FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDING 31 ...

AL RAJHI BANKING & INVESTMENT CORPORATION (MALAYSIA) BHD

(Incorporated in Malaysia)

Company No. 719057-X

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FINANCIAL STATEMENTS FOR THE FINANCIAL

YEAR ENDING 31 DECEMBER 2008

Registered Office

Ground Floor, East Block

Wisma Selangor Dredging

142-B Jalan Ampang

50450 Kuala Lumpur




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Contents Directors’ Report 3 Statement by Directors 17 Statutory Declaration 18 Report of the Auditors 19 Report of Shariah Committee 21 Balance Sheets 22 Income Statements 23 Statements of Changes in Equity 24 Cash Flow Statements 25 Summary of Significant Accounting Policies 26 Notes to the Financial Statements 36




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DIRECTORS’ REPORT The Directors hereby submit their report together with the audited financial statements of the Bank for the financial year ended 31 December 2008. PRINCIPAL ACTIVITIES The Bank is principally engaged in Islamic Banking business and the provision of related financial business under the Islamic Banking Act, 1983. There have been no significant changes to these principal activities during the financial year. FINANCIAL RESULTS

RM’000

Net loss for the financial year 59,708

DIVIDENDS No dividends has been paid or declared by the Bank since the end of the previous financial year. The Directors do not recommend the payment of any dividend for the current financial year. RESERVES AND PROVISIONS There were no material transfers to or from reserves or provisions during the financial year except as disclosed in the financial statements. DIRECTORS OF THE COMPANY The Directors who have held office during the year since the date of the last report are as follows: Abdullah Sulaiman Al Rajhi Saeed Mohammed Al Ghamdi Dato’ Dr Nik Norzrul Thani Bin Nik Hassan Thani Ahmed Baqar Rehman Dato’ Mohd Sallehuddin Bin Othman (appointed on 10 April 2008) Mohd Daruis Bin Zainuddin (resigned on 11 April 2008) According to the register of Directors’ shareholding, none of the Directors holding office at 31 December 2008 held any shares in the Bank during the financial year.




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DIRECTORS’ REPORT (cont’d) DIRECTORS’ BENEFITS Since the end of the previous financial year, no Director of the Bank has received nor become entitled to receive any benefit (other than directors’ remuneration as disclosed in Note 22 to the financial statements) by reason of a contract made by the Bank or a related corporation with the Director or with a firm of which the Director is a member, or with a company in which the Director has a substantial financial interest. Neither at the end of the financial year, nor at any time during that year, did there subsist any arrangements to which the Bank is a party whereby Directors might acquire benefits by means of the acquisition of shares in, or debentures of, the Bank or any other body corporate.

ISSUE OF SHARES There is no change to the issued and paid-up capital during the financial year. BAD AND DOUBTFUL FINANCING Before the financial statements of the Bank were made out, the Directors took reasonable steps to ascertain that proper actions had been taken in relation to the writing off of bad financing and the making of allowance for doubtful financing and have satisfied themselves that there were no known bad financing and that adequate allowance had been made for doubtful financing. At the date of this report, the Directors are not aware of any circumstances which would render any amount to be written off for bad financing or the amount of the allowance for bad and doubtful financing in the financial statements of the Bank, inadequate to any substantial extent. CURRENT ASSETS Before the financial statements of the Bank were made out, the Directors took reasonable steps to ensure that any current assets, other than debts and financing, which were unlikely to realise their value as shown in the accounting records in the ordinary course of business, had been written down to an amount which they might be expected so to realise. At the date of this report, the Directors are not aware of any circumstances which would render the values attributed to the current assets in the financial statements of the Bank misleading. VALUATION METHODS At the date of this report, the Directors are not aware of any circumstances which have arisen which render adherence to the existing methods of valuation of assets or liabilities of the Bank misleading or inappropriate.




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DIRECTORS’ REPORT (cont’d) CONTINGENT AND OTHER LIABILITIES At the date of this report, there does not exist: i) any charge on the assets of the Bank which has arisen since the end of the financial year and which

secures the liabilities of any other person; or ii) any contingent liability in respect of the Bank that has arisen since the end of the financial year other than

in the ordinary course of the banking business. No contingent liability or other liability of the Bank has become enforceable, or is likely to become enforceable within the period of twelve months after the end of the financial year which, in the opinion of the Directors, will or may substantially affect the ability of the Bank to meet its obligations as and when they fall due CHANGE OF CIRCUMSTANCES At the date of this report, the Directors are not aware of any circumstances not otherwise dealt with in this report or the financial statements of the Bank, which would render any amount stated in the financial statements misleading. ITEMS OF UNUSUAL NATURE The results of the operations of the Bank for the financial year were not, in the opinion of the Directors, substantially affected by any item, transaction or event of a material and unusual nature. There has not arisen in the interval between the end of the financial year and the date of this report any item, transaction or event of a material and unusual nature likely, in the opinion of the Directors, to affect substantially the results of the operations of the Bank for the current financial year in which this report is made. PERFORMANCE OVERVIEW 2008 For the year ended 31 December 2008, the Bank registered a pre-tax loss of RM63.937 million with total assets of the Bank increased from RM2.541 billion to RM4.799 billion as at 31 December 2008.

The Bank has expanded its suite of products and services to ensure greater accessibility and convenience to the customers. It is also gearing towards business scale and increasing businesses. With the launching of the Investment Bank, the Bank will now have the full universal offerings of a Bank and aims to be a key player in the Islamic Banking industry in Malaysia.




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DIRECTORS’ REPORT (cont’d) BUSINESS PLAN AND OUTLOOK FOR 2009 In 2009, the Bank has plans to further expand its footprint with openings of new branches and offsite banking facilities in other states in Malaysia to provide our customers with greater accessibility and convenience. The Bank is in talks with MEPS to gain access of their 7,000 ATM network across the country targeting to seal the deal in the near future. The corporate investment banking will play an even greater role by being the catalyst or intermediary for an ever increasing cross border transaction between Malaysia and Saudi and the South East Asian region. More innovative retail and corporate products are in the pipeline and targeted to be launched in 2009. The Bank has positioned itself well in the market thus far and will continue its growth momentum via marketing activities that meet and exceed the needs of their growing customer base. The Bank is confident that it has set the groundwork for such growth and will continue to propel it further in the coming years to come. STATEMENT OF CORPORATE GOVERNANCE The Board of Directors of the Bank (“the Board”) recognises the importance of corporate governance as set out in the Malaysian Code on Corporate Governance (“the Code”) in discharging its responsibilities to enhance shareholders’ value and safeguard the interests of other stakeholders towards enhancing business prosperity and corporate accountability. This also means inculcating a culture that seeks to balance conformance requirements with the need to deliver long term strategic success through performance, predicated on entrepreneurship, control and ownership, without comprising personal or corporate ethics and integrity. Although the Bank is not a listed company, the Board has endeavoured to apply the principles and comply with the relevant best practices of corporate governance as set out in the Code. The Bank is also required to comply with BNM’s Guidelines on Directorship in the Banking Institutions (“BNM/GP1”). BOARD OF DIRECTORS (i) Board Composition and Its Roles and Responsibilities At the date of this Annual Report, the Board comprises five (5) Directors, which includes two (2)

independent non-executive Directors. The appointment of non-executive Directors facilitates the exercise of independent evaluation in Board deliberations and decision-making, and thus providing the check and balance in the Board.

