION COMPANY LLC In 2015, FEB leased a labor accommodation building from Fujairah National Construction Company LLC built on a plot located in Dubai Investment Park II (DIP), under a Shari’a compliant structure. The asset was then sub leased back to Fujairah National Construction Company LLC, a well-established UAE construction company with an extensive track record in the UAE, for a period of 7 years with attractive returns. The plot is 94,787 ft2 with a built up area of 163,037 ft2, located in a city within a city with unique, self-contained mixed-use industrial, commercial and residential complex operated by Dubai Investments Park Development Company LLC. The investment in UAE’s industrial real estate sector is an opportunity to diversify FEB’s investments.

AL IZZ ISLAMIC BANK, OMANFEB through its wholly owned subsidiary First Energy Oman is one of the founding Promoters of Al Izz, which received its license from the Central Bank of Oman (CBO) on September 5, 2013. Al Izz commenced operations in 2013. Out of the banks total paid up capital, 40% of it was successfully raised through an Initial Public Offering (IPO) in October 2012. The Bank offers comprehensive business and retail Islamic banking solutions in accordance with Omani law and the CBO regulations governing Islamic banking in Oman.

AL-DUR POWER AND WATER COMPANY B.S.C. (C)During 2009, FEB successfully completed approximately 9% stake acquisition in the Al-Dur Independent Water and Power Project (IWPP). This co-investment with GDF SUEZ META and Gulf Investment Corporation is part of FEB’s strategy of building up a book of top quality energy related infrastructure assets. The Al-Dur project, which is the largest of its kind in the Kingdom of Bahrain, successfully commenced operation during the first quarter of 2012. The project is located on the southeast coast of the Kingdom and is valued at a total of USD2.2 billion. Its production capacity is 1,234 megawatts of power and 48 million gallons of water per day. The plant utilizes mainly GE turbines for the two power blocks and Reverse Osmosis (RO) as its water desalination technology. This project represents an important addition to the Kingdom of Bahrain and will help meet the rising demand for both power and electricity going forward. The Bahraini Electricity and Water Authority (EWA) is the sole off-taker of the plant output as stipulated in the 25-year Power and Water Purchase Agreement.

| INVESTMENT PORTFOLIO |


ADCAN PHARMA LLC / MEDISAL FOR PHARMACEUTICALS INDUSTRY LLC (PARTIALLY EXITED 2018)In 2015, FEB acquired a 40% equity stake in ADCAN Pharma LLC. ADCAN Pharma LLC is an Abu Dhabi based company primarily engaged in medicine production. ADCAN Pharma LLC will be a specialist in the fast-growing therapeutic area of diabetes, and chronic medicine disease such as hypertension, cardiovascular disease and central nervous system. In the longer term, ADCAN Pharma LLC is planning to complement its portfolio with therapeutic categories that support the core business/strategy. The company is still in the development phase. The commercial production is expected by the first half of 2017. This is an investment opportunity to diversify FEB’s investments in the health sector in UAE.

In 2015, FEB acquired a 45% equity stake in Medisal for Pharmaceuticals Industry L.L.C. (Medisal). Medisal is an Abu Dhabi based pharmaceutical company focused on producing intravenous solutions (IV) and eye drops for local and regional markets. Medisal’s factory has modern production lines with high-specifications. The machinery is able to produce IV solution products at the highest level of accuracy and quality. Medisal commenced its commercial production at the start of 2016. This along with the investment in ADCAN is an investment opportunity to diversify FEB’s investments in the health sector in UAE. Furthermore, the health sector is a focus of the UAE Government today as it is in line with their 2030 vision to diversify from the oil based sector.

In 2018, FEB has sold it’s partial equity stake in Medisal & Adcan. The exit is pending legal and regulatory formalities.

RIVERSDALE LTDIn 2016, FEB signed a 4 year US$ 35 million Secured Convertible Murabaha Facility with Riversdale Ltd, a holding company established in Malta, which will consolidate the operating assets of Alameda Group and finance capital requirement of these assets. Alameda Hospital network is a major private sector healthcare player in Egypt, which includes 4 key facilities in Cairo, including: As Salam International Hospital, Katameya International Hospital, Dar Al Fouad - 6th of October Hospital and Dar Al Fouad - Nasr City. FEB is acting as the Investment Agent and the Security Trustee under this Murabaha financing. In late 2017, Alameda Group completed a merger with Emirates Hospital Group, a leading global healthcare provider in the UAE.

ARAB DRILLING AND WORKOVER COMPANY (ADWOC) In 2009 FEB acquired a 40% stake in the Arab Drilling and Workover Company (ADWOC), one of the leading oil and gas onshore contract drilling and workover companies based out of Libya.

FEB TOWER The Bank is developing a mixed use property on a land, owned by FEB AQAR, located in the Bahrain Financial Harbour, which will also have the Bank’s new head office premises. The property will include residential and commercial spaces.

MARASSI BAHRAINFEB acted as a co-arranger for Syndicated Secured Murabaha Facility to Eagle Hills Marassi Bahrain. The facility will be used for the development of Marassi Bahrain, the largest mixed-use development in Bahrain, a catalyst for the Kingdom’s development plans and a driver for economic growth and job creation.

MENADRILL INVESTMENT COMPANY (TRANSFERRED 2018)MENAdrill is the first and principal investment of FEB, which was incorporated in August 2008 soon after the formation of FEB. Towards the end of the first quarter of 2012, MENAdrill became a subsidiary of FEB. MENAdrill’s assets include two Super M2 jackup drills constructed at the Maritime Industrial Services (MIS) in Sharjah. In May 2011, the first rig “MENAdrill I” successfully commenced drilling in Mexico for PEMEX- Exploración Producción (PEP), the national oil company of Mexico, and MENAdrill II started operation in September 2012 on a similar contract with Pemex. Currently, both the rigs are in Mexico and not operating. Marketing efforts are being made to find contracts to deploy the rigs.

In 2018, MENAdrill was transferred to a Trust, owned by the shareholders, in equal proportion of their ownership in the Bank.


CORPORATE GOVERNANCE


Corporate governance is the combination of processes and structures implemented by the Board in order to inform, direct, manage and monitor

the activities of the organisation toward the achievement of its objectives. FEB’s governance and management structure is illustrated below:

Board of Directors

Board Investment Committee

Chief Executive OfficerInternal Audit Compliance

Structured Finance

Private EquityCorporate Finance

Financial Institutions

Capital Market

Treasury

Operations

Internal Controls

Legal

IT Security

Boar

d Se

cret

ary

Chief Investment Officer

Advisory Services

** Governed by by FEB Tower Committee* Governed by FEB Capital Board of Directors

Shari’a BoardBoard Audit & Risk CommitteeNomination, Remuneration &

Governance Committee

Risk Management Board Secretary& MLRO

Head of Internal Shari’a Audit

Head of Shari’a Coordination& Implementation

Treasury & Capital Market Chief Operating Officer Chief Financial Officer Human Resources ** FEB Aqar

* FEB Capital Direct Investment & Investment Management

Investment Management

Investment Administration & Reporting

Syndication / PlacementAsset Management & Funds sourcing

Information Technology

Finance andAdministration

CorporateCommunication

Project Manager

| CORPORATE GOVERNANCE |


BOARD OF DIRECTORSFEB’s governance structure comprises the Board of Directors (the Board) and its Sub-committees.

As of 31 December 2018, the Board of Directors of FEB comprise of the following Directors (their term started in March 2017 and will expire in March 2020):

No. Name Type of

Membership

ExecutiveNon-ExecutiveIndependent

Board Investment Committee

Nomination,Remuneration & Governance

Committee

Board Audit & Risk Committee

1 Mr. Khaleefa Butti Bin Omair Chairman Independent ✓

2 Dr. Faisel Ahmed Gergab Vice Chairman Independent ✓

3 Mr. Matar Mohamed Al Blooshi Member Executive ✓

4 Dr. Ali Mahmoud Hassen Member Executive ✓

5 Mr. Mohammed Salem Al Shamsi Member Non-Executive ✓

6 Mr. Ammar Ali Mohamed Jaber Member Executive ✓

7 Mr. Abdulla Abdulkarim Showaiter Member Independent ✓

8 Mr. Adel Abdulaziz Al Jabr Member Independent ✓

9 Mr. Abdulla Ahmed Al Suwaidi Member Independent ✓

10 Mrs. Mayssoun Habra 1 Member Non-Executive ✓

11 Dr. Saif Abugulal 2 Member Independent ✓

12 Mr. Khalid Jassim Bin Kalban 3 X-Member Executive N/A N/A ✓

1- Mrs. Mayssoun Habra was appointed on 4th November 2018 2- Dr. Saif Abugulal was appointed on 13th January 20193- Mr. Khalid Jassim Bin Kalban resigned on 8th May 2018

BOARD COMMITTEESThere are three Board Sub-committees:

1. Board Investment Committee (BIC). 2. Nomination, Remuneration and Governance Committee (NRGC); and 3. Board Audit & Risk Committee (BARC).

All sub-committees are required to report their activities to the Board on a regular basis. The Committees responsibilities and names of their

respective members are as below:

1- Board Investment Committee (BIC)

Members Type of Membership Summary terms of reference, role and responsibilities:

Mr. Khaleefa Butti Bin Omair Chairman

The Board Investment Committee assists the Board in formulating the Bank’s investment policy and making investment transaction decisions. The BIC reports its activities to the Board of Directors on a quarterly basis.

Mr. Matar Mohamed Al Blooshi Member

Dr. Ali Mahmoud Hassen Member

Mr. Mohammed Salem Al Shamsi Member

Mr. Ammar Ali Mohamed Jaber 1 Member

1-Mr. Ammar Jaber was appointed as a member in the BIC after relocating from BARC on 6th December, 2018 due to changes in the CBB rules on Board Committees membership.


2- Nomination, Remuneration and Governance Committee (NRGC)


Mr. Abdulla Abdulkarim Showaiter Chairman The Nomination, Remuneration and Governance Committee, mindful of best practice in the field, assists the Board in formulating and reviewing the Bank’s policies and rules including the administrative policy and governance requirements related to nomination, remuneration and governance aspects. The committee is also responsible for the nomination, remuneration, and governance compensation of the Board and Executive Management and regularly reviews the Bank’s succession plan.

Mr. Adel Abdulaziz Al Jabr Member

Mrs. Mayssoun Habra 1 Member

Dr. Faisel Ahmed Gergab 2 X-Chairman

1- Mrs. Mayssoun Habra was appointed as a member in NRGC on 6th December 2018.2- Dr. Faisel Gergab was relocated to BARC on 6th December 2018 due to changes in the CBB rules on Board Committees membership.

3- Board Audit & Risk Committee (BARC)


Dr. Faisel Ahmed Gergab 1 Chairman The Committee assists the Board in fulfilling its oversight responsibilities by reviewing the financial information, the effectiveness of internal control structure, the compliance with legal, regulatory, anti-money laundering and Shari’a Supervisory Board requirements and setting the overall risk appetite parameters and limits. It oversees the performance of the Bank’s internal and external audit function. The Committee provides recommendations to the Board in relation to the risk strategies, appetite and policies necessary for a robust, integrated risk management framework. This process extends to reviewing the adequacy of all the Bank’s policies and procedures prior to approval by the Board. It also ensures that appropriate business continuity plans are developed and maintained.

Mr. Abdulla Ahmed Al Suwaidi Member

Mr. Saif Abu Gulal 2 Member

Mr. Abdulla Abdulkarim Showaiter 3 X-Member

Mr. Ammar Ali Mohamed Jaber 4 X-Member

Mr. Khalid Jassim Bin Kalban 5 X-Chairman

1- Dr. Faisel Gergab was appointed in BARC on 6th December, 2018.2- Mr. Saif Abu Gulal was appointed in BARC on 13th January, 2019.3- Mr. Abdulla Showaiter was appointed in BARC on 6th December, 2018 beside his role in NRGC.4- Mr. Ammar Jaber was relocated to BIC effective from 6th December, 2018 due to changes in the CBB rules on Board Committees membership.5- Mr. Khalid Jassim Bin Kalban resigned on 8th May, 2018.

Board and Sub-Committees Meetings held during 2018 and member’s attendance (Table 1):

Board of Directors* Date of Meetings

No. NameType of

Membership13/2/2018

Bahrain14/5/2018

Bahrain26/6/2018

Bahrain3/10/2018

Bahrain6/12/2018

BahrainPercentage of Attendance

1 Mr. Khaleefa Butti Bin Omair Chairman ✓ ✓ ✓ ✓ ✓ 100%

2 Dr. Faisel Ahmed Gergab Vice Chairman ✓ X ✓ ✓ ✓ 80%

3 Mr. Matar Mohamed Al Blooshi Member ✓ ✓ ✓ ✓ ✓ 100%

4 Dr. Ali Mahmoud Hassen Member ✓ ✓ ✓ ✓ ✓ 100%

5 Mr. Mohammed Salem Al Shamsi Member ✓ ✓ ✓ ✓ ✓ 100%

6 Mr. Ammar Ali Mohamed Jaber Member ✓ ✓ ✓ ✓ ✓ 100%

7 Mr. Abdulla Abdulkarim Showaiter Member ✓ ✓ ✓ ✓ ✓ 100%

8 Mr. Adel Abdulaziz Al Jabr Member ✓ ✓ ✓ ✓ ✓ 100%

9 Mr. Abdulla Ahmed Al Suwaidi Member ✓ ✓ ✓ ✓ ✓ 100%

10 Mrs. Mayssoun Habra 1 Member N/A N/A N/A N/A ✓ 100%

11 Mr. Khalid Jassim Bin Kalban 2 Member ✓ N/A N/A N/A N/A 100%

1- Mrs. Mayssoun Habra was appointed on 4th November, 20182- Mr. Khalid Jassim Bin Kalban resigned on 8th May, 2018

Corporate Governance (continued)


Board Investment Committee (BIC)* Date of Meetings

No. NameType of

Membership4/2/2018Abu Dhabi

14/4/2018Bahrain

3/10/2018Bahrain

6/12/2018Bahrain

Percentage of Attendance

1 Mr. Khaleefa Butti Bin Omair Chairman ✓ ✓ ✓ ✓ 100%

2 Mr. Matar Mohamed Al Blooshi Member ✓ ✓ ✓ ✓ 100%

3 Dr. Ali Mahmoud Hassen Member ✓ ✓ ✓ ✓ 100%

4 Mr. Mohammed Salem Al Shamsi Member ✓ ✓ ✓ ✓ 100%

5 Mr. Ammar Ali Mohamed Jaber1 Member N/A N/A N/A ✓ 100%

1- Mr. Ammar Jaber was appointed as a member in the BIC after relocating from BARC on 6th December, 2018 due to changes in the CBB rules on Board Committees membership.

Nomination, Remuneration & Governance Committee (NRGC)*

Date of Meetings

No. NameType of

Membership5/2/2018

Dubai6/5/2018Bahrain

10/7/2018Bahrain

17/9/2018Bahrain

14/11/2018Dubai


1 Mr. Abdulla Abdulkarim Showaiter Chairman ✓ ✓ ✓ ✓ ✓ 100%

2 Mr. Adel Abdulaziz Al Jabr Member ✓ ✓ ✓ ✓ ✓ 100%

3 Mrs. Mayssoun Habra 1 Member N/A N/A N/A N/A N/A N/A

4 Dr. Faisel Ahmed Gergab 2 X-Chairman ✓ ✓ ✓ ✓ X 80%

1- Mrs. Mayssoun Habra was appointed as a member in NRGC on 6th December 2018.2- Dr. Faisel Gergab was relocated to BARC on 6th December 2018 due to changes in the CBB rules on Board Committees membership.

Board Audit and Risk Committee (BARC)* Date of Meetings

No. Name Type of Membership5/2/2018

Dubai9/5/2018Bahrain

31/12/2018Bahrain


1 Dr. Faisel Ahmed Gergab 1 Chairman N/A N/A ✓ 100%

2 Mr. Abdulla Abdulkarim Showaiter 2 Member N/A N/A ✓ 100%

3 Mr. Abdulla Ahmed Al Suwaidi Member ✓ ✓ ✓ 100%

4 Mr. Ammar Ali Mohamed Jaber 3 X-Member ✓ ✓ N/A 100%

5 Mr. Khalid Jassim Bin Kalban 4 X-Chairman ✓ X X 100%

1- Dr. Faisel Gergab was relocated to BARC on 6th December 2018 due to changes in the CBB rules on Board Committees membership.2- Mr. Abdulla Showaiter was appointed in this committee on 6th December, 2018 besides his role in NRGC.3- Mr. Ammar Jaber was relocated to BIC effective from 6th December, 2018 due to changes in the CBB rules on Board Committees membership.4- Mr. Khalid Jassim Bin Kalban resigned on 8th May, 2018.

* The meetings of the Board of Directors and the Board committees are held whenever the need arises, but under the regulations, the BOD meets at least four times during each year.


SHARI’A COMPLIANCE

The Bank has a dedicated Shari’a department acting as the primary contact of communication between the Bank and its Shari’a Supervisory Board (SSB). The

responsibilities of the Shari’a department include the following:

· Ensuring programmes are in place for all approved products, with detailed procedures signed off by relevant departments.

· Ensuring there are Fatwas supporting all approved products and that the concerned departments adhere to them.

· Ensuring that the Bank complies with applicable AAOIFI standards, the SSB’s and other applicable Shari’a guidelines and the Bank’s Shari’a compliance

manual.

· Conducting periodic Shari’a audits, discussing the audit findings with management and issuing compliance reports.

· Reporting to the CEO and SSB on the results of the Shari’a audits and the status of implementation of the recommendations made by the Shari’a

Department.

· Assisting relationship managers and relevant departments in interpreting Shari’a guidelines.

· Collating inquiries and questions from Bank departments and submitting them to the SSB.

· Arranging and minuting SSB meetings.

MANAGEMENT COMMITTEES

The Bank has established Five Management Committees to support the Board committees in carrying out their duties and to ensure appropriate controls and

processes are in place. They are the Executive Management Committee (EMC), Management Risk Committee (MRC), Human Resources Committee (HRC),

Asset and Liability Committee (ALCO) and Information Technology & Security Steering Committee (ITSSC). The terms of reference of each committee are

derived from its respective responsibilities. Management committees meet monthly, if required, and report to the CEO.

1- Executive Management Committee (EMC)

The Executive Management Committee (EMC) focuses on the execution of the strategic business plan approved by the Board and provides

recommendations to the CEO on such matters. Within the overall approved guidelines laid down by the terms of reference of the committee. The

responsibilities of the EMC include the following:

· Regularly review the environment in which the Bank operates and reflect changes therein in the Bank’s future development.

· Oversee the day-to-day decision making so that the Bank can be effectively managed.

· Harness and enhance the team spirit between departments to improve coordination.

· Troubleshoot and address issues of concern.

· Continuously monitor and review activities of all departments with the objective of efficient resource utilization.

· Review the Bank’s business strategy and annual operating plans (revenue and cost) and monitors progress towards their achievement, taking

appropriate corrective action as necessary.

· Ensure continuity of management so that the day to day running of the Bank is unaffected by the absence of any one / all Committee members.

· Avoid concentrations of decision making power in the Bank by installing an appropriate delegation of authorities for operational decisions.

· Promote consistence and cohesiveness in the Bank’s relationships with all its stakeholders.

· Track industry trends and developments.

2- Management Risk Committee (MRC)

The principal role of the MRC is to assist in the development, installation, and ongoing maintenance of an integrated enterprise risk management

framework within the Bank. The principal duties & responsibilities of the MRC include the following:

· Formulate and recommend Risk Strategy to the Board for their approval

· Develop and recommend Risk Policies to the Board for their approval

· Review and approve all types of counterparty exposures, including, but not limited to credit transactions, investments, Islamic financings, Sukuks,

placements etc.



· Exercises the powers specifically delegated to it with care and diligence.

· Review all assumptions of risk howsoever originated, (credit counterparty, investment, operational, treasury) and approve/reject or recommend

the proposal to the relevant approving authorities depending on the approval authority level.

· Define and set risk parameters and benchmarks that are consistent with the Bank’s strategic business objectives and risk profile;

· Proactively review the Bank’s risk profile and ensure it is within the risk parameters approved by the Board;

· Review the Bank’s provisioning requirement and capital adequacy and allocate capital to businesses as required.

3- Asset and Liability Committee (ALCO)

The principal role of ALCO is to manage the liquidity, market and profit rate risk components of the asset and liability of the Bank, through the

development and initiation of appropriate strategies within the Board and regulatory guidelines. The principal responsibilities of the ALCO include

the following:

· Propose the necessary policies and procedures to manage liquidity and market risk.

· Review and monitor the balance sheet (and off-balance sheet positions) of the Bank (including the impact of its subsidiaries) such that the

Board’s liquidity and market risk policies are implemented.

· Ensure that lines of authority and accountability within the liquidity and market risk management process are clearly delineated.

· Oversee controls to manage the Bank’s market risk.

· Propose strategies to the Board in respect of proprietary investments and the use of derivatives.

· Ensure that on a day-to-day basis the Bank complies with applicable laws and regulations.

4- Human Resources Committee (HRC)

The principal role of the HRC is to assists in reviewing the Bank’s organizational structure, performance management system & human resources

policies and recommend necessary changes to the CEO by performing the following tasks:

· Ensuring the Bank has an effective organizational structure and appropriately staffed at all times to achieve the business plan approved by the

Board.

· Monitor competitive human resources and compensation policies and practices and recommending changes as appropriate.

· Ensuring appropriate processes are in place for the selection, evaluation, compensation, and succession of staff and senior management.

· Evaluating and recommending compensation for the staff.

· Evaluating other related initiatives as may be necessary or desirable to enhance performance.

· Perform such other tasks as delegated by the NRGC from time to time.

5- Information Technology & Security Steering Committee (ITSSC)

The principal role of ITSSC is to formulate and implement the IT, IT Security and Business Continuity strategy in alignment with the goals of the

respective business units and the overall Bank strategy. The main responsibilities of ITSSC include the following:

· Protect and safeguard Bank’s information.

· Maintain confidentiality, integrity and availability of information asset.

· Protect the critical business processes from the effects of major failure of information systems or disasters.

· Maintain IT related risk exposure to acceptable levels.


FEB shareholders List (Table 2) as of 31 December 2018

No. Names NationalityNo. ofShares

Nominal Value (USD)

Percentage of Capital

1 Tasameem Real Estate Co. L.L.C. UAE 131,102,300 131,102,300 21.85%

2 Libyan Investment Authority (Government of Libya) Libya 97,500,000 97,500,000 16.25%

3 Abu Dhabi Water and Electricity Authority (Government of Abu Dhabi) UAE 90,000,000 90,000,000 15.00%

4 Emirates Islamic Bank PJSC UAE 60,000,000 60,000,000 10.00%

5 Mohammed Bin Hussain Bin Ali Al Amoudi Saudi Arabia 30,000,000 30,000,000 5.00%

6 Al Jabr Holding Company Saudi Arabia 30,000,000 30,000,000 5.00%

7 Ithmaar Development Co. Ltd Cayman Islands 25,200,000 25,200,000 4.20%

8 Ibdar Bank B.S.C. Closed Bahrain 23,641,114 23,641,114 3.94%

9 Dubai Investment PJSC UAE 21,000,000 21,000,000 3.50%

10 Omar Ibn Abdullah Ibn Hassan Bahassan Saudi Arabia 12,000,000 12,000,000 2.00%

11 Awqaf and Minors Affairs Foundation (Government of Dubai) UAE 12,000,000 12,000,000 2.00%

12 Al Taif Investment L.L.C. UAE 9,000,000 9,000,000 1.50%

13 Taqa Investment Company Ltd Cayman Islands 7,572,827 7,572,827 1.26%

14General Pension and Social Security Authority(Government of the United Arab Emirates)

UAE 7,500,000 7,500,000 1.25%

15 RAK Properties PJSC UAE 7,500,000 7,500,000 1.25%

16 First Energy Bank B.S.C. Closed (Treasury Shares) Bahrain 6,000,000 6,000,000 1.00%

17 Bahrain Islamic Bank B.S.C. Bahrain 6,000,000 6,000,000 1.00%

18 Sultan Group Investment L.L.C. UAE 6,000,000 6,000,000 1.00%

19 Sharjah Islamic Bank UAE 6,000,000 6,000,000 1.00%

20 Alansari Holding Company Saudi Arabia 4,002,000 4,002,000 0.67%

21 Nahar Investment Co. W.L.L. Bahrain 3,181,758 3,181,758 0.53%

22 Sheikh Mohammed Bin Faisal Bin Thani Al Thani Qatar 3,000,000 3,000,000 0.50%

23 Solidarity Group Holding B.S.C. (C) Bahrain 1,800,000 1,800,000 0.30%

Total 600,000,000 600,000,000 100 %

In the EGM on 6th Dec, 2018 the shareholders have approved the reduction in Bank’s paid up capital from US$ 1 billion to US$ 600 million. The formalities to update the legal and regulatory records are currently in progress. Once, completed, the revised share certificates will be issued to the shareholders.



CORPORATE GOVERNANCE AND TRANSPARENCY DISCLOSURES:

a) Board Structure & Basic Organizational Chart:

I. Board Structure - Refer to (Table 1) Page 25-27.

II. Basic Organizational Chart - Refer to Chart Page 24.

III. Independent Board members

Following are the independent Directors in Board of FEB:

1- Mr. Khaleefa Butti Bin Omair

2- Dr. Faisel Ahmed Gergab

3- Mr. Abdulla Abdulkarim Showaiter

4- Mr. Adel A. Aziz Al Jabr

5- Mr. Abdulla Ahmed Sultan Al Yousif Al Suwaidi

6- Dr. Saif Abugulal

b) Bios of Board Members and Team Management:

Refer to the Board Bio’s Page 5-7 and to the Management Team Bio’s Page 12-15.

c) Information on the managerial structure:

I. Committees - Refer to Page 28-29.

II. Segregation of duties - The Bank maintains an effective governance structure with clear reposting lines to ensure independency and proper

segregation of duties. Also, all critical positions (approved persons) are approved by the CBB as required.

- All executive management members report to either CEO or appropriate Board Committee. The Shari’a functions reports to the Shari’a Supervisory

Board.

III. Responsibilities and Reporting lines - The executive management members are responsible for the day-to-day management of the Bank’s operations.

The functions are classified into business, control and support units with a proper segregations of duties to avoid any possible conflicts of interests.

This structure is governed by an independent Internal Audit, Risk Management, Compliance and Anti-Money Laundering functions, as well as a

Shari’a Coordinator and Implementation and Internal Sharia Audit functions. The responsibilities of each of the executive management members

are as defined in their job descriptions.

All executive management members report to the CEO, except for the control and Shari’a related functions. Internal Audit, Risk Management,

Compliance and Anti-Money Laundering functions report functionally to the Board Audit & Risk Committee and administratively to the CEO.

