in the name of allah, the compassionate, the merciful10b258bc-21d4-4ce7-a0be...dr. haidar hasan...

A n n u a l R e p o r t 2 0 0 8KUWAIT INTERNATIONAL BANK

In the Name of Allah, the Compassionate, the Merciful

HH Sheikh Sabah Al-AhmadAl-Jaber Al-Sabah

Amir of the State of Kuwait

HH Sheikh Nawaf Al-AhmadAl-Jaber Al-Sabah

Crown Prince of the State of Kuwait

HH Sheikh Nasser Al-MohammadAl-Ahmad Al-Sabah

Prime Minister of the State of Kuwait

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Foreword of the Chairman

Members of the Board of Directors

Executive Management

Members of the Fatwa & Sharia’a Supervision Board

Foreword of the Fatwa & Sharia’a Supervision Board

Summary Report on the Achievements and Actions Taken

by the Fatwa & Sharia’a Supervision Board

Global, Regional and Local Economic Developments

- Global Economic Developments

- Regional Economic Developments

- Islamic Financial Market Industry

- Developments of the Kuwaiti Economy

The Real Estate Report for the Year 2008

Management Report for the Year 2008

Achievements Realized During the Year 2008

Report of the Independent Auditors

Financial Statements

Notes to the Financial Statements

Table of Contents

Kuwait International Bank... Trust & Ease

6A n n u a l R e p o r t 2 0 0 8

KUWAIT INTERNATIONAL BANK

Dear Shareholders,

Assalamu Alikum,

The year 2008 signifies the first full year for Kuwait International Bank to exercise all of

its banking business transactions in accordance with the revered Islamic Sharia’a provisions,

following the completion of the conversion of our Bank in July 2007.

The external economic developments, witnessed since the third quarter of 2008, most salient

of which is the outbreak of the global financial crisis and the slump in the world oil prices,

along with the ensuing adverse repercussions on the domestic economy, jointly encumbered

the course of the Bank business during that year with further challenges. However, with the

Grace of Allah, the guidelines of our revered general assembly, and the objective policies

adopted by the Board of Directors, together with the sincere efforts exerted by the executive

management, the Bank succeeded to realize positive financial results.

Dear Shareholders,

I am honored to present to you the Annual Report for Kuwait International Bank for the

financial year ending 31/12/2008, which comprises the successful achievements of the Bank

in enhancing its financial position, maintenance of shareholders' equity, and its expansion

in providing its Islamic banking services to its customers, in trust and ease.

Dear Shareholders,

In 2008, the Bank realized net profits of KD 19.8 million, i.e. an increase of 10% above the

previous year levels. As such, the KIB earnings per share (E/PS) rose to 23.33 fils in 2008,

against 21.18 fils in 2007, i.e. an increase of 10%, and the return on shareholder's equity

reached 12.3% for year 2008 against 12% for the previous year, while the return on assets

reached 2% for the year 2008.

Dear Shareholders,

Kuwait International Bank realized substantial growth advancement expansion, following

its successful conversion into an Islamic Bank to provide Islamic Sharia’a compliant services,

whereby the year 2008 is the year when the Bank embarked upon encouraging financial

indicators and the milestone to achievement of acceptable financial results, in view of the

global economic crisis, as reflected by the financial statements of the years 2008, in terms

of the following:

First: Growth in the Overall Banking Activity of the Bank

Total assets rose to over one billion Kuwaiti dinar (KD 1.083 million), i.e. an increase of

14.2% above the previous year levels. On the side of resources, KIB succeeded to increase

customers and financial institutions deposits to KD 899 million, i.e. an increase of 16.6%

above the pervious year levels. In the context of utilization of available resources, the net

finance portfolio rose to KD 720 million, i.e. an increase of 25.5%. Undoubtedly, these results

are the outgrowth of the positive efforts expended by the Bank Board of Directors, and the

Executive Management through the optimum utilization of human and financial resources

altogether, in the context of priorities placed in order.

Second: Growth in Profits

Net profits of KIB for the year 2008 reached 10% above the previous year levels. For

transparency considerations, we would like to point out that the operating profits of the

Bank in 2008 witnessed slight decrease, owing to the economic conditions prevailed during

that year. In this context, the Bank allocated cautious provisions to avoid adverse implications

that may occur in event of persistence of the repercussions of the economic crisis in 2009.

Third: Growth in Shareholders' Equity and Reserves

Total shareholders' equity in 2008 reached KD 165 million, i.e. rising by 4.4% above the

previous year levels, in that the KIB, in exercise of its prudence and cautious practices,

deducted the amount of KD 9.5 million to be transferred to the general reserves account,

in compliance with the guidelines of the concerned regulatory authorities, in light of the

economic circumstances. Moreover, statutory reserve of KD 2 million has been deducted.

Foreword of the Chairman

{Our Lord comprehendeth all things in knowledge. In Allah do we put our trust. Our Lord! Decide

with truth between us and our folk, for Thou art the best of those who make decision} Al-Araf: Verse 89.

In the Name of Allah, Most Merciful Most BeneficientAllah, the Almighty said in the Holy Quran, "

7A n n u a l R e p o r t 2 0 0 8KUWAIT INTERNATIONAL BANK

Dear Shareholders,

The aforementioned financial results could have not been realized without the efforts expended

by the whole Bank entities, starting with the Board of Directors, ending with all the Bank

staff. Key priorities have been setup through which the Bank proceeded to a successful corporate

leap within relatively short period. The Bank implemented its strategic plan delineated by

highly professional consultancy bodies and took long strides towards fulfillment of the phases

of this plan with considerable perfect levels. As such, the Bank inaugurated three new branches

in highly populated geographic areas, thereby bringing to ten the total branches of the Bank,

styled with unified integrated architectural designs. In sha'a Allah, the Bank shall in 2009

plan to inaugurate five new uptown branches targeted to be established in industrial, residential

and business areas.

In 2009, the Bank offered new and developed products and services which witnessed significant

demand by customers, of which for example, Al-Joud Accounts, and other miscellaneous

accounts, such as financing collateralized by deposits, Salsabeel Account, Salary Account,

and finally Haboob Account for children. The Bank inaugurated also during the year the

Tele-Banking Service to customers, which is efficiently functional at present, equipped with

the state-of-the-art technologies and serves customers around the clock. The Bank introduced

other developed services such as Al-Dawli Online and applied the Onsite Sales service which

witnessed significant demand by customers. Moreover, the Bank continued to provide its staff

with the necessary training for the purpose of enhancement of their efficacies through

miscellaneous training courses.

Dear Shareholders,

You are aware of the repercussions of the global economic crisis and its adverse impacts on

the domestic economy. The growth rates of the main sectors and activities in the country are

anticipated to fall down. Therefore, the year 2009 is expected to be fraught with challenges

to financial and banking institutions in the country. The Bank management shall expend

its utmost efforts to continue realizing objective financial results in light of the efforts

undertaken for the development of assets, raising the performance efficiency, and increasing

returns, along with realizing a quality move in the Islamic banking business; thereby the

outgrowth shall be ample gains which will help enhance the financial position of the Bank

and protect shareholders' equity.

In view of the results of the year 2009, the Board of Directors has recommended to distribute

10% bonus shares for the year 2008. This recommendation is subject to the approval of the

regulatory authorities.

Dear Shareholders,

In spite of the present challenges, we are looking forward, with great hopes and optimism,

to take long strides in achievement of the main goals planned for the years 2009 and 2010,

with the support of Allah, as to focus our interest to enhance the financial position of the

Bank, expand the branches network, develop the banking products, upgrade customer services

and strengthen staff efficiencies.

Dear Shareholders,

While I present to you this Report, I extend my sincere thanks and appreciation to all who

stood in support to us and encouraged us to go forward on our course towards a fruitful

future, in Sha'a Allah. On the forefront of these institutions is the Central Bank of Kuwait

and its persistent support to us, and appreciate its regulatory and supervisory extinguished

role. We also extend our extreme thanks to all shareholders and dear customers, who lent

their ample contributions for the improvement of the financial position of the Bank during

2008. Our thanks are also extended to the members of the Board of Directors of the Bank,

and the revered scholars members of the Sharia’a Fatwa and Supervision Board of the Bank

and the executive management, as well as all staff.

May Allah help us all for the success and welfare of our customers and the benefit of our

beloved country; Kuwait, wishing you all success and prosperity and for our institution with

further success and affluence under auspices of His Highness the Amir, Sheikh Subah Al-

Ahmad Al-Jaber Al-Subah, may Allah protect him, and his faithful Crown Prince, Sheikh

Nawaf Al-Ahmad Al-Jaber Al-Subah, May Allah protect him, and His Highness the Prime

Minister Sheikh Nasser Al-Mohammad Al-Subah, may Allah protect him.

Wa Salamu Alikum Warahmatu Allahi Wabarakatuh

Abdulwahab Mohammad Al-Wazan

Chairman of the Board

8A n n u a l R e p o r t 2 0 0 8


Members of the Board of Directors

Mr. Abdul Wahab Mohammad Al-WazzanChairman of the Board of Directors

Mr. Yousuf Ali Al-MatrookDeputy Chairman of the Board of Directors

Mr. Hameed Ahmad Al-RasheedManaging Director

Sheikh Mohammed Jarrah Al-SabahBoard Member

Mr. Jassim Hasan ZainalBoard Member

Mr. Tawfiq Shamlan Al-BaharBoard Member

Mr. Anwar Jawad BukhamseenBoard Member

Dr. Haidar Hasan Al-JumahBoard Member

Mr. Jaffar Sadeq Al-QallafBoard Member


Members of the Executive Management

Mr. Adil AhmadGeneral Manager

Mr. Sulaiman Al-BaqsamiAssistant General Manager,

Commercial and International

Banking Department

Mr. Mahmoud BolandExecutive Manager,

Retail Banking Department

Mr. Boulima Ratenjil Akbar SiddikActing Treasury Manager

Mrs. Lamya Al-TabtebaiExecutive Manager,

Information Technology Department

Mr. Antoine SokhnExecutive Manager,

Risk Management Department

Mr. Fahad Al-FouzanExecutive Manager,

Operations Department

Mr. Fouad MandaniActing Human Resources Manager

Mr. Mansour ShashtariGeneral Internal Auditor

Internal Audit Department Manager

Mr. Yahya GholoumGeneral Legal Advisor

Legal Department Manager

Mr. Kamel Al GebaliFinancial Manager

Dr. Sadeq AbulManager, Economic Researches

Department and Board Secretary

10A n n u a l R e p o r t 2 0 0 8


Sheikh Ahmad Bazeea Al-YaseenChairman of the Fatwa & Sharia’a Supervision Board

Dr. Khaled Al-MathkourDeputy Chairman of the Fatwa & Sharia’a Supervision Board

Dr. Ali Hussain Al-SalehMember

Dr. Abdul Aziz Al-QassarMember and Rapporteur

Sheikh Mustafa Al-ZalzalahMember

Their Eminence Members of the Fatwa& Sharia’a Supervision Board


Allah Subhanahu Watala (the almighty) created man to live on earth and make use of all

possible means to build up his life on this earth. Allah the Almighty also created all means

for man to be able to realize such build-up of life. Allah Almighty said, "He brought you

forth from the earth and hath made you husband it". Hence, the system founded by Allah

the Almighty is sufficient enough for the prosperity of mankind, and brought forward all

instruments necessary for bringing success to this mission, if applied as ordered by Allah the

Almighty. Out of this system is the economic system based on the Islamic Sharia’a rules and

regulations, which prohibits riba (usury) and fights frauds, aleatory contracts, and gambling.

From the current financial crisis, which hit most of the countries in the world, from east to

west, on their different strengths and impacts, the present state of affairs excreted several

facts, of which are the following: that the world today tends to other principles with further

fairness, and keep away from unawareness, gambling, aleatory contracts and riba (usury).

This is the tendency towards real investment based on real economic grounds of development

and investment and entry into real projects which produce their positive impacts on the

society.

Hence, there was a dire need to find out the successful alternate, which proved its active

impact in several countries and various experiments. Therefore, several European countries

adopted such Islamic applications of Islamic economy in service of their economies, and

began to seriously think in the course of this trend to be applied as one of the present systems

in the economic arena, and adoption of the essential principles illuminated by the Islamic

financial regulations, of which are the following:

1. It is based on a set of values, ideals and ethics.

2. Entire steering clear of riba (usury) and the ways leading thereto.

3. Participation in profits and losses.

With the grace of Allah, blessed models were found, which succeeded to present honoring

ideals for the Islamic experiment for implementation of these regulations in Islamic banks.

Yet, they proved their capability to cope with events, and the Islamic banks course of action

is still running on accelerated growth, with the grace of Allah and blessed efforts expended

by the managements of those banks.

May Allah help us all for the service of the Islamic faith, to realize benefit for mankind and

all countries. May Allah protect Kuwait and its people, and help them all for the success and

prosperity of all Arab and Islamic countries, and Peace be upon his Messenger, Saydena

Mohammad, and Peace of Allah to all his family, and friends, and all his followers to the day

of heaven.

Dr. Abdulaziz Khalifa Al-Qassar

Member and Rapporteur of the Sharia’a Fatwa and Supervision Board

Foreword of the Fatwa & Sharia’a Supervision Board

12A n n u a l R e p o r t 2 0 0 8


Praise be to Allah, and Peace upon his Messenger, his family and followers …

The Sharia’a Fatwa and Supervision Board at the Kuwait International Bank sums up its

actions performed during the year 2008 in the following:

• Four meetings for the Board have been convened, and passed (22) twenty two resolutions,

whose provisions covered all the bank different departments.

• Agreements and contracts presented to the Sharia’a Board and the Islamic Department

reached (13) thirteen contracts, on Murabaha, under title of (Al-Joud), (Salsabeel),

Wakala in Investment, Musharaka Contract in Syndicated Banking Finance, endorsement

of fees and commissions on banking business services for the Commercial Banking

Department.

• On the banking area, amendments on agreements for letters of guarantee, documentary

letters of credit, adjustment of fees and commissions on banking services have been

endorsed, as well as the terms and conditions of Islamic banking credit cards issued by

the Kuwait International Bank.

• On the investment area, Wakala agreements in investment for the Investment Division

with other companies have been reviewed and endorsed, as well as the contracts by which

conventional portfolios of the Pre-Islamic conversion period to the Bank, have been

disposed of.

• On the area of marketing and public relations management, marketing advertising and

brochures of the accounts and deposits have been adjusted and endorsed, as well as the

patronages by the Bank.

• On the area of the Sharia’a revision, the endorsed plan for the semi-annual revision

have been applied in accordance with the policies certified in the Bank, and such revision

covered all the bank divisions and departments as well as the Bank branches.

• Visits have been made to all branches of the bank in order to identify the issues relevant

to the savings accounts, range of deposits and their Sharia’a considerations. In this

regard, it is worth mentioning that these actions, with the grace of Allah, have been

completed with positive cooperation of all executive managers, division heads and all

staff and workers in the Bank.

• On the side of the Sharia’a culturing, symposiums and training courses have been

concluded, and handled the following topics: Sharia’a grounds for the actions and

services of Islamic banks – Mudaraba and Wakala Investment – Istisna'a – Ijara

Muntahia Bitamleek and Operational Ijara – Collaterals and Mortgages and their

Sharia’a Regulations – Formulas and Instruments of Islamic Investments – Sharia’a

Qualification Course for the Newly Employed Staff, and the number of courses held

reached ten courses, for a total of 173 trainee staff members.

• An Islamic Sharia’a Fiqih contest was held in Arabic and English languages, which

handled the Islamic bank services and products. The number of participants reached

(149) participants.

• A contest was held for the recitation of verses in the Holy Qur'aan. The number of

participants reached (63) of male and female contesting staff.

• Three working papers have been made and submitted to the Conferences on Islamic

financial industry in Kuwait. Other essays on banking transactions have been displayed

on the Bank intranet page, as well as on the magazine for the Kuwait International

Bank family.

• The Manual for the Procedures of the Sharia’a Auditing Process has been made and

covered the documents needed for each products of the Kuwait International Bank

products.

• The Sharia’a culturing booklet on the products offered by the Bank has been prepared.

• The Sharia’a Supervision and Fatwa Board replied to the questions received from the

Bank staff and its customers.

Summary Report on the Achievements& Actions Taken by the Sharia’a Fatwa & Supervision Board


In 2008, Kuwait International Bank carried out Islamic banking transactions amidst very

critical economic and banking spheres which jointly signified considerable challenges to the

Bank course of action and its promising advancement. The following is a demonstration of

these developments:

1. Global Economic Developments

The year 2008 is deemed to be an exceptional year on the level of the world economic

conditions; yet it may account for a significant turning point for a new economic phase. A

vehement wave of acceleration in the energy and food prices prevailed during the first half

of the year 2008, along with heated surge world wide in the inflation rates, which rose from

3.8% to 6.8% between the end of 2007 and the mid of 2008, and from 7.5% to 12.4% for the

European Union Countries, from 5.4% to 9.6% in the developing countries, and from 7.3%

to 18.4% for the Middle East countries.

No sooner did the financial and monetary authorities in several parts of the world reap the

fruits of their plans targeted to contain the heated inflation rates, than the appalling global

financial crisis shocked the world in the mid of 2008, which was the outgrowth of the real

estate mortgage crisis in the United States of America, named also as the "Subprime Lending

Crisis". When the crisis erupted, the estimated credit losses ranged between 1.4 to 2.2 trillion

US dollar, accounting for 10% to 15% of the USA Gross Domestic Product (GDP). Following

the Subprime Crisis, the Wall Street Stock Exchange collapsed in the mid of September 2008,

followed by subsequent collapses in most world stock exchanges in Europe and Japan. In this

context, large world banks and financial companies in the world bankrupted, such as Liman

Brothers Bank, and Merrill Lynch Bank, which was acquired by Bank of America. Yet, the

endeavors in several industrial countries for introducing financial rescue funds and injection

of liquidity by central banks failed to thwart off the erosion of assets and curb the diffusion

of the repercussions of the financial crisis, whereas provisional estimates indicate their rising

at the end of 2008 to about 3 trillion US dollar.