The Board is responsible for the overall corporate governance, including its strategic direction, establishing

goals for management and monitoring the achievement of these goals. The roles of the Chairman and the Chief Executive Officer have always been separated, which is consistent with the principles of the Revised BNM/GP1 to institute an appropriate balance of power and authority. The Chairman is responsible for ensuring the effectiveness of the Board as well as representing the Board to the Shareholder.




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DIRECTORS’ REPORT (cont’d) BOARD OF DIRECTORS (cont’d) (i) Board Composition and Its Roles and Responsibilities (cont’d)

The Directors, with their different backgrounds and specialisations, collectively bring with them a wide range of experience and expertise. The Chief Executive Officer is responsible for implementing the policies and decisions of the Board, overseeing the operations as well as coordinating the development and implementation of business and corporate strategies. The independent non-executive Directors bring an independent judgment to the decision making of the Board and provide a review and challenge on the performance of the management.

As a principle of good governance, all Directors are subject to re-election at regular intervals. The Bank’s

Articles of Association also provide for the retirement of Directors by rotation and, under Bank Negara Malaysia’s guidelines, all appointment and re-appointment of Directors have to be approved by Bank Negara Malaysia.

(ii) Board of Directors’ Profile

The Directors’ profiles are as follows: Abdullah Sulaiman Al Rajhi Chairman Abdullah Sulaiman Al Rajhi, in his capacity as the Chief Executive Officer of Al Rajhi Bank, Saudi Arabia also spearheads the development of the Malaysian Bank’s operation as the Chairman. A member of the well-known Al Rajhi family, upon completion of his Business studies, he had bolstered his academic achievements with training courses at the Wharton School in the United States of America and the Cranfield School of Management in United Kingdom. Abdullah Sulaiman had familiarised himself with various activities and levels of banking operations by assuming various senior responsibilities in the Bank. He is also an avid speaker and advocate Islamic banking principles by participating in many of regional and international financial forums in recent years. Saeed Mohammed Al Ghamdi Non- independent Non-executive Director Saeed Mohammed Al Ghamdi, is the deputy Chief Executive Officer of Al Rajhi Bank, Saudi Arabia. He joined the Al Rajhi Banking and Investment Corporate in 1998 as the Chief Information Officer, in charged of operational functions. After overseeing the IT, Operations and Retail divisions, he was appointed to his current position as Deputy CEO for AL Rajhi Bank, Saudi Arabia. Saeed Mohammed obtained his Bachelor of Science from the King Fahad University of Petroleum & Minerals, Saudi Arabia.

Dato’ Dr Nik Norzrul Thani Bin Nik Hassan Thani Independent Non-executive Director Dato’ Dr Nik Norzul Thani was appointed as a Board member of the Bank with effect from 20 December 2006. Dato’ Dr. Nik advises clients on a wide range of legal matters covering a range of banking advisory aspects, including Islamic Finance and is currently attached to Zaid Ibrahim and Co. Besides being a board member for several other local companies, Dato’ Dr Nik also has several books and articles to his credit.




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DIRECTORS’ REPORT (cont’d) BOARD OF DIRECTORS (cont’d)

(iii) Board of Directors’ Profile (cont’d)

Ahmed Baqar Rehman Non- independent Executive Director Ahmed Rehman was appointed as a Board member of the Bank on 27

th July 2007 and is the Chief

Executive Officer of Al Rajhi Bank’s Malaysian operations with effect from March 2006. Leading the Saudi financial giant’s first foray into the international market, Ahmed was responsible for the set-up and launch of the Retail and Wholesale Islamic bank. With over two decades of experience in the financial sector, Ahmed has developed an in-depth knowledge and expertise in the banking industry. He held several multinational positions in a foreign international bank which includes overseeing markets such as Dubai, Pakistan, Middle East and Africa prior to his appointment at Al Rajhi Bank.

Dato’ Mohd Sallehuddin Bin Othman Independent Non-executive Director Dato’ Mohd Sallehuddin was appointed as a Board member with effect from 10 April 2008. An accountant by profession and has extensive working experience and holds top position in large corporations. His last position was the Group Managing Director with Malaysian Industrial Development Finance Bhd where he was responsible for the implementation of strategies and plans. A member of the Malaysia Institute of Accountants and obtained his Masters from the University of London, United Kingdom.




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DIRECTORS’ REPORT (cont’d) BOARD OF DIRECTORS (cont’d)

(iii) Board Meetings During the financial year ended 31 December 2008, six (6) Board meetings were held and attendances

by Directors at the board meetings were as follows:

Board meeting dates

Attendance by Directors Percentage attendance Chairman Non-Independent Independent

(1 member) (2 members) (2 members) 20

th February 2008 a a a 100%

2nd

May 2008 a a a 100%

1st July 2008 a a a 100%

27th September 2008 a a a 100%

13th November 2008 a a a 100%

16th December 2008 - a a 80%

At the Board meetings, the Board reviews various management reports on the business performance of

the Bank and the minutes of meetings of the Board Committees were tabled for review by members of the Board.

Members of the Board deliberate and in the process evaluate the potential risks and viability of business

propositions and corporate proposals that have significant impact on the bank’s business or on its financial position.

Board meetings are governed by a structured format agenda and the agenda for each Board meeting

and papers relating to the agenda items are forwarded to all Directors in advance prior to the scheduled Board meetings for their perusal.

Minutes of every Board meeting were also circulated to all the Directors for their perusal prior to

confirmation of the minutes at the following Board meeting




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DIRECTORS’ REPORT (cont’d) BOARD OF DIRECTORS (cont’d) (iv) Board Committee Board Committees were established to assist the Board in the running of the Bank. The following Board

Committees with their specific terms of reference and functions are as follows: Audit Committee The Audit Committee consists of two independent non-executive Directors and one non-independent

non-executive Director. There were four (4) meetings held during the financial year. The members of the committee are as follows:

Dato’ Dr Nik Norzrul Thani Bin Nik Hassan Thani - Member

Saeed Mohammad Al Ghamdi - Member Dato’ Mohd Sallehuddin Bin Othman - Chairman (appointed on 10 April 2008) Mohd Daruis Bin Zainuddin - Chairman (resigned on 11 April 2008) The primary function of the Audit Committee is to assist the Board in discharging its responsibilities by

providing independent oversight of the Bank’s financial reporting, the internal control system, the effectiveness of internal audit function and risk management system. The Audit Committee also provides, by way of regular meetings, a line of communication between the Board, the internal and external auditors.