The Shari’a Coordinator & Implementation and the Internal Sharia Audit departments report functionally to the Sharia Supervisory Board, and

administratively to the CEO.

d) Performance-linked Incentive Structure:

As per the bank’s remuneration policy approved by the CBB.

e) Nature and extent of transactions with related parties:

Covered under Note 23 of the consolidated financial statements.

f) Approval process for related party transactions:

Approval process for related party transaction is exactly the same as the approval process for unrelated party transactions as they are treated on arm’s

length basis and there is no exceptional treatment or process for approving such transactions. Refer to Note (o) below. However, as per the requirements

of Article 189 of the Bahraini Commercial Companies Law (BCCL), all related party transactions are approved by Board members, before being presented

to the shareholders for approval. The Board members who have any conflict of interest with subject transaction abstain themselves from voting on it. The

external auditors also issue their report in this respect. The following were the material transactions as of 31st December, 2018:

• USD 40 million, which constitute financing extended to N.M.C Health Care L.L.C which is related to a Director; and

• Financing facilities provided to the senior management, as per Bank’s approved staff loan policy, with a total amount of USD 329 thousand.


g) Changes in the structures from prior periods:

- Board of Directors:

Was in 2017 As of 31 December 2018

Mr. Khaleefa Butti Bin Omair Mr. Khaleefa Butti Bin Omair

Dr. Faisel Ahmed Gergab Dr. Faisel Ahmed Gergab

Mr. Matar Mohamed Al Blooshi Mr. Matar Mohamed Al Blooshi

Dr. Ali Mahmoud Hassen 1 Dr. Ali Mahmoud Hassen

Mr. Mohammed Salem Al Shamsi 2 Mr. Mohamed Salem Al Shamsi

Mr. Khalid Jassim Bin Kalban Mr. Ammar Ali Mohamed Jaber

Mr. Ammar Ali Mohamed Jaber 3 Mr. Abdulla Abdulkarim Showaiter

Mr. Abdulla Abdulkarim Showaiter Mr. Adel Abdulaziz Al Jabr

Mr. Adel Abdulaziz Al Jabr Mr. Abdulla Ahmed Al Suwaidi

Mr. Abdulla Ahmed Al Suwaidi 4 Mrs. Mayssoun Habra 1

H.E. Abdulla Saif Al Nuaimi 5 Mr. Khalid Jassim Bin Kalban 2

Mr. Mohamed Shukri Ghanem 6

1- Dr. Ali Mahmoud Hassan appointment was effective on 20 July 2017 1- Mrs. Mayssoun Habra was appointed on 4th November, 2018

2- Mr. Mohammed Salem Al Shamsi was appointed on 30 March 2017 2- Mr. Khalid Jassim Bin Kalban resigned on 8th May, 2018

3 -Mr. Ammar Ali Mohamed Jaber was appointed on 30 March 2017

4- Mr. Abdulla Ahmed Al Suwaidi was appointed on 30 March 2017

5- H.E. Abdulla Saif Al Nuaimi term ended on 30 March 2017

6- Mr. Mohamed Shukri Ghanem term was ended on 30 March 2017

Board’s Committees:

- Board Investment Committee (BIC):


Mr. Khaleefa Butti Bin Omair 1 Mr. Khaleefa Butti Bin Omair

Dr. Faisel Ahmed Gergab 2 Mr. Matar Mohamed Al Blooshi

Mr. Matar Mohamed Al Blooshi 3 Dr. Ali Mahmoud Hassen

Dr. Ali Mahmoud Hassen 4 Mr. Mohammed Salem Al Shamsi

Mr. Mohammed Salem Al Shamsi 5 Mr. Ammar Ali Mohamed Jaber1

H.E. Abdulla Saif Al Nuaimi 6

Mr. Abdulla Abdulkarim Showaiter 7

1- Mr. Khaleefa Buti was appointed in BIC in May 2017 1- Mr. Ammar Jaber was relocated to this committee effective 6th December 2018

2- Dr. Faisel Ahmed Gergab moved to BARC in May 2017

3- Mr. Matar Al Blooshi was appointed in March 2017

4- Dr. Ali Mahmoud Hassen was appointed in July 2017

5- Mr. Mohammed Al Shamsi was appointed in March 2017

6- H.E. Abdulla Saif Al Nuaimi term ended on 30th March, 2017

7- Mr. Abdulla Showaiter, effective from 30th March, 2017 was relocated to NRGC



- Nomination, Remuneration & Governance Committee (NRGC):


Dr. Faisel Ahmed Gergab 1 Dr. Faisel Ahmed Gergab 1

Mr. Abdulla Abdulkarim Showaiter 2 Mr. Abdulla Abdulkarim Showaiter 2

Mr. Adel Abdulaziz Al Jabr 3 Mr. Adel Abdulaziz Al Jabr

H.E. Abdulla Saif Al Nuaimi 4 Mrs. Mayssoun Habra 3

1-Dr. Faisel Gergab was appointed in this committee on 30th March, 2017 1- Dr Faisel Gergab was relocated to BARC on 6th December, 2018.

2-Mr. Abdulla Showaiter was appointed in this committee on 30th March, 2017 2- Mr. Showaiter was appointed in BARC on 6th December, 2018 beside his role in NRGC.

3-Mr. Adel Al Jabr was appointed in this committee on 30th March, 2017 3- Mrs. Mayssoun Habra was appointed in this committee on 6th December, 2018

4-H.E. Abdulla Saif Al Nuaimi term ended on 30th March, 2017

- Board Audit and Risk Committee (BARC):


Mr. Khalid Jassim Bin Kalban Dr. Faisel Ahmed Gergab 1

Mr. Ammar Ali Mohamed Jaber 1 Mr. Mr. Abdulla Ahmed Al Suwaidi

Mr. Mr. Abdulla Ahmed Al Suwaidi 2 Mr. Abdulla Abdulkarim Showaiter 2

Mr. Matar Mohamed Al Blooshi 3 Mr. Ammar Ali Mohamed Jaber 3

Mr. Adel Abdulaziz Al Jabr 4 Mr. Khalid Jassim Bin Kalban 4

1-Mr. Ammar Jaber was appointed in this committee on 30th March, 2017 1- Dr Faisel Gergab was appointed in this committee on 6th December, 2018

2-Mr. Abdulla Al Suwaidi was appointed in this committee on 30th March 2017 2- Mr. Showaiter was appointed in BARC on 6th December, 2018 beside his role in NRGC.

3-Mr. Matar effective 30th March, 2017, was relocated to BIC 3- Mr. Ammar Jaber was relocated to BIC on 6th December, 2018

4-Mr. Adel Al Jabr, effective 30th March, 2017 was relocated to NRGC 4- Mr. Khalid Kalban resigned on 8th May, 2018

Senior Management:


Name Designation Name Designation Effective from

Eihab Ahmed Corporate Secretary, MLRO, Head of Legal and Compliance

Mohannad Al Ansari Corporate Secretary & MLRO August 2018

Yousif Ebrahim CFO Muzaffar Naveed Allana Acting CFO August 2018

Muzaffar Naveed Allana Head of Internal Audit Hana Al Murran Head of Compliance August 2018

Nafeesa Ismail Head of Legal August 2018

h) Communications strategy:The Bank has a public disclosure policy approved by the Board of Directors. The Bank communicates with its customers and stakeholders in a timely manner through various channels. Information on developments, financial results, new products or any updates of existing products are placed on the Bank’s website www.1stenergybank.com and/or published in the media. The annual report includes all the notes for the current financial year and a minimum of five preceding financial years are provided on the Bank’s website. Product details are also disseminated to customers and other interested parties through prospectuses, brochures and/or periodic investment updates.

i) Distribution of ownership of shares by nationality:Refer to FEB shareholders list (Table 2) Page 30.


j) Directors’ and senior managers’ trading of the Bank’s shares during the year, on an individual basis: There was no such trading.

k) Distribution of ownership of shares by Directors and senior managers, on an individual basis:Directors and senior managers do not own any shares in the Bank. However, the Bank has phantom share scheme for employees, as per CBB requirements.

l) Distribution of ownership of shares by size of shareholder: Refer to FEB Shareholders List (Table 2) Page 30.

m) Ownership of shares by government: The following government entities hold shares in the Bank:

- Libyan Investment Authority Government of Libya 16.25 %- Abu Dhabi Water & Electricity Authority Government of Abu Dhabi 15.00 %- Awqaf and Miners Affairs Foundation Government of Dubai 2.00 %- General Pension & Social Security Authority Government of UAE 1.25 %

n) The Board’s functions: - The Board aims to perpetuate a successful business and optimizing long term financial returns.- The Board is responsible for establishing the Bank’s policies and strategy and for regularly monitoring the effectiveness of executive management in

carrying out those policies and strategies.- The Bank has a formalized “Directors Handbook” which is reviewed and approved by the Board members annually. The same includes all matters reserved

for the Board and its sub-committees.

o) The types of material transactions that require Board approval: The Board has delegated certain approval authorities to the Management Risk Committee (MRC) and Board Investment Committee (BIC). These approval authorities are risk sensitive i.e. the higher the risk, the lower the approval authority amount. For the (MRC) the maximum approval amounts range from US$10MM to US$25MM, and for the (BIC) the maximum approval amounts range from US$30MM to US$70MM depending on the internal rating of the obligor. Any amount exceeding the BIC approval authority limit has to be approved by the Board.

p) Number and names of independent Board members: Refer to Note (a) - (III) Page 31.

q) Board terms and start date for each term for each Director: Started March 2017 – ends March 2020.

r) What the Board does to induct, educate and orient new Directors:The Board arranges induction sessions to new Directors to educate them about their responsibilities, the business of the Bank, the regulator’s rules and regulations and introducing them to management as well. Further, appointment letters are issued by the Board to all new Directors which clearly state the rights, duties, responsibilities and expectations from new Directors. New Directors are given copies of the Directors Handbook as well for further information on the responsibilities of the Board and its committees.

s) Election system of Directors and any termination arrangements: Directors are elected by the Shareholders General Meeting in accordance with the Bank’s Memorandum & Articles and the Commercial Companies Law.

t) Meeting dates (number of meetings during the year):Refer to the Board and Sub-Committees Meetings (Table 1) Page 26/27.

u) Attendance of Directors at each meeting:

Refer to the Board and Sub-Committees Meetings (Table 1) Page 26/27.

v) The Board’s code of ethical business conducts, and how the Board monitors compliance:

The Directors have adopted a written code of conduct as included in the Director’s Handbook, which is approved by the Board. All Board members

adheres to the following code of conduct:



1.1 To act with honesty, integrity and in good faith, with due diligence and care, with a view to the best interest of the Bank and its

shareholders and other stakeholders.

1.2 To act only within the scope of their responsibilities and not participate in the day-to-day management of the Bank.

1.3 To have a proper understanding of, and competence to deal with the affairs and products of the Bank and devote sufficient time to

their responsibilities.

1.4 To safeguard the confidentiality of Board discussions and deliberations.

1.5 Not to make improper use of information gained through the position as a Director or take improper advantage of the position of

Director.

1.6 To make informed decisions with sufficient detailed knowledge of the Bank’s business and performance.

1.7 To independently assess and question the policies, processes and procedures of the Bank, with the intent to identify and initiate

management action on issues requiring improvement.

1.8 Not to agree to the Bank incurring an obligation unless he/she believes at the time, on reasonable grounds, that the Bank will be able

to perform the obligations when it is required to do so.

1.9 Not to agree to the business of the Bank being carried out or cause or allow the business to be carried out, in a manner likely to harm

the Bank’s creditors.

1.10 To deal fairly and show respect to all of the Bank’s employees and customers.

1.11 Not enter into competition with the Bank.

1.12 Not demand or accept substantial gifts from the Bank for himself/herself or his/her associates.

1.13 Not misuse the Bank’s assets.

1.14 Not take advantage of business opportunities to which the Bank is entitled for himself/herself or his/her associates.

1.15 Disclose to the Board any potential conflicts of interest.

1.16 Excuse themselves from any discussions or decision-making that involves a subject in which they are incapable of providing objective

advice or which involves a real or potential conflict of interest.

The Directors’ observance of the code of conduct will be regularly reviewed by the Board Audit & Risk Committee.

w) Minimum number of Board committee meetings per year, the actual number of Board meetings, attendance of committees’ members and the

work of committees and any significant issues arising during the period:

- Refer to the Board and Sub-Committees Meetings (Table1) Page 26-27.

x) Review of internal control processes and procedures:

The Board of Directors’ responsibilities are to:

- Review and evaluate the effectiveness of and/or weaknesses in the Bank’s internal controls, the overall control environment, accounting

and financial controls.

- Ensure that the Bank’s operations, individually and collectively are measured, monitored and controlled by appropriate effective and

prudent risk management systems that are commensurate with the scope of the Bank’s activities.

- Receive and discuss reports from management on an annual /periodic basis relating to compliance at the Bank (including anti-money

laundering and regulatory compliance), internal audit and risk management.

In fulfilling its responsibilities, the Board has established appropriate number of sub-committees with members having sufficient experience to enable

them performing their functions effectively. The Board receive, review and discuss periodic reports from the management, internal / external auditors

which assess effectiveness of the Bank’s internal control framework.

y) Directors responsibility with regard to the preparation of financial statements:

The Board of Directors, through its Board Audit & Risk Committee periodic meetings, has the following responsibilities in respect of the financial

statements:


- Review and discuss with the Bank’s management and external auditors the overall financial statements and assess any possible improprieties in financial reporting or other matters.- Assess whether the Bank has followed appropriate accounting policies and made appropriate estimates and judgments, taking into account the views of the external auditors.- Receive a written statement from the Bank’s CEO and the CFO that the Bank’s interim and annual financial statements present a true and fair view, in all material respects, of the Bank’s financial condition and results of operations in accordance with applicable accounting

standards.

z) Assessment of Board of Directors & Committees:

The Board, its Committees and individual Directors are annually assessed by the Board with respect to their effectiveness and contribution.

aa) Website and Communication with Shareholders:

Refer to the Communications Strategy Note (h) Page 33.

bb) Investor / consumer awareness programs for information on new products and services:

Periodic progress reports are sent by the Investment Department to the respective Investors.

cc) Mediation and advice bureaus for investors and customers set up by the Bank, including clearly written procedures for lodging of

complaints:

FEB has appointed a Customer Complaints Officer who is acting as per the approved Customer Complaints Manual. His contact details are

available on the website of the Bank.

dd) Social functions and charitable contributions of the Bank:

Refer to note 29 of the consolidated financial statements.

ee) Governance arrangements, systems and controls employed by the Bank to ensure Shari’a compliance:

Refer to Shari’a Section Page 28.

ff) Non-Shari’a-compliant earnings and expenditure and the manner in which they are disposed of:The non-Shari’a-complaint earnings and expenditure transferred, by a decision of the Shari’a Board of the Bank to a charity account.

gg) The annual zakah contributions of the Bank, where relevant: Zakah is the responsibility of individual shareholders. However, it is paid by the Bank on behalf of the shareholders based on retained earnings and other reserve balances at the end of the year with the payment of Zakah on share capital being the responsibility of the Bank’s shareholders. For details of contributions, please refer to the statement of sources and uses of Zakah and Charity fund as well as note 24 within the consolidated financial statements.

hh) Aggregate remuneration paid to the Board of Directors and Shari’a Supervisory Board:

During the year remuneration was paid to the Shari’a Supervisory board members amounted to USD 80,000 [2017: USD 80,000] whereas no

remuneration was paid to the Board of Directors.

ii) Remuneration policy of the Bank for Board members and senior management:

Remuneration of senior management as well as for all staff is reviewed by the Nomination, Remuneration & Governance Committee and

approved by the Board in line with CBB new remuneration requirements. With regards to Board members, AGM of the shareholder’s review and

approve remuneration for Board members, if any.

jj) Aggregate remuneration paid to senior management.

Details are as per note 23 of the consolidated financial statements.



OTHER DISCLOSURES:

a) Names of shareholders owning 5% or more:Refer to FEB Shareholders List (Table 2) Page 30.The Bank is not aware that any shareholders owning 5% or more act in concert or of any voting, shareholders’ or other agreements among them.

b) Directorships held by the Directors on other Boards:Refer to The Board Bio’s Page 5-7.

c) Director’s trading of the Bank’s shares during the year:There was no such trading

d) Audit fees charged by the external auditor: The audit fees charged and non-audit services provided by external auditors have been made available to the shareholders as part and when requested. Further details will be made available to the Bank’s shareholders as per their specific request provided that these disclosures would not negatively impact the Bank’s interest and its competition in the market.

e) Non-audit services provided by external auditors: Refer (d) above.

f) Reasons for any switching of auditor and reappointing of auditor: Auditors were reappointed by the AGM for the new financial year.

g) Conflict of interest:The Directors Handbook issued to all Directors on joining the Board contains a detailed section on conflicts of interest describing the steps the Board takes to ensure Directors exercise independent judgment in considering transactions and agreements in respect of which a Director or executive officer has a material interest. The Handbook stresses that:

• The Board and its members must act with honesty, integrity and in good faith, with due diligence and care, with a view to the best interest of the Bank and its shareholders and other stakeholders.

• Each Director must consider himself as representing all shareholders and must act accordingly.

• Directors must act ethically at all times and in accordance with the Code of Conduct and the Conflict of Interest policy.

• If an actual or potential conflict of interest arises in respect of a Director, the Director must promptly disclose such conflict to the Board.

• Each Director must make every practicable effort to arrange his personal and business affairs to avoid a conflict of interest with the Bank.

• A Director must absent himself from any discussion or decision-making that involves a subject where he is incapable of providing objective advice, or which involves a subject, transaction or proposed transaction where there is a potential conflict of interest.

• The Secretary shall ascertain, at the beginning of each Board committee meeting, the existence of any conflicts of interest and minute them accordingly.

• No conflict of interest was reported during 2018.

h) Employment of relatives of approved persons:The Bank has Human Resource policy duly approved by the Board which also includes matters related to employment of relatives of approved persons.

i) Fines Please refer to Risk and Capital Management disclosure, “Regulatory Compliance”.

j) HC Module As per the requirements of the High-Level Controls (HC) Module of the CBB Rulebook, the Bank must comply with the Guidelines or explain its

non-compliance in the Annual Report. During 2018, the Bank has taken the required actions to address the identified gaps.


FINANCIAL STATEMENTS


In The Name of Allah, The Beneficent, The Merciful

To the Respected Shareholders of First Energy Bank B.S.C.

Assalamu Alaykum Wa Rahmatu Allah Wa Barakatuh

In compliance with the terms of our letter of appointment, we are required to report as follows:

That Shari’a Supervisory Board (“SSB”) has reviewed the principles and contracts relating to the transactions conducted by First Energy Bank (the “Bank”) during the course of the year ending December 31st 2018. The review was conducted in order to judge whether the Bank followed the principles of the Islamic Shari’a, specific fatwa and guidelines issued by the SSB. The SSB has also reviewed and approved the internal periodic Shari’a reports issued by the Bank’s Head of Shari’a Compliance. The Bank’s management is responsible for ensuring that its operations are carried out in compliance with SSB rulings.

The SSB responsibility is to present an independent view of the Bank’s operations and to communicate it to the shareholders.

The review was planned and performed so as to obtain all necessary information and explanations to provide sufficient evidence providing that the Bank has not violated any rules and principles of the Islamic Shari’a.

In our opinion:

1. The Bank’s contracts, transactions and deals for the year ending December 31st 2018 are in compliance with the rules and principles of the Islamic Shari’a.

2. The Bank’s allocation of profit and charging of losses relating to investment accounts are in compliance with the rules and the principles of the Islamic Shari’a.

3. No earnings have been realized from sources or by means prohibited by Shari’a rules and principles.

4. The Bank’s calculation of Zakat is in compliance with the rules and principles of the Islamic Shari’a.

We beseech the almighty to grant us excellence and success.

Shaikh Dr. Nedham Yaqoobi Shaikh Dr. Mohamed Ali Elgari Shaikh Dr. Osama Bahar

Chairman - Shari’a Supervisory Board Member - Shari’a Supervisory Board Member - Shari’a Supervisory Board

| SHARI’A SUPERVISORY BOARD REPORT |


Report on the consolidated financial statements

We have audited the accompanying consolidated financial statements of First Energy Bank B.S.C. (c) (the “Bank”) and its subsidiaries (together the “Group”), which comprise the consolidated statement of financial position as at 31 December 2018, the consolidated statements of income, changes in equity, cash flows, and sources and uses of zakah and charity fund for the year then ended, and a summary of significant accounting policies and other explanatory notes.

Respective responsibilities of board of directors and auditors

These consolidated financial statements and the Group’s undertaking to operate in accordance with Islamic Shari’a rules and principles are the responsibility of the board of directors of the Bank. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

Basis of opinion

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

Opinion

In our opinion, the consolidated financial statements give a true and fair view of the consolidated financial position of the Group as at 31 December 2018, and of its consolidated results of operations, its consolidated cash flows, its consolidated changes in equity, and its consolidated sources and uses of zakah and charity fund for the year then ended in accordance with Financial Accounting Standards issued by the Accounting and Auditing Organisation for Islamic Financial Institutions and the Shari’a rules and principles as determined by the Shari’a Supervisory Board of the Bank.

Report on other regulatory requirements

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

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

b) the financial information contained in the chairman’s report is consistent with the consolidated financial statements;

c) we are not aware of any violations during the year of the applicable provision of the Commercial Companies Law and the CBB Financial Institutions Law No. 64 of 2006 (as amended), the CBB Rule Book (Volume 2, applicable provisions of Volume 6 and CBB directives), or the terms of the Bank’s articles of association that would have had a material adverse effect on the business of the Bank or on its financial position; and

d) satisfactory explanations and information have been provided to us by management in response to all our requests.

KPMG Fakhro

Partner registration No. 100

FIRST ENERGY BANK B.S.C. (c) 26 February 2019

Manama, Kingdom of Bahrain

| INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS |


Note 31 December 2018 31 December 2017

ASSETS

Cash and bank balances 5 15,407 12,100

Placements with financial institutions 6 89,818 84,953

Financing assets 7 117,426 131,482

Ijarah assets 8 75,100 78,700

Investment securities 9 428,737 407,569

Equity accounted investees 10 29,341 44,240

Other assets 11 52,080 36,406

Property and equipment 12 17,857 11,842

Assets held for sale 13 - 119,645

Total assets 825,766 926,937

Liabilities and equity

LIABILITIES

Placements from financial institutions 14 92,884 79,401

Bank financing 15 122,628 127,037

Other liabilities 16 23,434 20,498

Total liabilities 238,946 226,936

EQUITY

Share capital 17 600,000 1,000,000

Treasury shares (7,261) (7,261)

Statutory reserve 13,034 11,808

Investments fair value reserve (2,011) 5,664

Foreign exchange translation reserve (2,171) (2,171)

Accumulated losses (61,968) (355,202)

Total equity attributable to shareholders of the parent 539,623 652,838

Non-controlling interests 47,197 47,163

Total equity (page 45) 586,820 700,001

Total liabilities and equity 825,766 926,937

The consolidated financial statements were approved by the Board of Directors on 26 February 2019.

Khaleefa Bin Butti Bin Omair Abdulla Al Yousef Al Suwaidi Mohamed Ghanem Chairman Board Member Chief Executive Officer

CONSOLIDATED STATEMENT OF FINANCIAL POSITION At 31 December 2018 US$ 000’s

The accompanying notes 1 to 30 form an integral part of these consolidated financial statements


CONSOLIDATED STATEMENT OF INCOMEFor the year ended 31 December 2018 US$ 000’s

Note 2018 2017

INCOME

Income from investment securities 18 23,905 28,975

Income from financing and placements with financial institutions 12,754 12,423

Net income from Ijarah assets 19 2,692 1,776

Fees and commission income 7,868 3,371

Other income 97 157

Gain on disposal of equity accounted investees - 4,618

Share of results of equity accounted investees 10 (773) (3,129)

Loss on dilution of investment in associates 10 (6,102) -

Total income 40,441 48,191

EXPENSES

Staff cost 20 12,679 8,888

Finance cost 4,244 2,588

Depreciation and amortization 497 442

Other operating expenses 21 11,031 7,579

Total expenses 28,451 19,497

Profit from continuing operations before impairment allowance 11,990 28,694

Net impairment reversal 22 2,921 -

Profit from continuing operations 14,911 28,694

Discontinued operation

Loss from discontinued operation (Assets held for sale) 13 (2,612) (8,551)

PROFIT FOR THE YEAR 12,299 20,143

Attributable to:

Shareholders of the parent 12,256 20,056

Non-controlling interests 43 87

12,299 20,143



CONSOLIDATED STATEMENT OF CASH FLOWSFor the year ended 31 December 2018 US$ 000’s

Note 2018 2017OPERATING ACTIVITIESNet profit for the year 12,299 20,143Adjustments for:Depreciation on Ijarah assets 8 3,600 7,376Depreciation and amortization 497 442Amortization of discount (483) (303)Net impairment reversal 22 (2,921) -Loss on dilution of investment in associates 10 6,102 -Share of results of equity accounted investees 10 773 3,129Gain on disposal of investment securities 18 (6,396) (15,647)Gain on disposal of equity accounted investees - (4,618)Loss on disposal of property and equipment - 3Operating profit before changes in operating assets and liabilities 13,471 10,525Net changes in operating assets and liabilities:Financing assets 11,737 53,015Other assets (15,717) (6,975)Placements from financial institutions 13,483 (91,817)Other liabilities 2,921 (7,398)Payment to charities (235) (181)

Net cash from / (used in) operating activities 25,660 (42,831)

INVESTING ACTIVITIES Purchase of investment securities (144,599) (250,929)Proceeds from disposal / maturity of investment securities 131,546 302,371Proceeds from disposal of joint venture - 15,245Additions to Ijarah assets - (684)Adjustment on asset transfer to shareholders 2,113 -Purchase of property and equipment and intangible assets (2,068) (2,584)

Net cash (used in) / from investing activities (13,008) 63,419

FINANCING ACTIVITIESIssuance of share capital in a subsidiary - 62Proceeds from bank financing 40,000 40,000Dividend paid to non-controlling interests (23) (28)Repayment of bank financing (44,409) (110,768)

Net cash used in financing activities (4,432) (70,734)

Net increase / (decrease) in cash and cash equivalents 8,220 (50,146)Cash and cash equivalents at beginning of the year 97,053 147,199Effect of net impairment losses on placements with financial institutions (48) -Cash and cash equivalents at end of the year 105,225 97,053

Cash and bank balances 5 15,407 12,100Placements with financial institutions with original maturity of 90 days or less 6 89,818 84,953

105,225 97,053

The accompanying notes 1 to 30 form an integral part of these consolidated financial statements.