Before the end of 2008, the last circle of the series of the crisis predominated over the whole

world when a number of countries were hit by economic recession. As such, the economic

growth rates for these countries changed from the positive to the negative boxes, such as

Britain (-1.7%), Germany (-1.4%), Ireland (-2.5%) and Poland (-2.0%). Meanwhile, such

rates fell to limits nearing to the zero box in countries like the United States of America (0.9%

from 2.0% in 2007), the European Union Countries in their entirety (0.1% from 2.5% in

2007), Japan (0.5% from 2.0% in 2007). Correspondingly, the growth rates in the emerging

countries recorded marked decrease below their record levels realized in the year 2007, such

as China (9.0% from 11.5% in 2007), Russia (2.5% from 8.0% in 2007), India (6.1% from

8.9% in 2007), Brazil (2.4% from 5.3% in 2007). Towards these changes, the growth rates

in the whole world decelerated, whereby the growth rate fell from 4.9% to 2.5% in the year

2008.

This surge of economic recession placed serious pressures on the unemployment rates in both

the developed and developing countries, with an average of 7.5% and by a maximum of 9.0%

in china, and at minimum levels in Japan by 3.9%.

During the fourth quarter of 2008, a number of countries adopted bailout plans to withstand

the financial crisis brunt they faced. In the forefront of these plans was the American bailout

program covering almost 700 billion US$. The monetary authorities in these countries resorted

to interest rate cuts to give thrust to the economic activities, such as the Federal Reserve Bank

which announced continued discount rate cuts, plummeting to 2.25% in September 2008,

compared with 4.83% at the end of 2007 and 6.15% at the end of 2006.

Towards these developments, the so-called double economic phenomenon emerged on the

surface of the world banking transactions, whereas the US dollar exchange rate realized

marked rise at the end of 2008, against the other major currencies, specifically the Euro, in

a clear indication to the heated settlements of debts and liabilities of the world institutions

in the US dollar, whose economic strength faced, at the same time, continued deflation.

The world financial institutions circulars viewed the continued increase in the present financial

crisis as the severest since the world trespassed the big world recession in the thirties of the

last century, and the ensuing limited-sided crises, such as the American Economy Crisis (1971

– 1973), (1979 – 1980), the Japanese Banks Crisis (at the outset of the nineties), and then

the Asian financial crisis (at the end of the nineties). Forecasts of a number of international

institutions indicate that financial crisis is expected to worsen during the year 2009, towards

the tendency of a number of economies in the world to record adverse growth rates, most

noticeable of which is in the United States of America (-1.2%), Japan (-1.4%), Britain

(-1.6%), France (-0.7%), and Germany (0.5%).

Global, Regional & Local Economic Developments

14A n n u a l R e p o r t 2 0 0 8


2. Regional Economic Developments

The oil exporting countries in general (OPEC) and the Gulf Cooperation Council countries

(GCC), in particular, were beaten by the adverse world economic developments during the

year 2008. The prognostic of these impacts was the rise in inflation rates in these countries,

within an average of 10.0%. These adverse impacts were followed by the severe continued

slump in the oil prices, starting from August 2008, till such prices plummeted to US$ 36.6

per barrel at the end of 2008, compared with US$ 147 per barrel at the end of July of the

same year, i.e. a fall of 74.0%. These countries were also influenced by the implementation

of the OPEC policies aiming at the cut of their production quota of crude oil for the prices

to reach appropriate levels in view of the decrease in the world demand for oil. Consequently,

the International Monetary Fund sources expect that the value of oil exports for the GCC

countries will fall from US$ 584 billion in 2008 to US$ 298 billion in 2009. The third of

these adverse impacts was the economic recession wave which prevailed over all countries

world wide.

While the preliminary indicators show that the GCC countries are expected to realize

noticeable success in containing the inflation rates and bringing it to fall from 10.7% in

2008 to 6.3% in 2009, the slump in oil revenues and the persistence of the economic recession

account for salient challenges for these countries in their course towards realizing their

economic development plans. The IMF sources expect the deceleration in the economic

growth in the GCC countries, to be 3.5% in 2009, from 6.8% in 2008 and 5.3% in 2007.

3. Islamic Financial Market Industry

In 2008, the number of financial institutions in the whole world has come over 300

institutions, whose total assets at the end of 2008 reached more than 750 billion US$.

Specifically, the Gulf Cooperation Council countries recorded regular increase in the number

of new Islamic banks and investment companies. It is believed that the confidence of dealers

in Islamic financial institutions shall be enhanced, owing to the abundant innovated

banking products they offer, and thus the challenging pressures in 2009 shall be alleviated

to these institutions, and they shall be more vigorous to increase their share in the international

banking market.

With regard to the State of Kuwait, the Islamic banking industry has expanded during the

year 2008, whereas the number of Islamic investment companies rose to 53 companies. In

terms of total assets, the Islamic financial institutions dominated almost 30% of the total

banking and financial sector activity in the State of Kuwait.

4. Developments in the Kuwaiti Economy

In light of the slump in the crude oil prices, and the impacts of the global financial crisis,

a number of specialized estimates indicate that economic growth in the State of Kuwait

shall fall to 5.0% in 2009, following the record growth rates it witnessed – as published in

the official sources – during the years 2003 – 2006, with an annual average of 29.2%, and

then fell in 2007 to 8.0% when the Gross Domestic Product, GDP, (at current prices) reached

KD 31.8 billion.

During the first half of 2008, the Kuwaiti economy was specifically influenced by the

expanded inflation phenomenon, which rose from 5.5% in 2007 to 10.5% at the end of the

first half of 2008. The Central Bank of Kuwait; therefore, applied certain actions through

using the monetary policy for organization and rationalization of the marked growing rates

in the credit facilities granted by the banking and financial system units in the State of

Kuwait, to restrict the inflation pressures specifically and realize monetary and financial

stability in general. In fact, Money Supply (M2) began to decrease at the end of 2008 to

reach 15.8% from 19.1% at the end of 2007 and 21.7% at the end of 2006.

0

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Oil Prices (US$/b)

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On the other hand, and in the context of the policy aimed at moving the interest rate in

line with the economic developments and to cope up with the trends of interest rates on

the international currencies, the Central Bank of Kuwait made discount rate cuts during

the fourth quarter of 2008, as to fix such rate on 30 October 2008 at 4.25%, and then cut

it to 3.75% on 17 December 2008. And, within the endeavors expended for absorption of

the global financial crisis impacts, maintenance of the banking institutions as well as

protection of depositors, the Central Bank led the technical endeavors which brought forth

the Deposit Security Code in 28th October 2008. In the same context, the Central Bank of

Kuwait at the same period passed a number of regulations for enhancing the regulatory

role on banking institutions.

On another front, and despite the robust appreciation of the US dollar exchange against

major international currencies during the last months of 2008, the Kuwaiti dinar exchange

rate maintained its monetary position in general, whereby its depreciation against the US

dollar exchange rate was within very narrow margins, i.e. by 0.3% at the end of 2008

compared with its level at the end of the previous year. The policy for pegging the national

currency with a basket of currencies evidenced its feasibility in forming appropriate

protective coverage, whereas the Kuwaiti dinar at the end of December 2008 remained

higher by 5.1% than the US dollar exchange rate compared with the prevailing exchange

rates on 20 May 2007, the date when the Kuwaiti dinar was de-pegged from the US dollar

exchange rate.

In spite of the repercussions of the global financial crisis, the performance of banking

institutions in Kuwait was positive in general; whereby total assets of local banks rose at

the end of the year 2008 by 10.4% from KD 39.2 billion, and total deposits rose by 16.0%,

when they reached KD 21.2 billion at the end of 2008.

While the financial policy took the expansive trend during the last few years ending the

financial year 2008/09, the draft general budget for the year 2009/10 was enacted to divert

the direction of this policy towards deflated curves, whereby the total expenditures were

confined by KD 12.0 billion, i.e. a decrease of 36.4% below the financial year 2008/09

allocations, in view of the decrease in the estimates of oil revenues for the draft budget of

the fiscal year 2009/10 by 44.4% below the previous year levels, which were estimated in

this draft budget by KD 6.7 billion only (compared with KD 11.7 billion for the previous

year), based on computing the Kuwaiti crude oil barrel price at US$ 35/b.

On the other hand, the Kuwait Stock Exchange recorded significant developments during

the year 2008. The first half of the year witnessed the boom in the market activity which

prevailed during the years 2006 and 2007, and reached the peak in May 2008 when the

price index reached 15.500 point. However, the activity began to take continued deceleration

during the most of the periods in the second half of 2008, in view of the general investment

spheres witnessed with the collapse in the Wall Street Stock exchange and the other major

world exchanges, as well as the losses in the Gulf region exchanges. The shrinkage in the

activity of the Kuwait Stock Exchange during the fourth quarter of 2008 was attributable

to certain factors, most significant of which are the following:

• The deflation in the liquidity levels with dealers.

• The impacts of the collapses in the world exchanges, with psychological behavior of

retrogression force on the Kuwaiti market customers.

• The unwillingness of several investors to trade on the market in view of the continued

fall in stock prices, and the increase of their financial obligations.

• The sense of distrust in the future of investments in the money markets in general.


0

0.05

0.1

0.15

0.2

0.25

2004 2005 2006 20082007

2004 2005 2006 20070.00%

1.00%

2.00%

4.00%

6.00%

7.00%

3.00%

5.00%

2008 Oct 2008 Dec

4.75%

6.00% 6.25% 6.25%

4.25%3.75%

4.75%

6.00% 6.25% 6.25%

4.25%3.75%

Average Annual Growth in Money Supply (M2)(Year End)

Discount RateCentral Bank of Kuwait

16A n n u a l R e p o r t 2 0 0 8


The year 2008 witnessed the listing of ten companies on the Kuwait Stock Exchange,

thereby bringing the number of total listed companies to 206 companies. Notwithstanding

the rise in the number of transactions executed to almost 2.6 million transaction (i.e.

an increase of 23% than the year 2007 levels), and the volume of traded shares from 80.9

billion shares (i.e. an increase of 14.8% than the year 2007 levels); however, the total

value of traded shares fell . to KD 33.4 billion, i.e. 18.9% below the year 2007 levels. The

apprehensive fall in the activity of the Kuwait Stock Exchange was impacted on the price

index which fell by the end of 2008 to 7.892.6 point, by 38% at the end of the year 2007.

0

4000

8000

12000

16000

18000

2000

6000

10000

14000

2004

2005

2006

2007

2008

2008

2008

2008

Price Index of the Kuwait Stock Exchange(Point)

Qu

arte

r 1

Qu

arte

r 2

Qu

arte

r 3

Qu

arte

r 4


While the year 2007 recorded the beginning of considerable real estate boom following a

period of relative activity in the real estate sector in the State of Kuwait, which continued

for several years, the year 2008 ed the end of this boom with severe drop to return to the

trading rates of 2006.

As such, after the surge in the value of deals executed in the year 2007 (real estate contracts

and agencies) which amounted to KD 4,447 million, i.e. an increase of 63% above the

2006 levels when the value of deals amounted to KD 2,729 million, the value of deals

recorded in the year 2008 reached KD 2,790 million, i.e. a decrease of 37.3% below the

2007 deals and were probably equal to 2006 deals.

It can not be said that the events of 2008 were mere correction for the 2007 boom, whereas

several factors contributed to the deceleration in the market performance in 2008. Among

these factors were the issuance of the two laws 8 and 9 of 2008 which prohibited companies

from trading and mortgage of private housing real properties, and granted these companies

three years grace to get rid of their acquisitions of real properties and private housing

lands. Moreover, the Central Bank of Kuwait passed regulations for restrictions on credit

in order to curb the inordinate inflation. Furthermore, the severe losses which stroke the

Kuwait Stock Exchange in Kuwait and in the region led to evaporation of significant

portions of citizens savings, along with the loans monies which some borrowers obtained

for speculations in the Stock Exchange. Yet, the repercussions of the global economic crisis

on a large sector of the investment and real estate sector in Kuwait, which so far did not

disclose the volume of their losses, had the severest impact on the losses in the real estate

market in that year.

In light of the above, local banks adopted ad hoc protective measures and applied conservative

and selective policies for customers and the finance options, and some banks tended to

reduce finance granted to the real estate sector by almost 50%, for the purpose of alleviation

of risks which they may be subject to as a result of the continued losses in the real estate

market, thereby leading to the lack of liquidity with a considerable group of real estate

investors and adversely influencing the real estate market performance.

The considerable increase in the prices of construction materials from the mid of 2007,

which remained on this pattern till the mid of 2007, cast its noticeable impact on all

activities of the real estate sector. This increase led to the rising cost in the construction

of buildings, and consequently the significant rise in prices of real properties. For example,

the price of a ton of reinforcement iron sheets rose from KD 160 in the mid of 2007 to

exceed KD 400 per ton in the mid of 2008. Therefore, real estate investors preferred in this

period to purchase relatively recently constructed buildings, before the boom in the

construction materials prices, to construct buildings themselves, and be subject to the rise

of the continued increase in prices during the construction periods.

However, under the vehemence of the global financial crisis and the slump in the world

oil prices, as well as the increase in restrictions on the local credit to finance projects, the

construction materials prices decreased too during the second half of 2008, from 20% to

40%. Meanwhile, such decrease did not have sheer impact on the real estate market in

Kuwait because it was associated with other adverse factors which had further influences

on the real estate market activity. Furthermore, the local and global financial and economic

crisis cast its impacts on the local real estate market, and thus eliminated the positive

impacts which may have been brought forth from the decrease in the construction materials

prices.

On the performance of the real estate market in the year 2008 in more details, we notice

that the real estate market began to decelerate in the total value of deals since the beginning

of the year; whereas the market performance during the first quarter of 2008 fell by 22.3%

below the fourth quarter of 2007, and then continued its decrease in the second quarter

of 2008 by 21.7% below the first quarter of the same year. The same trend applies to the

third quarter when total value of deals fell by 27.1% below the second quarter levels, and

thus the market ended its performance in the fourth quarter with a fall of 9.1% below the

third quarter of 2008, which was the lowest fall levels during that year, when the total deals

Real Estate Report for the Year 2008

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

0

500

1,000

3,000

4,000

4,500

2,000

3,500

2,500

1,5001,547 1,583

1,2391,099

1,405

2,286

2,828 2,759

2,231

2,729

4,447

2,790

1,547 1,583

1,2391,099

1,405

2,286

2,828 2,759

2,231

2,729

4,447

2,790

Value of Annual Real Estate Deals

Tota

l Sal

es V

alu

e -

Mill

ion

s K

D

18A n n u a l R e p o r t 2 0 0 8


executed in the fourth quarter for all ranges of real properties reached KD 496.6 million,

i.e. the value of deals of the fourth quarter collectively was likely similar to the months

of November 2007 severally, when the value of deals recorded KD 483.5 million, thereby

indicating the range of decrease in the real estate market activity in 2008.

The total value of deals executed in the real estate market during the fourth quarter 2008

amounted to KD 2789.9 million, the share of investment real estate deals thereof recorded

39.6% with a value of KD 1104.4 million. Meanwhile, the value of deals in the commercial

real estate sector reached KD 527.7 million, i.e. accounting for 18.9% of the total deals

in the market, and the total value of deals in the private housing sector reached KD

1111.8 million, i.e. 38.9%, then the warehousing sector, where the value of deals reached

KD 43 million or 1.5%, while the industrial sector deals recorded KD 2.9 million or 0.1%

of the total deals in 2008.

This performance shows that real estate investors focused on the investment real estate

sector, with relatively lesser levels than the commercial real estate sector, owing to the

latter's relatively high prices and only investors with high net-worth who can trade on

these commercial properties. Also, investment real properties cater for a large group of

investors and the management of investment real estate properties are far easier and

their maintenance are lesser costly than the commercial real properties, along with the

convenience of liquidation of the investment real properties in the market when necessary,

thereby rendering them more preferred to the appetite of investors.

On the forecasts of the performance of the real estate market in Kuwait in the year 2009

in general, it is anticipated that the performance of the real estate market in the country

shall continue deceleration, specifically during the first and the second quarters of the

year, with the continued decrease in the prices of real properties, associated with the frail

purchasing power for citizens, and owing to the delay in the enforcement of the procedures

that shall be taken by the government of the State of Kuwait for enhancing the domestic

economy and investment companies influenced by the global economic and financial

crisis, and the slump in the world oil prices, as well as the whole world looking forward

to the new financial and economic policies which the United States of America shall

apply and the actions that shall be applied to get rid of this crisis, which will likely take

some time, let alone the emergence of the impacts of these procedures on the world

markets.

We shall demonstrate the performance of the real estate market along the year in brief

in the following:

Private Housing Sector

The private housing sector witnessed relative activity during the first three months of

2008, until the two laws 8 and 9 of 2008 were promulgated at the end of February, bringing

the performance of this market to considerable deceleration starting from the month of

April to the end of the year. Following the promulgation of these laws, the adverse impacts

mentioned above cast their shadows on the market in general and the private housing

sector in particular. Meanwhile, November and December witnessed relative increase in

the value of trading in the private housing sector above the previous months levels.