Risk Management Committee The Risk Management Committee consists of two independent non-executive Directors and one non-

independent non-executive Director and had four (4) meetings during the financial year. The members of the committee are as follows:

Dato’ Dr Nik Norzrul Thani Bin Nik Hassan Thani - Chairman Saeed Mohammad Al Ghamdi - Member Dato’ Mohd Sallehuddin Bin Othman - Member (appointed on 10 April 2008) Mohd Daruis Bin Zainuddin - Member (resigned on 11 April 2008) The objectives of the Risk Management Committee are to establish a forum for deliberation and

consideration of risks which the Bank is exposed to in relation to its strategic direction and objectives while overseeing to ensure that the risk management systems, policies and procedures are in place and functioning.




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DIRECTORS’ REPORT (cont’d) (iv) Board Committee (cont’d) Nominating Committee The Nominating Committee consists of two independent non-executive Directors and two non-

independent non-executive directors with three (3) meetings held during the financial year. The members of the committee are as follows:

Dato’ Dr Nik Norzrul Thani Bin Nik Hassan Thani - Chairman Abdullah Sulaiman Al Rajhi - Member Saeed Mohammad Al Ghamdi - Member Dato’ Mohd Sallehuddin Bin Othman - Member (appointed on 10 April 2008) Mohd Daruis Bin Zainuddin - Member (resigned on 11 April 2008) The responsibilities of the nominating committee is to provide a formal and transparent procedure for the

appointment of Directors and the Chief Executive Officer as well as the assessment of the effectiveness of individual Directors, Board as a whole and performance of Chief Executive Officer and senior management officers.

Remuneration Committee The Remuneration Committee consists of one independent non-executive Director and two non-

independent non-executives Director. Three (3) meetings were held during the financial year. The members of the committee are as follows:

Dato’ Dr Nik Norzrul Thani Bin Nik Hassan Thani - Chairman Abdullah Sulaiman Al Rajhi - Member Saeed Mohammad Al Ghamdi - Member The responsibilities of the Remuneration Committee is to provide for a formal and transparent procedure

for developing the remuneration policy for Directors, Chief Executive Officer and senior management officers and ensuring that the compensation is competitive and consistent with the Islamic Bank’s culture, objective and strategy.

INTERNAL AUDIT AND INTERNAL CONTROL ACTIVITIES The Malaysian Code on Corporate Governance and Bank Negara Malaysia’s Guidelines on Corporate Governance requires Banks to maintain a sound system of internal controls to safeguard shareholders' investments and the Bank's assets. Responsibility of the Board The Board recognises the importance of maintaining a sound system of internal control to safeguard shareholders' investments and the Bank's assets. The Board is also responsible for the Bank’s system of internal controls and its effectiveness. It includes reviewing adequacy and integrity of controls relating to financial, operational, risk management and compliance with applicable laws and regulations. The system is designed to manage the Bank’s risks within an acceptable risk profile and the Board acknowledges that the system, by its nature, can only provide reasonable assurance and not absolute assurance against material misstatement of management and financial information and records or against financial losses or fraud.




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DIRECTORS’ REPORT (cont’d) INTERNAL AUDIT AND INTERNAL CONTROL ACTIVITIES (Cont’d) Key Internal Control Elements The Bank has in place an on-going internal control processes for identifying, evaluating, managing and reporting on the significant risks that may affect the achievement of its business objectives throughout the financial year under review. The key internal controls elements in the process are described below: (i) Clear Line of Responsibilities The management of the Bank is primarily delegated to the Chief Executive Officer and its Management

Committee, whose responsibilities are set by the Board. The management assists the Board in the implementation of the policies and procedures on risk and control by identifying and assessing the risks faced, and in the design, operation and monitoring of suitable internal controls to mitigate and control these risks.

(ii) Risk Management Framework Risk Management Division is established to assist the Board in the development of general risk policies

and procedures, monitor and evaluate material risks that may arise from the Bank’s business activities. The Board with the assistance of the Risk Management Division, has established an enterprise-wide risk management framework that details a holistic risk management governance structure for risk management which balances risks and returns, as well as integrated risk management processes for credit risk, market risk, liquidity risk and operational risk.

(iii) Internal Audit Activities Ongoing reviews of the internal control system are carried out by the internal auditor to test control

effectiveness in the Bank. Results of such reviews are reported to the Audit Committee. The internal audit activities revolve primarily on areas of priority as identified by risk analysis and in accordance with the annual internal audit plans as approved by the Audit Committee.

(iv) Annual Business Plan A detailed budgeting process is established requiring all key business units in the Bank to prepare budgets

annually which are discussed and approved by the Board. Regular reporting on actual performance against approved budgets is in place and significant variances shall be followed up by the management and to be reported to the Board.

(v) Management Reporting The Board also receives and reviews reports from the management on a regular basis in ensuring the

effectiveness of the Bank’s daily operations and that the Bank’s operations are in accordance with the established goals.

(vi) Policies and Procedures There are policies, procedures and authority limits imposed on the management in respect of the day-to-

day operations. Compliance with internal controls and the relevant laws and regulations are also set out in operations manuals, guidelines and directives which are updated from time to time.




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DIRECTORS’ REPORT (cont’d)

RISK MANAGEMENT Risk management plays a substantial role in the governance of the Bank as the bank recognises the diversity and complexity of banking operations and the exposure to various kinds of risks mainly on credit risk, market risk and operational risk. The Bank recognises the importance of an effective risk management and control measures to ensure the Bank’s corporate value, sustained profitability and continued enhancement of shareholder value. A risk conscious corporate culture and pre-emptive actions of employees are also crucial for an effective risk management. The risk conscious corporate culture is met through communication, training, policies, procedures and organisational structures, roles and responsibilities. Overall Risk management Framework Risk Management Governance Structure and Processes The Bank has established within its risk management framework a holistic risk management governance structure for risk management which balances risks and returns, as well as integrated risk management processes for credit risk, market risk, liquidity risk and operational risk. The risk management governance structure provides clear accountabilities and responsibilities for risk management processes throughout the organisation at the Board level, at the Executive Management level and at the business unit and support unit level. The risk management processes encompass four broad processes, namely risk identification, risk assessment and measurement, risk control and mitigation and risk monitoring. Credit Risk Management Credit risk is defined as the risk of potential losses arising from a customer default or deterioration of the credit standing of a customer with whom the Bank has entered transactions into. The Bank establishes policies and procedures for credit origination, scoring, rating, approval, monitoring, collection and recovery. Credit approval authorities are delegated to committees and individuals in accordance to the risk appetite of the Board. Regular analysis and reporting of risk profile covering credit exposure, movements of non-performing financings (“NPFs”), concentration of credit exposure, adequacy of specific provision for NPFs and capital adequacy is updated to the Management, the Risk Management Committee and the Board. Market Risk Management Market risk is defined as the risk that could incur losses due to changes in the value of assets and liabilities (including off-balance sheet items) caused by fluctuations in the market risk factors such as profit rates and foreign exchange rates. Meanwhile, liquidity risk is defined as the risk of losses arising from funding difficulties to raise the necessary funds, or when it is forced to obtain funds at much higher rates than usual. The Bank establishes policies and procedures for monitoring, reporting and control of market and liquidity risks including setting appropriate management trigger and exposure limits and performing regular stress testing. The Asset and Liability Committee (“ALCO”) is established to monitor, deliberate and make decision on matters related to funding, liquidity as well as asset and liability mismatch risks management. The Bank manages its liquidity in compliance to BNM’s New Liquidity Framework. Regular analysis and reporting of market and liquidity risks profile is updated to the Management, the Risk Management Committee and the Board.