CONSOLIDATED STATEMENT OF CHANGES IN EQUITYFor the year ended 31 December 2018 US$ 000’s

Equity attributable to shareholders of the parent

2018Share

capitalTreasury

sharesStatutory

reserve

Investmentsfair value

reserve

Foreignexchange

translationreserve

Accumulatedlosses Total

Non-controlling

interestsTotal

equity

At 1 January 2018 1,000,000 (7,261) 11,808 5,664 (2,171) (355,202) 652,838 47,163 700,001

Changes in fair value of investments at fair value through equity - - - (5,155) - - (5,155) - (5,155)

Transfer to income statement on disposal of investments - - - (2,520) - - (2,520) - (2,520)

Profit for the year - - - - - 12,256 12,256 43 12,299

Total recognised income and expense for the year - - - (7,675) - 12,256 4,581 43 4,624

Transfer to zakah and charity fund - - - - - (250) (250) - (250)

Transfer to statutory reserve - - 1,226 - - (1,226) - - -

Dividends of subsidiary - - - - - - - (23) (23)

Capital reduction (note 17) (400,000) - - - - 280,355 (119,645) - (119,645)

Adjustment on asset transfer to shareholders - - - - - 2,099 2,099 14 2,113

At 31 December 2018 600,000 (7,261) 13,034 (2,011) (2,171) (61,968) 539,623 47,197 586,820

2017Share

capitalTreasury

sharesStatutory

reserve

Investmentsfair value

reserve

Foreignexchange

translationreserve

Accumulatedlosses Total

Non-controlling

interestsTotal

equity

At 1 January 2017 1,000,000 (7,261) 9,802 4,715 (5,640) (367,594) 634,022 41,484 675,506

Changes in fair value of investments at fair value through equity - - - 949 - - 949 - 949

Effects of exchange rate difference on equity accounted investees - - - - 3,469 - 3,469 - 3,469

Change in ownership interest in subsidiary - - - - - (5,558) (5,558) 5,558 -

Profit for the year - - - - - 20,056 20,056 87 20,143

Total recognised income and expense for the year - - - 949 3,469 14,498 18,916 5,645 24,561

Issuance of share capital in a subsidiary - - - - - - - 62 62

Transfer to zakah and charity fund - - - - - (100) (100) - (100)

Transfer to statutory reserve - - 2,006 - - (2,006) - - -

Dividends of subsidiary - - - - - - - (28) (28)

At 31 December 2017 1,000,000 (7,261) 11,808 5,664 (2,171) (355,202) 652,838 47,163 700,001



CONSOLIDATED STATEMENT OF SOURCES AND USES OF ZAKAH AND CHARITY FUNDFor the year ended 31 December 2018 US$ 000’s

2018 2017

Sources of zakah and charity funds

Undistributed charity and zakah funds at the beginning of the year 23 104

Contributions by the Bank 250 100

Total sources of zakah and charity funds during the year 273 204

Uses of zakah and charity fund

Contributions for charitable purposes (235) (181)

Total uses of funds during the year (235) (181)

Undistributed zakah and charity fund at end of the year 38 23

The accompanying notes 1 to 30 form an integral part of these consolidated financial statements.


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 31 December 2018 US$ 000’s

1 REPORTING ENTITY

First Energy Bank B.S.C. (c) (the “Bank”) is a closed shareholding company incorporated in the Kingdom of Bahrain on 23 June 2008, under Commercial Registration No. 69089. The Bank operates under an Islamic Wholesale Banking license issued by the Central Bank of Bahrain (the “CBB”) on 17 June 2008. The Bank’s registered office is at Building 1459, Road 4626, Block 346, Manama, Kingdom of Bahrain.

The principal activities of the Bank and its subsidiaries (the “Group”) are mainly Shari’a compliant investment advisory services, participation in project development, joint ventures, mergers and acquisitions and the purchase of assets and asset portfolios primarily related to the energy sector. The Bank’s activities are regulated by the CBB and supervised by a Shari’a Supervisory Board to ensure adherence to Shari’a rules and principles in its transactions and activities.

2 STATEMENT OF COMPLIANCE

The financial statements have been prepared in accordance with Financial Accounting Standards (‘FAS’) issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (‘AAOIFI’). In line with the requirement of AAOIFI for matters that are not covered by AAOIFI standards, the Group uses guidance from the relevant International Financial Reporting Standards (‘IFRS’).

3 BASIS OF PREPARATION

The consolidated financial statements are presented in United States Dollars (USD), which is also the principal currency of the Bank’s operations. They are prepared on the historical cost basis except for the measurement at fair value of certain investments.

4 SIGNIFICANT ACCOUNTING POLICIES

The significant accounting polices applied in the preparation of these consolidated financial statements are set out below. These accounting policies have been consistently applied by the Group and are consistent with those used in the previous year except for changes arising from early adoption of FAS 30.

(i) New standards, amendments and interpretations effective from 1 January 2018 There were no new standards and amendments and interpretations issued and effective during the year that were relevant to the Group.

(ii) Standards issued but not yet effectiveFAS 33 - Investment in Sukuk, shares and similar instrumentsThe standards replaces FAS 25 and produces revised guidance for classification and measurement of investments to align with international practices. Classification categories are now driven by business model tests and reclassification will be permitted only on change of a business model and will be applied prospectively. The standard is effective for the financial periods beginning on or after 1 January 2020 and the Group is currently evaluating the impact from adoption of the standard, however, given the nature of investments of the Group, the adoption of this standard is not expected to have a material impact on the consolidated financial statements.

EARLY ADOPTION OF FAS 30 - IMPAIRMENT, CREDIT LOSSES AND ONEROUS COMMITMENTSAAOIFI issued FAS 30 Impairment, Credit losses and onerous commitments in 2017 with an effective date of 1 January 2020. The Group has early adopted FAS 30 as mandated by the CBB on 1 January 2018. As permitted by transitional provisions of the standard, the group elected not to restate comparative figures. Any adjustments to the carrying amounts of exposures that are subject to credit risk at the date of transition were recognised in the opening balance of retained earnings.

The objective of this standard is to establish the principles of accounting and financial reporting for the impairment and credit losses



on financial assets that are subject to credit risk. FAS 30 will replace FAS 11 Provisions and Reserves and parts of FAS 25 “Sukuk, shares

and similar instruments” that deals with impairment.

FAS 30 classifies assets and exposures into three categories based on the nature of risks involved (i.e. credit risk and other risks) and prescribes three approaches for assessing losses for each of these categories of assets 1) Credit Losses approach, 2) Net Realizable Value approach (“NRV”) and 3) Impairment approach.

For the purpose of this standard, the assets and exposures are categorized, as under:

a. Assets and exposures subject to credit risk (subject to credit losses approach):i. Receivables; andii. Off-balance sheet exposures;

b. Inventories (subject to net realizable value approach); andc. Other financing and investment assets and exposures subject to risks other than credit risk (subject to impairment approach),

excluding inventories.

Credit losses approach for receivables and off -balance sheet exposures uses a dual measurement approach, under which the loss allowance is measured as either a 12-month expected credit loss or a lifetime expected credit loss.

Expected credit losses

FAS 30 introduces the credit losses approach with a forward-looking ‘expected credit loss’ model. The new impairment model will apply to financial assets, which are subject to credit risk. A number of significant judgements are also required in applying the accounting requirements for measuring ECL, such as:

Determining criteria for significant increase in credit risk (SICR);

Choosing appropriate models and assumptions for the measurement of ECL;

Establishing the number and relative weightings of forward-looking scenarios for each type of product/market and the associated ECL; and

Establishing groups of similar financial assets for the purposes of measuring ECL.

Impairment loss is the amount by which the carrying amount of assets exceeds its recoverable amount.

Set out below are the FAS 30 transition impact disclosures for the Group.

(a) Changes in significant accounting policiesThe adoption of FAS 30 has resulted in changes in the accounting policies for impairment of financial assets. FAS 30 also amends disclosures required under other standards dealing with financial instruments such as IFRS 7 ‘Financial Instruments: Disclosures’.The key changes to the Bank’s accounting policies resulting from the adoption of FAS 30 are summarised in note 4(p). Since the comparative financial information has not been restated, the accounting policies in respect of financial assets at amortised cost for comparative periods are based on respective standards as disclosed in the audited financial statements as of and for the year ended 31 December 2017.

(b) Impact of adopting FAS 30The adoption of FAS 30 as at 1 January 2018 did not result in a significant impact on retained earnings or non-controlling interests.(i) The following table reconciles the carrying amounts of financial instruments under FAS 11 to the carrying amounts of financial

instruments under FAS 30 as at 1 January 2018.

4 SIGNIFICANT ACCOUNTING POLICIES (continued)



Original carryingamounts under FAS 11 Re-Measurement

New carrying amounts under FAS 30

Cash and cash equivalents 12,100 - 12,100

Placements with financial institutions 84,953 13 84,940

Financing assets 131,482 1,417 130,065

Investments in sukuk 269,252 (1,673) 270,925

Other assets / receivables 29,791 243 29,548

Commitments and financial guarantees 1,507 - 1,507

529,085 - 529,085

(ii) Impairment of financial assets

Loss allowance at 31 December 2017 under FAS 11 32,507

Additional impairment recognised at 1 January 2018 on:

Placements with financial institutions 13

Financing assets 1,417

Investment in sukuk (1,673)

Other assets / receivables 243

Cash and cash equivalents -

Loss allowance at 1 January 2018 under FAS 30 32,507

a. Basis of consolidation

(i) SubsidiariesSubsidiaries are those enterprises (including special purpose entities) controlled by the Bank. Control exists when the Group has the power, directly or indirectly, to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities. Subsidiaries are consolidated from the date on which control is transferred to the Group and de-consolidated from the date that control ceases.

Special purpose entities (SPEs) are entities that are created to accomplish a narrow and well-defined objective such as the securitisation of particular assets, or the execution of a specific borrowing or investment transaction. An SPE is consolidated if, based on an evaluation of the substance of its relationship with the Group and the SPE’s risks and rewards, the Group concludes that it controls the SPE. The assessment of whether the Group has control over an SPE is carried out at inception and normally no further reassessment of control is carried out in the absence of changes in the structure or terms of the SPE, or additional transactions between the Group and the SPE. Where the Group’s voluntary actions, such as lending amounts in excess of existing liquidity facilities or extending terms beyond those established originally, change the relationship between the Group and an SPE, the Group performs a reassessment of control over the SPE.

Loss of controlUpon the loss of control, the Group derecognises the assets and liabilities of the subsidiary, any non-controlling interests and the other components of equity related to the subsidiary. Any surplus or deficit arising on the loss of control is recognised in the consolidated income statement. If the Group retains any interest in the previous subsidiary, then such interest is measured at fair


value at the date that control is lost. Subsequently it is accounted for as an equity-accounted investee or in accordance with the Group’s accounting policy for financial instruments depending on the level of influence retained.

Non-controlling interestsInterests in the equity of subsidiaries not attributable to the parent are reported in consolidated statement of financial position as non-controlling interests. Profits or losses attributable to non-controlling interests are reported in the consolidated income statement as income attributable to non-controlling interests. Losses applicable to the non-controlling interests in a subsidiary are allocated to the non-controlling interests even if doing so causes the non-controlling interests to have a deficit balance.

The Group treats transactions with non-controlling interests as transactions with equity owners of the Group. For purchases from non-controlling interests, the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity.

When the Group ceases to have control or significant influence, any retained interest in the entity is remeasured to its fair value, with the change in carrying amount recognised in the consolidated income statement. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognised in equity in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognised in other equity are reclassified to the consolidated income statement.

(ii) Equity-accounted investeesThe Group’s interests in equity-accounted investees comprise interests in associates and a joint venture.

Associates are those entities in which the Group has significant influence, but not control or joint control, over the financial and operating policies. A joint venture is an arrangement in which the Group has joint control, whereby the Group has rights to the net assets of the arrangement,

Interests in associates and the joint venture are accounted for using the equity method. They are initially recognised at cost, which includes transaction costs. Subsequent to initial recognition, the consolidated financial statements include the Group’s share of post-acquisition profit or loss and OCI of equity-accounted investees, until the date on which significant influence or joint control ceases.

When the Group’s share of losses exceed its interest in an associate or joint venture, the Group’s carrying amount is reduced to nil and recognition of further losses is discontinued, except to extent that the Group has incurred legal or constructive obligations or made payments on behalf of the associate or joint venture.

Dividends received from an equity accounted investee reduces the carrying amount of the investment.

(iii) Transactions eliminated on consolidation and equity accountingIntra-group balances and transactions, and any unrealised gains arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Intra-group gains on transactions between the Group and its equity accounted associates are eliminated to the extent of the Group’s interest in the investees. Unrealised losses are also eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. Accounting policies of the subsidiaries and associates have been changed where necessary to ensure consistency with the policies adopted by the Group.




The significant subsidiaries are as follows:

Name of subsidiary Equity interest Country ofincorporation Nature of business

2018 2017

North Africa Investment Company

100% 100% Kingdom of Bahrain To hold the Group’s 40% associate stake in Arab Drilling and Workover Company, Libya.

First Energy Oman 100% 100% Cayman Islands To hold 15% direct interest in Al Izz Islamic Bank in Oman.

FEB-Novus Aircraft Holding Company

98.50% 98.50% Commonwealth of the Bahamas

To purchase and lease one A330-300 aircraft to Malaysian Airlines.

MENAdrill Investment Company

- 99.99% Cayman Islands Development and lease of oil rigs

Al Dur Energy Investment Company

59% 59% Cayman Islands To hold 15% indirect interest in a power and water plant project in the Kingdom of Bahrain.

FEB Aqar S.P.C. 100% 100% Kingdom of Bahrain Real estate activities to own or lease property.

FEB Capital Limited 100% 100% United Arab Emirates Financial institution

b. Cash and cash equivalentsCash and cash equivalents comprise cash and balances with banks and placements with financial institutions with original maturities

of 90 days or less.

c. Placements with and from financial institutionsThese comprise inter-bank and over the counter placements made/ received using Shariah compliant murabaha and wakala contracts.

Placements are usually short term and are stated at amortised cost.

d. Ijarah assets Ijarah assets are stated at cost less accumulated depreciation and impairment allowance. Changes in the expected useful life are accounted for by changing the depreciation period or method, as appropriate, and treated as changes in accounting estimates.

Depreciation is calculated using the straight-line method to write down the cost of ijarah assets to their residual values over their useful life.

Ijarah assets are de-recognised on disposal or when no future economic benefits are expected from their use. Any gain or loss arising on de-recognition of the ijarah asset (calculated as the difference between the net disposal proceeds and the carrying amount of the ijarah asset) is recognised in the consolidated income statement in the year the asset is de-recognised.

The Group assesses at each reporting date whether there is objective evidence that Ijarah assets are impaired. Impairment losses are measured as a difference between carrying value of the asset and estimated recoverable amount. Impairment losses are recognised

in the consolidated income statement.



e. Investment securitiesInvestment securities comprise equity type instruments (quoted and unquoted shares) and debt type instruments (sukuk). Investment securities exclude investments in subsidiaries and equity accounted investments.

(i) ClassificationThe Group segregates its investment securities into debt-type instruments and equity-type instruments. Debt-type instruments are investments that have terms that provide fixed or determinable payments of profits and capital. Equity-type instruments are investments that do not exhibit features of debt-type instruments and include instruments that evidence a residual interest in the assets of an entity after deducting all its liabilities.

Debt-type Instruments:Investments in debt-type instruments are classified in the following categories: 1) at amortised cost or 2) at fair value through income statement (FVTIS).

A debt-type investment is classified and measured at amortised cost only if the instrument is managed on a contractual yield basis or the instrument is not held for trading and has not been designated at FVTIS. Debt-type investments at amortised cost include investments in medium to long-term sukuk.

Debt-type investment classified and measured at FVTIS include investments held for trading or designated at FVTIS. At inception, a debt-type investment managed on a contractual yield basis, can only be designated at FVTIS if it eliminates an accounting mismatch that would otherwise arise on measuring the assets or liabilities or recognising the gains or losses on them on different bases. The Group does not have any debt type instruments at FVTIS.

Equity-type investments:Investments in equity type instruments are classified in the following categories: 1) at fair value through income statement (FVTIS) or 2) at fair value through equity (FVTE), consistent with its investment strategy.

Equity-type investments classified and measured at FVTIS include investments held for trading or designated at FVTIS.

An investment is classified as held for trading if acquired or originated principally for the purpose of generating a profit from short-term fluctuations in price or dealer’s margin. Any investments that form part of a portfolio where there is an actual pattern of short-term profit taking are also classified as ‘held for trading’. The Group does not have any investments held for trading or FVTIS.

On initial recognition, the Bank makes an irrevocable election to designate certain equity instruments that are not designated at FVTIS to be classified as investments at fair value through equity. These include investments in certain quoted and unquoted equity securities.

(ii) Recognition and de-recognitionInvestment securities are recognised at the trade date i.e. the date that the Group contracts to purchase or sell the asset, at which date the Group becomes party to the contractual provisions of the instrument. Investment securities are derecognised when the rights to receive cash flows from the financial assets have expired or where the Group has transferred substantially all risk and rewards of ownership.

(iii)MeasurementInvestment securities are measured initially at fair value, which is the value of the consideration given plus transaction costs. For FVTIS investments, transaction costs are expensed in the consolidated income statement.




Subsequent to initial recognition, investments carried at FVTIS and FVTE are re-measured to fair value. Gains and losses arising from a change in the fair value of investments carried at FVTIS are recognised in the consolidated income statement in the period in which they arise. Gains and losses arising from a change in the fair value of investments carried at FVTE are recognised in the consolidated statement of changes in equity and presented in a separate fair value reserve within equity. When the investments carried at FVTE are sold, impaired, collected or otherwise disposed of, the cumulative gain or loss previously recognised in the consolidated statement of changes in equity is transferred to the consolidated income statement.

Investments at FVTE where the entity is unable to determine a reliable measure of fair value on a continuing basis, such as investments that do not have a quoted market price or other appropriate methods from which to derive reliable fair values, are stated at cost less impairment allowances.

Subsequent to initial recognition, debt type investments, other than those carried at FVTIS, are measured at amortised cost using the effective profit method less any impairment allowances.

(iv) Measurement principlesAmortised cost measurementThe amortised cost of a financial asset or liability is the amount at which the financial asset or liability is measured at initial recognition, minus capital repayments, plus or minus the cumulative amortisation using the effective profit method of any difference between the initial amount recognised and the maturity amount, minus any reduction (directly or through use of an allowance account) for impairment or uncollectability. The calculation of the effective profit rate includes all fees and points paid or received that are an integral part of the effective profit rate.

Fair value measurementFair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction on the measurement date.

When available, the Group measures the fair value of an instrument using the quoted price in an active market for that instrument. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.

f. Property and equipment

Property and equipment are stated at cost, net of accumulated depreciation and impairment allowance. The cost of additions and major improvements are capitalised; maintenance and repairs are charged to the consolidated statement of income as incurred. Gains or losses on disposal are reflected in other income. Depreciation is calculated using the straight-line method over the estimated useful lives of 3 to 4 years other than freehold land, which is deemed to have an indefinite life.

g. Intangible assets Intangible assets comprise principally the value of computer software. Intangible assets acquired are measured on initial recognition at cost. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any impairment losses. Intangible assets are amortised on a straight line basis in the consolidated income statement over its estimated useful life, from the date it is available for use. The estimated useful life of software for the current and comparative period is 3 years.

h. Financing assets Financing assets represents financing facilities provided to customers. They are recognized when they are originated. Financing assets are initially measured at fair value plus transaction costs, and subsequently measured at their amortised cost using the effective profit rate method. Financing income, dividends and losses relating to the assets are recognised in the consolidated income statement as income from financing.



i. Assets held for saleNon-current assets, or disposal groups comprising assets and liabilities, are classified as held-for-sale if it is highly probable that they will be recovered primarily through sale rather than through continuing use.

Such assets, or disposal groups, are generally measured at the lower of their carrying amount and fair value less costs to sell. Impairment losses on initial classification as held-for-sale and subsequent gains and losses on remeasurement are recognized in profit or loss. Once classified as held-for-sale, depreciable assets are no longer depreciated.

The sale should be expected to qualify for recognition as a completed sale within one year from the date of classification. If the criteria for classification as held for sale are no longer met, the entity shall not classify a non-current asset (or disposal group) as held for sale in those financial statements when issued.

j. DividendsDividends to shareholders are recognised as liabilities in the period in which they are declared.

k. Revenue recognition

• Profit from murabaha and wakala contracts Profit from murabaha and wakala contracts is recognised when the income is both contractually determinable and quantifiable

at the commencement of the transaction. Such income is recognised on a time-apportioned basis over the period of the contract using the effective profit method.

• Rental income from ijarah assets Rental income from investment in ijarah assets is recognized as revenue on a straight line basis over the term of the lease.

• Income from investment in sukuk Income from investment in sukuk is recognised over the term of the instrument using the effective profit rate method.

• Dividend income Dividend income is recognised when the right to receive is established. This is usually the ex-dividend date for equity securities.

• Fees and commission income Fees and commission income that are integral to the effective profit rate on a financial asset carried at amortised cost are included

in the measurement of the effective profit rate of the financial asset. Other fees and commission income, including account servicing fees, sales commission, management fees, placement and arrangement fees and syndication fees, are recognised as the related services are performed.

l. Earnings prohibited by Shari’aThe Group is committed to avoid recognising any income generated from non-Islamic sources. Accordingly all non-Islamic income is credited to a charity fund which the Group uses for social welfare activities.

m. ZakahZakah is calculated on the zakah base of the Group in accordance with FAS 9 Zakah using the net invested funds method. Zakah is paid by the Group based on statutory reserve, investment fair value reserve, foreign exchange translation reserve and retained earning balances at the end of the year and remaining zakah is payable by shareholders. The Group calculates and notifies the shareholders of their pro-rate share of zakah payable. The calculation of zakah is approved by Shari’a Supervisory Board.




n. Employees’ end of service benefits

(i) Short-term benefitsShort-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided and recognised as staff cost in the consolidated income statement. A provision is recognised for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.

(ii) Post-employment benefits Pensions and other social benefits for local employees are covered by the Social Insurance Organisation scheme, which is a “defined contribution scheme” in nature, and to which employees and employers contribute monthly on a fixed-percentage-of-salaries basis. Contributions by the Group are recognised as staff cost in the consolidated income statement when they are due. Termination benefits are recognised as an expense when the Group is committed demonstrably, without realistic possibility of withdrawal, to a formal detailed plan to either terminate employment before the normal retirement date, or to provide termination benefits as a result of an offer made to encourage voluntary redundancy.

Certain employees on fixed contracts are also entitled to leaving indemnities payable, based on length of service and final remuneration. Provision for this unfunded commitment has been made by calculating the notional liability had all employees left at the reporting date. The Bank also operates a voluntary employees saving scheme under which the Bank and the employee contribute monthly on a fixed percentage of salaries basis. The scheme is in the nature of a defined contribution scheme and contributions by the Bank are recognised as an expense in the consolidated income statement when they are due. These benefits are in the nature of “defined benefit scheme” and any increase or decrease in the benefit obligation is recognised as staff cost in the consolidated income statement.

o. ProvisionsProvisions are recognised when the Bank has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligations and a reliable estimate can be made of the amount of the obligation.

p. Impairment of financial assets

Policy applicable from 1 January 2018

(i) Financial assets carried at amortised cost

The Group recognises loss allowances for ECLs on:

• Bank balances and placements with financial institutions;

• Financing assets; and

• Investment in Sukuk- debt type securities at amortised cost ;

The Group measures loss allowances at an amount equal to lifetime ECLs, except for the following, which are measured at 12-month ECLs:

debt-type securities that are determined to have low credit risk at the reporting date; and

other debt-type securities and bank balances for which credit risk (i.e. the risk of default occurring over the expected life of

the financial instrument) has not increased significantly since initial recognition.

The Group applies a three-stage approach to measuring expected credit losses (ECL) on financial assets carried at amortised cost. Assets migrate through the following three stages based on the change in credit quality.



Stage 1: 12-months ECL

Stage 1 includes financial assets on initial recognition and that do not have a significant increase in risk since initial recognition

or that have low credit risk. 12-month ECL is the expected credit losses from default events that are possible within 12 months

after the reporting date.

Stage 2: Lifetime ECL - not credit impaired

Stage 2 includes financial assets that have had a significant increase in credit risk since initial recognition but that do not have

objective evidence of impairment. For these assets, lifetime ECL are recognised. Lifetime ECL are the expected credit losses that

result from all possible default events over the expected life of the financial instrument. Expected credit losses are the weighted

average credit losses with the life-time probability of default (‘PD’).

Stage 3: Lifetime ECL - credit impaired

Stage 3 includes financial assets that have objective evidence of impairment at the reporting date in accordance with the

indicators specified in the CBB’s rule book. For these assets, lifetime ECL is recognised.

The maximum period considered when estimating ECLs is the maximum contractual period over which the Group is exposed to

credit risk.

Significant Increase in credit risk

When determining whether the credit risk of a financial asset has increased significantly since initial recognition when estimating

ECLs, the Group considers reasonable and supportable information that is relevant and available without undue cost or effort.

This includes both quantitative and qualitative information and analysis, based on the Group’s historical experience and informed

credit assessment including forward-looking information.

In determining whether credit risk has increased significantly since initial recognition, the following criteria are considered:

downgrades in risk rating according to the approved ECL policy;

Exposures over due by 30 days at the reporting date subject to rebuttal.

Definition of default

The Group considers a financial asset to be in default when:

the borrower is unlikely to pay its credit obligations to the Group in full, without recourse by the Group to actions such as realising security (if any is held); or

the financial asset is more than 90 days past due

In general, for externally rated investments and exposures, if the credit rating of the sukuk is within investment grade (Bank

considers externally rated investments from AAA to BBB as investment grade) as on the measurement date, the sukuk will be

treated as a Stage 1 asset. However, for assets wherein the credit rating is below investment grade, a one-notch downgrade as

on the measurement date, compared to the origination rating will qualify as a significant deterioration of credit quality and will

therefore result in moving the asset to Stage 2. Additionally all assets domiciled in countries where the transfer risk is designated

as “High” will classified as Stage 2. All assets that are credit impaired at the reporting date will be considered as Stage 3.




Measurement of ECLs

ECLs are a probability-weighted estimate of credit losses. Credit losses are measured as the present value of all cash shortfalls (i.e. the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Group expects to receive. ECLs are discounted at the effective profit rate of the financial asset.

The key inputs into the measurement of ECL are the term structure of the following variables:

probability of default (PD);

loss given default (LGD);

exposure at default (EAD).

These parameters are generally derived from internally developed statistical models and other historical data. They are adjusted to reflect forward-looking information as described above.