On the other hand, some analysts suggest that the endorsement of these two laws in the

year 2008 had their positive impacts, against the outcome of such laws on the recession

in the real estate market, in that the prices of housing lands decreased with varying rates

in several areas, and thus enabled a category of citizens to purchase housing plots which

2.90.1%

1104.439.6%

527.718.9%

43.01.5% 1111.8

38.9%

0

200

400

1200

1400

800

1000

600

1231.91231.9

957.3957.3

749.1749.1

545.8545.8496.4496.4

07-Q4 08-Q1 08-Q2 08-Q3 08-Q4

Value of Deals in Each Sector (Million KD)And its Contribution in the Market Performance

in the Year 2008

Private housing

Apartment

CommercialIndustrial Stores

Total Value of Deals in the Kuwaiti Real Estate Marketfrom the Fourth Quarter 2007 to the Fourth Quarter 2008

Tota

l Sal

es V

alu

e -

Mill

ion

s K

D

Quarter

they were unable to purchase with the price levels prevailed prior to the issuance of these

two laws. If the issuance of these two laws were not parallel to issuance by the Central

Bank of Kuwait of its instructions on limitation of lending and the eruption of the global

financial crisis, the impacts of these two laws would have been positive for citizens.

The year 2008 witnessed a fall in the prices of undeveloped land with varying rates, whereas

such prices decreased from 5 – 10% for the areas located before the fourth ring road and

the plots overlooking the sea, and from 10 – 20% for other areas. Meanwhile, prices fell

between 20% to 50% for the undeveloped lands in areas where public services and roads

were not made available and where Kuwait Municipality does not give building licenses,

such as Abu Fatira, Fanitees and Maseelah. Demand is also few in the real estate market,

due to owners reluctance to sell their real properties owing to the downside of the market

prices of their properties below the value paid for purchase of such properties. Meanwhile,

the supply in the market is almost related to owners who are under pressures to sell their

properties. The meager demand in the market was also noticed, driven by the shortage in

liquidity on the one hand, and the wishers to purchase forecasts for further falls in prices

in future on the other hand.

These graphs displayed herein show the average prices of lands for private housing in some

areas in Kuwait from 2002 to 2008. The graphs show also the decrease occurred in 2008

compared with the average prices in the previous year. These average shown are for the

average price of one meter along the year and not the price of one meter at the last deal

executed in this year.

Meanwhile, the value of rent for residential units were not influenced with the declining

rates of these properties, in that they maintained the same levels of 2007 in majority of

the areas, and declined with no more than 3% in few areas thereof.


0

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2002 2003 2004 2005 2006 2007 2008

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2002 2003 2004 2005 2006 2007 2008

0.0

50.0

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150.0

198.0

170.7183.0

109.5

55.2 54.9

101.0

45.937.8 36.2

67.4

92.6

198.0

170.7183.0

109.5

55.2 54.9

101.0

45.937.8 36.2

67.4

92.6

Average Prices of Undeveloped Lands - Private Housing (1)KD / M2

Andalus

Jabriya

Salwa

Surra

Mishref

Yarmouk

Average Prices of Vacant Lands – Private Housing (2)KD / M2

Jahra

Sabah Al Salem

Qurain

Salam

Funaitees

Messilah

Total Value of Monthly Dealsfor the Private Housing Sector in 2008

Tran

sact

ion

Val

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- Mill

ion

s K

D

Jan

uar

y

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ruar

y

Mar

ch

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Month 2008

20A n n u a l R e p o r t 2 0 0 8


Investment Real Estate Sector

Investment real estate sector showed favorable performance in the first half of 2008,

though less than its distinguished performance it demonstrated in 2007, and then it faced

severe decline at the beginning of August in particular, and such decline continued to

end of the year. Notwithstanding the attempted limited rising occurred in October and

November, this sector suffered further retrogression in December when it witnessed its

lowest trading rates during the year; yet, an all-out lowest rates for the previous years.

These adverse outcomes were the outgrowth of the aggravated global economic crisis and

the succession of the adverse economic news on the local, gulf and world arenas, specifically

the bankruptcy of banks and companies and the ensuing impacts on investors. Although

the Central Bank of Kuwait made KD discount cuts several times, from 6.25% at the

beginning of the year to reach 3.75% in an effort to activation of the economy, such cuts

need some time for its effects to appear in the market. Some other favorable economic

factors are needed and transparency endorsed by the affected investment and real estate

companies in order to identify the fact findings of their investments and to restore investors

confidence.

Most noticeable in this sector during the first half of 2008 is the increase in demand in

areas which were rated in the second position by investment real estate dealers. For

example, demand for investment properties in Julaib Al-Shyoukh and Khitan considerably

increased, thereby leading to rises in the prices of land to be equal to those land areas

in Farawaniya and to exceed the prices of land in the adjacent Riqa'ei area, where the

prices of land were always higher. The price of one investment square meter in Julaib Al-

Shyoukh reached KD 750 – 800 per square meter, i.e. nearing to the prices of inbound

plots in Salmiya and Hawalley, thereby realizing the highest rise thereof to reach 43.5%,

compared with an increase of 33.5% for Farawaniya and 36.6% for Khitan and 37.1% for

Riqa'ei. However, as is the case with the real estate market in the second half of 2008, a

sharp decline occurred also in the prices of investment real properties in these area, in

that these increases in prices quickly receded, to realize final increase for the year 2008

ranged between 1% to 4% for the average rates compared to 2007.

1.300

1.500

1.700

2.100

2.300

2.700

2.500

2002 2003 2004 2005 2006 2007 2008

1.900

0

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2500

2002 2003 2004 2005 2006 2007 2008

1500

0.0

50.0

100.0

250.0

200.0

150.0127.8

117.7

146.2

121.5113.9

103.795.8

46.3 42.7

73.984.9

30.9

127.8117.7

146.2

121.5113.9

103.795.8

46.3 42.7

73.984.9

30.9

Average Rent for Private HousingKD / M2

Andalus

Mishref

Sabah Al Salem

Surra

Salwa

Jabriya

Yarmouk

Average Prices of Undeveloped Land – Investment (1)KD / M2

Jahra

Salmiya

Messilah

Bneid Al Gar

Hawalli

Sharq

Jabriya

Total Value of Monthly DealsFor the Investment Real Estate Sector in 2008

Tran

sact

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Val

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- Mill

ion

s K

D

Jan

uar

y

Feb

ruar

y

Mar

ch

Ap

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July

Au

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Sep

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Oct

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Dec

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er

Month 2008

Although the conversely proportionate value of income-generating investment real properties

with the increase or decrease in the banking interest rates, the value of real properties

declined from 5% to 10% during the second half of 2008, despite the interest rate cut by

2.5% during the year. This was due also to the above mentioned adverse factors which

placed pressures on inventors and made them apprehensive and indecisive in making

their investment real estate decision.

The average rent in investment real properties units began its gradual decrease in 2008

from 5% to 10% below their rising rates in the first half of 2008, after it had witnessed

continued increases in the previous years. However, such decrease was with varying rates

from one area to another and from one real property to another, whereas the declining

ratios in the rent of units rely upon the area and the location of the real property, the

standard of finishing, the number of vacant units in the real property, the adjacent area,

as well as the number of buildings recently completed in the area, whereas some owners

of new buildings offer their units for lesser rent than the existing real properties, for the

purpose of speeding up the leasing of these units, thereby lessees are encouraged to move

to new apartments with lesser rent values. This drives the owners of the existing real

properties to offer voluntary discounts in rents to keep up their lessees. Yet, the decline in

the rent is much lesser than the declining prices in real properties.

Commercial Real Estate Sector

The performance of commercial real estate sector was cool during the year 2008 and

boomed only in June and September, when known big deals were executed and led to the

rise in the value of deals in these two months higher than the remaining months, whose

performance was close and ranged between the monthly average for the value of transactions

in this year after exclusion of the value of June and September.


2002 2003 2004 2005 2006 2007 20080

100

200

500

700

600

300

400

2002 2003 2004 2005 2006 2007 20081.500

2.000

2.500

4.000

5.000

4.500

3.000

3.500

2002 2003 2004 2005 2006 2007 20081.500

1.700

1.900

2.900

3.300

3.100

2.100

2.500

2.300

2.700

Average Prices of Undeveloped Land – Investment (2)KD / M2

Manggaf

Riggae

Abou Halifa

Kheitan

Fahaheel

Farwaniya

Jleeb Al Shouyoukh

Average Prices of Rent of Flats in Investment Real Properties (1)KD / M2

Jahra

Salmiya

Hawalli

Bneid Al Gar

Jabriya

Average Prices of Rent of Flats in Investment Real Properties (2)KD / M2

Manggaf

Riggae

Abou Halifa

Kheitan

Jleeb Al Shouyoukh

Farwaniya

Fahaheel

As for the commercial undeveloped land, their prices were on the hike during the first

three quarters of the year, until the price of one square meter in some areas of Kuwait

city ranged from 12 to 14 thousand Kuwaiti dinar for the licensed commercial plots with

building ratios of 520 or 620%, and added ratio of 400% against a banking guarantee

to the Kuwait Municipality for the metropolitan development project; but a decline

occurred during the fourth quarter of 2008, ranging from 10% to 15% in the price of

commercial land plots, driven by the aforementioned reasons of the factors which impacted

the local market and the decline which began to occur on the average rates of rent of

offices recently constructed, although the demand for these offices is still favorable inside

the metropolitan with higher rates than in the other governorates. The demand currently

is focused on the commercial plots with distinguished locations in that investors have

become selective and deliberate in the purchase.

The average rent of commercial offices was in the rise in the first half of 2008, whereas

the average rent in Kuwait city ranged from KD 12 to KD 14 per square meter for the

smart modern buildings. However, owing to the deterioration in the global and local

financial and economic positions and due to the increase in the spaces of the offices

offered for rent, the average rent of one square meter of offices declined at the end of the

year to range between KD 11 to KD13/M2. It is expected that such decline will persist

during the next year, whereas the completion of large number of buildings, along with

the currently under-construction grand real properties (such as Al-Hamra'a Complex,

the Kuwait Business City Towers, Al-Mutahidah Tower, and Al-Raya 2, etc…) will increase

the supply of commercial spaces and office spaces, to surpass the demand thereto,

specifically in light of the frozen economic conditions and the decelerated steps for the

conversion of Kuwait into commercial, financial and global center.

The rent of commercial showrooms was stable during the first nine months of 2008 and

rose by average ranging from 5% to 8% above the previous year. Also, key money of KD

750 to 2000 /M2 was collected for showrooms overlooking the main streets fronts and

as per the location of the showroom. Yet, the commercial real properties were hit by the

same adverse conditions which stroke the other sectors. As such, the average rents began

to decrease in the fourth quarter of the year, falling from their peaks, with forecasts of

further declines during the next year, unless the economic conditions will be improved

in the near future.

Industrial, Professional and Warehousing Sector

The performance of this sector was very weak during the year 2008, whereas the industrial

sector recorded deals valued at KD 2.9 million all over the year; while the warehousing

sector recorded deals for KD 43 million only. This is an indicator of investors reluctance

of investment in this sector after it had witnessed marked declines in the past two years,

and ease pace is expected in this sector during the next year, in light of the present

economic crisis.

22A n n u a l R e p o r t 2 0 0 8


0.0

50.0

100.0

250.0

200.0

150.0

30.0 27.343.9 39.9

26.8

88.8

22.1 19.2

128.3

40.048.0

21.130.0 27.3

43.9 39.926.8

88.8

22.1 19.2

128.3

40.048.0

21.1

2002 2003 2004 2005 2006 2007 20080

1000

2000

6000

8000

10000

9000

4000

3000

7000

5000

2002 2003 2004 2005 2006 2007 20085.000

7.000

9.000

17.000

21.000

25.000

23.000

13.000

11.000

19.000

15.000

Tran

sact

ion

Val

ue

- Mill

ion

s K

D

Month 2008

Jan

uar

y

Feb

ruar

y

Mar

ch

Ap

ril

May

Jun

e

July

Au

gu

st

Sep

tem

ber

Oct

ob

er

No

vem

ber

Dec

emb

er

Total Value of Monthly Dealsfor the Commercial Real Estate Sector in 2008

Jleeb Al Shouyoukh

Hawalli

Kheitan

Salmiya

Farwaniya

Sharq

Fahaheel

Kuwait City

Average Prices of Undeveloped Land – CommercialKD / M2

Jleeb Al Shouyoukh

Hawalli

Kheitan

Jahra

Farwaniya

Salmiya

Fahaheel

Kuwait City

Average Rent of Commercial Shops(Basement, Ground & Mezzanine)

KD / M2


Retail Banking Department

Retail Banking Department (RBD) realized several achievements during the year 2008 in

that it succeeded to launch new and innovated products and services for the purpose of

enhancing and satisfaction of customers banking requirements in ease and convenient

environments. Among these services are the tele-banking services around the clock, Al-

Dawli Online Banking, whereas these two services allows customers to carry out all their

banking transactions quickly and easily where ever they are. The Department has also

updated some pre-existing products to ascribe them with distinguished attributes and to

place the Bank in a leading position in the

market. As such, the children account,

"Haboob", was launched, as well as Al-Joud

deposit, which enhanced the Bank position

among its customers.

During 2008, Retail Banking Department

supervised the inauguration of three more

branches in different geographic highly

populated areas, thereby raising the total count

of the Bank branches to ten. The Bank

commenced carrying on studies for the purpose

of surveying customers satisfaction for the Bank

services, using the latest means in questionnaire

applications.

The Department carried out also overall training during the year 2008 for all the Retail

Banking Department staff. The purpose of this training was to ensure the quality service

to customers. The RBD shall remain ready for rendering the best Islamic banking services

to our dear customers during the years 2009, in Sha'a Allah.

Management Report 2008

Retail Banking Division

Farwaniya new branch

Commercial Banking Division

Treasury Department

24A n n u a l R e p o r t 2 0 0 8


Commercial Banking Department

On the wake of the completion of the conversion of the Bank in July 2007, the year 2008

came to account for the first full year in which the Bank to exercise all banking businesses

under the Islamic banking system umbrella. The Commercial Banking Department

(CBD) succeeded to realize profit rates of 35% compared with the previous year levels,

despite the state of severe recession witnessed in the second half of the year.

In accordance with the laid down plan, the CBD continues its endeavors to reduce its

focus on real property assets in the total banking portfolio of the Bank, and the year 2008

was not excluded also of this trend. And, for the purpose of according greater focus on

implementing its businesses, the CBD embodies at present four divisions which render

Islamic products and solutions tailored in accordance with the Islamic Sharia’a provisions

in these several sectors.

The Bank expended utmost efforts for curbing low-

worth assets. The outcome of these efforts is signified

in the Bank success to reduce its share in these assets

compared to the total assets, despite the worsening

economic conditions during the second half of 2008.

Treasury Department

The Treasury Department is primarily responsible for

managing the liquidity in the Bank and optimizing

returns on the Bank's excess liquidity. The Department

has transformed itself to meet the challenges posed

by the changes in the Bank's financing structure to

suit the Islamic banking model.

The year 2008 was a year of major movements in the global financial markets, Treasury

achieved its objectives by minimizing the cost of funds with the rate set at the time of

budgeting for 2008 and optimizing returns on the Bank's excess liquidity. Furthermore,

Treasury Department posed a key role in servicing corporate clients for their Murabaha,

and Foreign Exchange Transactions and increased revenues from sale of Foreign Exchange

to customers.

During the first full year of Islamic banking activity, the Bank's Treasury conducted its

activities by employing a wide range of Islamic Treasury Instruments which included

Murabaha, Reverse Murabaha, Tawarruq, Deposits by points, Exchange of Deposits and

Investment in Liquid Funds


Furthermore, Treasury has also diversified its customers base by identifying and marketing

new relationships with corporate customers as well as expanding Inter-Bank relationships

with regional Islamic and conventional banks.

Going forward, Treasury intends to focus on raising long tenor funds as well as a marketing

program to attract a broader base of corporate relationships aimed at diversifying our

customers base in order to increase the stability of customer funds.

Information Technology Department

The Kuwait International Bank continues to invest in Information Technology to enhance

its product offering and competitive positioning, and to demonstrate the required flexibility

to ensure fast response to new business opportunities and the changing market conditions.

Effective execution is a primary enabler for IT to secure timely and within-budget delivery

which reduce time to market and increase profitability.

In short, IT tasks are outlined in the following:

• Integrating IT within the Bank's business strategy.

• Working to re-position KIB as a Technology driven Bank to cater for the market

requirements.

• Establishing the IT organization as a business partner and service provided focused on

maximizing business return.

Achievements in 2008

EMV Cards

KIB launched its first EMV (Europay, MasterCard, Visa) and Credit Cards, also known as

Chip card or Smart Card which represents the latest technology in payment cards offering

the most secure payment technology to its clients. The Introduction of KIB Chip Cards

followed a complete renovation and upgrade of KIB electronic payment infrastructure

which will provide KIB clients with secure, efficient and highly available payment system.

Chip cards contain enhanced security features such as data encryption to prevent cards

counterfeit. The Bank's ATM machines were all upgraded to comply with and acquire EMV

Cards transactions.

Internet Banking System

KIB launched its Internet Banking channel (Al-Dawli Online) providing a full suit of

banking services to made available to its clients at their convenience while they are at their

homes, or from anywhere in the world. The online services include account enquiries,

local and International transfers, utility payments, Charge cards accounts, Financing

Facilities enquiries, check book requests, statements, etc. The banking services will be

delivered in a secure and efficient channels over the Internet.

Customers can register immediately by logging onto www.kib.com.kw. All they need to

have is an active KIB ATM card, PIN, and Civil ID. There is no additional charge for KIB

Internet banking services.