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DIRECTORS’ REPORT (cont’d)

RISK MANAGEMENT (Cont’d) Operational Risk Management Operational risk is defined as the risk of loss, whether direct or indirect, to which the Bank is exposed due to inadequacy or failure of processes, procedures, systems or controls and external events. Operational risk, in some form, exists in each of the Bank’s business and support activities and can result in direct and indirect financial loss, regulatory sanctions, customer dissatisfaction and damage to the Bank’s reputation. The management of operational risk is an important priority for the Bank. To mitigate such operational risks, the Bank has developed an operational risk program and essential methodologies that enables identification, measurement, monitoring and reporting of inherent and emerging operational risks. The day to day management of operational risk exposures is through the development and maintenance of comprehensive internal controls and procedures based on segregation of duties, independent checks, segmented system access control and multi-tier authorisation processes. An incident reporting process is also established to capture and analyse frauds and control lapses. A periodic self-risk and control assessment is established for business and support units to pre-emptively identify risks and evaluate control effectiveness. Action plans are developed for the control issues identified. In addition, the Bank is in the progress of establishing the Business Continuity Plan (“BCP”) to ensure that critical operations are not interrupted so that critical business processes continue with minimal adverse impact on customers, staff and products and services. BCP constitutes an essential component of the Bank’s risk management process by providing a controlled response to potential operational risks that could have a significant impact on the Bank’s critical processes and revenue streams. The Bank’s business continuity plan is to maintain continuous operational viability in the event of natural disasters, systems failures and other types of emergencies. Regular analysis and reporting of operational risk profile is updated to the Management, the Risk Management Committee and the Board. DISCLOSURE OF SHARIAH COMMITTEE The Bank’s business activities are subject to Shariah compliance and confirmation by the Shariah Committee consisting of four members appointed by the Board of Directors as follows: Dr. Salleh Abdullah S. Allheidan - Chairman Burhanuddin Lukman - Deputy Chairman Dr. Azman Mohd Noor - Member Dr. Ashraf Md. Hashim - Member The duties and responsibilities of the Shariah Committee amongst others are as follows: (i) To advise the Board of Directors on Shariah matters in order to ensure that the business operations of

the Bank comply with the Shariah principles at all times; (ii) To endorse the Shariah Compliance Manual. The manual specifies the manner in which a submission

or request for advice be made to Shariah Committee, the conduct of the Shariah Committee’s meeting and the manner of compliance with any Shariah decision;




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DIRECTORS’ REPORT (cont’d) DISCLOSURE OF SHARIAH COMMITTEE (cont’d) (iii) To ensure that the Bank complies with Shariah principle in all aspect and to decide consequential

action upon any violation; (iv) To ensure that the products of the Bank comply with Shariah principles in all aspects, the Shariah

Committee must endorse the following;

(a) the terms and conditions contained in the proposal form, contract, agreement or other legal documentation used in executing the transactions; and

(b) the product manual, marketing advertisements, sales illustrations and brochures used to

describe the product.

(v) To provide assistance to related parties such as legal counsel, auditor or consultant on Shariah matters so that compliance with Shariah principles can be assured completely;

(vi) To provide written Shariah opinion and to record any opinion given under the following circumstances:

(a) where the Bank makes reference to the Shariah Advisory Council (“SAC”) of Bank Negara Malaysia for advice; and

(b) where the Bank submits applications to Bank Negara Malaysia for new products approval in

accordance with guidelines on product approval issued by Bank Negara Malaysia. (vii) To advise on matters to be referred to the SAC for matters which have not been resolved or endorsed.

The Shariah is also expected to assist the SAC on any matters referred by the Bank. The Shariah Committee is also planning to set up a Shariah Compliance Unit. Currently, the compliance work is carried out by the Secretariat to the Shariah Committee.

SIGNIFICANT EVENTS There were no significant events during the financial year ended 31 December 2008. SUBSEQUENT EVENTS Subsequent to the financial year end, the Bank increased its authorised as well as its issued and paid-up ordinary share capital from RM600,000,000 as at 31 December 2008 to RM1,000,000,000 as at 4 February 2009 by way of an issuance of 400,000,000 additional ordinary shares of RM1.00 at an issue price of RM1.00 per ordinary share for cash. The new ordinary shares issued were for working capital purposes and rank pari passu in all respects with the existing ordinary shares of the Bank.




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AUDITORS The auditors, PricewaterhouseCoopers, have expressed their willingness to continue in office. In accordance with a resolution of the Board of Directors dated 29 May 2009 AHMED BAQAR REHMAN DATO’ MOHD SALLEHUDDIN BIN OTHMAN DIRECTOR DIRECTOR Kuala Lumpur 29 May 2009




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STATEMENT BY DIRECTORS

PURSUANT TO SECTION 169(15) OF THE COMPANIES ACT, 1965

We, Ahmed Baqar Rehman and Dato’ Mohd Sallehuddin Bin Othman, being two of the Directors of Al Rajhi

Banking & Investment Corporation (Malaysia) Bhd, state that, in the opinion of the Directors, the financial

statements set out on pages 22 to 63 are drawn up so as to give a true and fair view of the state of affairs of the

Bank as at 31 December 2008 and of the results and cash flows of the Bank for the financial year then ended, in

accordance with the provisions of the Companies Act, 1965, MASB Approved Accounting Standards in Malaysia

for entities other than private entities and Bank Negara Malaysia Guidelines.

Signed on behalf of the Board of Directors in accordance with their resolution dated 29 May 2009

AHMED BAQAR REHMAN DATO’ MOHD SALLEHUDDIN BIN OTHMAN DIRECTOR DIRECTOR Kuala Lumpur 29 May 2009




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STATUTORY DECLARATION

PURSUANT TO SECTION 169(16) OF THE COMPANIES ACT, 1965

I, Kevin Soo Weng Kong, being the officer primarily responsible for the financial management of Al Rajhi Banking

& Investment Corporation (Malaysia) Bhd, do solemnly and sincerely declare that the accompanying financial

statements of the Bank as set out on pages 22 to 63 are, in my opinion, correct and I make this solemn

declaration conscientiously believing the same to be true and by virtue of the provisions of the Statutory

Declarations Act, 1960.