Credit-impaired financial assets

At each reporting date, the Group assesses whether financial assets carried at amortised cost are credit-impaired. A financial asset is ‘credit-impaired’ when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred. Evidence that a financial asset is credit-impaired includes the following observable data:

significant financial difficulty of the borrower or issuer;

a breach of contract such as a default or being more than 90 days past due;

the restructuring of a loan or advance by the Group on terms that the Group would not consider otherwise;

it is probable that the borrower will enter bankruptcy or other financial reorganisation; or

the disappearance of an active market for a security because of financial difficulties.

ECL on Investment in government of Bahrain sovereign debts has been calculated with LGD of zero as there has been no history of default.

Presentation of allowance for ECL in the statement of financial position

Loss allowances for financial assets measured at amortised cost are deducted from the gross carrying amount of the assets.

ii) Investments carried at fair value through equity (FVTE)There has been no change in the accountting policy as a result of adopting FAS 30 (refer below).

Policy before 1 January 2018

(i) Financial assets carried at amortised costFor financial assets carried at amortised cost, impairment is measured as the difference between the carrying amount of the financial assets and the present value of estimated cash flows discounted at the assets’ original effective profit rate. Losses are recognised in consolidated income statement and reflected in an allowance account. When a subsequent event causes the amount of impairment loss to decrease, the impairment loss is reversed through the consolidated income statement. The Group considers evidence of impairment for financial assets carried at amortised cost at both a specific asset and collective level. All individually significant financial assets are assessed for specific impairment. All individually significant financial assets found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Financial assets that are not individually significant are collectively assessed for impairment by grouping together assets with similar risk characteristics.



(ii) Equity Investments carried at fair value through equity (FVTE)In the case of investments in equity securities classified as FVTE, a significant or prolonged decline in the fair value of the security below its cost is an objective evidence of impairment. If any such evidence exists for FVTE investments, the unrealised re-measurement loss shall be transferred from equity to the consolidated income statement.

The cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that investment previously recognised in the consolidated income statement is removed from equity and recognised in the consolidated income statement. Impairment losses recognised in the consolidated income statement on equity instruments are subsequently reversed through equity.

For FVTE investments carried at cost less impairment due to the absence of reliable fair value, the Group makes an assessment of whether there is an objective evidence of impairment for each investment by assessment of financial and other operating and economic indicators. Impairment is recognised if the estimated recoverable amount is assessed to be below the cost of the investment. Currently, the Group does not have any investments under this category.

q. Impairment of non-financial assetsThe carrying amount of the Group’s non-financial assets or its cash generating unit, are reviewed at each reporting date to determine whether there is any indication of impairment. A cash generating unit is the smallest identifiable asset group that generates cash flows that largely are independent from other asset and groups. If any such indication exists, the asset’s recoverable amount is estimated. The recoverable amount of an asset or a cash generating unit is the greater of its value in use or fair value less costs to sell.

In assessing value in use, the estimated future cash flows are discounted to their present value using a discount rate that reflects current market assessments of expected return and the risks specific to the asset or cash generating unit. An impairment loss is recognised whenever the carrying amount of an asset or its cash generating unit exceeds its estimated recoverable amount. Impairment losses are recognised in the consolidated income statement. Impairment losses are reversed only if there is an indication that the impairment loss may no longer exist and there has been a change in the estimates used to determine the recoverable amount.

r. Foreign currency transactionsForeign currency transactionsItems included in the consolidated financial statements of the Group are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The consolidated financial statements are presented in US Dollars, which is the Bank’s functional and presentation currency.

Foreign currency transactions are translated using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the consolidated income statement. Translation differences on non-monetary items carried at their fair value, such as certain equity securities measured at fair value through equity, are included in investments fair value reserve.

Foreign operationsThe assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated into USD at the spot exchange rates at the reporting date. The income and expenses of foreign operations are translated into USD at the spot exchange rates at the dates of the transactions. Foreign currency differences are recognised in the consolidated statement of changes in equity, and accumulated in the foreign currency translation reserve (translation reserve), except to the extent that the translation difference is allocated to NCI. When a foreign operation is disposed of such that control is lost, the cumulative amount in the translation reserve related to that foreign operation is reclassified to profit or loss as part of the gain or loss on disposal. If the Group disposes of only part of its interest in a subsidiary that includes a foreign operation while retaining control, then the relevant proportion of the cumulative amount is reattributed to NCI.




If the settlement of a monetary item receivable from or payable to a foreign operation is neither planned nor likely in the foreseeable future, then foreign currency differences arising on the item form part of the net investment in the foreign operation and are recognised in statement of changes in equity, and accumulated in the translation reserve within equity.

s. De-recognition of financial assets and liabilities A financial asset (or, where applicable a part of a financial asset or part of a Group of similar financial assets) is de-recognised when:

(i) the right to receive cash flows from the asset have expired; (ii) the Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement; and either (a) the Group has transferred substantially all the risks and rewards of the asset, or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

A financial liability is de-recognised when the obligation specified in the contract is discharged, cancelled or expired.

t. Offsetting financial instruments Financial assets and financial liabilities are offset and the net amount reported in the consolidated statement of financial position if there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, to realise the assets and settle the liabilities simultaneously.

u. Statutory reserve The Bahrain Commercial Companies Law 2001 requires that 10 per cent of the annual net profit be appropriated to a statutory reserve which is normally distributable only on dissolution. Appropriations may cease when the reserve reaches 50 per cent of the paid up share capital.

v. Shari’a supervisory board The Group’s business activities are subject to the supervision of a Shari’a supervisory board consisting of three members appointed by the general assembly of shareholders.

w. Trade date accountingAll “regular way” purchases and sales of financial assets are recognised on the trade date, i.e. the date that the Group commits to purchase or sell the asset.

x. Judgments and estimates The preparation of the Group’s financial statements requires management to make judgments, estimates and assumptions that affect the amounts reported in the consolidated financial statements. The most significant uses of judgments and estimates are as follows:

Judgments:(i) Classification of investmentsManagement decides on acquisition of an investment whether it should be classified as an equity-type instrument at fair value through statement of income, an equity-type instrument at fair value through equity or a debt-type instrument at amortised cost. The classification of each investment reflects the management’s intention in relation to each investment and is subject to different accounting treatments based on such classification (refer note 4 (e) (i)).

Estimates:(i) Impairment of financial assets and amortised costDetermining inputs into ECL measurement model including incorporation of forward looking information is set out in note p(i).

(ii) Impairment of equity-type instruments at fair value through equityThe Group treats equity-type instruments at fair value through equity as impaired when there has been a significant or prolonged



decline in the fair value below its cost or where other objective evidence of impairment exists. The determination of what is ‘significant’ or ‘prolonged’ requires judgment.

(iii) Useful life of Ijarah assets The Group depreciates its Ijarah assets (note 8) over the estimated useful life of the assets. The Group annually estimates useful life and residual values of assets using an independent third party valuer who has the right experience and qualification in valuing such assets.

5 CASH AND BANK BALANCES

31 December 2018 31 December 2017

Cash 13 12Balances with banks 15,394 12,088

15,407 12,100

6 PLACEMENTS WITH FINANCIAL INSTITUTIONS


Commodity murabaha contracts 14,023 24,920Wakala contracts 75,851 60,041

Total gross murabaha and wakala contracts 89,874 84,961Less: Deferred profits (8) (8)

89,866 84,953Less: Net impairment allowance * (48) -

89,818 84,953

The original maturity of commodity murabaha and wakala contracts are 90 days or less.

* For stage wise exposure and allowance for impairment, refer note 27 (b).

7 FINANCING ASSETS


Gross commodity murabaha 131,880 144,568Less: Deferred profits (7,688) (14,088)Less: Impairment allowance (28,615) (30,011)

95,577 100,469Ijarah financing 24,168 31,013Less: Net impairment allowance * (2,319) -

117,426 131,482

* For stage wise exposure and allowance for impairment, refer note 27 (b).




8 IJARAH ASSETS


Cost:

At 1 January 2018 100,000 272,783

Additions - 684

Reclassification - (173,467)

At 31 December 2018 100,000 100,000

Depreciation:

At 1 January 2018 21,300 67,746

Charge for the year 3,600 7,376

Reclassification - (53,822)

At 31 December 2018 24,900 21,300

Net book value:

As at 31 December 2018 75,100 -

Net book value:As at 31 December 2017 - 78,700

(i) This represents an aircraft that is leased to an airline. It is mortgaged against term financing (refer note 15).

9 INVESTMENT SECURITIES


Equity type instruments - At fair value through equity

- Quoted equity securities (at fair value) (i) 35,645 37,780

- Unquoted equity securities (at cost less impairment) (ii) 139,280 995

174,925 38,775

Debt type instruments - At amortised cost

Quoted Sukuk (iii) 255,421 271,748

Subordinated financing (ii) - 99,542

Net impairment allowance (iv) (1,609) (2,496)

253,812 368,794

428,737 407,569



(i) During the year, the Group sold quoted equity securities of carrying value of USD 16.9 million resulting in gain of USD 5.5 million (note 18), and purchased equity securities of USD 19.9 million.

(ii) During the year, the Group acquired 15% indirect investment in Oba Makarnacilik Sanayi ve Ticaret A.S. (“Oba Makarna”), a Turkish incorporated company engaged in pasta production.

In addition, during the year, following shareholders resolution, the Group converted its subordinated financing to Al Dur Power and Water Company BSC (c), into equity.

During the year, the Bank reclassified its equity accounted investees (Adcan and Medisal) to unquoted equity securities (refer note 10) on loss of significant influence.

(iii) Quoted sukuk of USD 209 million (31 December 2017: USD 147 million) are pledged against general bank financing of USD 80 million (31 December 2017: USD 80 million) (refer note 15).

(iv) For stage wise exposure and allowance for impairment, refer note 27 (b).

10 EQUITY ACCOUNTED INVESTEES


Associates 105,128 113,925

Impairment allowance (69,685) (69,685)

Loss on dilution (6,102) -

29,341 44,240

Movement on the equity accounted investees during the year:

2018 2017

At 1 January 44,240 54,944

Disposals during the year - (10,627)

Share of results of equity accounted investees, net (773) (3,129)

Foreign exchange translation differences - 3,469

Intercompany finance expense (487) (417)

Reclassified to equity type instruments on loss of significant influence (note 9) (7,537) -

Loss on dilution (6,102) -

At 31 December 29,341 44,240


9 INVESTMENT SECURITIES (continued)


Equity accounted investees comprise the following associates:

Country of incorporation

% holding Nature of business

Arab Drilling and Workover Company (i) Libya 40% Lease of oil drilling rigs

Al Izz Islamic Bank (ii) Oman 15.18% Islamic retail banking

Adcan Pharma LLC (Adcan) (iii) United Arab Emirates 40% Pharmaceutical

Medisal for Pharmaceuticals Industry LLC (Medisal) (iv) United Arab Emirates 45% Pharmaceutical

Summarised financial information of associates and joint venture that have been equity accounted in these consolidated financial statements, not adjusted for percentage of ownership held by the Group:

2018 2017

Total assets 1,869,246 1,560,863

Total liabilities 1,237,572 999,065

Total revenues 36,622 22,605

Total net loss (26,240) (43,252)

(i) Due to the political situation in Libya, the investments have been fully provided for.

(ii) The information for 2018 presented in the table includes the results of Al Izz Islamic Bank based on the audited accounts for the period

from 1 October 2017 to 31 December 2017 and management accounts for the period from 1 January 2018 to 30 September 2018.

(iii) & (iv) During the year, the Group signed a Share Sale and Investment Agreement (SSIA) to sell part of its equity holdings in these two

companies. One of the conditions precedent in the SSIA was the formation of a new holding company (Holdco) into which the assets of

these companies were to be novated and equivalent shares in the Holdco issued to the existing shareholders. Post novation, the Holdco

would issue new shares to be fully subscribed by the buyer which will dilute existing shareholders. The sale and eventual dilution results in

a reduction in the Group’s interest to below associate level. The Holdco is in the process of being established in UAE for the two entities

in which the Group will hold 18.49% interest. This has been treated as deemed disposal resulting in a loss on dilution of USD 6,102

thousand. The Group’s interest in the new Holdco has been accounted for as equity type instrument at fair value through equity (note 9).



11 OTHER ASSETS


Receivable from investee * 11,957 12,024Ijarah rental receivable 24,612 17,767Prepayments and advances 5,330 3,656Intangible assets 139 122Dividend receivable 3,000 -Fees and commission receivable 4,430 -Others 2,671 2,837

52,139 36,406Less: Net impairment allowance ** (59) -

52,080 36,406

* This represents an amount advanced to Al Dur Power and Water Company, an investment of the Group, to meet liability reserve account (LRA) funding requirement under a common term agreement, whereby the shareholders are required to fund such account for the purpose of meeting the repayment of senior debt obligations of the investee. This includes LRA fee accrual as of 31 December 2018.

** For stage wise exposure and allowance for impairment, refer note 27 (b).

12 PROPERTY AND EQUIPMENT

31 December 2018 LandCapital

work-in-progress

Computersand

equipmentMotor

vehiclesFurniture

andfixtures

2018Total

2017Total

Cost At 1 January 23,657 1,006 1,830 626 1,264 28,383 26,241 Additions - 1,756 29 15 174 1,974 2,513 Disposals - - (2) - - (2) (371)At 31 December 23,657 2,762 1,857 641 1,438 30,355 28,383Impairment At 1 January 13,794 - - - - 13,794 13,794 Reversal (note 22) (4,460) - - - - (4,460) -

At 31 December 9,334 - - - - 9,334 13,794Depreciation At 1 January - - 1,588 319 840 2,747 2,682 Charge for the year - - 163 98 157 418 385 Disposal - - (1) - - (1) (320)

At 31 December --

1,750 417 997 3,164 2,747

Net book value At 31 December 14,323 2,762 107 224 441 17,857 11,842

Net book value At 31 December 2017 9,863 1,006 242 307 424 11,842



13 ASSETS HELD FOR SALE

This represents two oil rigs. As part of a capital reduction plan approved by the Bank’s shareholders in an extraordinary meeting on 6 December 2018, the shareholders approved the distribution of the two oil rigs with carrying value of USD 119.645 million to a company owned by Trust for the beneficial ownership of the Bank’s shareholders (refer note 17).

A. Results of discontinued operation

2018 2017

Expenses 2,612 8,551

Loss from discontinued operations 2,612 8,551

The loss from the discontinued operation of USD 2,612 thousand (2017: USD 8,551 thousand) is attributable entirely to the owners of the Bank. Of the profit from continuing operations of USD 14,911 thousand (2017: USD 28,694 thousand), an amount of USD 12,256 thousand (2017: USD 20,056 thousand) is attributable to the owners of the Company.

B. Cash flows from (used in) discontinued operation

2018 2017

Net cash used in operating activities (796) (5,864)

Net cash flows for the year (796) (5,864)

C. Effect of disposal on the financial position of the Group

2018

Ijarah assets 119,645

Net assets and liabilities 119,645

14 PLACEMENTS FROM FINANCIAL INSTITUTIONS


Commodity murabaha * 35,841 37,376

Wakala contracts 57,043 42,025

92,884 79,401

* This is from an entity, which is currently subject to regulatory sanctions. Accordingly, the funds have been frozen until such sanctions are formally lifted.



15 BANK FINANCING


Term financing * 41,338 45,920General financing ** 81,290 81,117

122,628 127,037

* Term financing is secured by a mortgage over an aircraft (refer note 8). Term financing has been obtained by FEB-Novus Fin One Ltd Bahamas, a 100% subsidiary of FEB-Novus Aircraft Holding Company, Bahamas which is a 98.5% subsidiary of the Bank. Term financing is at a floating rate of 1 month Libor plus 3.20% (2017: 1 month Libor plus 3.20%) maturing on 23 January 2024.

** This represent financing for general purpose secured by sukuk at rates ranging from 2.90% to 3.88% (2017: ranging from 2.56% to 2.69%) per annum. As of 31 December 2018, USD 40 million is maturing on 11 January 2019 and USD 40 million is maturing on 30 November 2020 (refer note 9).

16 OTHER LIABILITIES


Unclaimed dividends 11,288 11,288Employee-related accruals 6,458 5,866Deferred income 2,256 1,393Accrued expenses 651 304Customer current account 93 309Zakat and charity payable 38 23Accounts payable - 381Others 2,650 934

23,434 20,498

17 SHARE CAPITAL


Share capitalAuthorised:2,000,000,000 ordinary shares of USD 1 each 2,000,000 2,000,000

Issued, subscribed and paid-up:600,000,000 ordinary shares (2017: 1,000,000,000) of USD 1 each 600,000 1,000,000

In an extra-ordinary general meeting held on 6 December 2018, the shareholders approved a reduction in the Bank’s paid up capital from USD 1 billion divided into one billion ordinary shares of a nominal value of USD 1 each to USD 600 million divided into six hundred million ordinary shares of a nominal value of USD 1 each. The reduction was affected by transfer of assets with carrying value of USD 119.645 million (note 13) and write off of accumulated losses of USD 280.355 million. Legal process for updating the constitutional documents and records with the regulatory bodies is in progress as of the reporting date.

(i) The Group has only one class of equity shares and the holders of these shares have equal voting rights.

(ii) Names and nationalities of the major shareholders and the percentage of equity shares held in which they have an interest of 5% or more of outstanding shares are as follows:




2018 2017

% of holding

Share capital

% of holding

Share Capital

Tasameem Real Estate Co. LLC UAE 21.85 131,102 21.85 218,504

Libyan Investment Authority * Libya 16.25 97,500 16.25 162,500

Abu Dhabi Water and Electricity Authority UAE 15.00 90,000 15.00 150,000

Emirates Islamic Bank PJSC UAE 10.00 60,000 10.00 100,000

Mohammed Bin Hussain Bin Ali Al Amoudi KSA 5.00 30,000 5.00 50,000

AlJabr Holding Co KSA 5.00 30,000 5.00 50,000

* This entity is subject to regulatory sanctions.

(iii) The distribution schedule of equity shares, setting out the number of holders and percentage of holding is as follows:

At 31 December 2018 Number of shares(‘000)

Number ofshareholders

% of totaloutstanding

sharesCategories

Less than 5% ** 161,398 17 26.90%

5% up to less than 10% 60,000 2 10.00%

10% up to less than 25% 378,602 4 63.10%

600,000 23 100%

At 31 December 2017 Number of shares(‘000)

Number ofshareholders

% of totaloutstanding

sharesCategories

Less than 5% ** 268,996 17 26.90%

5% up to less than 10% 100,000 2 10.00%

10% up to less than 25% 631,004 4 63.10%

1,000,000 23 100%

** Includes 6,000 (2017: 10,000) thousand treasury shares.

18 INCOME FROM INVESTMENT SECURITIES

2018 2017

Profit on sukuk 12,014 11,546

Dividend income 5,495 1,782

Gain on disposal of sukuk 942 3,901

Gain on disposal of quoted equity securities (note 9) 5,454 -

Gain on disposal of unquoted equity securities - 11,746

23,905 28,975



19 NET INCOME FROM IJARAH ASSETS

2018 2017

Rental income 9,169 8,219

Finance cost (2,290) (2,047)

Depreciation on Ijarah assets (3,600) (3,600)

Other operating expenses (587) (796)

2,692 1,776 20 STAFF COST

2018 2017

Salaries and benefits 11,982 8,165

Other staff expenses 697 723

12,679 8,888

21 OTHER OPERATING EXPENSES

2018 2017

Professional and consultancy fee 5,361 1,163

Travelling and related expenses 1,246 1,031

Board and shari’a committee expenses 1,093 730

Rent and utilities 769 667

IT related expenses 748 679

Telecommunication and postages 119 112

Cleaning, repairs and maintenance 97 106

Advertising and marketing expenses 96 31

Foreign exchange loss 13 2,294

Others 1,489 766

11,031 7,579

22 NET IMPAIRMENT (REVERSAL) / LOSSES

2018 2017

Investment in Sukuk (note 27 (b)) 786 -

Placements with financial institutions (note 27 (b)) 35 -

Financing assets (note 27 (b)) 902 -

Other assets (note 27 (b)) (184) -

Reversal of impairment on Land (note 12) (4,460) -

(2,921) -



23 RELATED PARTY BALANCES AND TRANSACTIONS

Parties are considered to be related if one party has the ability to control the other party or exercise significant influence or joint control over the other party in making financial and operating decisions. Related parties comprise major shareholders, directors, shari’a supervisory board, external auditors and executive management of the Group and/or entities over which they exercise control and/or significant influence.

The related party balances included in these consolidated financial statements are as follows:

31 December 2018 Associates

Key managementpersonnel / Shari’a

board members/ external auditors

Significantshareholders / board

members / entities in which directors are

interested Total

Assets

Cash and bank balances - - 9,661 9,661

Placements with financial institutions - - 33,504 33,504

Financing assets * - - 57,143 57,143

Investment securities * - - 43,182 43,182

Equity accounted investees 29,341 - - 29,341

Other assets 10 - 4,371 4,381

Liabilities

Placements from financial institutions - - 35,841 35,841

Other liabilities - 1,123 11,382 12,505


Key managementpersonnel / Shari’a board members / external auditors

Significantshareholders/ board

members / entities inwhich directors are

interested Total

Assets

Cash and bank balances - - 98 98

Placements with financial institutions - - 18,509 18,509

Financing assets 14,312 - 50,039 64,351

Equity accounted investees 44,240 - - 44,240

Other assets 7 - - 7

Liabilities

Placements from financial institutions - - 34,875 34,875

Other liabilities 309 1,108 11,288 12,705




Key managementpersonnel / Shari’a

board members/ external auditors

Significantshareholders / board

members / entities in which directors are

interested Total

IncomeIncome from investment securities - - 7,949 7,949Income from financing and placements with financial institutions 709 - 4,197 4,906

Share of results of equity accounted investees (773) - - (773)Fees and commission income - - 7,868 7,868Other income - - 80 80ExpensesStaff cost - 3,454 - 3,454Finance cost on placements from financial institutions - - 983 983

Other operating expenses - 1,242 - 1,242Loss on dilution of investment in associate 6,102 - - 6,102

Net impairment losses 113 - 99 212


Key managementpersonnel / Shari’a board members / external auditors

Significantshareholders/ board

members / entities inwhich directors are

interested Total

IncomeIncome from financing and placements with financial institutions 589 - 4,625 5,214

Gain on disposal of equity accounted investee 4,618 - - 4,618Share of results of equity accounted investees (3,129) - - (3,129)Fees and commission income 16 - 2,668 2,684ExpensesStaff cost - 2,772 - 2,772Finance cost on placements from financial institutions - - 556 556

Other operating expenses - 904 - 904

* Included herein is Bank’s investment and financing in Adcan and Medisal which will be novated to a holding company under establishment where the Bank’s direct stake will be 18.49%. Post novation, the same will not be considered as related party of the Bank (refer note 9).

Key management personnel of the Group comprise of the Board of Directors and key members of management having authority and responsibility for planning, directing and controlling the activities of the Bank. The key management personnel compensation is as follows:

2018 2017

Board member fees 1,000 634

Salary and other benefits 2,958 2,587

Post employment benefits 496 185

4,454 3,406


23 RELATED PARTY BALANCES AND TRANSACTIONS (continued)


24 ZAKAH

Zakah payable by the shareholders in respect of each share for the year ended 31 December 2018 is US cents 2.14 (2017: US cents 1.27) for every share held. US cents Nil (2017: US cents Nil) is payable by the Bank in their capacity as the agents of the shareholders and US cents 2.14 (2017: US cents 1.27) is the responsibility of the individual shareholders.

25 SEGMENT INFORMATION

a) Industry sectorThe industrial distribution of the Group’s assets and liabilities is as follows:

2018Banks and financial

institutionsEnergy, power and

infrastructure Others Total

AssetsCash and bank balances 15,407 - - 15,407Placements with financial institutions 89,818 - - 89,818Financing assets - 2,741 114,685 117,426Ijarah assets - - 75,100 75,100Investment securities 142,535 99,541 186,661 428,737Equity accounted investees 29,341 - - 29,341Other assets 10 13,091 38,979 52,080Property and equipment - - 17,857 17,857Total assets 277,111 115,373 433,282 825,766

LiabilitiesPlacements from financial institutions 92,884 - - 92,884Bank financing 122,628 - - 122,628Other liabilities - 51 23,383 23,434Total liabilities 215,512 51 23,383 238,946

2017Banks and financial

institutionsEnergy, power and

infrastructure Others Total

AssetsCash and bank balances 12,100 - - 12,100Placements with financial institutions 84,953 - - 84,953Financing assets - - 131,482 131,482Ijarah assets - - 78,700 78,700Investment securities 145,786 126,586 135,197 407,569Equity accounted investees 28,768 - 15,472 44,240Other assets 7 13,184 23,215 36,406Property and equipment - - 11,842 11,842Assets held for sale - 119,645 - 119,645Total assets 271,614 259,415 395,908 926,937

LiabilitiesPlacements from financial institutions 79,401 - - 79,401Bank financing 127,037 - - 127,037Other liabilities - 394 20,104 20,498Total liabilities 206,438 394 20,104 226,936



b) Geographic sectorThe geographical distribution of the Group’s assets and liabilities is as follows:

2018 MENA Europe America Asia Total

Assets

Cash and bank balances 12,902 2,505 - - 15,407

Placements with financial institutions 89,818 - - - 89,818

Financing assets 114,685 - 2,741 - 117,426

Ijarah assets - - - 75,100 75,100

Investment securities 322,655 75,920 - 30,162 428,737

Equity accounted investees 29,341 - - - 29,341

Other assets 48,042 3,000 - 1,038 52,080

Property and equipment 17,857 - - - 17,857

Total assets 635,300 81,425 2,741 106,300 825,766

Liabilities

Placements from financial institutions 92,884 - - - 92,884

Bank financing - 122,628 - - 122,628

Other liabilities 22,824 - 33 577 23,434

Total liabilities 115,708 122,628 33 577 238,946

2017 MENA Europe America Asia Total

Assets


Placements with financial institutions 84,953 - - - 84,953

Financing assets 131,482 - - - 131,482

Ijarah assets - - - 78,700 78,700

Investment securities 338,779 52,737 - 16,053 407,569

Equity accounted investees 44,240 - - - 44,240

Other assets 35,115 - 26 1,265 36,406

Property and equipment 11,842 - - - 11,842

Assets held for sale - - 119,645 - 119,645

Total assets 656,889 54,359 119,671 96,018 926,937

Liabilities

Placements from financial institutions 79,401 - - - 79,401

Bank financing - 127,037 - - 127,037

Other liabilities 19,556 - 385 557 20,498

Total liabilities 98,957 127,037 385 557 226,936

The Group’s revenue and expenses are reviewed at a Group level and therefore no separate operating segment results and other disclosures are provided in these consolidated financial statements.