Mobile Sales Force with Laptops

For the first time in Kuwait, and to support sales of financing facilities at commercial

showrooms, KIB launched its mobile banking channel whereby KIB Sales staff are equipped

with laptops fully configured, and connected to the Bank Core banking system offering

full banking services to the mobile sales staff team.

Safe Lockers in Branches

A new system module was launched to manage a new service of Safe Lockers in KIB

branches. The new system module enables branch staff to allocate safe deposit lockers to

clients and maintain them securely.

Electronic Recruitment

KIB launched its web-based portal for electronic recruitment through KIB website. The

new portal improves the quality of data and information of each job application, and

speeds up the matching with the Bank vacant positions requirements.

Internet Control and Regulatory Compliance

Anti-Money Laundering System

As part of strengthening the Banking operational controls, and for the first time in KIB,

a new Anti-Money laundering system was implemented and launched in 2008.

The new AML solution integrates the complete components of Money Laundering detections

which includes filtering blacklisted names in order to stop any illegal transactions as well

as analyzing and detecting any suspicious activities based on transactions pattern and

doubtful behaviors.

The new system is operated by the AML Compliance Unit and is also installed across all

the Bank branches.

The system replaces the previous manual process of checking daily transactions, and hence

reduces the risks of money laundering and fraud activities, and thus it meets the Central

Bank of Kuwait as well as Basel II requirements.

Credit Risk Management System

KIB launched its first Credit Risk Management System (CRMS) providing an enterprise-

wide credit risk management system. CRMS offers a configurable framework for consistent

and in-depth financial analysis. User can now formulate modules for risk rating, enabling

Risk Management Division

KIB to enjoy business benefits through speed, consistency and balance between credit

growth and risk management. Improved risk analysis leads to appropriate pricing of

each credit exposure which is a key requirement for a profitable business.

Risk Management Department

The Bank recognizes that Risk, while being an integral part of all banking activities, has

to be within acceptable levels. For this purpose, Risk Management in the Bank, is assigned

the task of constantly measuring and monitoring the level of risk to ensure that the same

is within the Bank's risk appetite.

The year 2008 was the first full year of our functioning as an Islamic Bank. This gave

rise to many opportunities as well as challenges. Risk Management Department

concentrated its efforts on the strengthening the policies, procedures and regular review

of commercial financing credit facilities.

A noticeable addition to Risk Management Department activities in the Bank during

2008 was the CBK Compliance function, which was placed under Risk Management.

This helped to centralize the monitoring and control of all CBK-compliance related

issues.

Another significant achievement of the Department during the year was the start of

implementation of the Credit Management System (CRMS), which was designed internally,

to provide an enhanced and sophisticated system for the consistent Risk Grading of the

Bank's credit risk exposures. Risk Management, in coordination with the Business

Departments concerned, is in the process of fine-tuning the Risk grading benchmarks

before formal launch of the credit-risk grading system. The Department also continued

the process of consolidating the Bank's risk measurement and control systems where

necessary, in order to focus more closely on the mix and risk profile of the Bank's assets,

within the Islamic Banking model. These include periodical reporting on the various

risks to the Board Risk Management Committee as well as other levels of the Bank's

hierarchy.

Risk Management has also established the implementation framework of the Bank's 5-

year Medium Term Strategy. This has been structured on the basis of the Project

Management methodology to ensure timely completion and implementation of the key

strategy initiatives, so that the stakeholders can realize the expected benefits from the

same.

During the year, Risk Management was also involved in the project to prepare the Bank

for the expected CBK guidelines for measuring and reporting capital adequacy, based on

Basel II methodology. The draft policy changes were prepared based on CBK draft

guidelines, and are to be finalized once CBK final instructions in this regard are issued.

Risk Management was closely involved in the preparations for the launch of the Bank's

Online Banking facility, both in respect of Policy formulation as well as thorough testing

of the system from IT-Security perspective.

Human Resources Department

Human Resources Department is continuously keen to attract staff equipped with high

skills to join the Bank. The number of recruitments in the Bank reached 123 staff.

Applicants can now submit their employment application through the Bank website.

Furthermore, Staff Affairs Division is always keen to develop the Human Resources system

with new reports for the purpose of easing working procedures, as well as implementation

the social security system for the GCC staff members.

26A n n u a l R e p o r t 2 0 0 8



Human Resources Department, represented in the Labor Force Planning Division, continued

to prepare the labor force budgeting and year 2008 reports on labor force in terms of

costing, count and follow-up the employment process according to the setup budget, as

well as maintaining the ratio of Kuwaiti labor force, in compliance of the Central Bank

of Kuwait Instructions. The Division prepared a job description for all the present and

updated job titles for the year 2008. Among the achievements of the Division also is the

completion of the second line staff project for the Bank, in order to ensure reserve staff

members possessing leadership attributes through knowing the points of weakness for

them and giving them training to assume such responsibility.

Since Human Resources Department is dedicated to upgrade the efficiencies of the Bank

staff, the Training Division at the Human Resources Department convened 186 training

courses in which 776 trainees took part. These courses were distributed among in-house

and external courses, aimed at raising the efficacies of the Bank staff and development of

its human resources. The Division adopted two projects; namely the development of quality

service for the staff working in the Retail Banking Department, and the project for

qualification of Kuwaiti newly graduate employees, and thus succeeded to qualify highly

efficient staff. The first project is concerned with development of the skills and levels of

staff and managers working in the Retail Banking Department in the Bank branches as

well as the tele-banking staff. This project commenced in April 2008 and continued until

February 2009. The second project comprised training courses for qualifying Kuwaiti newly

graduated employees and continued for 20 months, in which trainees were provided with

the essential skills required in the banking sector and their sound understanding of the

Islamic banking business. Furthermore, in-house training courses were convened which

comprised the secrecy of dealing by information technology, money laundering combating,

and essentials and principles of Islamic banking.

Legal Department

Legal Department completed the active role it assumed during the procedures taken by the

Bank for the conversion into Islamic banking. The Department completed in timely and

accurately manner the conversion of all contracts to be compliant with the Islamic Sharia’a

provisions. This was associated with the Legal Department standing up to treatment of all

legal and practical issues encountered the implementation of the conversion by entry of

the necessary adjustments to the existing contracts, or prepare annexes to such contracts.

This process was carried out in line with the Department preparing and wording the new

contracts and follow-up their official notarizations.

The Legal Department continued also to carry out other tasks, in that it assumed the

defense on behalf of the Bank before courts and follow-up the execution procedures for

collection of the Bank dues against third parties and made great strides in this regard. This

had been significantly reflected in the Bank balance sheet and resulted in favorable

outcomes to its shareholders.

It is worth mentioning in this respect to point out to the active role undertaken by the

Legal Department in assisting the other departments in the Bank and its branches to carry

on their functions in service of customers and to help drive the Bank forward for further

success and prosperity, throughout providing the legal advices, preparation and oversight

of the contracts executed between the Bank and external bodies. The Legal Department's

performance in carrying out all these duties was characterized with fast performance,

accuracy and continued development of the work.

Property Management Department

Property Management maintained its performance for realizing the best outcomes, in

terms of cost-effectiveness, along with providing distinguished services

to keep up tenants of housing and commercial units, as well as

adjustment of the rental values to match the levels prevailing in

the market, in pursuit of increasing the annual revenues for all

real properties.

The following are the most significant projects accorded special

concern by the Property Management:

1. Entire supervision over the maintenance of the Bank branches,

with regard to signature of the maintenance contracts for these

branches, in coordination with the Technical and Administration

Division.

2. Contacts established with the Public Authority for Awqaf, upon

request of the Authority, for the Property Management Division

to manage six new real properties owned in full to the Authority.Human Resources Division

3. Final Approvals have been obtained from the Board of Directors, in coordination with

the Investment Department, for the establishment of a limited liability real estate

company, which will assume the task of appraisal, management, sale and purchase

of real properties, thus it will directly assist in increasing the Bank revenues. The

incorporation of a real property company is deemed a considerable move with regard

to providing services to customers, tenants and property owners throughout a new

vision aimed at excellence in providing services and speeding up the execution of

transactions, as well as enhancement of confidence between the Bank and customers.

Real Estate Appraisal Division

The year 2008 witnessed the Bank expansion in the area of real estate appraisal, whereby

the number of real properties appraised reached 5832 from 5076 in 2007, i.e. an increase

by 14.9%. The Division complied with the Central Bank of Kuwait instructions and made

evaluation for all the mortgaged real properties, thereby leading to the increase in the

contribution of the Real Estate Appraisal Division in the Bank revenues and operating

profits, whereas the Division's revenues rose by 7.8% above the previous year levels, after

deduction of all expenses.

In 2008, the Annual Real Estate Report was issued also, along with the issuance of a

quarterly report covering the real estate trading in Kuwait, in terms of the total real estate

sales, their development from one quarter to another, and the impacts of these developments

on the real estate market, as well as the future forecasts. This report, and the other ad

hoc reports made by the Real Estate Appraisal Division, received the commendation of

the economic entities which monitor the developments in the real estate market.

Among the most significant achievements of the Real Estate Appraisal Division was the

completion of preparing and commissioning the Real Estate Data Base, which will

produce the best impacts on speeding up the real estate appraisal function, and providing

all information and possible means for staff undertaking this task for making the

necessary comparison to determine the value of a real property and identify the latest

developments in the real estate market, with regard to the prices of land, rental rates and

the value of sale.

The Real Estate Appraisal Division held a course on the principles and ways for real estate

appraisal at the Ministry of Finance (Properties Limitation Department), and thus

signifying a new commencement for the Division in the area of training. The course was

commended by all attendees, thereby indicating a promising future for the Division in

this area as and whenever the chance is availed in future.

The Real Estate Appraisal Division was keen to attend all exhibitions and local training

courses concerned in real estates. The training plan for the Real Estate Appraisal Division

for the year 2008 intended to deputize some staff members to attend specialized training

courses in the area of real estate in the United States of America to keep pace with the

advancements in this business line.

Financial Control Department

In 2008, Financial Control Department succeeded to set in motion the role of the

Management Reporting Unit by means of expanding the reporting base prepared for

measuring performance and the ease to make sound decisions. Management decisions

encompassed reports made on daily, weekly and monthly basis for appraisal of the

financial performance. The principle of "in-house pricing of invested funds among the

different departments of the Bank" has been implemented, thereby it has a positive impact

on preparing the miscellaneous reports to accurately image appraisal of customers by

means of preparing the customer profitability report, appraisal of products through the

product profitability report, and evaluation of the different departments and divisions

in terms of the financial performance, throughout the department's profitability.

In coordination with the Information Technology Division, the Financial Control

Department made the online linking of the regulatory bodies reports, which will help

enhance the speed and accuracy of the required periodic reports and make available data

base that suits the preparation of any report as soon as possible.

The Financial Control Department lends essential contribution in the project for

implementation of the Capital Adequacy Standards according to Basel II recommendations.

The Department contributed with the Information Technology Department for preparing

the reports related to the spontaneous study of the Standard, carried out with strict

accuracy and speed. It is expected that the project shall be completed during the year

2009.

Economic Research Department

In furtherance of organizing and developing the functions of the Economic Research

Department, the organizational chart of the Department was laid down to encompass

a group of specializations in the area of economic research, statistical analysis,

documentation and information.

In 2008, the Department prepared a number of specialized studies covered the following

titles, "Indicative Prices for the Kuwaiti Real Estate Market", "Trends of the Credit Cards

Market in Kuwait", as well as studying the performance of stock markets in the Gulf

Cooperation Council countries. The Department also made presentations to the Executive

28A n n u a l R e p o r t 2 0 0 8



Management in the Bank on the most significant global, regional and local developments.

The Department continued providing researches and specialized studies required by the

several Bank departments, among which preparing economic feasibility studies for

inauguration of new branches for the Bank and preparing the Bank annual report.

The Department carried out a number of tasks related to technical support to the Top

Management and the various departments, in the form of specialized working papers,

media materials, etc. The Department's tasks were diversified to cover representing the

Bank in a number of conferences, seminars and committees specialized in the economic

and banking affairs, and took part in these committees with various working papers.

At the end of 2008, the Department commenced the establishment of a specialized library

in the Bank. In the framework of development of the statistical and information lines

falling within the tasks assumed by this Department, it prepared a program designed for

creation of data bases. The Department is planning to carry on a package of specialized

assignments in 2008, most significant of which are preparing a group of studies under

title of "Trends of Credit Market in Kuwait in Light of Repercussions of the Global Financial

Crisis", and the "Trends of Banking Deposits in Kuwait", in coordination with the Retail

Banking Department, and selection of an appropriate price index for the Kuwaiti real estate

market, in cooperation with the Real Estate Appraisal Division.

Finance Division

Bank library

Index

31

32

33

34

35

36

37


Independent Auditors’ Report

Balance Sheet

Statement of Income

Statement of Changes in Shareholders’ Equity

Statement of Cash Flows

Notes to the Financial Statements

2008

19.8

23.33

2007

18.0

21.18


* The Board of Directors recommended 10% bonus shares knowing that it is basedon the approval of the general assembly and concerned divisions.

Net Profit for the Year (KD Million)

Earnings per Share (fils)*


20072008

23.3323.33

21.1821.18

E/P Share (fils)10% Growth

20072008

19.819.8

18.018.0

Net profit (KD million)10% Growth

We have audited the accompanying financial statements of Kuwait International Bank K.S.C. (“the Bank”), which comprise thebalance sheet as of 31 December 2008 and the statement of income, statement of changes in equity and statement of cash flowsfor the year then ended, and a summary of significant accounting policies and other explanatory notes.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with InternationalFinancial Reporting Standards as adopted for use by the State of Kuwait. This responsibility includes: designing, implementingand maintaining internal controls relevant to the preparation and fair presentation of financial statements that are free from materialmisstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accountingestimates that are reasonable in the circumstances.

Auditors’ Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordancewith International Standards of Auditing. Those standards require that we comply with ethical requirements and plan and performthe audit to obtain reasonable assurance whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements.The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of thefinancial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal controlsrelevant to the entity’s preparation and presentation of the financial statements in order to design audit procedures that areappropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internalcontrol. An audit also includes evaluating the appropriateness of accounting polices used and the reasonableness of accountingestimates made by management, as well as evaluating the overall presentation of the financial statements.

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

Opinion

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Bank as of 31 December2008, and of its financial performance and its cash flows for the year then ended in accordance with International FinancialReporting Standards as adopted for use by the State of Kuwait.

Report on other Legal and Regulatory Requirements

Furthermore, in our opinion proper books of account have been kept by the Bank and the financial statements, together with thecontents of the report of the Board of Directors relating to these financial statements, are in accordance therewith. We furtherreport that we obtained all the information and explanations that we required for the purpose of our audit and that the financialstatements incorporate all information that is required by Commercial Companies Law of 1960, as amended and by the Bank’sArticles of Association, that an inventory was duly carried out and that, to the best of our knowledge and belief, no violations ofthe Commercial Companies Law of 1960, as amended, or of the Articles of Association have occurred during the year ended 31December 2008 that might have had a material effect on the business of the Bank or on its financial position.

We further report that, during the course of our audit, we have not become aware of any material violations of the provisions ofLaw No 32 of 1968, as amended, concerning currency, the Central Bank of Kuwait and the organisation of banking business, andits related regulations during the year ended 31 December 2008.

10 February 2009 Kuwait

Bader A. Al WazzanLicence No. 62APricewaterhouseCoopers

Waleed A. Al OsaimiLicence No. 68Aof Ernst & YoungAl Aiban, Al Osaimi & Partners

INDEPENDENT AUDITORS’ REPORTTO THE SHAREHOLDERS OF KUWAIT INTERNATIONAL BANK K.S.C.

32A n n u a l R e p o r t 2 0 0 8


3

4

5

6

6

7

8

9

10

11

12

12

13

14

15

15

15

15

14

11,289

4,946

267,379

546,469

27,325

61,875

9,741

-

3,583

15,255

947,862

198,173

571,833

1,504

18,500

790,010

85,729

49,480

20,558

7,072

9,572

8,356

4,846

17,473

203,086

(45,234)

157,852

947,862


ASSETS

Cash and balances with banks and financial institutions

Treasury bonds

Due from banks and other financial institutions

Financing receivables

Loans and advances

Investment securities

Investments in associates

Investment property

Other assets

Property and equipment

Total Assets

LIABILITIES AND SHAREHOLDERS’ EQUITY

Liabilities

Due to banks and other financial institutions

Depositors’ accounts

Customer deposits

Other liabilities

Total Liabilities

Shareholders’ Equity

Share capital

Share premium

Statutory reserve

Voluntary reserve

Fair valuation reserve

Revaluation surplus

Treasury shares reserve

Retained earnings

Treasury shares

Total Shareholders’ Equity

Total Liabilities and Shareholders’ Equity

The accompanying notes 1 to 31 form an integral part of the financial statements.