KEVIN SOO WENG KONG

Subscribed and solemnly declared by the abovenamed, Kevin Soo Weng Kong, at Kuala Lumpur on 29 May 2009

Before me:




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INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF AL RAJHI BANKING & INVESTMENT CORPORATION (MALAYSIA) BHD

REPORT ON THE FINANCIAL STATEMENTS We have audited the financial statements of Al Rajhi Banking & Investment Corporation (M) Berhad, which comprise the balance sheet as at 31 December 2008, and the income statement, statement of changes in equity and cash flow statement of the Bank for the year then ended, and a summary of significant accounting policies and other explanatory notes, as set out on pages 22 to 63. Directors’ Responsibility for the Financial Statements The Directors of the Bank are responsible for the preparation and fair presentation of these financial statements in accordance with the Companies Act, 1965, the MASB Approved Accounting Standards in Malaysia for Entities Other than Private Entities and the Bank Negara Malaysia Guidelines. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditors’ Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with approved standards on auditing in Malaysia. Those standards require that we comply with ethical requirements and plan and perform the 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 our judgment, including the assessment of risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Bank’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Bank’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial statements. Opinion In our opinion, the financial statements have been properly drawn up in accordance with the MASB Approved Accounting Standards in Malaysia for Entities Other than Private Entities and the Bank Negara Malaysia Guidelines so as to give a true and fair view of the financial position of the Bank as of 31 December 2008 and of its financial performance and cash flows for the year then ended. Report on Other Legal and Regulatory Requirements In accordance with the requirements of the Companies Act 1965 in Malaysia, we also report that, in our opinion, the accounting and other records and the registers required by the Act to be kept by the Bank have been properly kept in accordance with the provisions of the Act.




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REPORT ON THE FINANCIAL STATEMENTS (cont’d) Other matters This report is made solely to the member of the Bank, as a body, in accordance with Section 174 of the Companies Act 1965 in Malaysia and for no other purpose. We do not assume responsibility to any other person for the content of this report. PRICEWATERHOUSECOOPERS (No AF: 1146) Chartered Accountants

MOHAMMAD FAIZ BIN MOHAMMAD AZMI (No. 2025/03/10 (J)) Chartered Accountants

Kuala Lumpur, 29 May 2009




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REPORT OF SHARIAH COMMITTEE

In the name of Allah, the most Beneficent, the most Merciful

Praised be to Allah, the Lord of the Worlds and peace and blessings be upon our Prophet Muhammad, and on

his family and companions

KاMNOآQRو Tا UVWور YZ[\] م_`

We the undersigned, Dr Salleh Abdullah S. Al Lheidan and Burhanuddin Lukman, in our capacity as members of

the Shariah Committee of Al Rajhi Banking & Investment Corporation (Malaysia) Bhd, do hereby confirm on behalf

of the members of the Shariah Committee that the operations of the Bank for the financial year ended 31

December 2008 have, in general, been conducted in compliance with Shariah. However, it has become clear to

the Shariah Committee the presence of irregularities which must be rectified. The Shariah Committee has

communicated to the Bank of the said irregularities and the Bank is in the midst of rectifying these irregularities.

On behalf of the Shariah Committee,

DR SALLEH ABDULLAH S. AL LHEIDAN BURHANUDDIN LUKMAN

Chairman Deputy Chairman




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BALANCE SHEET AS AT 31 DECEMBER 2008

Note 2008 2007 RM’000 RM’000 ASSETS Cash and short-term funds 2 1,529,945 540,054 Financing and advances 3 2,860,348 1,866,779 Securities held-to-maturity 4 79,721 - Other assets 5 17,912 16,039 Statutory deposits with Bank Negara Malaysia 6 98,193 3,180 Investment properties 7 95,000 - Property and equipment 8 68,478 73,673 Intangible assets 9 26,445 22,180 Deferred tax assets 10 23,319 19,090 Total Assets 4,799,361 2,540,995

LIABILITIES AND SHAREHOLDER’S EQUITY Liabilities Deposits from customers 11 4,247,141 2,073,832 Deposits and placements of banks and other financial institutions

12

120,000

-

Bills and acceptances payable 9,807 5,247 Other liabilities 13 54,039 33,834 Total Liabilities 4,430,987 2,112,913

Shareholder’s equity Share capital 14 600,000 600,000 Reserves (231,626) (171,918) Total Shareholder’s Equity 368,374 428,082 Total Liabilities and Shareholder’s Equity 4,799,361 2,540,995

COMMITMENTS AND CONTINGENCIES 27 735,160 248,929

CAPITAL ADEQUACY 29 Core capital ratio 11.71% 24.02% Risk-weighted capital ratio 13.19% 25.69%

The accompanying notes are an integral part of these financial statements.




23

INCOME STATEMENT

FOR THE FINANCIAL YEAR ENDING 31 DECEMBER 2008

Note 2008 2007 RM’000 RM’000 Operating Revenue 15 180,974 36,282

Income derived from investment of depositors’ funds and others

16

156,049 23,775

Income derived from investment of shareholders’ funds

17

24,925

12,507

Allowance for losses on financing 18 (23,874) (30,101) Other expenses directly attributable to the investment of the depositors’ funds

(7,544)

(4,085)

Total distributable income 149,556 2,096 Income attributable to depositors 19 (100,400) (16,680) Total net income 49,156 (14,584) Personnel expenses 20 (53,028) (44,970) Other overheads and expenditures 21 (60,065) (46,668)

Loss before zakat and taxation (63,937) (106,222) Zakat - - Taxation 23 4,229 9,417 Net loss for the financial year

(59,708)

(96,805)

Basic loss per share (sen) 24 (9.95) (26.27)





24

STATEMENT OF CHANGES IN EQUITY FOR THE FINANCIAL YEAR ENDING 31 DECEMBER 2008

Distributable

Share

Statutory

Accumulated

Capital Reserve losses Total RM’000 RM’000 RM’000 RM’000 At 1 January 2008 600,000 - (171,918) 428,082 Transfer to statutory reserves - - - - Net loss for the financial year - - (59,708) (59,708) At 31 December 2008 600,000 - (231,626) 368,374

Distributable

Share

Statutory

Accumulated

Capital Reserve losses Total RM’000 RM’000 RM’000 RM’000 At 1 January 2007 300,000 - (75,113) 224,887 Issue of share capital 300,000 - - 300,000 Transfer to statutory reserves - - - - Net loss for the financial year - - (96,805) (96,805) At 31 December 2007 600,000 - (171,918) 428,082





25

CASH FLOW STATEMENT FOR THE FINANCIAL YEAR ENDING 31 DECEMBER 2008

Note 2008 2007 RM’000 RM’000 CASH FLOWS FROM OPERATING ACTIVITIES Loss before zakat and taxation (63,937) (106,222) Adjustments for: Depreciation of property and equipment 14,364 12,552 Amortisation of intangible assets 7,232 4,563 Allowance for losses on financing 23,874 30,101 Net income suspended (967) - (19,434) (59,006) Increase in Operating Assets Deposits and placements with other financial institutions

-

173,000

Financing and advances (1,016,476) (1,894,472) Other assets (1,873) (12,742) Statutory deposits with Bank Negara Malaysia (95,013) (3,180) Increase in Operating Liabilities Deposits from customers 2,173,309 2,031,970 Deposits and placements of banks and other financial institutions

120,000 -

Bills and acceptances payable 4,560 4,600 Other liabilities 20,205 9,853 Net cash generated from operating activities 1,185,278 250,023 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of securities held-to-maturity (79,721) - Purchase of investment property (95,000) - Purchase of property and equipment (9,169) (34,920) Purchase of intangible asset (11,497) (10,308) Net cash used in investing activities (195,387) (45,228) CASH FLOWS FROM FINANCING ACTIVITES Issuance of ordinary shares - 300,000 Net cash from financing activities - 300,000 NET INCREASE IN CASH AND CASH EQUIVALENTS

989,891 504,795

CASH AND CASH EQUIVALENTS AS AT 1 JANUARY

540,054 35,259

CASH AND CASH EQUIVALENTS AS AT 31 DECEMBER

2 1,529,945

540,054





26

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS FOR THE FINANCIAL YEAR ENDING 31 DECEMBER 2008 A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following accounting policies have been used consistently in dealing with items which are considered

material in relation to the financial statements. These policies have been consistently applied to all the financial years presented, unless otherwise stated.

1. BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS

The financial statements of the Bank have been prepared under the historical cost convention (unless otherwise indicated) and in accordance with Financial Reporting Standards (“FRS”), the Malaysian Accounting Standards Board (“MASB”) approved accounting standards in Malaysia for Entities Other Than Private Entities together with the directives and guidelines issued by Bank Negara Malaysia (“BNM”) and comply with the provisions of the Companies’ Act, 1965 and Shariah requirements.

The preparation of financial statements in conformity with the provisions of the Companies Act 1965,

FRS, the MASB Approved Accounting Standards in Malaysia for Entities Other Than Private Entities and BNM’s guidelines requires the use of estimates and assumption that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statement and the reported amounts of revenues and expenses during the year. It also requires directors to exercise their judgment in the process of applying the Bank’s accounting policies. Although these estimates are based on the directors’ best knowledge of current events and actions, actual results may differ from those estimates.

Critical accounting estimates and assumptions used that are significant to the financial statements, and

areas involving a higher degree of judgment and complexity are disclosed in Section B.

(a) Standards, amendments to published standards and interpretations to existing standards that are effective:

During the financial year, the Bank adopted the following revised FRS issued by MASB that are relevant and effective for financial periods beginning 1 January 2008. The revised FRS that is relevant to the Bank are as follows: • FRS 107 Cash Flow Statements • FRS 112 Income Taxes • FRS 118 Revenue • FRS 121 The Effects of Changes in Foreign Exchange Rates • FRS 134 Interim Financial Reporting • FRS 137 Provisions, Contingent Liabilities and Contingent Assets

The adoption of the above revised FRS does not have any significant financial impact on the results of the Bank.




27

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS FOR THE FINANCIAL YEAR ENDING 31 DECEMBER 2008 (Cont’d)

A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

1. BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS (Cont’d)

(b) The new accounting standards and interpretations to existing standards that are relevant and mandatory for the Bank for financial periods beginning 1 January 2009 or later periods, but which the Bank has not early adopted are as follows:

• Amendment to FRS 101: Presentation of Financial Statements – Capital Disclosures (effective

for accounting periods beginning on or after 1 January 2009). The amendment introduces disclosures about the level of an entity’s capital and how the capital is managed. The amendment to FRS 101 will create additional disclosure requirements for the Bank’s financial statements

• IC Interpretation 9 Reassessment of Embedded Derivatives (effective for accounting periods beginning on or after 1 January 2010). IC Interpretation 9 requires an entity to assess whether an embedded derivative is required to be separated from the host contract and accounted for as a derivative when the entity first becomes a party to the contract. Subsequent reassessment is prohibited unless there is a change in the terms of the contract that significantly modifies the cash flows that otherwise would be required under the contract, in which case reassessment is required. The adoption of IC 9 does not have any significant financial impact on the results of the Bank.

• IC Interpretation 10 Interim Financial Reporting and Impairment (effective for accounting periods beginning on or after 1 January 2010). IC Interpretation 10 prohibits the impairment losses recognised in an interim period on goodwill and investments in equity instruments and in financial assets carried at cost to be reversed at a subsequent balance sheet date. The adoption of IC 10 does not have any significant financial impact on the results of the Bank.

• FRS 139 Financial Instruments: Recognition and Measurement (effective for accounting periods beginning on or after 1 January 2010). FRS139 establishes principles for recognising and measuring financial assets, financial liabilities and some contracts to buy and sell non-financial items. Hedge accounting is permitted only under strict circumstances. The Bank will apply this standard when effective. Nevertheless, the accounting policies of the Bank incorporate requirements of the Guidelines on Financial Reporting for Licensed Islamic Banks ('BNM/GP8i') which includes selected principles of FRS 139.

• FRS 8 Operating Segments (effective for accounting periods beginning on or after 1 January 2009). FRS 8 replaces FRS 114 2004 Segment Reporting. The new standard requires a ‘management approach’, under which segment information is presented on the same basis as that used for internal reporting purposes. The adoption of FRS 8 will require additional disclosure requirements in the Bank’s financial statements.

• FRS 7 Financial Instruments: Disclosure (effective for accounting periods beginning on or after 1 January 2010). FRS 7 replaces the disclosures requirements currently in FRS 132: Financial Instruments: Disclosures and Presentation. FRS 7 requires disclosure of quantitative and qualitative information about exposure to risks arising from financial instruments, including minimum disclosures about credit risk, market risk and liquidity risk. The adoption of FRS 7 will require additional disclosure requirements in the Bank’s financial statements.




28


A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

1. BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS (Cont’d)

In respect of FRS139 and FRS 7, the Bank have applied the transitional provision in the respective standards which exempts the Bank from disclosing the possible impact arising from the initial application of the standard on the Bank’s financial statements.

2. INCOME RECOGNITION

(i) Finance income is recognised on an accrual basis by using the effective profit method. Financing income on financing assets is recognised either on a monthly rest basis or the sum of digit method.

Where an account is classified as non-performing, income is suspended until it is realised on a cash basis. Financing income recognised prior to the non-performing classification is not clawed back to the first day of default in conformity with Bank Negara Malaysia guidelines. Customers’ accounts are classified as non-performing where repayments are in arrears for more than 90 days from the day of default.

(ii) Income from banking services is recognised as and when the related services are rendered. Fees from advisory and corporate finance activities are recognised net of service taxes and discounts on completion of each stage of the assignment. Other fees and commission on services and facilities extended to customers are recognised on inception of such transactions.

(iii) Income from Ijarah rental is recognised based on contractual agreement.

3. FINANCING AND ADVANCES

(i) Recognition

Financing and advances are recognised when cash is disbursed to customers. They are initially recorded at fair value, which is the cash given to originate the advances, and subsequently are carried at amortised cost, which is represented by the outstanding balance, net of allowances for bad and doubtful debts and unearned profit. They are derecognised when either customers repay their obligations, or the financing and advances are written off, or substantially all the risks and rewards of ownership are transferred.




29


A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 3. FINANCING AND ADVANCES (Cont’d)

(ii) Allowance for losses on financing

Specific allowances are made for non-performing financing and advances which have been individually reviewed and specifically identified as bad, doubtful or substandard. Any allowances made during the year are charged to the income statement.

A general allowance based on a percentage of the financing portfolio (net of specific allowances for bad and doubtful financing) is also made to cover possible losses which are not specifically identified. These percentages are reviewed annually in light of past experiences and prevailing circumstances and an adjustment is made to the overall general allowance, if necessary.