25 SEGMENT INFORMATION (continued)


26 COMMITMENTS


Financing commitments 15,916 939

Operating lease commitments 1,289 568

17,205 1,507

27 RISK MANAGEMENT

The Group has exposure to the following risks from its use of financial instruments:

• liquidity risk;

• credit risk;

• market risks; and

• operational risk

The Bank has a risk management framework in place for managing these risks which are constantly evolving as the business activities

change in response to credit, market, product and other developments.

This note presents information about the Group’s exposure to each of the above risks, its objectives, policies and processes for measuring

and managing risk, and the Bank’s management of capital.

Risk management frameworkThe Board of Directors has overall responsibility for the establishment and oversight of the Bank’s risk management framework.

The Bank’s risk management policies are established to identify and analyse the risks faced by the Bank, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed to reflect changes in market conditions, products and services offered.

The Management Risk Committee is responsible for recommending policy and framework to the Board Audit and Risk Committee, which in turn is responsible for reviewing and recommending to the Board for approval. The Risk Management Department is responsible for monitoring compliance with the Bank’s risk management policies and procedures, and for reviewing the adequacy of the risk management framework in relation to the risks faced by the Bank.

The principal risks associated with the Group’s business and the related risk management processes are as follows:

(a) Liquidity riskLiquidity risk is defined as the risk that the Group will encounter difficulty in meeting obligations associated with financial liabilities that are to be settled by delivering cash or another financial asset. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation.



The Board of Directors approves all significant policies and strategies related to the management of liquidity. Management Committees including the Asset Liability Committee and the Management Risk Committee review the liquidity profile of the Group on a regular basis and any material change in the current or prospective liquidity position is notified to the Board through the Board Audit and Risk Committee.

The Risk Management Department monitors the liquidity profile of the Bank on an ongoing basis to ensure that the liquidity gap is within regulatory limits and the liquidity gap and key liquidity ratios are within the internal Board approved limits.

Details of the Group’s liquid assets to total assets at the reporting date and during the reporting period were as follows:

2018 2017

At 31 December 0.48 0.44

Average for the year 0.46 0.45

Analysis of financial liabilitiesThe table below summarises the maturity profile of the Group’s financial liabilities based on contractual undiscounted repayment obligations.

At 31 December 2018 Gross undiscounted cash flows

Carrying value

Less than3 months

3 to 12 months

1 year to3 years

Over 3 years Total

Placements from financial institutions 93,158 - - - 93,158 92,884

Bank financing 42,935 5,275 56,951 28,917 134,078 122,628

Other liabilities 16,467 646 1,125 5,196 23,434 23,434

Total liabilities 152,560 5,921 58,076 34,113 250,670 238,946

At 31 December 2017 Gross undiscounted cash flows

Carrying value

Less than3 months

3 to 12 months

1 year to3 years

Over 3 years Total

Placements from financial institutions 79,740 - - - 79,740 79,401

Bank financing 42,692 46,123 13,281 35,058 137,154 127,037

Other liabilities 15,043 682 - 4,773 20,498 20,498



27 RISK MANAGEMENT (continued)


The table below summarises the maturity profile of the Group’s assets and liabilities based on expected periods to cash conversion from the consolidated statement of financial position date:

2018 Up to3 months

3 to 6months

6 monthsto 1 year

1 to 3years

3 to 5years

5 to 10years

10 to 20years

No fixedMaturity Total

AssetsCash and bank balances 15,407 - - - - - - - 15,407Placements with financial institutions 89,818 - - - - - - - 89,818Financing assets 1,471 9,415 2,954 79,418 24,168 - - - 117,426Ijarah assets - - - - - - - 75,100 75,100Investment securities - 5,052 12,069 265,248 46,968 91,863 - 7,537 428,737Equity accounted investees - - - - - - - 29,341 29,341Other assets 4,894 470 18,858 3,459 23,760 - - 639 52,080Property and equipment - - - - - - - 17,857 17,857Total assets 111,590 14,937 33,881 348,125 94,896 91,863 - 130,474 825,766

LiabilitiesPlacements from financial institutions 92,884 - - - - - - - 92,884Bank financing 42,380 1,191 2,407 50,264 10,915 15,471 - - 122,628Other liabilities 16,467 141 505 1,125 5,196 - - - 23,434Total liabilities 151,731 1,332 2,912 51,389 16,111 15,471 - - 238,946Net gap (40,141) 13,605 30,969 296,736 78,785 76,392 - 130,474 586,820Cumulative net gap (40,141) (26,536) 4,433 301,169 379,954 456,346 456,346 586,820 -

Commitments 1,147 163 5,631 10,263 1 - - - 17,205

2017 Up to3 months

3 to 6months

6 monthsto 1 year

1 to 3years

3 to 5years

5 to 10years

10 to 20years

No fixedMaturity Total

AssetsCash and bank balances 12,100 - - - - - - - 12,100Placements with financial institutions 84,953 - - - - - - - 84,953Financing assets 2,999 - 51,157 35,000 11,313 31,013 - - 131,482Ijarah assets - - - - - - - 78,700 78,700Investment securities - - - 194,379 102,283 110,907 - - 407,569Equity accounted investees - - - - - - - 44,240 44,240Other assets 1,496 - 15,965 1,412 7 16,904 - 622 36,406Property and equipment - - - - - - - 11,842 11,842Assets held for sale - - - - - - - 119,645 119,645Total assets 101,548 - 67,122 230,791 113,603 158,824 - 255,049 926,937

LiabilitiesPlacements from financial institutions 79,401 - - - - - - - 79,401Bank financing 42,186 1,147 42,419 9,742 10,511 21,032 - - 127,037Other liabilities 15,043 188 494 - 4,773 - - - 20,498Total liabilities 136,630 1,335 42,913 9,742 15,284 21,032 - - 226,936Net gap (35,082) (1,335) 24,209 221,049 98,319 137,792 - 255,049 700,001Cumulative net gap (35,082) (36,417) (12,208) 208,841 307,160 444,952 444,952 700,001 -

Commitments 159 81 84 244 939 - - - 1,507



(b) Credit riskCredit risk is the risk that a counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial loss. The Group is exposed to credit risk principally from placements with financial institutions, financing assets (commodity murabaha), investments in quoted sukuk and other receivables.

The Bank attempts to reduce credit risk by assigning limits for each counterparty, monitoring credit exposure, and continuously assessing the creditworthiness of counterparties.

For risk management reporting purposes, the Bank considers and consolidates all elements of credit risk exposure (such as individual obligor default risk, country risk and sector risk).

i) Credit Risk MeasurementThe estimation of credit exposure for risk management purposes is complex and requires the use of models, as the exposure varies with changes in market conditions, expected cash flows and the passage of time. The assessment of credit risk of a portfolio of assets entails further estimations as to the likelihood of defaults occurring, of the associated loss ratios and of default correlations between counterparties. The Group measures credit risk using Probability of Default (PD), Exposure at Default (EAD) and Loss Given Default (LGD) as required under FAS 30.

ii) Credit risk gradesThe Group uses internal credit risk grading that reflect its assessment of the probability of default of individual counterparties. The Group uses internal rating models tailored to the various categories of counterparty. The credit grades are calibrated such that the

risk of default increases exponentially at each higher risk grade.

iii) Credit quality assessmentsPursuant to the adoption of FAS 30, the Bank has mapped its internal credit rating scale to Moody’s (or any other external rating) rating scale, the table below provides an analysis of counterparties by rating grades and credit quality of the Bank’s credit risk,

based on Moody’s ratings (or their equivalent) as at 31 December 2018.

Rating gradeFinancing

AssetsInvestment in Sukuk

Placements with financial

institutions

Other assets / receivables

AAA to AA- 41,889 42,078 - 24,612

A+ to A- - 45,239 16,306 -

BBB to BBB- - 30,162 - -

BB+ to B- 75,537 136,333 73,512 19,328

Unrated - - - -

Total 117,426 253,812 89,818 43,940

Management of credit riskCredit risk is assessed and approved on an individual basis for each counterparty at least once a year as a part of the internal risk review process. As at 31 December 2018, all credit exposures were appropriately approved by the relevant authority level. The credit risk assessment conducted as a part of the internal risk review process included rating each exposure using industry specific rating models which consider key risk factors to assign the internal credit rating. The Bank assigns rating-based credit limits for all counterparty banks and financial institutions with whom it places short-term funds. All placements during the year were with financial institutions having internal and / or external credit ratings mapped to the “Standard” credit category of the Bank. The Bank also conducts detailed




assessments of the debt investment opportunities to evaluate the commercial viability of the investments. Sukuk investments during the year were with obligors who were either banks, sovereigns or sovereign owned companies, subsidiaries, and were rated externally and/or internally. The Bank monitors the creditworthiness of the counterparties and the performance of the exposures with regard to timeliness of payments and other credit conditions on an ongoing basis. Annual and interim credit reviews are conducted to check the credit quality and impairment assessment requirement, if any.

In addition to external ratings, the Bank assigns an internal rating which is mapped to the lowest external rating, in cases where the entity is rated by more than one credit rating agency. The external ratings used for this purpose are those issued by S&P, Moody’s, Fitch and Capital Intelligence. In case the entity is not rated externally the Bank assigns an internal rating based on an in house credit assessment.

Maximum exposure to credit riskThe table below shows the gross maximum exposure to credit risk for the components of the consolidated statement of financial position. The figures represent gross exposure net of any provision for impairment, without taking into account any collateral held and other credit mitigates.

2018 2017

Balances with banks 15,394 12,088Placements with financial institutions 89,818 84,953Financing assets 117,426 131,482Investment in Sukuk 253,812 269,252Other assets/receivables 46,156 30,863

522,606 528,638

Credit quality per class of financial assetsThe table below analyses the Group’s maximum credit exposure where the credit quality is reflected by external credit ratings (S&P, Moody’s, Fitch and Capital Intelligence) of the counterparties where relevant:

2018 Bankbalances


institutions

Financing assets

Investmentsecurities

Otherassets Total

Prime to High grade: AAA - AA 2,523 - 41,889 61,233 24,612 130,257Medium grade: A - BBB 2,506 16,306 - 106,295 - 125,107Non-investment / speculative: BB - B 10,365 73,512 75,537 86,284 19,328 265,026Unrated - - - - 2,216 2,216

15,394 89,818 117,426 253,812 46,156 522,606

2017 Bankbalances

Placements with financial institutions

Financing assets

Investmentsecurities

Otherassets Total

Prime to High grade: AAA - AA - 20,009 - 9,140 - 29,149Medium grade: A - BBB 1,674 3,003 - 121,097 - 125,774Non-investment / speculative: BB - B 170 18,509 - 139,015 - 157,694 Unrated 10,244 43,432 131,482 - 30,863 216,021

12,088 84,953 131,482 269,252 30,863 528,638

Concentration risk is the risk of insufficient diversification of the portfolio resulting in an adverse impact of an external event on portfolio constituents sensitive to similar risk factors. Concentration risk primarily arises due to name and sector concentration, including geographic concentration.

The Bank has established internal limits on the maximum permissible exposures to sectors for managing sector concentration.



In respect of geographical concentration, the Bank has defined limits for each country / geography which is based on the lowest among the available ratings by S&P, Moody’s, Fitch and Capital Intelligence. The Bank also closely monitors political risk arising from events in each country of exposure.

Movement in ECLThe following table shows reconciliation from the opening to the closing balances of the carrying amounts of financial assets at amortized cost and the loss allowance:

Stage 1USD’000

Stage 2USD’000

Stage 3 USD’000

Total USD’000

Gross exposure subject to ECL at 31 December - Financing assets 79,715 40,030 28,615 148,360 - Investment in Sukuk 120,183 135,238 - 255,421 - Placements with financial institutions 89,866 - - 89,866- Other assets 39,569 4,430 - 43,999

329,333 179,698 28,615 537,646Opening Balance ECL (Day 1 impact) - as at 1 January 2018 - Financing assets 1,417 - 30,011 31,428- Investment in Sukuk 746 77 - 823

- Placements with financial institutions 13 - - 13- Other assets 243 - - 243

2,419 77 30,011 32,507Net transfer between stages - Financing assets (582) 582 (1,396) (1,396)- Investment in Sukuk - - - -

- Placements with financial institutions - - - -- Other assets - - - -

(582) 582 (1,396) (1,396)Charge for the year (net) - Financing assets 875 27 - 902- Investment in Sukuk (266) 1,052 - 786

- Placements with financial institutions 35 - - 35- Other assets (243) 59 - (184)

401 1,138 - 1,539Closing Balance ECL - as at 31 December 2018 - Financing assets 1,710 609 28,615 30,934- Investment in Sukuk 480 1,129 - 1,609

- Placements with financial institutions 48 - - 48- Other assets - 59 - 59

2,238 1,797 28,615 32,650Net exposure at 31 December 2018 - Financing assets 78,005 39,421 - 117,426- Investment in Sukuk 119,703 134,109 - 253,812

- Placements with financial institutions 89,818 - - 89,818- Other assets 39,569 4,371 - 43,940

327,095 177,901 - 504,996

Cash and bank balances did not have a significant ECL impact.




(c) Market Risk

Market risk is the risk that changes in market risk factors, such as currency risk, profit rates and equity prices will affect the Group’s income or the value of its holdings of financial instruments.

The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing the return on risk.

Currency riskCurrency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Group’s major exposure is in GCC currencies, which are primarily pegged to the US Dollars. The Bank monitors this exposure on an ongoing basis.

The Group had the following net exposures denominated in foreign currencies (other than GCC currencies) as of 31 December:

2018 2017

Turkish Lira 35,201 -

The table below indicates the impact of reasonably possible changes in exchange rates on the Group’s net foreign currency exposure. The impact has been calculated using the net foreign currency exposure as at the consolidated statement of financial position date and calculating the impact of the changes in exchange rates:

Change in exchange rates (+/-)%

Net income and equity (+/-)USD 000’s

Turkish Lira 10 3,520

Equity price riskThe Group’s listed and unlisted equity securities are susceptible to market price risk arising from uncertainties about future values of the investment securities. The Group manages equity price risk through diversification and by placing limits on individual and total equity instruments. Reports on the equity portfolio are submitted to the Group’s senior management on a regular basis. The Group’s Board of Directors reviews and approves all equity investment decisions.

As at 31 December 2018, the Group had investments in quoted equities on the Bahrain Bourse. The table below reflects the sensitivity of the investment by considering the impact of reasonably expected changes in the capitalisation rate.

Change inexchange rates (+/-)

%

2018 Effect on net equity (+/-)

USD 000’s

2017 Effecton net equity (+/-)

USD 000’s

Stock Exchange 10 3,565 3,778

The Group also has unquoted investments carried at cost where the impact of changes in equity prices will only be reflected when the investment is sold or deemed to be impaired, when the consolidated statement of income will be impacted, or when a third party transaction in the investment gives a reliable indication of fair value which will be reflected in equity.



Profit rate risk in the banking bookProfit rate risk in the banking book is the exposure of the Group’s financial condition to adverse movements in profit rates. Changes in profit rates affect the Group’s earnings by changing its net profit income and the level of other profit rate sensitive income and expenses. Changes in profit rates also affect the underlying value of the Group’s assets and liabilities because of the absolute or economic value changes of future cash flows due to the change in profit rates. Profit rate risk primarily arises on account of reprising risk, yield curve risk, basis risk and optionality risk.

The Group’s profit rate sensitive assets are mainly commodity murabaha and wakala placed with financial institutions and investments in Sukuk. The Group has exposures to fixed rate Sukuk. Fixed rate sukuk represent 100% of the total Sukuk portfolio as at 31 December 2018 (2017: 100%). The rate sensitive liabilities comprise of due to financial institutions, murabaha financing, term financing and general financing.

The Group has minimal exposure to reprising and yield curve risks. Reprising risk arises on account of mismatch in profit rate fixation periods between assets and liabilities. Yield curve risk arises due to shift in the yield curve resulting in changes in the economic value of cashflows. Exposure to basis risk is not material and although the basis risk exposure is monitored, the Bank does not consider this item of profit rate risk in the internal risk calculations. The rate sensitive assets mainly comprise commodity murabaha and wakala contracts and Sukuk. Part of these assets are funded by rate sensitive liabilities in the form of murabaha and wakala payable. The short-term nature of these items and high degree of correlation between profits earned and paid on them minimises the basis risk. The remaining rate sensitive assets (Sukuks and residual inter-bank placements) are funded by equity. The Group is not exposed to optionality risk arising due to embedded options in rate sensitive assets or liabilities.

The Bank monitors the timing difference in the re-pricing of the Bank’s rate-sensitive assets and liabilities and resulting impact of any parallel shift in the yield curve on the expected net profit income for up to one year, and the value of equity and overall economic value of equity considering the changes in net profit income and the value of equity. The profit rate risk is managed by monitoring the sensitivity of the Bank’s financial assets and liabilities to various standard and non-standard profit rate scenarios. A standard 200 basis point (bp) profit rate shock by way of parallel shift in all yield curves is considered on a monthly basis to ensure that the resulting impact on the economic value of equity is within the limit prescribed by the Basel Committee on Banking Supervision.

Profit rate risk is managed principally through monitoring profit rate gaps and by having pre-approved limits for re-pricing bands. A summary of the Group’s profit rate gap position is as follows:

2018Up to 3months

3 to 6months

6 monthsto 1 year

1 to 3years

Over3 years Total

Assets

Placements with financial institutions 89,818 - - - - 89,818

Financing assets 1,471 9,415 2,954 79,418 24,168 117,426

Investment securities - 5,052 12,069 97,860 138,831 253,812

Other assets 863 - - - 23,749 24,612

Total assets 92,152 14,467 15,023 177,278 186,748 485,668

Liabilities

Placements from financial institutions 92,884 - - - - 92,884

Bank financing 42,380 1,191 2,407 50,264 26,386 122,628


Profit rate sensitivity gap (43,112) 13,276 12,616 127,014 160,362 270,156




2017Up to 3Months

3 to 6months

6 monthsto 1 year

1 to 3years

Over3 years

Total

Assets


Financing assets 2,999 - 51,157 35,000 42,326 131,482

Investment securities - - - 56,062 213,190 269,252

Other assets 863 - - - 16,904 17,767

Total assets 88,815 - 51,157 91,062 272,420 503,454

Liabilities


Bank financing 42,186 1,147 42,419 9,742 31,543 127,037


Profit rate sensitivity gap (32,772) (1,147) 8,738 81,320 240,877 297,016

The sensitivity of the Group’s consolidated statement of income to a 200 basis points parallel increase (decrease) in market profit rates (assuming no asymmetrical movement in yield curves and a constant statement of financial position), would be an increase of profit by USD 5,403 thousand (2017: USD 5,940 thousand).

Overall, profit rate risk positions are managed by Treasury, which uses commodity murabaha and wakala contracts with/ from financial institutions to manage the overall position arising from the Group’s activities.

The average effective profit rates on the financial assets and liabilities as at 31 December were as follows:

2018 2017

Placements with financial institutions 1.97% 1.11%

Financing assets 7.78% 7.80%

Investment securities 4.92% 5.66%

Placements from financial institutions 2.10% 1.40%

Bank financing 4.08% 3.90%

(d) Operational risk

Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or loss resulting from external events. Operational risk also includes Shari’a non-compliance risk but excludes strategic and reputational risks.

The Bank manages operational risk through appropriate controls, instituting segregation of duties and internal checks and balances. In addition the Bank is committed to the training of its staff. The Bank has conducted Risk and Control Self Assessment of Operational Risk in all departments to identify the Key Risk Indicators as a part of the overall Operational Risk Management framework. The Bank monitors the key risks and operational risk losses on an ongoing basis and regularly reports the position to the senior management and the Board. The Bank has also implemented an IT enabled operational risk system to automate the operational risk processes namely risk and controls assessment, loss data collection and key risk indicator calculation.



Capital managementThe Central Bank of Bahrain (CBB) sets and monitors capital requirements for the Bank as a whole. In implementing current capital requirements CBB requires the Bank to maintain a prescribed ratio of total capital to total risk-weighted assets. Capital adequacy regulations of CBB is based on the principles of Basel III of the IFSB guidelines.

The Bank’s regulatory capital is analysed into two tiers:

• Tier 1 capital: includes CET1 and AT1. CET1 comprise of ordinary share capital that meet the classification as common shares for regulatory purposes, disclosed

reserves including share premium, general reserves, legal / statutory reserve, common shares issued by consolidated banking subsidiaries of the Bank and held by third parties, retained earnings after regulatory adjustments relating to goodwill and items that are included in equity which are treated differently for capital adequacy purposes.

AT1 comprise of instruments that meet the criteria for inclusion in AT1, instruments issued by consolidated banking subsidiaries of the Bank held by third parties which meet the criteria of AT1, and regulatory adjustments applied in calculation of AT1.

• Tier 2 capital, includes instruments issued by the Bank that meet the criteria for inclusion in Tier 2 capital, stock surplus resulting from issue of Tier 2 capital, instruments issued by consolidated banking subsidiaries of the Bank held by third parties that meet the criteria for inclusion in Tier 2, general provisions held against unidentified losses on financing and qualify for inclusion within Tier 2, asset revaluation reserve from revaluation of fixed assets and instruments purposes and regulatory adjustments applied in the calculation of Tier 2 capital.

The Capital components are subject to various limits as per the CA modules. These regulatory adjustments required for certain items such as goodwill on mortgage service right, deferred tax assets, cash flow hedge reserve, gain on sale of related securitization transactions, defined benefit pension fund assets and liabilities, investment in own shares and reciprocal cross holdings in the capital of Banking and financial entities, investment in the capital of Banking and financial entities that are outside the scope of regulatory consolidation and where the bank does not own more than 10% of issued common shares capital of the entity and significant investments in the capital of banking and financial entities that are outside the scope of regulatory consolidation.

The regulatory adjustments are subject to limits prescribed by the CA module. These deductions would be effective in a phased manner through transitional arrangements from 2015 to 2018. The regulations prescribe higher risk weights for certain exposures that exceeds materiality thresholds.

As at 31 December the Bank has made regulatory adjustments of USD Nil (2017: USD Nil). In line with the requirements of CA module. Banking operations are categorised as either trading book or banking book, and risk-weighted assets are determined according to specified requirements that seek to reflect the varying levels of risk attached to assets and off-balance sheet exposures.

The Bank’s policy is to maintain a strong capital base and meet the minimum capital requirements imposed by the regulator (CBB), so as to maintain investor, creditor and market confidence and to sustain future development of the business. The impact of the level of capital on shareholders’ return is also recognised and the Bank recognises the need to maintain a balance between the returns and security afforded by a sound capital position.

The allocation of capital between specific operations and activities is primarily driven by regulatory requirements. The Bank’s capital management policy seeks to optimize returns within the internally defined risk tolerances while satisfying all the regulatory requirements.




The Bank ensures that the regulatory capital adequacy requirements are met and complied with at all times. In addition, the Bank has developed a comprehensive ICAAP.

The Bank’s regulator (CBB) sets and monitors capital requirements for the Bank. CBB requires the Bank to maintain the ratio of eligible capital base to the total risk-weighted assets at a minimum of 12.5%.

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

31 December

2018

31 December

2017

Total risk weighted assets 835,474 1,263,343

Tier 1 capital:

- CET1 prior to regulatory adjustments 539,623 678,036

- Less: regulatory adjustments - -

CET1 after regulatory adjustments 539,623 678,036

AT1 - -

Tier 2 capital 4,035 2,496

Total regulatory capital 543,658 680,532

Total regulatory capital expressed as a percentage of total risk weighted assets 65% 54%

Liquidity coverage ratio 382% 419%

Net stable funding ratio 116% 116%

Leverage ratio 71% 79%

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

28 FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value is the amount for which an asset could be exchanged or a liability settled between knowledgeable and willing parties in an arm’s length transaction.

a) Fair value of financial instrumentsThe fair value of the Group’s investments in sukuk held at amortised cost of USD 255,421 thousand as of 31 December 2018 (2017: USD 271,748 thousand) was USD 240,194 thousand (2017: USD 269,369 thousand).

For murabaha financing, the profit rate is in line with the current market rates for similar facilities, hence, after considering the prepayment risk it is expected that the current value would not be materially different to its fair value. Other than equity investments carried at cost less impairment of USD 139,280 thousand (2017: USD 995 thousand), the Group’s other financial instruments are not significantly different from the carrying values.



Fair value hierarchy The table below analyses the financial instruments carried at fair value, by valuation method. The different levels have been defined as follows:

• Level 1: quoted prices (unadjusted) in active markets for identical assets and liabilities.• Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e.as

prices) or indirectly (i.e. derived from prices).• Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

The following table shows an analysis of financial instruments recorded at fair value by level of the fair value hierarchy:

2018 Level 1 Level 2 Level 3 Total

Fair value through equity

Quoted equity securities 35,645 - - 35,645

2017 Level 1 Level 2 Level 3 Total

Fair value through equity

Quoted equity securities 37,780 - - 37,780

29 SOCIAL RESPONSIBILITY

The Bank discharges its social responsibilities through donations to charitable causes and organisations.

30 COMPARATIVES

Certain prior year amounts have been regrouped to conform to current year presentation. Such regrouping did not affect previously

reported profit for the year or total equity.


28 FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)


OBA MAKARNA is Turkey’s largest and leading pasta producer and is the 2nd largest in the world of pasta in terms of production capacity


RISK AND CAPITAL MANAGEMENT


TABLE OF CONTENTS Page

89

1 EXECUTIVE SUMMARY 89

2 Introduction 89

2.1 Pillar I 89

2.2 Pillar II 89

2.3 Pillar III 90

3 COMPOSITION OF CAPITAL DISCLOSURE 90

3.1 Step 1 and 2: Statement of financial position under the regulatory scope of consolidation and reconciliation of published financial statements to regulatory 90

3.2 Step 3: Composition of Capital Common Template (transition) as at 31 December 2018 91

3.3 Disclosure template for main feature of regulatory capital instruments 94

4 OVERALL RISK MANAGEMENT 95

4.1 Risk management strategy 95

4.2 Risk management framework 96

4.3 Risk types 96

5 CAPITAL STRUCTURE, CAPITAL MANAGEMENT AND CAPITAL ADEQUACY 96

5.1 Capital and group structure 96

5.2 Capital management 97

5.2.1 Regulatory capital requirement and capital adequacy 97

5.2.2 Internal capital adequacy assessment process 97

5.3 Exposures exceeding materiality thresholds 98

5.4 Financial performance and position 98

6 CREDIT AND INVESTMENT RISK 98

6.1 Credit and investment risk management 98

6.1.1 Credit and investment exposures and risk-weighted assets 101

6.2 Capital requirements for credit and investment risk 101

6.2.1 Credit and investment exposures and risk-weighted assets 102

6.2.2 Capital requirements by type of Islamic financing contract 103

6.2.3 Gross funded and unfunded exposure 103

6.2.4 Equity investments held in the banking book 104

6.3 Concentration of credit risk 105

6.3.1 Industry and sector-wise distribution as at 31 December 2018: 105

6.3.2 Geographic distribution as at 31 December 2018: 106

6.3.3 Credit risk mitigation 106

6.4 Counterparty credit risk 107

6.5 Settlement risk 107

6.6 Earnings prohibited by Shari’a 107

6.7 Transactions with related parties 107

7 MARKET RISK 107

7.1 Capital requirements for market risk 108

7.2 Foreign currency translation risk 108

8 OPERATIONAL RISK 108

8.1 Operational risk management 108

8.2 Legal compliance and litigation 108

8.3 Shari’a compliance 108

8.4 Capital requirements for operational risk 108

9 LIQUIDITY RISK 109

9.1 Maturity profile 110

10 PROFIT RATE RISK IN THE BANKING BOOK 110

11 REPUTATIONAL RISK 112

12 STRATEGIC RISK 112

13 OTHER RISKS 112

14 REGULATORY COMPLIANCE 112

15 BASEL III RATIOS 113

| RISK AND CAPITAL MANAGEMENT DISCLOSURES |


1 EXECUTIVE SUMMARYFirst Energy Bank B.S.C. (c) (the “Bank”) is a closed shareholding company incorporated in the Kingdom of Bahrain on 23 June 2008, under Commercial Registration No. 69089. The Bank operates under Islamic Wholesale Banks license issued by the Central Bank of Bahrain (the “CBB”). The Bank’s registered office is at Building 1459, Road 4626, Block 346, Manama, Kingdom of Bahrain.