Abdul Wahab Mohammad Al-WazzanChairman

Adil AhmadGeneral Manager

Balance Sheet31 December 2008

Hameed Ahmed Al RasheedManaging Director

Note

(KD ‘000)

26,198

-

235,633

717,550

2,396

61,952

9,600

5,589

9,049

14,878

1,082,845

263,128

636,269

-

18,630

918,027

94,302

49,480

22,633

16,550

4,455

8,356

4,846

9,430

210,052

(45,234)

164,818

1,082,845

2008 2007

16

17

18

19

20

21

22

8

23

29,658

29,643

(18,434)

(17,326)

23,541

2,144

2,617

1,010

416

29,728

(9,719)

(3,681)

(988)

3,510

-

(10,878)

18,850

(170)

(463)

(10)

(225)

17,982

21.18

34A n n u a l R e p o r t 2 0 0 8


Statement of IncomeYear ended 31December 2008


Note

(KD ‘000)

78,940

-

-

(49,480)

29,460

11,021

2,023

(262)

67

42,309

(11,534)

(3,564)

(1,549)

(9,438)

4,534

(21,551)

20,758

(187)

(520)

(116)

(135)

19,800

23.33

2008 2007

INCOME

Murabaha and other Islamic financing income

Interest income

Interest expense

Distribution to depositors

Net financing income

Investment income

Net fees and commission income

Net (loss)/gain from foreign exchange

Other income

EXPENSES

Staff cost

General and administrative expenses

Depreciation

Impairment and other provisions

Reversal of impairment loss

Operating profit before deductions

Contribution to Kuwait Foundation for the Advancement of Sciences

National Labor Support Tax

Zakat

Directors’ remuneration

Net profit for the year

Earnings per share (fils)

85,729

-

-

-

-

-

-

85,729

85,729

-

-

-

-

-

-

8,573

-

-

94,302

49,480

-

-

-

-

-

-

49,480

49,480

-

-

-

-

-

-

-

-

-

49,480

18,673

-

-

-

-

-

1,885

20,558

20,558

-

-

-

-

-

-

-

-

2,075

22,633

7,072

-

-

-

-

-

-

7,072

7,072

-

-

-

-

-

-

-

-

9,478

16,550

4,132

5,440

5,440

-

5,440

-

-

9,572

9,572

130

(1,071)

(4,176)

(5,117)

-

(5,117)

-

-

-

4,455

8,356

-

-

-

-

-

-

8,356

8,356

-

-

-

-

-

-

-

-

-

8,356

4,846

-

-

-

-

-

-

4,846

4,846

-

-

-

-

-

-

-

-

-

4,846

9,478

-

-

17,982

17,982

(8,102)

(1,885)

17,473

17,473

-

-

-

-

19,800

19,800

(8,573)

(7,717)

(11,553)

9,430

(45,234)

-

-

-

-

-

-

(45,234)

(45,234)

-

-

-

-

-

-

-

-

-

(45,234)

142,532

5,440

5,440

17,982

23,422

(8,102)

-

157,852

157,852

130

(1,071)

(4,176)

(5,117)

19,800

14,683

-

(7,717)

-

164,818


STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITYYear ended 31 December 2008

Balance as of 31 December 2006

Financial assets available for sale:

- Net fair value gains

Net income recognized directly in equity

Profit for the year

Total recognized income for the year

Cash dividends - 2006

Transfer to reserves



Financial assets available for sale:

- Net fair value gains

- Net fair value loss due to reclassified

securities (note 2 & 7)

- Realized on sale

Net expense recognized directly in equity

Profit for the year

Total recognized income for the year

Issue of bonus shares

Cash dividends - 2007

Transfer to reserves


Sharecapital

Sharepremium

Statutoryreserve

Voluntaryreserve

Fairvaluationreserve

Revaluationsurplus

Treasurysharesreserve

Retainedearnings

Treasuryshares

Total

(KD ‘000)


19,800

-

(9,269)

262

(1,752)

1,549

9,438

(4,534)

15,494

20,533

(171,081)

20,891

(5,466)

64,955

64,436

(1,504)

130

8,388

4,946

(11,699)

11,191

-

141

(9,389)

(1,172)

-

9,269

3,287

(7,717)

(7,717)

3,958

255,046

259,004

17,982

(4,134)

(1,869)

(1,010)

(275)

988

4,349

-

16,031

(23,622)

(549,950)

456,105

(871)

119,000

571,833

(561,519)

(116)

26,891

124,352

(17,165)

4,141

(9,600)

-

-

(2,400)

4,134

1,869

105,331

(8,102)

(8,102)

124,120

130,926

255,046

36A n n u a l R e p o r t 2 0 0 8


Cash flows from operating activities:


Adjustments for:

Profit on treasury bonds

Dividend received

Unrealized foreign exchange (loss)/gain

Net gain from investments in securities

Depreciation


Reversal of impairment loss

Operating profit before changes in operating assets and liabilities

Changes in operating assets and liabilities

Due from Banks’ and other financial institutions


Loans and advances

Other assets

Due to Banks’ and other financial institutions


Customer deposits

Other liabilities

Net cash from operating activities

Cash flows from investing activities:

Proceeds from treasury bonds

Purchase of investments in securities

Proceeds from sale of investments in securities

Purchase of investment in associate

Proceeds from sale of investments in associate

Purchase of investment property

Purchase of property and equipment

Profit received on treasury bonds

Dividend received

Net cash from investing activities

Cash flows from financing activities:

Dividends paid

Net cash used in financing activities

Net increase in cash and cash equivalents

Cash and cash equivalents at beginning of the year

Cash and cash equivalents at end of the year (note 24)

STATEMENT OF CASH FLOWSYear ended 31 December 2008

(KD ‘000)

2008 2007



NOTES TO FINANCIAL STATEMENTS31 December 2008

1. Incorporation and activities

Kuwait International Bank K.S.C (The Bank) is a public shareholding Company incorporated in the State of Kuwait on 13 May1973 as specialized bank and is regulated by the Central Bank of Kuwait.

On 25 December 2006 the Bank’s shareholders’ amended the articles of association of the Bank to operate in accordancewith Islamic Sharia’a and changed the name of the Bank to “Kuwait International Bank K.S.C.”. .

In June 2007, the Central Bank of Kuwait (CBK) licensed the Bank to operate as an Islamic bank from 1 July 2007. Fromthat

date, all activities are conducted in accordance with Islamic Sharia’a, as approved by the Bank’s Fatwa and Sharia’a SupervisoryBoard.

The Bank is engaged principally in providing banking services, the purchase and sale of properties, leasing, and other tradingactivities. Trading activities are conducted on the basis of purchasing various commodities and selling them on murabaha atnegotiated book margin which can be settled in cash or on installment credit basis.

The registered office of the Bank is at West Tower – Joint Banking Center, P.O. Box 22822, Safat 13089, Kuwait.

These financial statements have been approved for issue by the Board of Directors on 10 February 2009. The Annual GeneralAssembly of the shareholders has the power to amend these financial statements after issuance.

2. Significant accounting policies

a. Basis of Preparation

The financial statements of the Bank have been prepared in accordance with International Financial Reporting Standards(IFRS) as adopted for use by the State of Kuwait for financial services institutions regulated by the CBK. These regulationsrequire adoption of all IFRS except for the IAS 39 requirement for collective provision, which has been replaced by the CBKrequirement for a minimum general provision as described under the accounting policies for impairment and uncollectibilityof financial assets.

The financial statements have been prepared under the historical cost basis of measurement as modified by the revaluationof financial assets classified as “at fair value through profit or loss” or “available for sale”, and land and buildings.

The financial statements have been presented in Kuwaiti Dinars rounded off to the nearest thousand except where otherwisestated.

The accounting policies are consistent with those used in the previous year except as follows:

i) Adoption of amendments to IAS 39: Financial Instruments: Recognition and Measurement

On 13 October 2008, the International Accounting Standards Board (IASB) approved and published amendments to IAS 39Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures to allow reclassificationsof certain financial instruments held for trading to either loans or receivables or available for sale categories.The Bank has adopted the amendments to IAS 39 with effect from 1 December 2008. As a result, the Bank has reclassifiedcertain trading investments with a carrying value of KD 7,775 thousand from the ‘fair value through profit or loss’ category tothe ‘available for sale’ category with effect from 1 December 2008 as these investments are no longer held for the purposeof selling or repurchasing in the near term due to the impact of the global financial crisis on the local and regional equitymarkets.

Subsequent to the reclassification, the Bank has recorded unrealised losses of KD 1,071 thousand in respect of the reclassifiedinvestments in cumulative changes in fair value within shareholders’ equity. Had the Bank not adopted the amendments toIAS 39, the unrealised loss would have been recorded in the statement of income.

ii) IAS 40 – Investment property as disclosed in note 2 (e).

The following International Accounting Standard Board (IASB) standards and International Financial Reporting Interpretations

38A n n u a l R e p o r t 2 0 0 8



Committee (IFRIC) Interpretations, though issued, are not yet mandatory and have not yet been adopted by the Bank:

• IAS 1: Presentation of financial statements (amended - effective 2009)• IAS 16: Property, plant and equipment (amended – effective 2009)• IAS 36: Impairment of asset (amended – effective 2009)• IFRS 8: Operating segments (effective 2009)• IFRIC 11: IFRS 2 – Group and Treasury Share Transactions;• IFRIC 12: Service Concession Arrangements;• IFRIC 13: Customer Loyalty Program; and• IFRIC 14: IAS 19 – The limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction.

The application of IAS 1 (Revised), which will be effective for annual periods beginning on or after 1 January 2009, will impactthe presentation of financial statements to enhance the usefulness of the information presented.

The application of IFRS 8, which will be effective for annual periods beginning on or after 1 January 2009, will result indisclosure of information to evaluate the nature and financial effects of the business activities in which the Bank engagesand the economic environments in which it operates.

The application of other standards and interpretations are not expected to have a material impact on the financial statementsof the Bank.

Additional disclosure will be made in the financial statements when these standards and interpretations become effective.

b. Classification, recognition, de-recognition and measurement of financial instruments

i) Classification

In accordance with IAS 39, the Bank classifies financial instruments as “at fair value through profit or loss”, “loans andreceivables” or “available for sale”. Financial liabilities are classified as other than “at fair value through profit or loss”.Management determines the appropriate classification of each instrument at the time of acquisition. .

Loans and receivables

These are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market.

Since having converted to an Islamic bank, the Bank offers Sharia’a compliant products and services only such as Murabaha,Istisnaa and Ijara, which are classified as financing receivables. The amount due is settled either by installments or on adeferred payment basis.

Murabaha is a sale agreement for commodities and real estate to “a promise to buy” customer, at a price comprising of cost

plus agreed profit, after the Bank has acquired the asset.

Istisnaa is a sale contract between a contract owner and a contractor whereby the contractor based on an order from thecontract owner undertakes to manufacture or other wise acquire the subject matter of the contract according to specifications,and sells it to the contract owner for an agreed upon price and method of settlement whether that be in advance, by installmentsor deferred to a specific future date.

Ijara is a finance lease agreement between the Bank and customers.

At fair value through profit or loss

Financial assets “at fair value through profit or loss” are further divided into two sub categories: “held for trading” and “designatedat fair value through profit or loss at inception”. A financial asset is classified in this category if acquired principally for thepurpose of selling in the short term or if they are managed and their performance is evaluated and reported internally on afair value basis in accordance with a documented investment strategy. Financial assets “at fair value through profit or loss”are subsequently remeasured at fair value and gains or losses arising from changes in fair value are included in the statementof income.

Available for sale

These are non-derivative financial assets not included in any of the above classifications and are principally acquired to beheld for an indefinite period of time; which may be sold in response to needs for liquidity or changes in rates of return or equityprices.



Financial liabilities other than at fair value through profit or loss

Financial liabilities which are not held for trading are classified as “other than at fair value through profit or loss”.

On conversion to an Islamic bank, financial liabilities include depositors’ accounts created by Mudarabha and Wakala contracts.Mudaraba represents an agreement whereby the Bank and the customer share an agreed percentage of any profit earnedon customers’ investments as agreed. Wakala represents an agreement whereby the Bank agrees to provide a certain rateof return for the transactions entered on behalf of the customer.

Mudaraba and Wakala payables are subsequently re-measured and carried at amortized cost using the effective yield method,finally determined at the end of each year.

ii) Recognition and de-recognition

A financial asset or a financial liability is recognized when the Bank becomes a party to the contractual provisions of theinstrument.

A financial asset is de-recognized (in whole or in part) where:

• the rights to receive cash flows from the assets have expired, or• the Bank retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without

material delay to a third party under a ‘pass through’ arrangement or• the Bank has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all

the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards ofthe asset, but has transferred control of the asset.

When the Bank has transferred its rights to receive cash flows from an asset and has neither transferred nor retainedsubstantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extentof the Bank’s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferredasset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration thatthe Bank could be required to repay.

A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. Where anexisting financial liability is replaced by another from the same lender on substantially different terms, or the terms of anexisting liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liabilityand the recognition of a new liability.

All regular way purchases and sales of financial assets are recognised using settlement date accounting i.e. the date thatthe Bank receives or delivers the assets. Changes in fair value between the trade date and settlement date are recognisedin the statement of income, or in equity in accordance with the policy applicable to the related instrument. Regular waypurchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame generallyestablished by regulations or conventions in the market place.

iii) Measurement

All financial instruments are initially recognised at fair value. Transaction costs are included only for those financial instrumentsthat are not measured at fair value through profit or loss. Transaction costs on financial assets classified as investments atfair value through profit or loss are recognised in the statement of income.

On subsequent re-measurement, financial assets classified as “at fair value through profit or loss” are carried at fair valuewith resultant unrealised gains or losses arising from changes in fair value included in the statement of income. “Loans andreceivables” are carried at amortised cost using the effective yield method less any provision for impairment. Losses arisingfrom impairment are recognized in the statement of income. Those classified as “available for sale” are subsequently measuredand carried at fair values. Unrealised gains and losses arising from changes in fair value of financial assets classified as“available for sale” are taken to fair valuation reserve in shareholders’ equity. When the “available for sale” asset is disposedof, or impaired, the related accumulated fair value adjustments previously recognised in equity are transferred to the statementof income as realized gains or losses.

Investments in equity instruments that do not have a quoted market price in an active market and whose fair value cannotbe reliably measured and derivatives that are linked to and must be settled by delivery of such unquoted instruments aremeasured at cost less impairment loss, if any. “Financial liabilities other than at fair value through profit or loss” are carriedat amortised cost using the effective rate of return method.

40A n n u a l R e p o r t 2 0 0 8



iv) Fair values

Fair values of quoted instruments are based on quoted closing bid prices or using the current market rate of return for thatinstrument. Fair values for unquoted instruments are based on net asset values provided by fund managers or are estimatedusing applicable price/earnings or price/cash flow ratios refined to reflect the specific circumstances of the issuer. The fairvalue of investments in mutual funds, unit trusts or similar investment vehicles are based on the last published bid price.

The fair value of unquoted financial instruments is determined by reference to the market value of a similar investment, orthe expected discounted cash flows, brokers’ quotes, or other appropriate valuation models.

The fair value of financial instruments carried at amortised cost is estimated by discounting future cash flows at the currentmarket rate of return for similar financial instruments.

v) Impairment and uncollectibility of financial assets

An assessment is made at each balance sheet date to determine whether there is objective evidence that a specific financialasset or a group of similar financial assets may be impaired as a result of one or more events that occurred after the initialrecognition of those assets and that event has an impact on the estimated future cash flows of the financial asset or groupof financial assets, that can be reliably measured. If such evidence exists, any impairment loss is recognised in the statementof income.

Impairment is determined as follows:

a) for financial assets with fixed rates of return, carried at amortised cost, impairment is the difference between the carryingvalue and the present value of the estimated future cash flows (excluding future credit losses that have not been incurred)discounted at the original effective interest rate; and for financial assets with variable interest rates, carried at amortisedcost, discounted at the current effective rate of return;

b) for financial assets carried at fair value, impairment is the difference between cost and fair value, less any impairmentloss previously recognised in the statement of income;

c) for financial assets carried at cost, impairment is the difference between the carrying value and present value of futurecash flows discounted at the current market rate of return for a similar financial asset.

Reversal of impairment losses recognized in prior years is recorded when there is an indication that the impairment lossesrecognized for the asset no longer exist or have decreased and the decrease can be related objectively to an event occurringafter the impairment was recognized. Except for equity instrument classified as available for sale, reversal of impairment lossesare recognized in the statement of income to the extent the carrying value of the asset does not exceed its amortised cost atthe reversal date. For available for sale equity investments, reversals of impairment losses are recorded as increases in fairvaluation reserve through equity.

In addition, in accordance with CBK instructions, a minimum general provision is made on all credit facilities net of certaincategories of collateral, to which CBK instructions are applicable and not subject to specific provision.

In March 2007, the CBK issued a circular amending the basis of making minimum general provisions on facilities changingthe rate from 2% to 1% for cash facilities and 0.5% for non cash facilities. The required rates were applied effective from1 January 2007 on the net increase in facilities, net of certain restricted categories of collateral during the reporting period.The minimum general provision in excess of the present 1% for cash facilities and 0.5% for non cash facilities has beenretained as a general provision until a further directive from the Central Bank of Kuwait is issued. .

Financial assets are written off when there is no realistic prospect of recovery.

vi) Offsetting

Financial assets and financial liabilities are offset and the net amounts reported in the balance sheet only when there is alegally enforceable right to set off the recognised amounts and the Bank intends to either settle on a net basis, or to realisethe asset and settle the liability simultaneously.



vii) Collateral pending sale

The Bank occasionally acquires property in settlement of certain financing receivables and loans and advances. Such propertyis stated at the lower of the carrying value of the related financing receivables and loans and advances and the current fairvalue of such assets. Gains or losses on disposal, and revaluation losses, are recognised in the statement of income.

viii) Financial guarantees

In the ordinary course of business, the Bank gives financial guarantees, consisting of letters of credit, guarantees andacceptances. Financial guarantees are initially recognized in the financial statements at fair value, being the premium received,in other liabilities. The premium received is recognized in the statement of income in ‘fees and commission income’ on astraight-line basis over the life of the guarantee. The guarantee liability is subsequently carried at initial measurement lessamortization. When a payment under the guarantee is likely to become payable, the present value of the expected paymentsless the unamortized premium, is charged to the statement of income.

c. Investments in associates

An associate is an entity over which the Bank exerts significant influence. Investments in associates are accounted for underthe equity method of accounting. Where an associate is acquired and held exclusively for resale, it is accounted for as a non-current asset held for resale under IFRS 5.