Any uncollectible financing or a portion of financing classified as bad is written off after taking into consideration the realisable value of collateral, if any, when in the judgment of the management, there is no prospect of recovery. The Bank’s allowance for non-performing financing and advances is in conformity with the minimum requirements of revised BNM’s ‘Guidelines on the Classification of Non-Performing Loans and Provision for Substandard, Bad and Doubtful Debts’ (‘Revised BNM/GP3’). BNM has granted indulgence to the Bank from complying with the requirement on the impairment of financing and advances under the revised BNM/GP3 which states that impaired credit facilities should be measured at their estimated recoverable amount (present value of estimated future cash flows discounted at original effective interest rate).

4. SECURITIES HELD-TO-MATURITY Securities held-to-maturity are securities with fixed or determinable payment and fixed maturity that the

Bank has the positive intention and ability to hold to maturity. Securities held-to-maturity are measured at fair value at initial recognition and subsequently at amortised cost using the effective profit rate method less accumulated impairment loss. Any gain or loss is recognised in the income statement when the securities are derecognised or impaired and through the amortisation process.

The Bank assesses at each balance sheet date whether there is objective evidence that a security is impaired. A security is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the securities that can be reliably estimated.

If there is objective evidence that an impairment loss on securities held-to-maturity carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the financial asset’s original effective profit rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the income statement. If a held-to-maturity security has a variable profit rate, the discount rate for measuring any impairment loss is the current effective profit rate determined under the contract.




30

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2007 (Cont’d)

A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 4. SECURITIES HELD-TO-MATURITY (Cont’d) If, in the subsequent period, the amount of the impairment loss decreases and the decrease can be

related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss will be reversed either directly or by adjusting the allowance account. The reversal will not result in the carrying amount of securities exceeding what the amortised cost would have been had the impairment not been recognised at the date the impairment is reversed. The amount of the reversal will be recognised in the income statement.

If the Bank sold or reclassified more than an insignificant amount of the securities held-to-maturity portfolio before maturity (other than under those conditions specified in BNM/GP8-i) during the current financial year or the last two preceding financial years, the entire category would be tainted and reclassified as securities available-for-sale at fair value. The difference between the carrying value and fair value at the date of reclassification is recognised directly in equity.

5. PROPERTY AND EQUIPMENT AND DEPRECIATION

Property and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Cost includes expenditure that is directly attributable to the acquisition of the items and any other costs directly attributable to bringing the asset to working conditions for its intended use.

Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Bank and the cost of the item can be measured reliably. The carrying amount of the replaced part is de-recognised. All other repairs and maintenance are charged to the income statement during the financial year in which they are incurred.

Subsequent to recognition, property and equipment except for assets in progress are stated at cost less accumulated depreciation and any accumulated impairment losses. Assets in progress are not depreciated as these assets are not available for use. Depreciation of the property and equipment is calculated to write off the cost of the property and equipment on a straight line basis over the expected useful lives of the assets concerned. The principal annual rates of depreciation are as follows:

Furniture fittings and office equipment 10%

Renovations 20% Computer equipment and software 20%




31


A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 5. PROPERTY AND EQUIPMENT AND DEPRECIATION (Cont’d)

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate at each balance sheet date. At each balance sheet date, the Bank assess whether there is any indication of impairment. Where an indication of impairment exists, the carrying amount of the asset is written-down immediately to its recoverable amount. See accounting policy Note 10 on impairment of non-financial assets. Any item of property and equipment is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Gains and losses on disposals are determined by comparing proceeds with carrying amount and are included in the income statement.

6. INVESTMENT PROPERTIES

Investment properties, comprising principally land and office buildings, are held for long term rental yields or for capital appreciation or both, and are not occupied by the Bank. Investment properties are stated at fair value, representing open-market value determined annually by external valuers. Fair value is based on active market prices, adjusted, if necessary, for any difference in the nature, location or condition of the specific asset. If this information is not available, the Bank uses alternative valuation methods such as recent prices of less active markets or discounted cash flow projections. Changes in fair values are recorded in the income statement. On disposal of an investment property, or when it is permanently withdrawn from use or no future economic benefits are expected from its disposal, it shall be derecognised. The difference between the net disposal proceeds and the carrying amount is recognised in income statement in the period of the retirement or disposal.

7. INTANGIBLE ASSETS

Intangible assets acquired separately are measured on initial recognition at cost. Following initial recognition, intangible assets are carried at cost less accumulated amortisation and any accumulated impairment losses. The useful lives of intangible assets are assessed to be either finite or infinite. Intangible assets with finite lives are amortised on a straight-line basis over the estimated economics useful lives and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least at each balance sheet date. Intangible assets with indefinite useful lives are not amortised but tested for impairment annually or more frequently if the events or changes in circumstances indicate that the carrying value may be impair either individually or at the cash-generating unit level. The useful life of an intangible asset with an indefinite life is also reviewed annually to determine whether the useful life assessment continues to be supportable. Intangible assets are amortised over their finite useful lives as follows: Computer software 5 years




32


A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 8. OTHER ASSETS

Other assets are initially recognised at their cost when the contractual right to receive cash or another financial asset from another entity is established. Subsequent to initial recognition, receivables are stated at cost less allowance for doubtful debts.

9. CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of cash and bank balances and short term deposits with banks and

other financial institutions that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value.

10. IMPAIRMENT OF NON-FINANCIAL ASSETS

Non-financial assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Non-financial assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the carrying amount of the non-financial asset exceeds its recoverable amount. The recoverable amount is the higher of a non-financial asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there is separately identifiable cash flow (cash generating units). Non-financial assets that suffered impairment are reviewed for possible reversal of the impairment at each reporting date. The impairment loss is charged to the income statement. Any subsequent increase in recoverable amount is recognised in the income statement.

11. OTHER PROVISIONS

Provisions are recognised when all of the following conditions have been met: (i) The Bank has a present legal and constructive obligation as a result of past events; (ii) It is probable that an outflow of reserves will be required to settle the obligation; and

(iii) A reliable estimate of the amount can be made.

Provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate. Where the effect of the time value of money is material, the amount of the provision is the present value of the expenditure expected to be required to settle the obligation.




33


A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED 12. LIABILITIES

Deposits from customers, deposits and placements of banks and financial institutions are stated at placement values. Other liabilities are stated at cost which is the fair value of the consideration expected to be paid in future for the goods and services received.

13. BILLS AND ACCEPTANCES PAYABLE Bills and acceptance payable represent the Bank’s own bills and acceptances rediscounted and

outstanding in the market. 14. EMPLOYEE BENEFITS

(i) Short-term employee benefits

Wages, salaries, paid annual leave and non-monetary benefits are accrued in the period in which the associated services are rendered by employees of the Bank. A provision is recognised for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the bank has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.

(ii) Defined contribution plans A defined contribution plan is a pension plan under which the Bank pays fixed contributions to the national pension scheme, Employees’ Provident Fund (“EPF”). The Bank’s contributions to defined contribution plans are charged to the income statement in the period to which they relate. Once the contributions have been paid, the Bank has no further payment obligations.