The principal activities of the Bank and its subsidiaries (the “Group”) are mainly Shari’a compliant investment advisory services, participation in project development, joint ventures, mergers and acquisitions and the purchase of assets and asset portfolios related to the energy sector. The Bank is regulated by the CBB and supervised by a Shari’a Supervisory Board for compliance with the Shari’a rules and principles.

The CBB Basel II guidelines became effective on 1 January 2008 as the common framework for the implementation of Basel II capital adequacy framework for Banks incorporated in the Kingdom of Bahrain. The disclosures in this report have been prepared in accordance with the CBB requirements outlined in the Public Disclosure Module (“PD”), CBB Rule Book - Volume II for Islamic Banks. The requirements of the section follow the requirements of Basel II - Pillar III and the Islamic Financial Services Board’s (IFSB) recommended disclosures for Islamic banks.

This report only contains qualitative and quantitative information on risk components and capital adequacy.

2 INTRODUCTIONBasel II based framework provides a more risk sensitive approach for the assessment of risk and the calculation of regulatory capital i.e. the minimum capital that a bank is required to maintain. The framework intends to strengthen the risk management practices and processes within financial institutions. The Bank has accordingly taken steps to comply with these requirements.

The CBB’s capital management framework, consistent with the Basel II accord, is built on three pillars:

• Pillar I: calculation of the risk weighted amounts and regulatory capital requirement.

• Pillar II: the supervisory review process, including the Internal Capital Adequacy Assessment Process.

• Pillar III: rules for the disclosure of risk management and capital adequacy information.

2.1 Pillar I

Pillar I prescribes the basis for the calculation of the regulatory capital adequacy ratio. It defines the regulatory minimum capital requirements for each bank to cover credit risk, market risk and operational risk inherent in its business model. It also defines the methodology for measurement of these risks and the various elements of qualifying capital. The capital adequacy ratio is calculated by dividing the regulatory capital base by the total Risk Weighted Assets (RWAs).

The resultant ratio is to be maintained above a predetermined and communicated level. Effective from 1 January 2015 CBB has introduced Basel III framework for calculation of capital adequacy ratio. According to the new framework, banks are required to maintain a minimum consolidated total capital adequacy ratio of 12.5% and a solo total capital adequacy ratio of 8%.

Under the CBB’s Basel II capital adequacy framework, the RWAs are calculated by multiplying book values of the assets by standard weights (prescribed by the CBB) for each risk category (as per External Credit Assessment Institutions) within each asset category.

The table below summarizes the Pillar I risks and the approaches used by the Bank for calculating the RWAs in accordance with the CBB’s Basel II capital adequacy framework.

Risk Type Approach used by the Bank

Credit risk Standardised Approach

Market risk Standardised Approach

Operational risk Basic Indicator Approach

2.2 Pillar II

Pillar II deals with the Supervisory Review and Evaluation Process (SREP). It also recommends banks to establish the Internal Capital Adequacy Assessment Process (ICAAP) for assessing the adequacy of the available capital to cover all material risks (including those covered under Pillar I).

Under the CBB’s Pillar II guidelines, each bank is to be individually assessed by the CBB for prescribing the bank-specific minimum capital adequacy ratio. Pending finalization of the assessment process, all banks incorporated in Bahrain are required to continue to maintain the existing 12.5% and 8% minimum capital adequacy ratios on consolidated and solo basis respectively.

The ICAAP incorporates a review and evaluation of risk management and capital relative to the risks to which the Bank is exposed. The ICAAP framework was approved by the Board. The ICAAP framework includes identification, assessment, measurement, monitoring and reporting of all material risks and maintaining appropriate level of capital in line with the Bank’s overall risk profile and business plan. The ICAAP is also supplemented by developing stress scenarios and assessing the impact of such scenarios on the portfolios, risk profile, capital adequacy of the Bank and ensuring the adequacy of capital in such instances.


2.3 Pillar IIIPillar III of the CBB’s Basel II framework prescribes the coverage, depth, timelines and medium of communicating the information by the institution on its governance structure, risk profile, risk management framework and the capital adequacy position. The disclosures comprise detailed qualitative and quantitative information. The purpose of the Pillar III disclosure requirements is to complement the first two Pillars and enabling stakeholders and market participants in getting an insight in the institution’s risk appetite and risk exposures and enable detailed assessment and comparability between different banks.

3 COMPOSITION OF CAPITAL DISCLOSURE

3.1 Step 1 and 2: Statement of financial position under the regulatory scope of consolidation and

reconciliation of published financial statements to regulatory reporting as at 31 December 2018.

CategoriesStatement of financial

position as in published financial statements

Statement of financial position as per regulatory

reportingReference

Cash and bank balances 15,407 13,304 A

Placements with financial institutions 89,866 89,866

Less: Expected credit losses (Stages 1 & 2) (48) - C

Net placements with financial institutions 89,818 89,866

Financing assets 119,745 144,358 A

Less: Expected credit losses (Stages 1 & 2) (2,319) - C

Net financing assets 117,426 144,358

Ijarah assets 75,100 - A

Investment securities 430,346 476,783 B

Less: Expected credit losses (Stages 1 & 2) (1,609) - C

Net investment securities 428,737 476,783

Equity accounted investees 29,341 - A

Other assets 52,139 17,032 A

Less: Expected credit losses (Stages 1 & 2) (59) - C

Net other assets 52,080 17,032

Property and equipment 17,857 772 A

Total assets 825,766 742,115

Placements from financial institutions 92,884 93,014 A

Bank financing 122,628 81,290 A

Other liabilities 23,434 24,153 A

Total liabilities 238,946 198,457

Share capital 600,000 600,000

Treasury shares (7,261) (7,261)

Total share capital 592,739 592,739 D

Statutory reserve 13,034 12,968 E

Investments fair value reserve (2,011) (2,011) F

Foreign exchange translation reserve (2,171) - A

Current interim cumulative net income / loss - -

Accumulated losses (61,968) (64,073) G

Non-controlling interests 47,197 - A

Expected credit losses (Stages 1 & 2) eligible for Tier 2 capital - 4,035 C

Total equity 586,820 543,658

Total liabilities and equity 825,766 742,115

2- Introduction (continued)


The table below shows the total assets and shareholders’ equity of the Bank’s subsidiaries as at 31 December 2018 which are unconsolidated

for capital adequacy calculation purposes. For principal activities of these subsidiaries refer Note 4 a. of the consolidated financial statements as

at 31 December 2018.

Entity name Total Assets Total Shareholders’ equity

Al Dur Energy Investment Company 113,309 113,291

North Africa Investment Company 133 (117)

First Energy Oman 28,941 28,884

FEB-Novus Aircraft Holding Company 78,310 36,394

FEB Aqar S.P.C. 17,231 13,836

Total 237,924 192,288

3.2 Step 3: Composition of Capital Common Template (transition) as at 31 December 2018

Composition of Capital and mapping to regulatory reportsComponent

of regulatory capital

Amounts subject to Pre-2015

Treatment

Reference letters of the statement

of financial position under the regulatory

scope of consolidation

from step 2

Common Equity Tier 1 capital: instruments and reserves

1Directly issued qualifying common share capital (and equivalent for non-joint stock companies) plus related stock surplus

592,739 - D

2 Retained earnings (64,073) - G

3 Accumulated other comprehensive income (and other reserves) 10,957 - E+F

4 Not applicable - -

5 Common share capital issued by subsidiaries and held by third parties (amount allowed in group CET1) - -

6 Common Equity Tier 1 capital before regulatory adjustments 539,623 -

Common Equity Tier 1 capital: regulatory adjustments

7 Prudential valuation adjustments - -

8 Goodwill (net of related tax liability) - -

9 Other intangibles other than mortgage-servicing rights (net of related tax liability) - -

10Deferred tax assets that rely on future profitability excluding those arising from temporary differences (net of related tax liability)

- -

11 Cash-flow hedge reserve - -

12 Shortfall of provisions to expected losses - -

13 Securitisation gain on sale (as set out in paragraph 562 of Basel II framework) - -

14 Not applicable. - -

15 Defined-benefit pension fund net assets - -

16 Investments in own shares (if not already netted off paid-in capital on reported balance sheet) - -

17 Reciprocal cross-holdings in common equity - -

18Investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions, where the bank does not own more than 10% of the issued share capital (amount above 10% threshold)

- -





Treatment




from step 2

19Significant investments in the common stock of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions (amount above 10% threshold)

- -

20 Mortgage servicing rights (amount above 10% threshold) - -

21Deferred tax assets arising from temporary differences (amount above 10% threshold, net of related tax liability)

- -

22 Amount exceeding the 15% threshold - -

23 of which: significant investments of financials - -

24 of which: mortgage servicing rights - -

25 of which: deferred tax assets arising from temporary differences - -

26 National specific regulatory adjustments - -

REGULATORY ADJUSTMENTS APPLIED TO COMMON EQUITY TIER 1 IN RESPECT OF AMOUNTS SUBJECT TO PRE-2015 TREATMENT -

-

27Regulatory adjustments applied to Common Equity Tier 1 due to insufficient Additional Tier 1 and Tier 2 to cover deductions

- -

28 Total regulatory adjustments to Common equity Tier 1- -

29 Common Equity Tier 1 capital (CET1) 539,623 -

Additional Tier 1 capital: instruments

30 Directly issued qualifying Additional Tier 1 instruments plus related stock surplus

31 of which: classified as equity under applicable accounting standards - -

32 of which: classified as liabilities under applicable accounting standards - -

33 Directly issued capital instruments subject to phase out from Additional Tier 1

34Additional Tier 1 instruments (and CET1 instruments not included in row 5) issued by subsidiaries and held by third parties (amount allowed in group AT1)

- -

35 of which: instruments issued by subsidiaries subject to phase out - -

36 Additional Tier 1 capital before regulatory adjustments - -

Additional Tier 1 capital: regulatory adjustments

37 Investments in own Additional Tier 1 instruments - -

38 Reciprocal cross-holdings in Additional Tier 1 instruments - -

39Investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions, where the bank does not own more than 10% of the issued common share capital of the entity (amount above 10% threshold)

- -

40Significant investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation (net of eligible short positions)

- -


REGULATORY ADJUSTMENTS APPLIED TO ADDITIONAL TIER 1 IN RESPECT OF AMOUNTS SUBJECT TO PRE-2015 TREATMENT

- -

42 Regulatory adjustments applied to Additional Tier 1 due to insufficient Tier 2 to cover deductions - -

43 Total regulatory adjustments to Additional Tier 1 capital - -

3- Composition of Capital Disclosure (continued)





Treatment




from step 2

44 Additional Tier 1 capital (AT1) - -

45 Tier 1 capital (T1 = CET1 + AT1) 539,623 -

Tier 2 capital: instruments and provisions

46 Directly issued qualifying Tier 2 instruments plus related stock surplus - -

47 Directly issued capital instruments subject to phase out from Tier 2 - -

48Tier 2 instruments (and CET1 and AT1 instruments not included in rows 5 or 34) issued by subsidiaries and held by third parties (amount allowed in group Tier 2)

- -

49 of which: instruments issued by subsidiaries subject to phase out - -

50 Expected credit losses (Stages 1 & 2) 4,035 - C

51 Tier 2 capital before regulatory adjustments 4,035 -

Tier 2 capital: regulatory adjustments

52 Investments in own Tier 2 instruments - -

53 Reciprocal cross-holdings in Tier 2 instruments - -

54Investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions, where the bank does not own more than 10% of the issued common share capital of the entity (amount above the 10% threshold)

- -

55Significant investments in the capital banking, financial and insurance entities that are outside the scope of regulatory consolidation (net of eligible short positions)

- -


REGULATORY ADJUSTMENTS APPLIED TO TIER 2 IN RESPECT OF AMOUNTS SUBJECT TO PRE-2015 TREATMENT

- -

57 Total regulatory adjustments to Tier 2 capital - -

58 Tier 2 capital (T2) 4,035 -

59 Total capital (TC = T1 + T2) 543,658 -

RISK WEIGHTED ASSETS IN RESPECT OF AMOUNTS SUBJECT TO PRE-2015 TREATMENT

60 Total risk weighted assets 835,474 -

Capital ratios

61 Common Equity Tier 1 (as a percentage of risk weighted assets) 64.59% -

62 Tier 1 (as a percentage of risk weighted assets) 64.59% -

63 Total capital (as a percentage of risk weighted assets) 65.07% -

64Institution specific buffer requirement (minimum CET1 requirement plus capital conservation buffer plus countercyclical buffer requirements plus D-SIB buffer requirement expressed as a percentage of risk weighted assets)

9.00% -

65 of which: capital conservation buffer requirement 2.50% -

66 of which: bank specific countercyclical buffer requirement (N/A) N/A -

67 of which: D-SIB buffer requirement (N/A) N/A -

68 Common Equity Tier 1 available to meet buffers (as a percentage of risk weighted assets) 64.59% -





Treatment




from step 2

National minima including CCB (if different from Basel 3)

69 CBB Common Equity Tier 1 minimum ratio 9.00% -

70 CBB Tier 1 minimum ratio 10.50% -

71 CBB total capital minimum ratio 12.50% -

Amounts below the thresholds for deduction (before risk weighting)

72 Non-significant investments in the capital of other financial entities 35,645 - B

73 Significant investments in the common stock of financial entities - -

74 Mortgage servicing rights (net of related tax liability) - -

75 Deferred tax assets arising from temporary differences (net of related tax liability) - -

Applicable caps on the inclusion of provisions in Tier 2

76Expected credit losses (ECL) Stages 1 & 2 eligible for inclusion in Tier 2 in respect of exposures subject to standardised approach (prior to application of cap)

4,035 - C

77 Cap on inclusion of ECL in Tier 2 capital (1.25% of credit risk-weighted assets) 10,443 -

78 N/A - -

79 N/A - -

Capital instruments subject to phase-out arrangements (only applicable between 1 Jan 2020 and 1 Jan 2024)

80 Current cap on CET1 instruments subject to phase out arrangements - -

81 Amount excluded from CET1 due to cap (excess over cap after redemptions and maturities) - -

82 Current cap on AT1 instruments subject to phase out arrangements - -

83 Amount excluded from AT1 due to cap (excess over cap after redemptions and maturities) - -

84 Current cap on T2 instruments subject to phase out arrangements - -

85 Amount excluded from T2 due to cap (excess over cap after redemptions and maturities) - -

3.3 Disclosure template for main feature of regulatory capital instruments

Key features of all regulatory capital instruments

1. Issuer First Energy Bank B.S.C. (c)

2. Unique identifier (e.g. CUSIP, ISIN or Bloomberg identifier for private placement) FEB

3. Governing law(s) of the instrumentAll applicable laws and regulations of the Kingdom of Bahrain

Regulatory treatment

4. Transitional CBB rules Common Equity Tier 1

5. Post-transitional CBB rules Common Equity Tier 1

6. Eligible at solo/group/group & solo Solo and group

7. Instrument type (types to be specified by each jurisdiction) Equity shares

8. Amount recognised in regulatory capital (Currency in mil, as of most recent reporting date) USD 592.7 Million

3- Composition of Capital Disclosure (continued)


Key features of all regulatory capital instruments

9. Par value of instrument USD 1

10. Accounting classification Shareholders’ equity

11. Original date of issuance 23 June 2008

12. Perpetual or dated Perpetual

13. Original maturity date No maturity

14. Issuer call subject to prior supervisory approval No

15. Optional call date, contingent call dates and redemption amount Not applicable

16. Subsequent call dates, if applicable Not applicable

Coupons / dividends

17. Fixed or floating dividend/coupon Dividend as decided by the Shareholders

18. Coupon rate and any related index Not applicable

19. Existence of a dividend stopper Not applicable

20. Fully discretionary, partially discretionary or mandatory Full discretionary

21. Existence of step up or other incentive to redeem No

22. Noncumulative or cumulative Non-cumulative

23. Convertible or non-convertible

24. If convertible, conversion trigger (s) Not applicable

25. If convertible, fully or partially Not applicable

26. If convertible, conversion rate Not applicable

27. If convertible, mandatory or optional conversion Not applicable

28. If convertible, specify instrument type convertible into Not applicable

29. If convertible, specify issuer of instrument it converts into Not applicable

30. Write-down feature

31. If write-down, write-down trigger(s) Not applicable

32. If write-down, full or partial Not applicable

33. If write-down, permanent or temporary Not applicable

34. If temporary write-down, description of write-up mechanism Not applicable

35. Position in subordination hierarchy in liquidation (specify instrument type immediately senior to instrument) Not applicable

36. Non-compliant transitioned features No

37. If yes, specify non-compliant features Not applicable

4 OVERALL RISK MANAGEMENT

4.1 Risk management strategyThe Bank perceives good risk management capabilities to be the foundation for delivering superior results on a risk-adjusted basis to customers, investors and shareholders. The Bank will continue to adopt international best practices of risk management, superior corporate governance and the highest level of market discipline.

The primary objectives of the risk management strategy of the Bank are to:

• Manage risks inherent in the Bank’s activities in line with the risk appetite of the Bank;

• Strengthen the Bank’s risk management practices to reflect industry best practices; and

• Align internal capital requirements with risk materiality.


The risk appetite is articulated through the limit structures for individual risks. These limits are based on the Bank’s business plans and guided by

the regulatory requirements and guidelines. By defining the risk appetite, the Bank links its individual risks to its strategy. The risk appetite defines

the level of risk that the Bank is prepared to take in order to achieve its objectives. The Bank reviews and realigns its risk appetite as per the

evolving business plan of the Bank with changing economic and market scenarios. The Bank also assesses its tolerance for specific risk categories

and its strategy to manage these risks. The risk appetite outlines the Bank’s risk exposures and defines its tolerance levels towards accepting or

rejecting these risks. Tolerance levels are reflected in the limits defined by the Bank for each risk area.

4.2 Risk management framework

The Bank’s Board of Directors through its Audit and Risk Committee (a subcommittee of the Board of Directors) has the responsibility

for ensuring the establishment and effective implementation of an integrated risk management framework for the Bank. Further, the Risk

Management Department (RMD) is empowered to independently identify and assess risks that may arise from the Bank’s investing, financing

and operating activities; as well as recommend directly to the Management Risk Committee (MRC) any prevention and mitigation measures

as it deems fit. In addition, the Internal Audit function, which is independent of both operations and the Bank’s investments units, reviews

the risk management process.

4.3 Risk types

As an Islamic investment bank dealing predominantly in alternative assets, the Bank is exposed to various risks in the normal course of its business

and these risks include:

a. Credit and investment risk including concentration risk, counterparty credit risk and settlement risk

b. Market risk

c. Operational risk

d. Liquidity risk

e. Profit rate risk in banking book

f. Reputational risk

g. Strategic risk

h. Other risks

The details on exposure of the Bank to these risks and the management framework for them are discussed in the following sections 6-14 of this

document.

5 CAPITAL STRUCTURE, CAPITAL MANAGEMENT AND CAPITAL ADEQUACY

The Bank has been in compliance with the minimum capital adequacy ratios prescribed by the CBB during the year ended 31 December 2018.

The Bank’s Tier 1 and total capital adequacy ratios comply with the minimum capital requirements under the CBB’s Basel III framework.

Amounts disclosed in the tables related to the calculation of the capital adequacy ratio in line with the Prudential Information Report (PIR) comprise only

the Bank excluding all subsidiaries which are commercial entities.

The Bank’s total risk weighted exposures as at 31 December 2018 amounted to USD 835,474 thousand. Credit risk accounted for 87.12%, operational risk

8.67%, and market risk 4.21% of the total risk weighted assets. Total regulatory capital was USD 543,658 thousand.

As at 31 December 2018, Bank’s total capital adequacy ratio was 65.07%.

5.1 Capital and group structure

The authorized share capital of the Bank is 2 billion shares of USD 1 each. The paid up capital of the Bank is USD 600 million divided into 600

million shares of USD 1 each.

4- Overall Risk Management (continued)


The table below shows the treatment by the Bank of its subsidiaries and associates for capital computation purposes.

Entity name%age of holding


Entity classification as per CA Module

Treatment for accounting purposes

Treatment for regulatory purposes

Al Dur Energy Investment Company (ADEIC) - Subsidiary

58.83% Cayman Islands Commercial entity Consolidated Risk weighted

North Africa Investment Company - Subsidiary

100% Kingdom of Bahrain

Commercial entity Consolidated Risk weighted

First Energy Oman - Subsidiary 100% Cayman Islands Commercial entity Consolidated Risk weighted

FEB-Novus Aircraft Holding Company - Subsidiary

98.50% Commonwealth of the Bahamas


FEB Aqar S.P.C. - Subsidiary 100% Kingdom of Bahrain


FEB Capital Limited - Subsidiary 100% United Arab Emirates

Other financial entity

Consolidated Consolidated

5.2 Capital managementThe Bank’s policy is to maintain a strong capital base and meet the minimum capital requirements imposed by the regulator (CBB), so as to maintain investor, creditor and market confidence and to sustain future development of the business. The impact of the level of capital on shareholders’ return is also recognised and the Bank recognises the need to maintain a balance between the returns and security afforded by a sound capital position.

The allocation of capital between specific operations and activities is primarily driven by regulatory requirements. The Bank’s capital management policy seeks to optimize returns within the internally defined risk tolerances while satisfying all the regulatory requirements.

The Bank ensures that the regulatory capital adequacy requirements are met and complied with at all times.

5.2.1 Regulatory capital requirement and capital adequacy

The Bank’s regulator (CBB) sets and monitors capital requirements for the Bank. CBB requires the Bank to maintain the ratio of total capital

base to the total risk weighted assets at a minimum of 12.5%.

The Bank has a financial institution subsidiary, FEB Capital Limited, which is being consolidated for regulatory purposes. The Bank does not

have interest in insurance entities.

The Bank has been in compliance with the minimum capital adequacy ratios prescribed by the CBB during the year ended 31 December

2018.

The following table summarises the regulatory capital requirements for credit risk, market risk and operational risk as at 31 December 2018:

USD 000’s

Risk weighted exposureRisk weighted

exposure% of Total risk

weighted assets

Credit & Investment risk 727,827 87.12%

Operational risk 72,446 8.67%

Market risk 35,201 4.21%

Total 835,474 100.00%

5.2.2 Internal capital adequacy assessment processIn line with the guidelines provided under the Pillar II of the Basel II Accord, the Bank has established the ICAAP to augment the regulatory capital adequacy. The ICAAP considers the adequacy of capital with respect to the internal capital adequacy ratio target and includes other material risks apart from those prescribed under the regulatory Pillar I guidelines, stressed scenarios and growth in business based


on the business plan. The Bank segregates all material risks into measurable and non-measurable risks and has established measurement methodologies for all material risks and quantifies the capital requirement for them. Currently, the Bank maintains an additional capital buffer of 2% for the non-measurable risks. As of 31 December 2018, the internal capital adequacy ratio was above the internal target.

5.3 Exposures exceeding materiality thresholdsThe Bank is required to carry out capital adjustments (deduction) for its exposure to significant investments in capital of banking and financial entities subject to certain materiality thresholds as defined in the Capital Adequacy Module (“CA Module”) of the CBB Rule Book.

Further, the exposures in excess of limits prescribed by Credit Risk Management Module (“CM Module”) (single obligor limit of 15% of total capital, aggregate limit of 25% and 60% of total capital for connected and unconnected counterparty exposures, respectively) are subject to risk weight of 800%.

As of 31 December 2018, the Bank has no exposure exceeding regulatory limits.

5.4 Financial performance and positionThe following table summarises the financial performance ratios as at 31 December:

Ratio 2018 2017 2016 2015 2014

Return on Average Equity 1.91% 2.93% -13.02% -39.68% 1.40%

Return on Average Assets 1.40% 2.01% -8.88% -31.14% 1.18%

Net income margin 30.41% 41.80% -646.22% -5,419.66% 18.44%

Operating cost to Income 70.35% 40.46% 120.37% 347.49% 18.51%

The Bank reported consolidated net profit of USD 12.3 million (2017: USD 20.1 million) for the year ended 31 December 2018.

During the year, the Bank acquired 15% indirect investment in Oba Makarnacilik Sanayi ve Ticaret A.S. (“Oba Makarna”), a Turkish incorporated company engaged in pasta production.

Further, as part of a capital reduction plan approved by the Bank’s shareholders in an extra-ordinary general meeting on 6 December 2018, the shareholders approved the distribution of the two oil rigs in MENAdrill Investment Company to a company owned by Trust for the beneficial ownership of the Bank’s shareholders.

In addition, the Bank has reclassified its equity accounted investees (Adcan and Medisal) to unquoted equity securities on loss of significant influence and recognized loss on dilution of USD 6.1 million in the consolidated income statement for the year ended 31 December 2018.

6 CREDIT AND INVESTMENT RISK

6.1 Credit and investment risk managementThe credit and investment risk exposures faced by the Bank are by way of its short-term liquidity related placements with other financial institutions, financing facilities provided to third parties and associates, and in respect of investments in projects, sukuk, listed and unlisted equities. The investment related funding exposures arise in the ordinary course of its investment banking activities and are generally transacted without collateral or other credit risk mitigants, however the majority of such investments are asset based.

RMD is responsible for conducting independent risk review and analysis for all credit and investment applications received from Investment Banking, Financing, Capital Markets and Treasury Departments. It is also responsible for the ongoing review of the credit worthiness of existing clients through the process of periodic credit reviews, annual or more frequently, if required. RMD is also responsible for monitoring all approved limits, and reporting breaches, if any to the MRC, Board Audit and Risk Committee and the Board as appropriate.