Under the equity method, the investment in associate is initially recognised at cost and adjusted thereafter for the post-acquisition change in the Bank’s share of the associate’s equity. Goodwill relating to an associate is included in the carryingamount of the investment and is not amortised. The Bank recognises in the statement of income its share of the total recognisedprofit or loss of the associate from the date that influence effectively commenced until the date that it effectively ceases.Distributions received from the associate reduce the carrying amount of the investment. Adjustments to the carrying amountmay also be necessary for changes in Bank’s share in the associate arising from changes in the associate’s equity. The Bank’sshare of those changes is recognised directly in equity, fair value reserve or foreign exchange translation reserve as appropriate.

Unrealised gains on transactions with associate are eliminated to the extent of the Bank’s share in the associate. Unrealisedlosses are also eliminated unless the transaction provides evidence of impairment in the asset transferred. An assessmentfor impairment of investments in associates is performed when there is an indication that the asset has been impaired, or thatimpairment losses recognised in prior years no longer exist.

The associates’ financial statements are prepared either to the Bank’s reporting date or to a date not earlier than three monthsof the Bank’s reporting date using consistent accounting policies. Where practicable, adjustments are made for the effects ofsignificant transactions or other events that occur between the reporting date of the associates and the Bank’s reporting date.

d. Property and equipment

Freehold land and premises are revalued annually and are carried net of accumulated depreciation and/ or accumulatedimpairment loss.

Increases in the carrying amount arising on revaluation are credited to revaluation surplus in the statement of changes inshareholders’ equity. Decreases that offset previous increases of the same asset are charged against revaluation surplusdirectly in equity; all other decreases are charged to the statement of income.

The useful life of premises is estimated to be 17 years.

Computer and other equipment are carried at cost less accumulated depreciation and accumulated impairment loss. Depreciationis charged on a straight-line basis over their estimated useful lives of 5 years.

e. Investment property

Land and buildings, held for long-term capital appreciation and rental yields, and not occupied by the Bank, is classified asinvestment property. Investment property is carried at cost which includes purchase price and transaction costs less accumulateddepreciation and impairment losses. Freehold land is not depreciated. Depreciation is computed on a straight line basis overthe estimated useful lives of 20 years. The open market value is determined periodically by external valuers.

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. The carryingamount of each item is reviewed at each balance sheet date to determine whether there is any indication of impairment. If

42A n n u a l R e p o r t 2 0 0 8



any such indication exists the assets are written down to their recoverable amount and the impairment loss is recognised inthe statement of income. Impairment is tested at the lowest level of the cash generating unit (CGU) to which the item belongs.

Investment property is derecognised when either it has been disposed of or when the investment property is permanentlywithdrawn from use and no future economic benefit is expected from its disposal. Any gains or losses on the retirement ordisposal of an investment property are recognised in the statement of income in the period of retirement or disposal.

f. Post employment benefits

The Bank is liable under Kuwait Labour Law to make payments under defined benefit plans to employees at cessation ofemployment. The defined benefit plan is unfunded and is based on the liability that would arise on involuntary termination ofall employees on the balance sheet date. This basis is considered to be a reliable approximation of the present value of thisliability.

g. Treasury shares

The cost of the Bank’s own shares purchased, including directly attributable costs, is recognised in equity. Gains or lossesarising on sale are separately disclosed under equity and in accordance with the instructions of Central Bank of Kuwait; theseamounts are not available for distribution. These shares are not entitled to any cash dividends. .

h. Revenue recognition

Income from Murabaha and Istisnaa are recognised on an effective yield basis which is established on initial recognition ofthe asset and is not revised subsequently.

Income from Ijara is recognized over the term of the Ijara agreement so as to yield a constant rate of return on the netinvestment outstanding.

Interest income and expenses related to conventional banking services (before conversion) are recognized in the statementof income for all interest bearing instruments using the effective yield method.

The calculation of the effective yield or interest rate includes all fees paid or received, transactions costs and discounts orpremiums that are an integral part of the effective yield or interest rate.

Fees and commission income that relate mainly to transaction and service fees are recognised as the related services areperformed.

Dividend income is recognised when the right to receive payment is established. Other fees are recognized as the servicesare provided.

Once a financial instrument categorised as “finance receivables” is written down to its estimated recoverable amount, relatedincome is thereafter recognised on the unimpaired portion based on the original effective yield rate that was used to discountthe future cash flows for the purpose of measuring the recoverable amount.

i. Provisions

Provisions are recognised when, as a result of past events, it is probable that an outflow of economic resources will be requiredto settle a present, legal or constructive obligation and the amount can be reliably estimated.

j. Foreign currencies

Foreign currency transactions are recorded at rates of exchange ruling at the date of the transactions. Monetary assets andliabilities in foreign currencies outstanding at the year-end are translated into Kuwaiti Dinars at rates of exchange ruling atthe balance sheet date and forward foreign exchange contracts are valued at the prevailing forward rate of exchange. Anyresultant gains or losses are taken to the statement of income.

Non-monetary items carried at fair value that are denominated in foreign currencies are translated at the rates prevailing onthe date when the fair value was determined. Translation difference on non-monetary items classified as “at fair value throughprofit or loss” are reported as part of the fair value gain or loss in the statement of income whereas, those on non-monetaryitems classified as “available for sale” financial assets are included in “fair valuation reserve” in the statement of changes inshareholders’ equity.



k. Cash and cash equivalents

Cash and cash equivalents comprise cash and balances with banks, deposits with banks and other financial institutions andshort term Murabaha with original maturity up to three months from the date of placement.

l. Dividends on ordinary shares

Dividends on ordinary shares are recognised as a liability and deducted from equity when they are approved by the Bank’sshareholders.

Dividends for the year that are approved after the balance sheet date are disclosed as an event after the balance sheet date.

m. Statutory contributions

National Labour Support Tax (NLST)

The Bank calculates the NLST in accordance with Law No. 19 of 2000 and the Minister of Finance Resolutions No. 24 of 2006at 2.5% of taxable profit for the period. As per Law No.19 of 2000, cash dividends from listed companies which are subjectedto NLST have been deducted from the profit for the year.

Kuwait Foundation for the Advancement of Sciences (KFAS)

The Bank calculates the contribution to KFAS at 1% in accordance with the modified calculation based on the Foundation’sBoard of Directors resolution, which states that the transfer to statutory reserve should be excluded from profit for the yearwhen determining the contribution.

Zakat

Contribution to Zakat is calculated at 1% of the profit of the Bank in accordance with the Ministry of Finance resolutionNo. 58/2007 effective from 10 December 2007.

n. Contingencies

Contingent assets are not recognised in the financial statements, but are disclosed when an inflow of economic benefit isprobable.

Contingent liabilities are not recognised in the financial statements, but are disclosed unless the possibility of an outflow ofresources embodying economic benefit is remote.

o. Segment information

A segment is a distinguishable component of the Bank that is engaged either in providing products or services (businesssegment), or in providing products and services within a particular economic environment (geographic segment), which issubject to risks and rewards that are different from those of other segments.

p. Significant accounting judgments and estimates

a) Judgements

In the process of applying the Bank’s accounting policies, management has made the following judgements, apart from thoseinvolving estimations, which have the most significant effect on the amounts recognised in the financial statements:

i) Classification of investments

On acquisition of an investment, the Bank decides whether it should be classified as “at fair value through profit or loss” or“available for sale”.

The Bank classifies investments as ‘at fair value through profit or loss’ if they are acquired primarily for the purpose of shortterm profit making or if they are managed and their performance is evaluated on a reliable fair value basis in accordance witha documented investment strategy. All other investments are classified as “available for sale”.

2,580

1,441

22,177

26,198

1,532

885

8,872

11,289

44A n n u a l R e p o r t 2 0 0 8



ii) Impairment of investments

The Bank treats “available for sale” equity investments as impaired when there has been a significant or prolonged declinein their fair value below their cost. The determination of what is “significant” or “prolonged” requires significant judgement. Inaddition, the Bank also evaluates among other factors, normal volatility in the share price for quoted equities and the futurecash flows and the discount factors for unquoted equities. Impairment may be considered appropriate when there is evidenceof deterioration in the financial position of the investee, industry and sector performance; changes in technology and operationaland financing cash flows.

iii) Classification of real estate property

Management decides on acquisition of a real estate property whether it should be classified as trading or investment property.

The Bank classifies property as trading property if it is acquired principally for sale in the ordinary course of business.

The Bank classifies property as investment property if it is acquired to generate rental income or for capital appreciation, orfor undetermined future use.

The Bank classifies property under development if it is acquired with the intention of development.

b) Estimation uncertainty

The key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date, thathave a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financialyear are discussed below:

Impairment losses on financing receivables and loans and advances and investments in debt instruments

The Bank reviews problem loans and financing receivables and investments in debt instruments on a regular basis to assesswhether a provision for impairment should be recorded in the statement of income. In particular, considerable judgment bymanagement is required in the estimation of the amount and timing of future cash flows when determining the level of provisionsrequired. Such estimates are necessarily based on assumptions about several factors involving varying degrees of judgmentand uncertainty.

Valuation of unquoted equity investments

Valuation techniques for unquoted investment securities is based on estimates such as expected cash flows discounted atcurrent rates applicable for items with similar terms and risk characteristics; recent arm’s length market transactions; currentfair value of another instrument that is substantially the same; or valuation models.

Any changes in these estimates and assumptions as well as the use of different, but equally reasonable estimates andassumptions may have an impact on the carrying value of loan losses and fair values of unquoted equity investments.

3. Cash and balances with banks and financial institutions

Cash balances

Dues from banks and financial institutions

Balances with Central Bank of Kuwait

(KD ‘000)

2008 2007

- 4,946Treasury bonds

(KD ‘000)

2008 2007

4. Treasury bonds


555,572

196,354

1,799

753,725

(12,761)

740,964

(23,414)

717,550

473,387

88,179

834

562,400

(6,157)

556,243

(9,774)

546,469

9,581

9,702

19,283

(16,887)

2,396

39,358

17,104

56,462

(29,137)

27,325

17,022

215,784

2,827

235,633

105,269

138,488

23,622

267,379

(KD ‘000)

2008 2007

5. Due from Bank’s and other financial institutions

Tawarruq transactions with Central Bank of Kuwait

Murabaha finance with other banks and financial institutions –

contractual maturity of 90 days or less.

Murabaha finance with other banks and financial institutions –

contractual maturity of more than 90 days

6. Financing receivables and loans and advances

Financing receivables comprise of facilities extended to the customers to the Bank in the form of Murabaha, Istisnaa and Ijaracontracts. Wherever necessary, financing receivables are secured by acceptable forms of collateral to mitigate the relatedcredit risk. Financing receivables and loans and advances comprise the following:

B) Loans and advancesThis represents facilities to the Bank’s customers which are in accordance with conventional banking contracts that remainoutstanding after conversion to an Islamic Bank. The Bank plans to convert these facilities to comply with Islamic Sharia’a.The interest relating to these loans was suspended and charged to liability (note 13).

(KD ‘000)

2008 2007

These financial instruments are issued by the Central Bank of Kuwait on behalf of the Ministry of Finance. They mature withina period not exceeding twelve months. These instruments were converted into tawaruq transactions to comply with IslamicSharia’a.

A) Financing receivables

Murabaha receivable

Ijara receivables

Other receivables

Less: Deferred profit

Net receivable

Provision for impairment

(KD ‘000)

2008 2007

Corporate loans

Consumer and installment loans

Less: Provision for impairment


46A n n u a l R e p o r t 2 0 0 8



The policy of the Bank for calculation of the impairment provision for financing receivables and loans and advances compliesin all material respects with the specific provision requirements of the Central Bank of Kuwait. The analysis of provision setout above is based on the requirements of the Central Bank of Kuwait and in accordance with the Central Bank of Kuwaitinstructions, a minimum general provision of 1% (2007: 1%) on all credit facilities, net of certain restricted categories of collateraland not subject to specific provision made.

The available provision on non-cash facilities of KD 5,627 thousand (2007: KD 2,979 thousand) is included in other liabilities(note 13).

Under the terms of Amiri Decree Nos. 32 of 1992, 41 of 1993 and subsequent amendments, any recovery of provisions madeas at 31 December 1991 on loans and advances and financing receivables and investments as at that date, which were notpurchased under these decrees, are required to be ceded to the Central Bank of Kuwait. As at 31 December 2008 suchrecoveries amounted to nil thousand (2007: KD 145 thousand).

At 31 December 2008 financing receivables and loans and advances on which normal profits or interest is not being accrued,or is suspended, amounted to KD 53,333 thousand (2007: KD 61,055 thousand). Unrecognised profit or interest relating tosuch financing receivables and loans and advances amounted to KD 20,183 thousand (2007: KD 22,687 thousand).

Impaired financing receivables and loans and advances divided between facilities granted pre-invasion and post liberationas required by the Central Bank of Kuwait as follows:

Movement in provision for impairment:

42,269

(145)

(3,213)

38,911

8,550

-

1,224

9,774

33,719

(145)

(4,437)

29,137

38,911

-

1,390

40,301

9,774

-

8,570

18,344

29,137

-

(7,180)

21,957

(KD ‘000)

2008 2007

Specificprovision

Generalprovision

Total Specificprovision

Generalprovision

Total

Balance at beginning of the year

Ceded to the Central Bank of Kuwait

Provision (no longer required)/

charged - (note 22)

Balance at end of the year

2,515

2,515

2,488

2,488

50,818

19,440

58,567

26,649

53,333

21,955

61,055

29,137

Pre-invasion Post liberation Total

(KD ‘000)

2008

Financing receivables and loans and advances

Specific provisions

2007


Specific provisions

5,073

12,438

17,511

3,390

1,554

4,944

(KD ‘000)

2008 2007

Investments at fair value through profit or loss:

Quoted securities designated at fair value at inception

Quoted securities held for trading

7. Investment securities



-

-

-

9,600

9,600

-

-

141

9,600

9,741

50

502040

9,741

-

-

(141)

9,600

150

9,600

(9)

-

9,741

(KD ‘000)

2008 2007

(KD ‘000)

2008 2007

-

3,253

28,144

12,967

44,364

-

44,364

61,875

6,704

5,603

25,743

20,558

58,608

(1,600)

57,008

61,952

(KD ‘000)

2008 2007

Investments available for sale:

Quoted securities

Unquoted funds

Unquoted securities

Investment sukuk

Less: Impairment (note 22)

Investments include conventional investments of KD 8,395 thousand. The Bank’s Fatwa and Sharia’a Supervisory Board, hasinstructed the Bank to dispose of these investments and to donate any realized gains to charity. Unrealized gains or lossestill disposal are included in other liabilities.

Due to adoption of the IAS 39 amendments issued by the IASB on 13 October 2008, the Bank reclassified certain quotedsecurities held for trading with a carrying value of KD 7,775 thousand from the ‘fair value through profit or loss category tothe ‘available for sale category with effect from 1 December 2008 (see note 2).

8. Investment in associates

The Financial Group of Kuwait KSCC

Kuwait Projects Company for

Contracting and Building SAK (Closed)

Pearl Holding Company Luxembourg (SA)

Warba Takaful Insurance

The movement in the carrying value of investments in associates is as follows:

Kuwait

Kuwait

Luxembourg

Kuwait

Financial institution

Contracting

Banking & Investment

Insurance

% ofholding

Principal activityCountry ofincorporation

Balance at beginning of the year

Purchase of investment in associate

Provision for impairment of investment in associate

Sale of investments in associate


In 2005 and 2006, the Bank recognized an impairment provision of KD 11,226 thousand to fully write down the value of theinvestment in Financial Group of Kuwait KSCC (FGK).

During the year, FGKs financial statements for the years ended 31 December 2004 to 31 December 2007 were approved byits shareholders. The shareholders’ also resolved to distribute cash dividends and to reduce the capital from KD 20 million toKD 1 million, and to distribute the surplus.

9,389

(3,800)

5,589

-

-

-

242,973

-

155

20,000

263,128

142,665

1,015

368

54,125

198,173

48A n n u a l R e p o r t 2 0 0 8


During the year, the Bank received KD 7,547 thousand as cash dividends and KD 4,534 thousand as partial repayment ofcapital on capital reduction. These amounts have been recognized in the statement of income as “investment income” and“reversal of impairment loss”, respectively.

The Bank has retained an accumulated impairment loss of KD 6,691 thousand on FGK since reliable financial informationabout its financial position as of 31 December 2008 is not available.


(KD ‘000)

2008 2007

(KD ‘000)

2008 2007

9. Investment property

10. Property and equipment

Freehold land and premises were revalued on 31 December 2008 using the lower of the values determined by two externalvaluers. The valuation was not significantly different from the carrying value and accordingly no revaluation adjustments havebeen made during the year.

Additions during the year

Impairment


Murabaha payable

Wakala payable

Current and call accounts from banks

Term financing

Investment property represents local freehold land acquired during the year. The fair value of investment property as of31December 2008 was KD 5,589 thousand based on a market valuation by an independent valuer.

11. Due to Bank’s and other financial institutions

12. Depositors’ accounts and customer deposits

Depositors’ accounts are deposits received from customers under Mudaraba and Wakala contracts.

Customer Deposits due under conventional banking contracts will be repaid upon maturity.

Depositors’ accounts and customer deposits are classified as “other than at fair value through profit or loss”.

3,251

810

5,627

8,942

18,630

4,828

3,176

2,979

7,517

18,500

13. Other liabilities(KD ‘000)

2008 2007

Depositors’ profit payable

Donation payable

Provision on non-cash credit facilities

Others

Term financing represents borrowings denominated in Kuwaiti Dinars from local conventional banks and are repayable overa period of 3 year, and are classified as “other than at fair value through profit or loss”.



2008

94,216

9.99%

45,234

21,104

85,651

9.99%

45,234

59,099

2007

Donation payable represents interest income less interest expense on facilities provided to the Bank’s customers on conventionalbanking terms. In accordance with the directions of the Bank’s Fatwa and Sharia’a Supervisory Board, this amount has beentransferred to donations payable as these customers have not committed to transform their facilities to Islamic Sharia’acompliant products.

14. Shareholders’ equity

a) Share capital

The authorized, issued and paid up capital of the Bank comprises of 943,024,000 ordinary shares of 100 fils each (31 December2007: 857,294,770 shares of 100 fils each).

b) Cash dividend paid

At the shareholders’ annual general meeting held on 26 March 2008, the shareholders approved payment of a cash dividendof 10 fils per share for the year ended 31 December 2007 proposed by the Board of Directors.

c) Proposed dividends

The Board of Directors proposed issuance of bonus shares amounting to 94,302,425 share of fils 100 per share in the rateof 10 shares for each 100 share for the financial year ended 1 December 2008 (2007: 85,729,588 share fils 100 per sharein the rate of 10 shares for each 100 share). The proposed dividends are subject to approval by shareholders in the forthcomingAnnual General Assembly.

d) Treasury shares

The Board of Directors has been given the authority to purchase treasury shares up to a maximum of 10% of the share capitalof the Bank.

Number of treasury shares (’000)

Percentage of treasury shares

Cost of shares (KD ‘000)

Market value of shares (KD ‘000)

15. Reserves

In accordance with the Law of Commercial Companies and the Bank’s Articles of Association, 10% of the Bank’s profit forthe year before contribution to KFAS, NLST, Zakat and directors remuneration is transferred to statutory reserve. Distributionof the statutory reserve is limited to the amount required to enable the payment of a dividend of 5% of share capital in yearswhen retained earnings are not sufficient for the payment of a dividend of that amount.

During the year KD 9,478 thousand was transferred to voluntary reserve.

The balances in share premium and gain on sale of treasury shares are not available for distribution.

The revaluation surplus represents the surplus of market value over carrying value of freehold land and premises owned bythe Bank. The balance in this reserve will be directly transferred to retained earnings on disposal of the underlying assets.

63,673

15,267

78,940

27,695

1,963

29,658

16. Murahaba and other Islamic financing income(KD ‘000)

2008 From1 July 2007

Income from Murabaha

Income from Ijara

50A n n u a l R e p o r t 2 0 0 8



22,640

4,021

2,982

29,643

-

-

-

-

13,701

4,578

155

18,434

-

-

-

-

2

4.75

4.9375

5.0625

5.1875

1

0.4375

0.8125

2.625

1

4.4375

4.4375

-

2

2.875

3.0625

3.1875

3.3125

(KD ‘000)

2008 Up to 30 June2007

(KD ‘000)

2008 Up to 30 June2007

17. Interest income

18. Interest expense

Loans and advances

Treasury bonds and other investments

Placements with banks

Time deposits

Borrowings – Banks and financial institutions

Savings and call accounts

19. Distribution to depositors

On the basis of the results for the year, the Board of Directors of the Bank determined the depositors’ share of profit at thefollowing rates:

(%)

2008 2007

KD customer accounts

Saving account

1 month deposit

3 months deposit

6 months deposit

Recurring deposits

Non-KD customer accounts

Saving account

1 month deposit

3 months deposit - USD

3 months deposit - GBP

9,269

(2,623)

4,375

11,021

1,869

73

202

2,144

(KD ‘000)

2008 2007

Dividend income

Net (loss) gain from investments at fair value through profit or loss

Net gain from investments available for sale

20. Investment income

Dividend income includes KD 7,547 thousand received from an associate (note 8).



23.33 21.18

19,800 17,982

943,024

(94,216)

848,808

943,024

(94,216)

848,808

2,026

(3)

2,023

2,617

-

2,617

(1,390)

(2,648)

-

(1,600)

(3,800)

(9,438)

3,213

364

(67)

-

-

3,510

(KD ‘000)

2008 2007

(KD ‘000)

2008 2007

(KD ‘000)

2008 2007

Fees and commission income

Fees and commission expense

Net fees and commission income

Financing receivables and loans and advances (note 6)

Non-cash facilities

Other provisions

Impairment on available for sale investments (note 7)

Impairment on investment property (note 9)

21. Net fees and commission income

22. Impairment and other provisions

23. Earnings per share

Earnings per share is computed by dividing the net profit for the year attributable to the shareholders by the weighted averagenumber of shares outstanding during the year, less treasury shares.

The computation of earnings per share is as follows:

Weighted average number of shares outstanding:

Weighted average of number of shares issued

Weighted average number of treasury shares

Weighted average number of shares outstanding


Earnings per share

The prior year comparative has been restated for the effect of bonus shares issued on 26 March 2008.

Shares(’000s)

Shares(’000s)

FilsFils

26,198

17,022

215,784

259,004

11,289

105,269

138,488

255,046

(KD ‘000)

2008 2007

Cash and balances with banks and financial institutions

Tawarruq transactions with Central Bank of Kuwait

Murabaha finance with other banks and financial institutions - less than 90 days

24. Cash and cash equivalents

52A n n u a l R e p o r t 2 0 0 8



477

-

233

1,092

44

-

125

1

-

-

1

-

-

-

3

-

7

2

1

-

16

297

-

473

924

41

-

178

1

-

-

1

-

-

-

2

-

6

2

1

-

13

25. Commitments and contingent liabilities

To meet the financial needs of customers, the Bank enters into various contingent liabilities and irrevocable commitments.Even though these obligations may not be recognized on the balance sheet, they expose the Bank to credit risk and thereforeform part of the overall risk of the Bank.

The total outstanding contingent liabilities and commitments are as follows:

7,856

3,563

43,888

54,484

7,208

7,501

41,669

65,341

(KD ‘000)

2008 2007

Acceptances

Letters of credit

Letters of guarantee

Commitments to extend credit

26. Related Parties

These are transactions with certain related parties (shareholders, associates, directors and executive officers of the Bank,close members of their families and companies in which they are principal owners or over which they are able to exercisesignificant influence) who were customers of the Bank in the ordinary course of business. Such transactions were made onsubstantially the same terms including profit and interest rates and collateral as those prevailing at the same time for comparabletransactions with unrelated parties and did not involve more than a normal amount of risk.

No major transaction with the key management has been performed during the year.

The year-end balances included in the balance sheet are as follows:

2008 2007

No. of directorsor executive

officers

No. of relatedparties

AmountKD ‘000

Directors

Financing receivables and loans

Credit cards

Deposits

Collaterals

Executive officers

Financing receivables and loans

Credit cards

Deposits

No. of directorsor executive

officers

No. of relatedparties

AmountKD ‘000

The remuneration to directors and other members of key management during the year was as follows:

1,119

183

1,302

1,025

113

1,138

(KD ‘000)

2008 2007

Short-term benefits

Post-employment benefits



27. Segment information

a) Primary segment information

For the purposes of segment reporting, the Bank’s management has grouped the Bank’s products and services into thefollowing primary business segments:

• Commercial, Consumer and International Banking - comprising of range of banking services and investment products tocorporate and individual customers, providing commodity and real estate murabaha finance, Ijara and wakala facilities;

• Treasury, Fund Management and Institutional Banking - comprising of liquidity management, correspondent banking,clearing, murabaha investments, exchange of deposits with banks and financial institutions; .

• Investment Management - comprising of investment in associates and other investments.

Segment results include revenue and expenses directly attributable to a segment and an allocation of cost of funds to segmentsbased on daily weighted average balance of segment assets. Segment revenue and segment expenses do not include anyinter-segment transfers.

Segment assets and liabilities comprise those operating assets and liabilities that are directly attributable to the segment.

Capital expenditure represents the total cost incurred during the year to acquire assets that are expected to be used duringmore than one period.

26,198

235,633

-

-

-

-

-

-

-

261,831

263,128

-

-

263,128

10,374

2,238

-

-

-

-

-

-

61,952

9,600

5,589

-

-

77,141

-

-

-

-

11,021

2,377

-

3,800

-

-

-

-

-

-

-

9,049

14,878

23,927

-

-

18,630

18,630

692

150

-

-

26,198

235,633

717,550

2,396

61,952

9,600

5,589

9,049

14,878

1,082,845

263,128

636,269

18,630

918,027

91,788

19,800

1,028

9,438

-

-

717,550

2,396

-

-

-

-

-

719,946

-

636,269

-

636,269

69,701

15,035

-

5,638

Commercial,consumer andinternational

banking

Treasury, fundmanagement

and institutionalbanking

Investmentmanagement

Others Total

ASSETS

Cash and balances with banks

and financial institutions

Due from banks and other

financial institutions


Loans and advances

Investment in securities

Investment in associates

Investment property

Other assets


Total assets

LIABILITIES

Due to banks and other


Depositors’ account

Other liabilities

Total liabilities

As at December 2008

Segment revenue

Net profit

Capital expenditure


As at December 2008

(KD ‘000)

54A n n u a l R e p o r t 2 0 0 8



11,289

4,946

267,379

-

-

-

-

-

-

283,614

198,173

-

-

-

198,173

12,524

3,437

-

-

-

-

-

-

-

61,875

9,741

-

-

71,616

-

-

-

-

-

2,144

588

-

-

-

-

-

-

-

-

-

3,583

15,255

18,838

-

-

-

18,500

18,500

-

-

-

-

11,289

4,946

267,379

546,469

27,325

61,875

9,741

3,853

15,255

947,862

198,173

571,833

1,504

18,500

790,010

65,488

17,982

2,399

(3,510)

-

-

-

546,469

27,325

-

-

-

-

573,794

-

571,833

1,504

-

573,337

50,820

13,957

-

(3,510)

Commercial,consumer andinternational

banking

Treasury, fundmanagement

and institutionalbanking

Investmentmanagement

Others Total

As at December 2007

ASSETS



Treasury and CBK bonds

Due from banks and other



Loans and advances to customers



Other assets


Total assets

LIABILITIES

Due to banks and other


Depositors’ account

Customer deposits

Other liabilities

Total liabilities

As at December 2007

Segment revenue

Net profit

Capital expenditure


(KD ‘000)

b) Secondary segment information

The Bank does not operate from any geographical location other than Kuwait.

28. Financial instruments and risk management

a) Strategy in using financial instruments

As an Islamic commercial bank, the Bank’s activities are principally related to the sourcing of funds through Sharia’a compliantfinancial instruments, within the guidelines prescribed by Central Bank of Kuwait (CBK) and deploying these funds in Sharia’acompliant financing and investment activities, to earn a profit. The profits are shared between the shareholders as well asthe profit sharing deposit account holders, as per policies and proportions determined by the Board of Directors and Fatwaand Sharia’a Supervisory Board. The funds raised vary in maturity between short and longer tenors and are mainly in KuwaitDinars, apart from major foreign currencies and GCC currencies. While deploying the funds, the Bank focuses on the safetyof the funds as well as maintaining sufficient liquidity to meet all claims that may fall due. Safety of shareholder and depositorfunds is further enhanced by diversification of financing activities across economic and geographic sectors, as well as borrowertypes.



b) Overall risk management

The main objective of risk management in the Bank is to achieve an optimum balance between the twin goals of profitmaximization and capital maintenance.

The Bank’s risk management framework is built around this objective and seeks to address specific concerns of the variousstakeholders such as shareholders, Central Bank of Kuwait, rating agencies, customers, depositors and the general public.

The Bank’s commitment to the creation and maintenance of effective risk management systems and procedures is evidencedby the oversight responsibility given to the Board Risk Management Committee.

The Bank has established a prudent and professional approach to risk-taking with the following underlying principles thatsupport its risk management framework:

• Actively promoting an overall culture that accords high value to disciplined and effective risk management;• Using professionally qualified people with appropriate risk management skills;• Disciplined processes for evaluation and acceptance of risk within appropriate limits in individual transactions, products

and the management of financing and investments;• A management information system that provides timely and accurate information on risks to the relevant management

group and the commitment to continuously upgrade these systems and apply the most up-to-date analytical tools andsystems to properly capture risks, monitor positions and determine the impact of potential management actions; and

• An internal audit function to ensure ongoing adherence to and integrity of risk management processes.

The Bank has a Risk Management Department, which is primarily responsible for risk management in the Bank. The RiskManagement Department is structured in a manner which facilitates focused attention on each of the specific risk arising fromfinancial instruments areas, e.g., credit, liquidity, market (encompassing foreign exchange, profit rate, equity risks) and otherrisks such as operational risks.

The Bank’s risk management methodologies include:

• Pro-active methodologies such as continuous review and enhancement of: the Bank’s policies and procedures; developmentand enhancement of risk measurement tools such as risk grading models, pricing models and VaR models; risk inputsin respect of the Bank’s strategic planning as well as structuring and review of product and services.

• On-going methodologies, such as risk management inputs in respect of proposed Financing and Investment applications;compliance review - post approval - of financing and investment facilities; periodical review of the financing and investmentportfolio by way of reports and highlighting perceived risks to top management as well as line functionaries; continuousmonitoring of market, operational and IT-security related risks.

• Post fact methodologies, such as review of proposals and trends in respect of provisions; write-offs and disposal ofinvestments.

i) Credit risk

Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party toincur a financial loss. This includes the risk of decline in the credit standing of the customer. While such decline does not implydefault, it increases the probability of the customer defaulting. Financial instruments that create credit risk include financingfacilities and commitments to extend credit, securities and investment in securities.

Credit risk management structure

To manage credit risk, the Bank has established a Board level Financing and Investment Committee and the followingmanagement committees:

• Financing and Investment Committee• Provision Committee

The Board Financing and Investment Committee is responsible for reviewing and approving the management level financingand investment committee’s recommendations with regard to credit facilities, financing relationships, financing limits, pricingand profitability.

The management level financing and investment committee is responsible for safeguarding the asset quality of the Bank andensuring profitable use of funds. The committee reviews the Bank’s credit policy in line with Central Bank of Kuwait guidelines


56A n n u a l R e p o r t 2 0 0 8


for commercial and retail credit as well as the inter-bank and country limits. The committee approves or renews credit proposalswithin the committee’s lending limits and reviews and concurs in the approval process for extension of credit in excess of theauthority of the committee.

The provision committee is primarily responsible for determining the provisions required for impaired loans when the facilityis not already classified as irregular according to Central Bank of Kuwait regulations (i.e. the Watch list classification of financingfacilities). In addition to this the committee also reviews the required provisions for irregular financing facilities to ensurecompliance with Central Bank of Kuwait regulations.

In accordance with the instructions of the Central Bank of Kuwait dated 18 December 1996, setting out the rules and regulationsregarding the classification of credit facilities, the Bank has formed an internal committee which is composed of competentprofessional staff and which has as its purpose the study and evaluation of the existing credit facilities of each customer ofthe Bank. This committee is required to identify any abnormal situations and difficulties associated with a customer’s position,which might cause the debt to be classified as irregular, and to determine an appropriate provisioning level. The Committee,which meets regularly throughout the year, also studies the positions of those customers whose irregular balances exceed25% of their total debt, in order to determine whether further provisions are required.

Credit risk management strategy and process

The Bank manages its credit facilities portfolio with the objective of ensuring that it is well diversified and it earns a level ofreturn appropriate to the risk it assumes.

In the course of normal business, the Bank deploys its funds in various credit facilities, with the primary objective of generatingprofits for the shareholder. However, at the same time, the Bank seeks to ensure the quality of the credit facilities. The Bankcontinually strives to achieve an optimal balance between the return and credit quality of the portfolio.

The Bank’s polices and procedures manuals dealing with credit lay down the credit risk management framework by specifyingvarious covenants and credit standards which include:

• clear definition of roles and responsibilities of the various functionaries involved in the different stages of the credit facilitylife cycle;

• establishing clear approval authority structure both for routine as well as exceptional credit facilities;• listing beneficiary, facility, collateral and pricing parameters for the Bank’s product-set;• standardizing credit approval packages;• defining criteria for collateral valuation and policies for collateral management;• detailing the procedures for the entire credit life-cycle, including problem loan management;• ensuring, by way limits, a diversification of the credit portfolio across geographies (countries/ regions), sectors, and

counterparties.

Credit risk measurement

The Bank measures credit risk in terms of asset quality using two primary measures - the provisioning ratio and the non-performing financing receivables and loans and advances ratio. The non performing loans ratio is the ratio of non-performingloans as a percentage of total loans.

Definitions of past due and impaired

The following classification of credit exposures is considered by the Bank for identifying impaired credit facilities

No. of days past due ClassificationMore than 30 days but not exceeding 90 days watch listMore than 90 days but not exceeding 180 days substandardMore than 180 days but not exceeding 365 days doubtfulMore than 365 days bad

Maximum exposure to credit risk

The table below shows the maximum exposure to credit risk for the components of the balance sheet, including derivativeswithout taking account of any collateral and other credit enhancements. The maximum exposure is shown gross, before theeffect of mitigation through the use of master netting and collateral agreements.