RMD reviews every Application received from the respective business initiator (LOB) and prepares an independent comprehensive Risk Analysis with recommendations. The Application and the Risk Analysis are submitted to the MRC for approval, if within their approval authority, or for review and further submission to the appropriate approval authority.

Following approval and draw down, the credit exposures are monitored on an ongoing basis. These include keeping track of counterparties’ compliance with credit terms, identifying early signs of irregularity, conducting periodic valuation of collateral, if applicable, and monitoring timely repayments. All the exposures are reviewed at least annually, and interim reviews are conducted in case of any adverse developments.

RMD assesses the creditworthiness of the counterparties using rating models as a part of the review for new facilities as well as existing facilities

5- Capital Structure, Capital Management and Capital Adequacy (continued)


undergoing the annual review process. The Bank has implemented industry specific rating models based on key factors relevant to the industry. These models are used to rate exposures to financial institutions and also for counterparties in various other industries except in case of counterparties rated externally by at least two rating agencies recognised by the CBB. The Bank rates the exposures on a scale of 1 to 10 mapped to the following categories; 1 is mapped to Prime, 2 to High grade, 3 to Upper medium grade, 4 to Lower medium grade, 5 to Non-investment grade speculative, 6 to Highly speculative, 7 to Substantial risk, 8 to Extremely speculative, 9 to In default with little prospect of recovery and 10 to In default with no prospect of recovery (Loss).

The Bank maintains a strong focus on identification of signs of deterioration in the credit worthiness of counterparties and performance of investments in order to take preventive measures before an existing facility becomes substandard / doubtful or deteriorates in value.

RMD also monitors credit and investment risk exposures against established limits on a daily basis. RMD alerts the concerned business line and the MRC whenever a limit is breached. RMD also produces periodic exposure and risk reports for the Board as well as reports required for regulatory reporting and public disclosure as required under the Pillar III guidelines.

The credit categorisation of the Bank including problem credit categories is aligned with the regulatory categorisation. All credit exposures which are regular and performing (as the contract requires) and for which there is no reason to suspect that the creditor’s financial condition or collateral adequacy has depreciated in any way will be categorised as Standard or Current.

There are three categories of problem credit exposure classification indicating increasing degrees of potential risk of loss in addition to watch-listing.

Substandard

An obligation or part of an obligation that is inadequately protracted by the current financial condition of the obligor or the collateral pledged.

The normal repayment of principal and profit or settlement at maturity may be or has been jeopardised or collateral coverage is clearly

deficient. No loss is foreseen but a protracted work-out is a possibility.

Substandard accounts may exhibit one or all of the following characteristics:

• Principal or profit repayment is past due for more than 90 days;

• Cash-flow is not sufficient to meet currently maturing financing facility;

• Accounts which carry more than a normal degree of risk due to the absence of updated or satisfactory financial information or inadequate

collateral documentation.

Doubtful

An obligation or part of an obligation where there is a high probability of some loss, the extent which cannot be currently quantified.

Doubtful accounts may exhibit one or all of the following characteristics:

• Principal or profit repayment is past due for more than 180 days;

• Collection in full on the basis of currently existing facts, conditions and values is highly questionable and improbable;

• Likelihood of loss is high but decision to classify as Loss has been deferred till an exact decision is determined.

Loss

An obligation regarded as uncollectable and where loss and consequent write-off is imminent. Once written off these amounts are no longer

shown as exposure although eventual recovery may still be a possibility.

Loss accounts may exhibit one or both of the following characteristics:

• Principal or profit repayment is past due for more than a year;

• Immediate circumstances indicate that an asset is uncollectable.

The Bank regularly assesses its credit portfolio for any indicators of impairment on a periodic basis and would consider provision for impairment

on specific credit exposures.

The Bank has adopted FAS 30 as mandated by the CBB on 1 January 2018, which resulted in changes in accounting policies for the impairment

and credit losses on various Islamic financing, debt investment and certain other assets, and provisions against onerous commitments.


Key changes in the Bank’s accounting policy for impairment of financial assets are listed below:

The Bank applies a three-stage approach to measuring expected credit losses (ECL) on financial assets carried at amortised cost and debt

instruments classified as FVOCI. Assets migrate through the following three stages based on the change in credit quality since initial recognition.

Stage 1: 12 months ECL

Stage 1 includes financial assets on initial recognition and that do not have a significant increase in credit risk since initial recognition or that

have low credit risk (i. Local sovereign that carry (zero) credit weight in accordance with capital adequacy instructions of the CBB ii. High quality

externally rated debt instruments. iii. Other financial assets which the group may classify as such after obtaining CBB’s no objection) at the

reporting date. For these assets, 12-month ECL are recognised and interest is calculated on the gross carrying amount of the asset (that is,

without deduction for credit allowance). 12-month ECL is the expected credit losses that result from default events that are possible within 12

months after the reporting date. It is not the expected cash shortfalls over the 12-month period but the entire credit loss on an asset weighted

by the probability that the loss will occur in the next 12-months.

Stage 2: Lifetime ECL - not credit impaired

Stage 2 includes financial assets that have had a significant increase in credit risk since initial recognition but that do not have objective evidence

of impairment. For these assets, lifetime ECL are recognised, but interest is still calculated on the gross carrying amount of the asset. Lifetime ECL

are the expected credit losses that result from all possible default events over the expected life of the financial instrument.

Expected credit losses are the weighted average credit losses with the life-time probability of default (‘PD’) as the weight.

Stage 3: Lifetime ECL - credit impaired

Stage 3 includes financial assets that have objective evidence of impairment at the reporting date in accordance with the indicators specified

in the CBB’s instructions. For these assets, lifetime ECL is recognised and treated with the interests calculated on them, according to CBB’s

instructions.

When determining whether the risk of default on a financial instrument has increased significantly since initial recognition, the Bank considers

reasonable and supportable information that is relevant and available without undue cost or effort. This includes both quantitative and qualitative

information and analysis, based on the Bank’s historical experience and expert credit assessment and including forward-looking information.

The following attributes in a facility will be considered for default:

• Facilities in which any instalment or partial instalment is outstanding for a period of more than 90 days.

• All facilities put on non-accrual status (i.e. profit is suspended)

• All facilities designated as non –performing

• All facilities for which specific provisions are held by the Bank

• Imminent probability of foreclosure of facility or repossession of collateral due to insolvency or other financial difficulty which may indicate

inability to recover exposure

• Customers against which the Bank has taken legal proceedings

• Insufficiency of sources for repaying the full value of the principal and profit as well as the insufficient collaterals and evidences of the

customer’s solvency or deterioration in the financial position, issuing of judicial verdicts against them, confiscating their properties, any other

evidences of insolvency.

In determining whether credit risk has increased significantly since initial recognition, the following criteria are considered:

I. Two notches down for rating from X to Y or one notch down for ratings from Y to Z

II. Facilities restructured during previous twelve months

III. Facilities overdue by 30 days as at the reporting date

Credit risk grades are defined using qualitative and quantitative factors that are indicative of risk of default. These factors vary depending on the

nature of the exposure and the type of borrower. Exposures are subject to ongoing monitoring, which may result in an exposure being moved to

a moved to a different credit risk grade.

6- Credit and Investment Risk (continued)


The Bank employs statistical models to analyse the data collected and generate estimates of PD of exposures and how these are expected to

change as a result of the passage of time. This analysis includes the identification and calibration of relationships between changes in default rates

and changes in key macro-economic factors, across various geographies in which the Bank has taken exposures.

Credit Risk Measurement

The estimation of credit exposure for risk management purposes is complex and requires the use of models, as the exposure varies with changes

in market conditions, expected cash flows and the passage of time. The assessment of credit risk of a portfolio of assets entails further estimations

as to the likelihood of defaults occurring, of the associated loss ratios and of default correlations between counterparties. The Group measures

credit risk using Probability of Default (PD), Exposure at Default (EAD) and Loss Given Default (LGD). This is similar to the approach used for the

purposes of measuring Expected Credit Loss (ECL) under FAS 30.

The Bank uses internal credit risk gradings that reflect its assessment of the probability of default of individual counterparties. The Bank uses

internal rating models tailored to the various categories of counterparty. The credit grades are calibrated such that the risk of default increases

exponentially at each higher risk grade.

As of 31 December 2018, total ECL provision amounted to USD 4,305 thousand for the Bank’s financing assets, investment debt securities,

placements with financial institutions and other assets.

The Bank did not have any exposure to highly leveraged and other high risk counterparties as at 31 December 2018. (As per the CBB Highly

Leveraged Institutions (HLIs) are defined as having the following characteristics: i- subject to little or no regulatory oversight; ii- generally subject

to very limited disclosure requirements and are not subject to rating by credit reference agencies; and iii- often take on significant leverage, where

leverage is the ratio between risk, expressed in some common denominator, and capital). The Bank also did not have any renegotiated exposures

as at 31 December 2018.

As on the reporting date, the Bank does not have any obligation with respect to recourse transaction (i.e. where the asset has been sold, but the

bank retains responsibility for repayment if the original counterparty defaults or fails to fulfil obligations). The Bank has also not imposed any

penalties on customers for default during the year.

6.1.1 Credit and investment exposures and risk-weighted assets

The following table shows the movement in provision for impairment during the year.

Provision for losses Specific provision against ECL provision

Financing facilities Investments Others

At 1 January 2018 30,011 121,151 286,464 2,496

Charges during the year - - - 1,539

Reversals during the year (1,396) (23,353) (277,130) -

At 31 December 2018 28,615 97,798 9,334 4,035

1 The reversal on financing facilities pertains to foreign exchange loss due to revaluation.2 The reversal on investments is on account of sale of quoted equity investments.3 Others reversals pertains to distribution of assets to shareholders and reversal of impairment on land.

6.2 Capital requirements for credit and investment risk

The Bank uses the Standardised Approach under the Basel II framework for measuring the regulatory capital requirement for its credit risk. The

Bank utilizes ratings from External Credit Assessment Institution (ECAI) recognised by the CBB (S&P, Moody’s, Fitch, and Capital Intelligence)

for its regulatory credit risk capital charge calculations.


The table below analyses the Group’s maximum credit exposure where the credit quality is reflected by external credit ratings (S&P, Moody’s,

Fitch and Capital Intelligence) of the counterparties where relevant:

USD 000’s

2018Bank

balances


institutionsFinancing

assetsInvestment

securitiesOtherassets Total

Prime to High grade: AAA - AA 2,523 - 41,889 61,233 24,612 130,257

Medium grade: A – BBB 2,506 16,306 - 106,295 - 125,107

Non-investment / speculative: BB – B 10,365 73,512 75,537 86,284 19,328 265,026

Unrated - - - - 2,216 2,216

15,394 89,818 117,426 253,812 46,156 522,606

Pursuant to the adoption of FAS 30, the Bank has mapped its internal credit rating scale to external ratings of approved agencies whenever available as follows:

External rating agenciesInternal ratings

1 to 7- 8 9 10

S & P AAA to CCC- CC C D

Moody’s Aaa to Caa3 Ca C -

CI AAA to C- Regulatory supervision (RS) Selective default (SD) D

Fitch AAA to CCC CC CRestricted default or

default

6.2.1 Credit and investment exposures and risk-weighted assets The following table summarises the components of credit risk as computed for regulatory capital adequacy purposes, net of the relevant deductions as at 31 December 2018:

USD 000’s

Asset categories for credit risk Credit exposuresAverage risk

weights

Credit risk weighted

assets

Capital requirements@

12.5%

Cash items 13 0.00% - -

Total claims on sovereigns:

Sukuk - Bahrain and other GCC 76,607 0.00% - -

Sukuk - Other sovereigns on non-relevant

currencies 3,974 100.00% 3,974 497

Total claims on PSEs:

PSEs treated as sovereigns 16,198 48.31% 7,826 978

Total claims on banks:

Standard risk weights 86,776 72.72% 63,106 7,888



Asset categories for credit risk Credit exposuresAverage risk

weights

Credit risk weighted

assets

Capital requirements@

12.5%

Short-term claims on locally incorporated banks 82,497 20.00% 16,499 2,062

Claims on corporate 189,110 80.25% 151,761 18,970

Investment in securities:

Equity investments 207,230 141.29% 292,787 36,598

Holdings of real estate:

All other holdings of real estate 64,906 200.00% 129,812 16,227

Investment in unlisted real estate companies 13,835 400.00% 55,342 6,918

Other assets 6,720 100.00% 6,720 840

Total 747,866 97.32% 727,827 90,978

6.2.2 Capital requirements by type of Islamic financing contract

The following table summarises the components of credit risk by type of Islamic financing contract as at 31 December 2018:

USD 000’s

Asset categories for credit risk

Credit exposures

(after deduction)

Average risk weights

Credit risk weighted assets

Capital requirements

@ 12.5%

Financing assets 119,745 134.04% 160,501 20,063

Placements with financial institutions:- Commodity murabaha- Wakala

14,01575,851

39.28%22.89%

5,50517,360

6882,170

Sukuk

- Murabaha 750 0.00% - -

- Al Wakala Bil Istithmar 107,914 66.42% 71,680 8,960

- Ijarah 146,757 37.12% 54,469 6,809

Total 465,032 66.56% 309,515 38,690


6.2.3 Gross funded and unfunded exposure

The following table summarises the total gross credit exposure and average gross exposure over the year ended 31 December 2018 broken down by major types of credit exposures into funded and unfunded:

USD 000’s

Asset categories Average exposures* Gross exposure

Cash and bank balances 10,830 15,407

Placements with financial institutions 95,257 89,818

Financing assets 126,779 117,426

Ijarah assets 76,450 75,100

Investment securities 410,799 428,737

Equity accounted investees 45,077 29,341

Other assets 43,620 52,080

Property and equipment 13,404 17,857

Assets held for sale 89,734 -

Total funded exposures 911,950 825,766

Financing commitment 4,337 15,916

Investment commitment 375 -

Operating lease commitments 1,176 1,289

Forward treasury commitments 550 -

Total unfunded exposures 6,438 17,205

* Represents quarterly average balances for the year ended 31 December 2018.

6.2.4 Equity investments held in the banking book All the equity investments of the Bank other than the investments in subsidiaries consolidated for capital computation purposes are held in the banking book and are subject to credit risk weighting under the capital adequacy framework.

The following table summarises the breakdown of the Bank’s equity investments by objectives and market type as at 31 December 2018:

USD 000’s

Objective Type Gross ExposureAverage risk

weight %Risk weighted

ExposureCapital Requirement

@ 12.5%

Strategic Quoted 36,115 100% 36,115 4,514

Strategic * Unquoted 184,949 169% 312,012 39,002

* This includes investment in subsidiaries and equity accounted investees which are risk weighted for purposes of PIR.

The following table summarises the cumulative realised and unrealised gains or losses for the year ended 31 December 2018:

USD 000’s

Total

Total realised gains arising from sales during the year 5,454

Total unrealised gains / (losses) arising from fair valuing equities recognized in the consolidated statement

of financial position but not through consolidated statement of income (2,011)

Unrealised gains / (losses) included in Tier 1 capital (2,011)

The Bank does not have any exposure to equity based financing structure.



6.3 Concentration of credit risk Concentration risk is the risk of insufficient diversification of the portfolio resulting in adverse impact of an external event on portfolio constituents sensitive to similar risk factors. Concentration risk in portfolios primarily arises due to name, product, sector and geographic concentration.

The Bank adheres to the regulatory guidelines in respect of large exposures and connected and related counterparty exposures to effectively manage the name concentration. Any excess above the said limit has been reported to the CBB and treated in accordance with the regulatory guidelines in respect of capital deduction for such exposures. In addition, the Bank has established internal limits on the maximum permissible exposure to business lines / activities, sectors and countries for managing concentration risk. The portfolio is segregated by business line / activities, geography and industry segments. The activities are segregated as Treasury, Islamic Financing and Investments and the Bank has internal limits for these activities. In addition to the business line limits, the Bank segregates all its exposures by country, sets rating-based country limits and monitors the exposures with respect to these limits. Additionally, the Bank has established HHI limits for Name, Country, and Sector concentrations. RMD monitors adherence to the limits on an ongoing basis.

6.3.1 Industry and sector-wise distribution as at 31 December 2018:The following table summarises the distribution of exposures by industry broken down by major types of credit exposures as at 31 December 2018:

USD 000’s

Asset categoriesBanks and

financialinstitutions

Energy,power and

infrastructureOthers Total

Cash and bank balances 15,407 - - 15,407

Placements with financial institutions (gross) 89,866 - - 89,866

Less: Expected credit losses (Stages 1 & 2) (48) - - (48)

Placements with financial institutions (net) 89,818 - - 89,818

Financing assets (gross) - 31,356 117,004 148,360

Less: Expected credit losses (Stages 1 & 2) - - (2,319) (2,319)

Less: Specific provision - (28,615) - (28,615)

Financing assets (net) - 2,741 114,685 117,426

Ijarah assets - - 75,100 75,100

Investment securities (gross) 143,578 99,541 187,227 430,346

Less: Expected credit losses (Stages 1 & 2) (1,043) - (566) (1,609)

Investment securities (net) 142,535 99,541 186,661 428,737

Equity accounted investees (gross) 40,033 58,993 - 99,026

Less: Specific provision (10,692) (58,993) - (69,685)

Equity accounted investees (net) 29,341 - - 29,341

Other assets (gross) 10 13,091 39,038 52,139

Less: Expected credit losses (Stages 1 & 2) - - (59) (59)

Other assets (net) 10 13,091 38,979 52,080

Property and equipment (gross) - - 27,191 27,191

Less: Specific provision - - (9,334) (9,334)

Property and equipment (net) - - 17,857 17,857

Total funded exposures 277,111 115,373 433,282 825,766

Financing commitments - - 15,916 15,916

Operating lease commitments - - 1,289 1,289

Total unfunded exposures - - 17,205 17,205


6.3.2 Geographic distribution as at 31 December 2018:The following table summarises the geographic distribution of exposures broken down into significant areas by major type of credit exposures as at 31 December 2018:

USD 000’s

Asset categories MENA Europe Americas Asia Total


Placements with financial institutions (gross) 89,866 - - - 89,866

Less: Expected credit losses (Stages 1 & 2) (48) - - - (48)

Placements with financial institutions (net) 89,818 - - - 89,818

Financing assets (gross) 117,004 28,615 2,741 - 148,360

Less: Expected credit losses (Stages 1 & 2) (2,319) - - - (2,319)

Less: Specific provision - (28,615) - - (28,615)

Financing assets (net) 114,685 - 2,741 - 117,426

Ijarah assets - - - 75,100 75,100

Investment securities (gross) 322,863 77,017 - 30,466 430,346

Less: Expected credit losses (Stages 1 & 2) (208) (1,097) - (304) (1,609)

Investment securities (net) 322,655 75,920 - 30,162 428,737

Equity accounted investees (gross) 99,026 - - - 99,026

Less: Specific provision (69,685) - - - (69,685)

Equity accounted investees (net) 29,341 - - - 29,341

Other assets (gross) 48,101 3,000 - 1,038 52,139

Less: Expected credit losses (Stages 1 & 2) (59) - - - (59)

Other assets (net) 48,042 3,000 - 1,038 52,080

Property and equipment (gross) 27,191 - - - 27,191

Less: Specific provision (9,334) - - - (9,334)

Property and equipment (net) 17,857 - - - 17,857

Total funded exposure 635,300 81,425 2,741 106,300 825,766

Financing commitments 15,916 - - - 15,916

Operating lease commitments 1,289 - - - 1,289

Total unfunded exposures 17,205 - - - 17,205

The Group allocates exposures to a particular geographical area based on the risk domicile concept, which could be either the location of

the asset or the location of the counterparty.

6.3.3 Credit risk mitigationThe Bank uses a variety of techniques to mitigate credit risks to which it is exposed to. As a policy, obtaining adequate mitigants will not be the reason for granting credit to counterparties lacking creditworthiness. Only eligible collaterals as per the CBB guidelines and approved by the Bank’s Shari’a Supervisory Committee are considered for reducing the capital requirement though the Bank can continue to take non-eligible collaterals to safeguard its exposure. The Bank has clear policies on the type of assets that can be accepted as collateral security and the mode of valuation of these assets. In general, all eligible collaterals are valued at least once a year.

The position of collateral cover for all credit exposures categorized on the basis of the type of security as on 31 December 2018 is given in the table below:



USD 000’s

Collateral type Type of Islamic financing contract Collateral value Gross exposure % of coverage

Listed securities * Murabaha financing 1,087 28,615 3.80%

Equipment and Bank balances ** Murabaha financing 6,355 2,999 211.90%

Total assets*** Murabaha financing 33,002 12,252 269.36%

* These listed securities are pledged with the Security Trustee as collateral for the Bank for the murabaha financing facility extended. As a policy, the Bank applies 25% haircut for this type of collateral plus 8% for foreign currency mismatch.The Bank also uses on-balance sheet netting as a credit risk mitigant technique if:(1) It has a well-founded legal basis for concluding that the netting or offsetting agreement is enforceable in each relevant jurisdiction regardless of whether the counterparty is insolvent or bankrupt;(2) It is able at any time to determine those assets and liabilities with the same counterparty that are subject to the netting agreement.

As of 31 December 2018, USD 29 million (100%) provision for impairment has been provided against the murabaha financing facility of USD 29 million.

** The collateral value is based on the net book value of the pledged assets. *** This relates to a restructured facility amounting to USD 12 million net of ECL provision of USD 0.27 million as of 31 Dec 2018

6.4 Counterparty credit risk Counterparty Credit Risk (CCR) is the risk that the counterparty to a transaction could default before the final settlement of the transaction’s cash flows. An economic loss would occur if the transaction or portfolio of transactions with the counterparty has a positive economic value at the time of settlement and the counterparty is in default. The Bank does not have positions in OTC derivatives, Securities Financing Transactions (SFTs), Margin Lending Transactions or any other long settlement transactions which would expose it to counterparty credit risk.

6.5 Settlement riskSettlement risk is the risk that a counterparty does not deliver on its obligation or its value in cash as per agreement when the trade was entered though the other counterparty or counterparties have already delivered their obligation as agreed. The Bank is exposed to settlement risk occasionally on account of the foreign exchange spot transaction entered into for business and operational requirements. The Bank has established limit structure based on the credit quality (assessed based on credit rating) for settlement exposures and the limits are monitored on an ongoing basis.

The Bank uses an IT enabled limit monitoring system for online monitoring of credit and settlement limits of counterparties. The system assists in setting and monitoring of limits by tenor, facilities, counterparties, group of related counterparties, products, sectors and countries. The system also enables monitoring limit end dates and review dates for facilities.

6.6 Earnings prohibited by Shari’aDuring the year, the Bank did not have any earnings from non-Islamic transactions that are prohibited by Shari’a.

6.7 Transactions with related parties Related party transactions were on an arm’s length basis. For the significant balances and transactions with related parties, refer Note 23 of the consolidated financial statements as at 31 December 2018.

7 MARKET RISKMarket risk is the risk that changes in market prices, such as profit rates, equity prices, foreign exchange rates and commodity prices will affect the Bank’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing the return on risk.

The Bank does not maintain a trading portfolio in commodities, equities or sukuk. Therefore, there is no trading book market risk exposure.

As of 31 December 2018, the Bank’s major source of market risk was from foreign exchange open position which resulted in a capital charge of USD 2,816.


7.1 Capital requirements for market risk The Bank follows standardised approach for measuring the regulatory capital required for market risk. Foreign exchange risk charge is computed based on 8% of overall net open foreign currency position of the Bank and is risk weighted by multiplying with a multiple of 12.5 times.

USD 000’s

Risk weighted exposure (RWE)

Capital requirement @ 12.5%

Maximum RWE during the year

Minimum RWE during the year

Foreign exchange risk 35,201 4,400 35,201 -

7.2 Foreign Currency Translation RiskAs of 31 December 2018, the Bank has no investment in foreign operations exposed to foreign currency translation risk.

8 OPERATIONAL RISKOperational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or loss resulting from external events. Operational risk also includes Legal and Shari’a non-compliance risk but excludes strategic and reputational risks.

Currently, the Bank conducts its business from a principal office in Bahrain in accordance to well-defined processes and procedures. These processes and procedures include a number of internal controls, including segregation of duties to avoid conflict of interest and other internal checks, which are designed to prevent either inadvertent staff errors or malfeasance prior to the release of a transaction. The critical data from the SWIFT system used by Operations Department is replicated online. Data for other key departments namely Human Resources, Treasury and Financial Control is replicated at the end of the working day on the disaster recovery site. The Bank has successfully tested three scenarios namely accessing the live systems in the head office in Bahrain Financial Harbour remotely from the business continuity center, accessing data in the disaster recovery site from head office and lastly accessing systems remotely from laptops using Citrix clients with 2 way authentication.

8.1 Operational risk managementThe Bank has developed and implemented all relevant operational risk management policies and procedures. Risk and Control Self Assessment (RCSA) for Operational Risk is periodically conducted in coordination with all departments to evaluate (and where required, mitigate) operational risk exposures. The last round of RCSAs was conducted during the third quarter of 2018 using a well-recognized industry standard operational risk system. Loss data collection and KRI reporting are also performed through the system. The Bank monitors the key risks and operational risk losses on an ongoing basis and regularly reports the position to senior management and the Board.

8.2 Legal compliance and litigationAs on the reporting date, the Bank had no material legal contingencies including pending legal actions. The Bank’s legal risks are mitigated through legal counsel review of transactions and documentation, as appropriate. Where possible, the Bank uses standard formats for transaction documentation.

8.3 Shari’a compliance

The Shari’a Supervisory Board (SSB) is entrusted with the duty of directing, reviewing and supervising the activities of the Bank in order to ensure

that they are in compliance with the rules and principles of Islamic Shari’a. The Bank has a dedicated internal Shari’a reviewer, who performs

ongoing review of the compliance with the fatwas and rulings of the SSB on products and processes and also reviews compliance with the

requirements of the Shari’a standards prescribed by AAOIFI. The SSB reviews and approves all products and services before launching and offering

to the customers and also conducts periodic reviews of the transactions of the Bank. An annual audit report is issued by the SSB confirming the

Bank’s compliance with Shari’a rules and principles.

During the year, no non-Shari’a compliant income was generated and no instances of Shari’a violations were identified.

8.4 Capital requirements for operational risk

The Bank follows the Basic Indicator Approach to evaluate operational risk charge in accordance with the CBB capital adequacy module for

Islamic banks. According to this approach, Bank’s average gross income for past three financial years is multiplied by a fixed coefficient alpha of

15% set by CBB and a multiple of 12.5x is used to arrive at the risk weighted assets that are subject to capital charge. The operational risk capital

requirement is based on the average of the actual gross income for the last three years.