1,924

4,946

276,744

573,794

61,875

9,741

3,583

932,607

7,208

7,501

41,669

65,341

121,719

1,054,326

(KD ‘000)

Gross maximum exposure

2008 2007

Credit risk exposures relating to on-balance sheet items:

Balances with banks and financial institutions

Treasury and Central bank bonds





Other assets

Total

Credit risk exposures relating to off-balance sheet items:

Acceptances

Letters of credit

Guarantees

Commitments to extend credit

Total

Total credit risk exposure

1,441

-

235,633

719,946

61,952

9,600

9,049

1,037,621

7,856

3,563

43,888

54,484

109,791

1,147,412

Credit risk can also arise due to a significant concentration of Bank’s assets to any single counterparty; this risk is managedby diversification of the portfolio. The 20 largest gross exposures outstanding as a percentage of total credit risk exposuresas at 31 December 2008 is 28% (2007: 33.77%).

Risk concentrations of the maximum exposure to credit risk

Concentrations of credit risk arise when a number of counterparties are engaged in similar business activities, or activitiesin the same geographic region, or have similar economic features that would cause their ability to meet contractual obligationsto be similarly affected by changes in economic, political or other conditions. Concentrations of credit risk indicate the relativesensitivity of the Bank’s performance to developments affecting a particular industry or geographic location.

Geographical and industry sector concentrations of financial assets and off balance sheet items are as follows:

33

5,584

52,629

2,541

871,820

932,607

-

-

273

269

121,177

121,719

27

5,066

84,596

8,702

939,230

1,037,621

-

-

-

96

109,695

109,791

Geographic region:

Asia

North America

Middle East (excluding Kuwait)

Europe

Kuwait

2008 2007

(KD ‘000)

Financial assets Off balancesheet items


58A n n u a l R e p o r t 2 0 0 8



112,986

298,886

330,721

133,100

56,914

932,607

41

542

121,136

-

-

121,719

101,253

371,862

401,860

133,117

29,529

1,037,621

579

168

82,472

26,572

-

109,791

Industry sector:

Personal

Financial institutions

Real estate

Construction

Others

2008 2007

(KD ‘000)



Credit risk mitigation

Credit risk mitigation techniques that the Bank is permitted to recognize are collateral, netting and guarantees provided certainconditions which include such agreements being binding on all parties and legal enforceability are met.

The Bank does not make use of netting whether on or off-balance sheet.

The Bank’s lending policy specifies the acceptable types of collateral, source of valuation, accuracy of valuation and frequencyof revaluation in respect of collateral. The policy also specifies the maximum facility commitment to collateral value and approvallevels for different types of collateral and facility. The accepted collaterals are cash, first demand bank guarantees, equityshares listed on the Kuwait Stock Exchange, and real estate-both within and outside Kuwait.

As part of general collateral control mechanism, the Bank periodically re-values all collateral to ascertain that the collateralcover is not lower than the value at the time of the original approval. The Bank also continuously monitors the validity andexpiry dates of mortgages to ensure their timely renewal.

The main types of guarantors are individuals and corporate entities. Since none of the Bank’s guarantor counterparties havebeen rated by any of the three rating agencies, approved by the Central Bank of Kuwait for the purposes of calculation ofCapital adequacy, the Bank has not taken any guarantor related credit risk mitigation allowance while arriving at the capitaladequacy.

Collateral and other credit enhancements

The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. Guidelines areimplemented regarding the acceptability of types of collateral and valuation parameters.

The main types of collateral are cash, securities, and charges over real estate properties and counter-guarantees.

Management monitors the market value of collateral, requests additional collateral in accordance with the underlying agreement,and monitors the market value of collateral obtained during its review of the adequacy of the allowance for impairment losses.

It is the Bank’s policy to dispose of repossessed properties in an orderly fashion. The proceeds are used to reduce or repaythe outstanding claim. In general, the Bank does not occupy repossessed properties for business use.

At 31 December 2008, 73% (31 December 2007: 71%) of the total outstanding financing receivables and loans and receivableswere fully secured with a collateral coverage of 2 times the underlying financing receivables and loans and advances(2007 : 2 times).

Credit quality of financial instruments

The Bank classifies the various credit risk exposure which are neither past due nor impaired into three categories of creditquality as under:

Neither past due nor impaired



• High quality: Regular exposures covered fully by collateral in excess of 100% of the amount outstanding.• Standard quality: Regular exposures where collateral does not fully cover the amount outstanding, but the customer has

no incident of past due during the previous 12 months.• Moderate quality: All other regular exposures where the collateral does not fully cover the amount outstanding.

The table below shows the credit risk exposure by credit quality of financing receivables and loan and advance by class andgrade gross of deferred profit and provision.

2008


- Corporate financing

- Consumer financing

2007

Loans and advances

- Corporate lending

- Consumer lending

High quality Standardquality

Moderatequality

Total

395,519

34,547

430,066

321,981

43,020

365,001

3,104

537

3,641

45,246

57,071

102,317

100,559

59,141

159,700

4,232

4,108

8,340

499,182

94,225

593,407

371,459

104,199

475,658

(KD ‘000)

Ageing analysis of past due but not impaired financing receivables and loans and advances as per class of financial assets.

Neither past due nor impaired

2008




Fair value of collateral

2007

Loans and advances

- Corporate lending

- Consumer lending

Fair value of collateral

Past dueup to 30 days

Total

99,646

2,343

101,989

159,812

66,731

2,708

69,439

122,704

16,451

1,623

18,074

39,923

10,853

1,430

12,283

22,832

6,552

879

7,431

26,162

1,453

1,267

2,720

8,403

122,649

4,845

127,494

225,897

79,037

5,405

84,442

153,939

(KD ‘000)

Past due30 to 60 days

Past due60 to 90 days

60A n n u a l R e p o r t 2 0 0 8



Financing receivables and loans and advances by class individually impaired

2008




2007

Loans and advances

- Corporate lending

- Consumer lending

Grossexposure

Impairment Fair value ofcollateral

671,755

101,253

773,008

499,133

121,985

621,118

40,973

12,360

53,333

50,357

10,698

61,055

46,835

11,293

58,128

76,035

8,265

84,300

(KD ‘000)

ii) Liquidity Risk

Liquidity risk is the risk that the Bank will encounter difficulty in meeting obligation associated with financial liabilities. To limitliquidity risk, management has arranged diversified funding sources, manages assets with liquidity in mind, and monitorsliquidity on a daily basis.

The Bank maintains access to liquidity in the form of balance sheet positions and access to markets such that, even underadverse conditions, it does not need to raise deposits at unreasonable rates or sell assets on a forced basis. The Bank’smanagement of liquidity risk is consistent with its overall risk management framework and includes establishing minimumliquid asset requirements and limits with regards to the acceptance of short term wholesale deposits to protect against shortterm liquidity demands.

The Bank monitors liquidity risk by measuring the liquidity gaps on a daily basis and the position is reviewed by asset liabilitymanagement committee (ALCO) on a monthly basis. Similarly liquidity reserve position and the ratio of financing facilities toeligible deposits are monitored on a daily basis.

The bank measures liquidity risk by preparing and monitoring the maturity profile of its assets and liabilities as disclosed below:

-

20,506

75,339

-

-

-

9,049

-

104,894

-

-

229,118

-

-

-

-

-

229,118

-

2,827

355,001

39,090

9,600

5,589

-

14,878

426,985

26,198

235,633

719,946

61,952

9,600

5,589

9,049

14,878

1,082,845

26,198

212,300

60,488

22,862

-

-

-

-

321,848

Up to1 month

1 to 3 Months 3 to 12 Months Over 1year

Total

ASSETS







Investment property

Other assets


Total assets

At 31 December 2008

(KD ‘000)



46,826

180,743

-

-

227,569

(122,675)

-

-

29,877

12,016

-

-

-

-

41,893

13,857

180,838

-

-

-

194,695

(152,802)

69,186

104,509

-

-

173,695

55,423

-

-

23,622

215,972

-

-

-

-

239,594

35,325

157,329

-

-

-

192,654

46,940

155

-

18,630

164,818

183,603

243,382

-

-

-

333,509

39,708

9,741

3,583

15,255

401,796

34,292

581

-

18,500

157,852

211,225

190,571

263,128

636,269

18,630

164,818

1,082,845

-

11,289

4,946

267,379

573,794

61,875

9,741

3,583

15,255

947,862

198,173

571,833

1,504

18,500

157,852

947,862

-

146,961

351,017

-

-

497,978

(176,130)

11,289

4,946

213,880

12,297

22,167

-

-

-

264,579

114,699

233,085

1,504

-

-

349,288

(84,709)

Up to1 month

1 to 3 Months 3 to 12 Months Over 1year

Total

LIABILITIES AND EQUITY



Other liabilities

Shareholders’ equity

Total liabilities and equity

Net liquidity gap

At 31 December 2007

ASSETS



Treasury and Central Bank bonds





Other assets


Total assets

LIABILITIES AND EQUITY



Customer deposits

Other liabilities

Shareholders’ equity

Total liabilities and equity

Net liquidity gap

The table below summarises the maturity profile of the Bank’s financial liabilities at 31 December 2008 based on contractualundiscounted repayment obligations. See note – ‘Maturity analysis of assets and liabilities’ for the expected maturities of theseliabilities. Repayments which are subject to notice are treated as if notice were to be given immediately.

(KD ‘000)

267,714

636,269

18,630

922,613

54,888

123,989

-

178,877

Less than1 month

Over 5years

Total

At 31 December 2008

UNDISCOUNTED LIABILITIES



Other liabilities

(KD ‘000)

30,453

214,630

-

245,083

182,196

249,332

-

431,528

-

-

-

-

1 to 3Months

3 to 12Months

177

48,318

18,630

67,125

1 to 5Years

62A n n u a l R e p o r t 2 0 0 8



211,823

461,313

1,504

18,500

693,140

98,092

89,456

1,504

-

189,052

Less than1 month

Over 5years

Total

At 31 December 2007



Customer deposits

Other liabilities

(KD ‘000)

44,114

84,482

-

-

128,596

35,325

286,794

-

-

322,119

-

-

-

-

-

1 to 3Months

3 to 12Months

34,292

581

-

18,500

53,373

1 to 5Years

The table below shows the contractual expiry of the Bank’s contingent liabilities and commitments.

Less than1 month

Over 5years

Total

At 31 December 2008

UNDISCOUNTED LIABILITIES

Contingent liabilities

Commitments

At 31 December 2007

Contingent liabilities

Commitments

(KD ‘000)

1 to 3Months

3 to 12Months

1 to 5Years

10,185

1,745

11,930

10,891

5,601

16,492

15,833

11,272

27,105

12,056

3,145

15,201

18,197

29,990

48,187

22,071

35,347

57,418

11,082

11,477

22,559

11,329

21,248

32,577

10

-

10

31

-

31

55,307

54,484

109,791

56,378

65,341

121,719

iii) Market risk management

Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes inmarket prices. Market risk comprises of three types of risk currency risk, rate of return risk and other price risk (other thanthose arising from rate of return risk or currency risk).

The objective of market risk management is to manage and control exposures within acceptable parameters, whilst optimisingreturns. Given the Bank’s current profile of financial instruments, the principle exposure is the risk of loss arising from fluctuationsin the future cash flows or fair values of these financial instruments because of a change in achievable rates. This is managedprincipally through monitoring gaps between effective profit and rental rates and by having approved rates and bands reviewedat regular re-pricing meetings.

Market risk management structure

The overall responsibility of managing the Bank’s market risks is of ALCO. The day to day management of market risks isthe responsibility of the treasury department which is headed by the Treasurer who reports to the General Manager. TheInternational Banking Department is responsible for proposing country limits based on Moody’s long term sovereign currencydebt rating, or equivalent rating by the two other rating agencies, and reviewing them annually. The measurement, monitoringand reporting of market risks is the responsibility of the market risk division within risk management department.

Market risk management strategy and process

The Bank has established risk management policies and limits within which exposure to market risks is monitored andcontrolled.

The following table sets out the market risk capital charge for profit rate risk, equity position risk, foreign exchange risk andcommodity risk.



(iii a) Rate of return risk• Rate of return for commodity Murabaha and Wakala receivables are agreed with the counterparty bank at the time of

each transaction and the profit mark-up and effective yield rate is consequently fixed for the duration of the contract. Riskexposure is managed by reviewing maturity profiles of transactions entered into.

• Effective rates applied to new consumer finance transactions are agreed on a monthly basis by ALCO and the profit mark-up will then be fixed for each individual transaction for the agreed deferred payment terms.

• Rental for longer term commercial property financing is benchmarked against a market measure, in agreement with theBank’s Fatwa and Sharia’a Supervisory Board, and therefore amounts receivable are reassessed every year.

• Rates of return payable on customer deposit accounts are calculated at the end of three month end in line with theMudaraba profit model and customer terms and conditions.

The Bank is not exposed to profit rate risk, since in accordance with Islamic Sharia’a the Bank does not provide contractualrate of return for deposits.

(iii b) Currency riskCurrency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes inforeign exchange rates. The Bank views itself as a Kuwaiti entity, with the Kuwaiti Dinar as its functional currency. The Boardhas set limits on positions by currency. Positions are monitored on a daily basis and hedging strategies used to ensure positionsare maintained within established limits.

The Bank had the following net exposures denominated in foreign currencies as at 31 December:

(670)

6

479

(185)

(648)

(44)

337

(355)

(KD ‘000)

2008 2007

Net assets/(liabilities)

US Dollars

Sterling Pounds

Others

A sensitivity analysis is not disclosed since the Bank does not have significant exposure to foreign exchange risk.

(iii c) Equity price riskThis is a risk that the value or future cash flow of a financial instrument will fluctuate as a result of changes in market prices(other than those arising from rate of return risk or currency risk), whether those changes are caused by factors specific tothe individual instrument or its issuer or factors affecting all instruments traded in the market. The Bank manages this riskthrough diversification of investments in terms of geographical distribution and industry concentration. The Bank does not havea significant exposure to equity price risk.

(iii d) Prepayment riskPrepayment risk is the risk that the Bank will incur a financial loss because its customers and counterparties repay or requestrepayment earlier or later than expected, such as fixed rate mortgages when profit/ interest rates fall. Due to the contractualterms of its products the Bank is not exposed to prepayment risk.

iv) Operational risk

Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from externalevents.

The Bank’s business and support units have primary responsibility for identifying, assessing and managing their operationalrisks. They employ internal control techniques to reduce their likelihood or impact to tolerable levels within the Bank’s riskappetite. Where appropriate, risk is mitigated by way of insurance.

The Bank has a set of policies and procedures that are applied to identify, assess and control operations risk in addition toother types of risks relating to the banking and financial activities of the Bank. Operational risk is managed through the Risk Management Department. This department ensures compliance with policies and procedures to identify, assess, control andmonitor operational risk as part of overall risk management.

The management of operational risks complies in all material respects with Central Bank of Kuwait instructions dated 14November 1996, regarding general guidelines for internal control systems and directive issued on 13 October 2003, regarding“Sound practices for management and control of operational risks“.

64A n n u a l R e p o r t 2 0 0 8



29. Fair values of financial instruments

Fair values of financial instruments are not materially different from their carrying values. For financial assets and liabilitiesthat are liquid or having a short term maturity (less than three months) it is assumed that the carrying amounts approximatetheir fair value. This assumption is also applied to savings accounts under mudarabha contract without a specific maturity.

As of 31 December 2008 fair values of financial instruments based on quoted market prices and observable market dataamounted to KD 6,704 thousand (2007: KD 4,938 thousand). Certain financial instruments are recorded at fair value usingvaluation techniques as current market transactions or observable market data are not available. Their fair value is determinedusing a valuation model that has been tested against the prices of actual market transactions and using the Bank’s bestestimate of the most appropriate model inputs. These are adjusted to reflect the marketability, earnings spread of theseinstruments and limitations of the model. The impact on income statement and equity would be immaterial if the assumptionswere changed by 5%.

The methodologies and assumptions used to determine fair values of financial instruments is described in fair value sectionof note 2. Significant Accounting policies.

As explained in note 7, included under investment available for sale are unquoted equity investments with a carrying valueof KD 25,743 thousand (2007: KD 17,646 thousand) for which fair value cannot be reliably determined.

30. Capital adequacy and capital management

The Bank’s objectives when managing capital, which is a broader concept than the ‘equity’ on the face of balance sheet, are:

• To comply with the capital requirement set by the regulators of the banking markets where the entities within the Bankoperate;

• To safeguard the Bank’s ability to continue as a going concern so that it can continue to provide returns for shareholders’and benefits for other stakeholders; and

• To maintain a strong capital base to support the development of its business.

Capital adequacy and the use of regulatory capital are monitored daily by the Bank’s management, employing techniques basedon the guidelines developed by the Basel committee and the Central Bank of Kuwait directives, as implemented by the State of Kuwaitfor supervisory purposes. The required information is filed with the Central Bank of Kuwait on a quarterly basis.The Bank’s regulatory capital position at 31 December 2008 was as follows:

94,302

81,956

1,184

(45,234)

132,208

5,765

5,765

137,973

938,169

14.71%

14.09%

85,729

80,079

1,377

(45,234)

121,951

8,096

8,096

130,047

756,579

17.19%

16.12%

(KD ‘000)

2008 2007

Tier 1 capital

Share capital

Reserves

Retained earnings

Treasury shares

Tier 2 capital

Fair value reserve

Total regulatory capital

Risk-weighted assets

Capital ratios

Total regulatory capital expressed as a percentage of total risk-weighted assets

Total tier 1 capital expressed as a percentage of risk-weighted assets

31. Shareholders’ Zakat

The responsibility for payment of Zakat is that of the shareholders.

in the name of allah, the compassionate, the merciful10b258bc-21d4-4ce7-a0be...dr. haidar hasan...

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