7- Market Risk (continued)


USD 000’s

Average gross income Risk weighted exposure Capital charge at 12.5%

Operational risk 38,638 72,446 9,056

9 LIQUIDITY RISK

Liquidity risk is the risk that the Bank will encounter difficulty in meeting obligations arising from its financial liabilities. The Bank’s approach for managing

liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when they become due, under both normal and

stressed conditions, without incurring unacceptable losses or risking damage to the Bank’s reputation.

The following are the key liquidity ratios which reflect the liquidity position of the Bank as of 31 December 2018:

Liquidity Ratios 31 December 2018

Cash and Cash equivalents 1 / Total Assets 12.74%

Liquid Assets 2 / Total Assets 47.80%

Short-term Assets / Short-term Liabilities 1.03x

Inter Bank Placements / Inter Bank Borrowings 0.97x

Gearing Ratio (Total Liabilities / Total Equity) 0.41x

1 Cash and cash equivalents include cash and balances with banks, amounts placements with financial institutions and investments in short-term

government sukuk with original maturities of 90 days or less.

2 Liquid assets include cash and cash equivalents, investments in sukuk and quoted equity investments.


9.1 Maturity profileMaturity analyses of assets and liabilities based on residual contractual / expected maturity as of 31 December 2018 as per audited consolidated financial statements is as follows:

USD 000’s

Up to 3 months

3 to 6 months

6 months to 1 year

1 to 3 years

3 to 5 years

5 to 10 years

*No fixed maturity Total

Assets

Cash and bank balances 15,407 - - - - - - 15,407


institutions 89,818 - - - - - - 89,818

Financing assets 1,471 9,415 2,954 79,418 24,168 - - 117,426

Ijarah assets - - - - - - 75,100 75,100

Investment securities - 5,052 12,069 265,248 46,968 91,863 7,537 428,737

Equity accounted investees - - - - - - 29,341 29,341

Other assets 4,894 470 18,858 3,459 23,760 - 639 52,080

Property and equipment - - - - - - 17,857 17,857

Total assets 111,590 14,937 33,881 348,125 94,896 91,863 130,474 825,766

Liabilities

Placements from financial

institutions 92,884 - - - - - - 92,884

Bank financing 42,380 1,191 2,407 50,264 10,915 15,471 - 122,628

Other liabilities 16,467 141 505 1,125 5,196 - - 23,434

Total liabilities 151,731 1,332 2,912 51,389 16,111 15,471 - 238,946

Net gap (40,141) 13,605 30,969 296,736 78,785 76,392 130,474 586,820

Cumulative net gap (40,141) (26,536) 4,433 301,169 379,954 456,346 586,820 -

Commitments 1,147 163 5,631 10,263 1 - - 17,205

*This includes certain assets which do not have any contractual maturity

The Bank does not have any exposure in 10 to 20 years bucket.

10 PROFIT RATE RISK IN THE BANKING BOOKProfit rate risk in banking book is the exposure of the Bank’s financial condition to adverse movements in profit rates. Changes in profit rates affect the Bank’s earnings by changing its net profit income and the level of other profit rate sensitive income and operating expenses. Changes in profit rates also affect the underlying value of the Bank’s assets, liabilities, and commitments because of the absolute or economic value changes of future cash flows due to the change in profit rates. Profit rate risk primarily arises on account of repricing risk, yield curve risk, basis risk and optionality risk.

9- Liquidity Risk (continued)


The MRC is responsible for recommending the profit rate policy, setting limits and guidelines. The same is reviewed by the Board Audit and Risk Committee and is approved by the Board.

The Bank has minimal exposure to repricing and yield curve risks. Repricing risk arises on account of mismatch in profit rate fixation periods between assets and liabilities. Yield curve risk arises due to shift in yield curve resulting in change in the economic value of cashflows. The rate sensitive assets mainly comprise short-term interbank placements and Sukuk. A part of these placements are funded by rate sensitive liabilities in the form of short-term interbank deposits. The short-term nature of these items and high degree of correlation between profits earned and paid on them minimises the basis risk. The remaining rate sensitive assets (Sukuks and residual inter-bank placements) are funded by equity. The Bank is not exposed to optionality risk arising due to embedded options in rate sensitive assets or liabilities.

The Bank’s profit rate sensitive assets comprise placements with financial institutions, Sukuk investments and Islamic Financing Facilities. On the liabilities side, the Bank’s profit bearing liabilities include mainly placements from Central Bank and other financial institutions. The Board has approved limits on profit rate sensitivity in each time bucket.

Profit rate risk in the banking book is managed principally through monthly monitoring of the re-pricing gaps and the impact of profit rate changes on the Economic Value of Equity (EVE). The Bank ensures that the re-pricing gap and the impact on EVE as a result of shifts in profit rates do not exceed the pre-approved limits set on both. This is measured based on the impact of a parallel shift in the yield curve on EVE which is the sum of the impact on earnings and impact on balance sheet.

The impact on earnings (measured by the sensitivity of Net Profit Income (NPI)) is calculated by estimating the change in Profit Income of the Bank due to a stipulated change in the profit rates of assets and liabilities over a time horizon of one year. The Bank assumes a 2% change (i.e. 200 basis points) in rates of assets and liabilities to calculate the dollar impact on earnings on the residual period up to one year. The Bank also assumes that the cashflow duration for a bucket is the mid-point of bucket.

The impact on balance sheet is calculated using the leverage adjusted duration gap approach and assesses the impact of changes in the market profit rates on the Bank’s total assets as a percentage of the Bank’s equity. The higher the duration, the higher shall be the profit rate sensitivity of a financial instrument and vice-versa.

The Bank ensures that shift in profit rates does not result in the overall economic value based on the re-pricing gaps to exceed the limits set on the economic value of equity. This is assessed based on the impact of a parallel shift in the yield curve on the expected Net Profit Income for up to one year horizon and the economic value of the Bank’s equity on a regular basis.

A summary of the Bank’s profit rate gap position is as follows:

USD 000’s

Up to 3 months

3 to 6 months

6 months to 1 year 1 to 3 years Over 3

years Total

Assets


Financing assets 1,471 9,415 2,954 79,418 24,168 117,426

Investment securities - 5,052 12,069 97,860 138,831 253,812

Other assets 863 - - - 23,749 24,612

Total assets 92,152 14,467 15,023 177,278 186,748 485,668

Liabilities


Bank financing 42,380 1,191 2,407 50,264 26,386 122,628


Profit rate sensitivity gap (43,112) 13,276 12,616 127,014 160,362 270,156

Commitments - - - - - -


The impact on EVE, which is the sum of the impact on earnings and impact on balance sheet, to a 200 basis points parallel increase (decrease) in market profit rates (assuming no asymmetrical movement in yield curves and a constant statement of financial position), are as follows:

USD 000’s

Impact of 200bp increase in profit rates: 31 December 2018

Impact on earnings 5,403

Impact on balance sheet (16,515)

Impact on Economic Value of Equity (11,112)

Impact of 200bp decrease in profit rates: 31 December 2018

Impact on earnings (5,403)

Impact on balance sheet 16,515

Impact on Economic Value of Equity 11,112

The overall impact on EVE for a 200 bps shock is within the limit prescribed by the Basel Committee on Banking Supervision as well as the Bank’s more conservative internal limit.

11 REPUTATIONAL RISKReputational risk is the risk that negative perception regarding the Bank’s business practices or internal controls, whether true or not, will cause a decline in the Bank’s investor base, lead to costly litigation that could have an adverse impact on liquidity or capital of the Bank. Reputation is an important asset and among the issues that could affect the Bank’s reputation is the inability to exit from investments, lower than expected returns on investments and poor communication with investors. As at 31 December 2018, the Bank was not exposed to any significant reputational risk.

The Bank has developed adequate policies and procedures to identify, monitor and address all potential risks that may arise from all such activities. The Bank has also developed an internal dashboard for monitoring and reporting reputational risk exposures which is quarterly presented to the BARC.

The Bank considers complaints from all investors/customers seriously. These can adversely affect the Bank’s reputation and if it is left unattended these can also lead to litigation and possible censure by the regulatory authorities. The Bank has a formal process of handling complaints from investors/customers, in line with the CBB’s requirements.

12 STRATEGIC RISKStrategic risk is the current and prospective impact on earnings or capital arising from adverse business decisions, improper implementation of decisions, or

lack of responsiveness to industry changes. Strategic risk management practices are designed to ensure the comparability of the Bank’s strategic goals, the

resources deployed against these goals and the quality of implementation. The Bank has developed adequate policies and procedures to identify, monitor

and address strategic risk which were duly approved by the Board.

13 OTHER RISKSOther risks include fiduciary risks, displaced commercial risk and regulatory compliance risk etc. which are inherent in all business and not easily measurable or quantifiable. The Bank currently does not have funding from equity of investment account holders and off balance sheet equity of investment account holders and hence is not exposed to fiduciary or displaced commercial risks. The Bank as a matter of policy prepares its business plan in consultation with the Board to incorporate the shareholders expectations and regularly reviews and monitors financial and marketing strategies, business performance with respect to the business plan, new legal and regulatory developments and their potential impact on the Bank’s business and corporate governance practices to ensure avoidance of any regulatory non-compliance.

14 REGULATORY COMPLIANCEDuring the year, the Bank has paid penalties of USD 79,576 to the Central Bank of Bahrain for late submission of some of the date sensitive reporting requirements as required by the regulator.

10- Profit Rate Risk in the Banking Book (continued)


15 BASEL III RATIOSAs part of its commitment to strengthening risk management practices and adopting industry best practices, the Bank is currently monitoring Basel III ratios on a periodic basis as required by the CBB. Detailed below are the Basel III Ratios for the Bank as of 31 December 2018:

No. Particulars Minimum Limit Set by CBB As of 31 December 2018*

1 Common Equity Capital Ratio - Consolidated 6.5% 64.59%

2 Common Equity Capital Ratio - Solo 4.5% 64.32%

3 Total Capital Ratio - Consolidated 12.5% 65.07%

4 Total Capital Ratio - Solo 8% 64.80%

5 Liquidity Coverage Ratio 100% 382%

6 Net Stable Funding Ratio 100% 116%

7 Leverage Ratio - Consolidated Note 1 71.47%

8 Leverage Ratio - Solo Note 1 71.31%

Note 1: Disclosure requirement regarding Leverage Ratio started in 2017 and has been migrated to Pillar I in 2018.

As evident above, the Bank’s current Basel III Ratios are significantly exceeding the minimum limit set by the CBB (where limits have been defined). The Bank will continue to monitor the Basel III Ratios (as mandated by the CBB) and will actively seek to optimize their levels.


REMUNERATION DISCLOSURES


The Bank’s approach to remuneration, including the variable remuneration policy for employees who are approved persons and/or material risk-takers, is in line

with the requirements of the Central Bank of Bahrain.

The key features and objectives of the remuneration framework are summarized below.

Remuneration strategy

The Bank’s variable remuneration policy will be driven primarily by a performance based culture that aligns employee interests with those of the shareholders

of the Bank. These elements support the achievement of our objectives through balancing reward for both short-term results and long-term sustainable

performance. Our strategy is designed to share our success, and to align employees’ incentives with our risk framework and risk outcomes.

The quality and long-term commitment of all of our employees is fundamental to our success. We therefore provide a competitive level of total remuneration

to attract, retain and motivate the very best people who are committed to maintaining a career with the Bank, and who will perform their role in the long-term

interests of shareholders. The Bank’s reward package comprises the following key elements:

1. fixed pay;

2. benefits; and

3. annual performance bonus.

All compensation matters, and overall compliance with regulatory requirements, are overseen by the Nomination, Remuneration and Governance Committee

of the Board (NRGC).

The Bank’s remuneration policy in particular considers the role of each employee and its application depends on whether an employee is a Material Risk Taker

and/ or an Approved Person in a business line or control or support function. An Approved Person is an employee whose appointment required prior regulatory

approval because of the significance of the role within the Bank. Material Risk Takers are the heads significant business lines and any individuals within their

control who have a material impact of the Bank’s risk profile.

In order to ensure alignment between what we pay our people and our business strategy, we assess individual performance against annual and long-term

financial and non-financial objectives summarised in line with our performance management system. This assessment also takes into account adherence to

the Bank’s values, risk and compliance measures and acting with integrity. Altogether, performance is therefore judged not only on what is achieved over the

short and long term but also importantly on how it is achieved, as the NRGC believes the latter contributes to the long-term sustainability of the business.

NRGC role and focus

The NRGC has oversight of all reward policies for the Bank’s employees. The NRGC is the supervisory and governing body for compensation policy, practices

and plans. It is responsible for determining, reviewing and proposing variable remuneration policy for approval by the Board. It is responsible for setting the

principles and governance framework for all compensation decisions. The NRGC ensures that all persons must be remunerated fairly and responsibly. The

remuneration policy is reviewed on a periodic basis to reflect changes in market practices and the business plan and risk profile of the Bank. No changes were

made following the 2015 review.

The responsibilities of the NRGC as regards the variable compensation policy of the Bank, as stated in its mandate, include, but are not limited to, the following:

• Approve, monitor and review the remuneration system to ensure the system operates as intended.

• Approve the remuneration policy and amounts for each Approved Person and Material Risk-Taker, as well as total variable remuneration to be distributed,

taking account of total remuneration including salaries, fees, expenses, bonuses and other employee benefits.

• Ensure remuneration is adjusted for all types of risks and that the remuneration system takes into consideration employees that earn same short-run

profit but take different amount of risk on behalf of the bank.

• Ensure that for Material Risk Takers and Approved Persons in non-control functions, variable remuneration forms a substantial part of their total

remuneration.

• Review the stress testing and back testing results before approving the total variable remuneration to be distributed including salaries, fees, expenses,

bonuses and other employee benefits.

| REMUNERATION RELATED DISCLOSURES |


• Carefully evaluate practices by which remuneration is paid for potential future revenues whose timing and likelihood remain uncertain and question

payouts for income that cannot be realized or whose likelihood of realization remains uncertain at the time of payment.

• Ensure that for approved persons in risk management, internal audit, operations, financial controls, Shari’a review/audit, AML and compliance functions

(the ‘control functions’) the mix of fixed and variable remuneration is weighted in favour of fixed remuneration.

• Recommend Board member remuneration based on their attendance and performance and in compliance with Article 188 of the Bahrain Commercial

Companies Law.

• Ensure appropriate compliance mechanisms are in place to ensure that employees commit themselves not to use personal hedging strategies or

remuneration-and liability-related insurance to undermine the risk alignment effects embedded in their remuneration arrangements.

The NRGC comprises the following members:

NRGC Member Name Appointment date Number of meetings attended

Dr. Faisel Ahmed Gergab* 30 March 2017 4

Abdulla Abdulkarim Showaiter 30 March 2017 5

Adel Abdulaziz Al Jabr 30 March 2017 5

Mayssoun Habra 6 December 2018 -

* Mr. Gergab was relocated to BARC effective 6 December 2018

The aggregate remuneration paid to the NRGC members during the year in the form of sitting fees amounted to USD 70,000 [2017: USD 60,000].

External consultantsConsultants were appointed in 2014 to advise the Bank on its variable remuneration policy. This included assistance in designing appropriate phantom share-

based Incentive Plan Rules.

Board remunerationThe Bank’s board remuneration is determined in line with the provisions of Article 188 and 224 of the Bahrain Commercial Companies Law, 2001 (as amended). Board remuneration is subject to approval of the shareholders in the Annual General Meeting. Remuneration of non-executive directors does not include performance-related elements such as grants of shares, share options or other deferred stock-related incentive schemes, bonuses or pension benefits.

Variable remuneration for staffThe variable remuneration is performance related and consists primarily of the annual performance bonus award. As part of the staff’s variable remuneration, the annual bonus rewards delivery of operational and financial targets set each year, the individual performance of the employees in achieving those targets, and their contribution to delivering the Bank’s strategic objectives.

The Bank has adopted a Board approved framework to develop a transparent link between variable remuneration and performance. The framework is designed on the basis that the combination of meeting both satisfactory financial performance and achievement of other non-financial factors, would, all other things being equal, deliver a target bonus pool for the employees, prior to consideration of any allocation to business lines and employees individually. In the framework adopted in determining the variable remuneration pool, the NRGC aims to balance the distribution of the Bank’s profits between shareholders and employees.

The key performance metrics at the bank level include a combination of short term and long term measures and include profitability, solvency, liquidity and growth indicators. The performance management process ensures that all goals are appropriately cascaded down to respective business units and employees.

In determining the amount of variable remuneration, the Bank starts from setting specific targets and other qualitative performance measures that would result in a target bonus pool. The bonus pool is then adjusted to take account of risk via the use of risk-adjusted measures (including forward-looking considerations).

The NRGC carefully evaluates practices by which remuneration is paid for potential future revenues whose timing and likelihood remain uncertain. NRGC demonstrates that its decisions are consistent with an assessment of the Bank’s financial condition and future prospects.

The Bank uses a formalized and transparent process to adjust the bonus pool for quality of earnings. It is the Bank’s objective to pay out bonuses out of realized and sustainable profits. If the quality of earnings is not strong, the profit base could be adjusted based on the discretion of the NRGC.

For the overall Bank to have any funding for distribution of bonus pool, thresholds of financial targets have to be achieved. The performance measures ensure


that the total variable remuneration is generally considerably contracted where subdued or negative financial performance of the Bank occurs. Furthermore, the target bonus pool as determined above is subject to risk adjustments in line with the risk adjustment and linkage framework.

Remuneration of control functions

The remuneration level of staff in the control functions allows the Bank to employ qualified and experienced personnel in these functions. The Bank ensures that the mix of fixed and variable remuneration for control function personnel is weighted in favour of fixed remuneration. The variable remuneration of control functions is based on function-specific objectives and is determined independently from (and not by the individual financial performance of) the business areas they monitor.

The Bank’s performance management system plays a major role in deciding the performance of the control functions on the basis of the objectives set for them. Such objectives are more focused on non-financial targets that include risk control, compliance and ethical considerations as well as the market and regulatory environment apart from value adding tasks which are specific to each unit.

Variable compensation for business units

The variable compensation for the business units is primarily decided by the key performance objectives set through the performance management system of the Bank. Such objectives contain financial and non-financial targets, including risk control, compliance and ethical considerations as well as market and regulatory environment. The consideration of risk assessment in the performance evaluation of individuals ensures that any two employees who generate the same short-run profit but take different amounts of risk on behalf of the bank are treated differently by the remunerations system.

Risk assessment frameworkThe purpose of the risk linkages is to align variable remuneration to the risk profile of the Bank. In its endeavour to do so, the Bank considers both quantitative measures and qualitative measures in the risk assessment process. Both quantitative measures and human judgment play a role in determining risk adjustments. The risk assessment process encompasses the need to ensure that the remuneration policy reduces employees’ incentives to take excessive and undue risk, is symmetrical with risk outcomes and has an appropriate mix of remuneration that is consistent with risk alignment.

The Bank’s NRGC considers whether the variable remuneration policy is in line with the Bank’s risk profile and ensures that through the Bank’s ex-ante and ex-post risk assessment framework and processes, remuneration practices where potential future revenues whose timing and likelihood remain uncertain are carefully evaluated.

Risk adjustments take into account all types of risk, including intangible and other risks such as reputation risk, liquidity risk and the cost of capital. The Bank undertakes risk assessment to review financial and operational performance against the business strategy and risk performance prior distribution of the annual bonus. The Bank ensures that total variable remuneration does not limit its ability to strengthen its capital base. The extent to which capital needs to be built up is a function of a bank’s current capital position and its ICAAP.

The bonus pool takes into account the performance of the Bank which is considered within the context of the Bank’s risk management framework. This ensures that the variable pay pool is shaped by risk considerations and Bank-wide notable events.

The size of the variable remuneration pool and its allocation within the bank takes into account the full range of current and potential risks, including:

(a) The cost and quantity of capital required to support the risks taken;

(b) The cost and quantity of the liquidity risk assumed in the conduct of business; and

(c) Consistency with the timing and likelihood of potential future revenues incorporated into current earnings.

The NRGC keeps itself abreast with the Bank’s performance against the risk management framework. The NRGC will use this information when considering remuneration to ensure the return, risk and remuneration are aligned.

Risk adjustments

The Bank has an ex-post risk assessment framework which is a qualitative assessment to back-test actual performance against risk assumptions.

In years where the Bank suffers material losses, the risk adjustment framework would work as follows:

• There would be considerable contraction of the Bank’s total variable remuneration.

• At the individual level, poor performance by the Bank would mean certain individual KPIs are not met and hence employee performance ratings would be lower.

• Reduction in value of deferred phantom shares or awards.

• Lastly, if the qualitative and quantitative impact of a loss incident is considered significant, a malus or clawback of previous bonus awards may be considered.

The NRGC, with Board approval, can rationalize and make the following discretionary decisions:

• Increase/ reduce the ex-post adjustment

• Consider additional deferrals of phantom share awards

• Recovery through malus and clawback arrangements

Malus and Clawback framework

The Bank’s malus and clawback provisions allows the Bank’s Board of Directors to determine that, if appropriate, unvested elements under the deferred bonus plan can be forfeited/ adjusted or the delivered variable compensation could be recovered in certain situations. The intention is to allow the Bank to respond appropriately if the performance factors on which reward decisions were based turn out not to reflect the corresponding performance in the longer term.

Variable remuneration for staff (continued)


Any decision to take back an individual’s award can only be taken by the NRGC (taking into account the advice of the CEO and the Risk, Finance, HR, Legal & Compliance and other departments as appropriate).

The Bank’s malus and clawback provisions allows the Bank’s Board to determine that, if appropriate, vested /unvested elements under the deferred bonus plan can be adjusted/ cancelled in certain situations. These events include the following:

· Reasonable evidence of misbehaviour or material error of the employee causing the Bank/the employee’s business unit to suffer material downturn in its financial performance, material risk management failure.

· The employee deliberately misleads the market and/or shareholders in relation to the financial performance of the Bank during the concerned performance year.

Clawback can be used if the malus adjustment on the unvested portion is insufficient given the nature and magnitude of the issue.

Components of Variable remuneration

Variable remuneration has following main components:

Upfront cashThe portion of the variable compensation that is awarded and paid out in cash on conclusion of the performance evaluation process for each year.

Deferred CashThe portion of variable compensation that is awarded and paid in cash on a pro-rata basis over a period of 3 years

Upfront phantom share awardsThe portion of variable compensation that is awarded and issued in the form of phantom shares on conclusion of the performance evaluation process for each year.

Deferred phantom sharesThe portion of variable compensation that is awarded and paid in the form of phantom shares on a pro-rata basis over a period of 3 years

All deferred awards are subject to malus provisions. All phantom share awards are released to the benefit of the employee after a six-month retention period

from the date of vesting. The number of phantom share awards is linked to the Bank’s share price as per the rules of the Bank’s phantom share Incentive

Plan Rules. Any dividend on these phantom shares is released to the employee along with the phantom shares (i.e. after the retention period in line with the

Incentive Plan Rules).

Deferred compensation

All Approved Persons and/or Material Risk-Takers whose total annual remuneration (including all benefits) is in excess of BD100,000 are subject to deferral of

variable remuneration as follows:

Element of variable remunerationCEO, his deputies and 5

most high paid business line employees

Other covered

staff

Deferral period

Retention Malus Clawback

Upfront 40% 50% Immediate - - Yes

Upfront phantom shares - 10% Immediate 6 months Yes Yes

Deferred cash 10% - Over 3 years - Yes Yes

Deferred phantom share awards 50% 40% Over 3 years 6 months Yes Yes

The NRGC, based on its assessment of role profiles and risk taken by an employee could increase the coverage of employees that would subject to deferral arrangements.

Details of remuneration paid

(a) Board of Directors USD ‘000

2018 2017

· Sitting Fees 795 702

· Remuneration - -

· Others 205 89


(b) Employee remuneration

2018

USD ‘000Number

of staff

Fixed remuneration Sign on bonuses(Cash /

phantom shares)

Guaranteed bonuses(Cash /

phantom shares)

Variable remuneration

TotalUpfront Deferred

Cash Others Cash Phantom Shares

Phantom Shares Others

Approved persons - Business lines 4 2,680 77 - - 223 - 335 - 3,315- Control & support 6 1,434 72 - - 69 10 40 - 1,626Other staff 49 5,196 327 437 - - - 5,960TOTAL 59 9,310 476 - - 729 10 375 - 10,900

2017

USD ‘000Number

of staff

Fixed remuneration Sign on bonuses(Cash /

phantom shares)

Guaranteed bonuses(Cash /

phantom shares)

Variable remuneration

TotalUpfront Deferred

Cash Others Cash Phantom Shares

Phantom Shares Others

Approved persons

- Business lines 4 2,284 54 - - 130 - 196 - 2,664

- Control & support 3 885 55 - - 74 15 59 - 1,088

Other staff 46 4,185 301 400 - - 4,886

TOTAL 53 7,354 410 - - 604 15 255 - 8,638

(c) Deferred awards

2018

Cash Phantom Shares Others Total

(USD) Number (USD ‘000) (USD ‘000) (USD ‘000)

Opening balance - 555,071 366 - 366

Awarded during the period - 423,776 385 - 385

Paid out / released during the period - (168,570) (111) - (111)

Service, performance and risk adjustments - - - - -

Changes in value of unvested opening awards - - 96 - 96

Closing balance - 810,277 736 - 736

2017

Cash Phantom Shares Others Total

(USD) Number (USD ‘000) (USD ‘000) (USD ‘000)

Opening balance - 292,255 187 - 187

Awarded during the period - 408,943 270 - 270

Paid out / released during the period - (146,127) (94) - (94)

Service, performance and risk adjustments - - - - -

Changes in value of unvested opening awards - - 3 - 3

Closing balance - 555,071 366 - 366

(d) Severance pay

FEB has not paid under Severance pay any amount other than what is contractual or law related requirements payments.

Details of remuneration paid (continued)

First Energy Bank B.S.C.(c)

Head OfficeBahrain Financial Harbour, West Tower, 20th Floor

P.O.Box 209, Manama, Kingdom of Bahrain,Tel: +973 17170000 - Fax: +973 17170170

FEB CAPITAL LimitedDubai International Financial Centre,

Office 302, Level 3, Gate Precinct, Building 3P.O. Box 506781, Dubai, United Arab Emirates Tel: +971 4 329 8825 - Fax: +971 4 329 8826

FEB AQARBahrain Financial Harbour, West Tower, 20th Floor

P.O.Box 209, Manama, Kingdom of Bahrain,Tel: +973 17170000 - Fax: +973 17170170

First Energy Bank B.S.C.(c) is a closed joint stock company incorporated in the Kingdom of Bahrain with CR No.69089 and licensed as an Islamic wholesale bank by the Central Bank of Bahrain

www.1stenergybank.com

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