15. INCOME TAX

Current tax expense is determined according to the tax laws of Malaysia and includes all taxes based upon the taxable profits for the financial year. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets or liabilities and the carrying amount of the asset or liability as reported in the financial statements. It reflects the manner in which the Bank expects to recover the carrying value of the asset or settle the carrying value of the liability. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the deductible temporary differences can be utilised.

Deferred tax is determined using tax rate (and tax laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred tax asset is realised or deferred tax liability is settled.




34

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2007 (Cont’d) A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 16. ZAKAT

Zakat represents business zakat payable by the Bank to comply with the principles of Shariah and as approved by the Shariah Advisory Council. The Bank only pays zakat on its business and does not pay zakat on behalf of depositors or shareholders. Zakat provision is calculated based on 2.5% of profit subject to zakat.

17. CURRENCY CONVERSION AND TRANSLATION

(a) Functional and presentation currency

The financial statements are presented in Ringgit Malaysia, which is the Bank’s functional and presentation currency.

(b) Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of transactions. Foreign exchange gains and losses resulting from the settlement of such transaction at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when deferred in equity as qualifying cash flow hedges and qualifying net investment hedges.

18. CONTINGENT LIABILITIES AND ASSETS

The Bank does not recognise a contingent liability but discloses its existence in the financial statements. A contingent liability is a possible obligation that arises from past events whose existence will be confirmed by the occurrence or non-occurrence of one or more uncertain future events beyond the control of the Bank or a present obligation that is not recognised because it is not probable that an outflow of resources will be required to settle the obligation. A contingent liability also arises in the extremely rare case where there is a liability that cannot be recognised because it cannot be measured reliably. A contingent asset is a possible asset that arises from past events whose existence will be confirmed by the occurrence or non-occurrences of one or more uncertain future events beyond the control of the Bank. The Bank does not recognise contingent assets but discloses its existence where inflows of economic benefits are probable, but not virtually certain.

19. FINANCIAL INSTRUMENTS Financial instruments are recognised in the balance sheet when the Bank has become a party to the

contractual provisions of the instrument. The accounting policies on recognition and measurement of these items are disclosed in their respective accounting policies.

Financial instruments are classified as liabilities or equity in accordance with the substance of the

contractual arrangement. Profit, dividends and gains or losses relating to a financial instrument classified as a liability, are reported as expense or income. Distributions to holders of financial instruments classified as equity are charged directly to equity. Financial instruments are offset when the Bank has a legally enforceable right to offset and intends to settle the liability simultaneously




35

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2007 (Cont’d) B. CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS

The preparation of the financial statements involved making certain estimates, assumptions and judgements that affect the accounting policies applied and reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the financial statements in the period in which the estimate is revised and in any future periods affected. Significant areas of estimation, uncertainty and critical judgements used in applying accounting policies that have significant effect on the amount recognised in the financial statements include the following:

(i) Allowance for losses on financing and advances

The Bank makes allowance for losses based on assessment of recoverability. Whilst management’s judgment is guided by the relevant BNM guidelines, judgment is made about the future and other key factors in respect of the recovery of the financing and advances. Amongst factors considered are the Bank’s aggregate exposure to the borrower, the net realisable value of the underlying collateral value, the viability of the customer’s business model and the capacity to generate sufficient cash flow to service debt obligations and the aggregate amount and ranking of all other creditor claims.

(ii) Income taxes

Deferred tax assets are measured and recognised based on the tax rates that are expected to apply in the period when the asset is realised. Estimates are made as to the amount of taxable profits in these periods which will enable the deferred tax assets to be realised.




36

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2008

1. GENERAL INFORMATION

The Bank is principally engaged in Islamic banking business which refers generally to the acceptance of deposits and granting of financing under the principles of Shariah as well as the provision of related financial services. The Bank is a licensed Islamic Bank under the Islamic Banking Act 1983, incorporated and domiciled in Malaysia. The registered office of the Bank is located at the Ground Floor, East Block, Wisma Selangor Dredging, 142-B Jalan Ampang, 50450 Kuala Lumpur. The holding company of the Bank is Al Rajhi Banking and Investment Corporation, Saudi Joint Stock Company, a public limited liability company, incorporated in Riyadh on 29 June 1987. The registered office is located at PO Box 28, Riyadh 11411, Kingdom of Saudi Arabia. As at 31 December 2008, the Bank has 19 branches and the numbers of full time employees in the Bank at the end of the financial year were 357 (2007: 329).

2. CASH AND SHORT-TERM FUNDS

2008 2007 RM’000 RM’000 Cash and bank balances with banks and other financial institutions

220,581 72,476

Money at call and deposit placements maturing within one month 1,309,364 467,578 1,529,945 540,054

3. FINANCING AND ADVANCES

(i) By type 2008 2007 RM’000 RM’000 Term Financing: Corporate financing 3,915,317 3,252,931 Personal financing 622,302 211,441 Home financing 166,307 17,074 SME financing 80,341 - Vehicle financing 4,252 1,760 Charge cards 3,436 2,841 Staff financing 42 - 4,791,997 3,486,047 Unearned income (1,877,638) (1,589,131) Gross financing and advances 2,914,359 1,896,916 Less: Allowance for bad and doubtful debts and financing - General (43,525) (28,360) - Specific (10,486) (1,777) Total net financing and advances 2,860,348 1,866,779




37

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2008 (cont’d) 3. FINANCING AND ADVANCES (CONT’D)

(ii) Financing and advances analysed by contract are as follows: 2008 2007 RM’000 RM’000 Bai’ Bithaman Ajil 2,910,881 1,894,075 Qard 3,436 2,841 Others 42 - 2,914,359 1,896,916

(iii) Financing and advances analysed by type of customers are as follows:

2008 2007 RM’000 RM’000 Domestic non-bank financial institutions - Others 4,220 15,409 Domestic business enterprise - Others 749,338 209,624 Individuals 514,615 159,788 Foreign entities 1,646,186 1,512,095 2,914,359 1,896,916

(iv) Financing and advances analysed by profit rate sensitivity are as follows:

2008 2007 RM’000 RM’000 Fixed rate: Corporate financing 2,310,997 1,734,151 Personal financing 427,291 148,040 Home financing 38,864 10,457 SME financing 73,748 - Vehicle financing 3,483 1,427 Charge card 3,436 2,841 Staff financing 42 - Variable rate: Home financing 56,498 -

2,914,359 1,896,916

(v) Financing and advances analysed by purpose are as follows:

2008 2007 RM’000 RM’000 Purchase of securities 1,508,763 1,509,118 Working capital 794,310 225,033 Personal use 427,334 148,040 Charge card 3,436 2,841 Purchase of landed property – residential property 95,362 10,457 Purchase of transport vehicles 3,483 1,427 Others 81,671 - 2,914,359 1,896,916




38


(vi) Financing and advances analysed by sectors are as follows:

2008 2007 RM’000 RM’000 Telecommunication 1,543,914 1,509,118 Household 529,614 162,765 Manufacturing 330,644 63,173 Wholesale & Retail trade 259,582 70,180 Construction 168,174 - Agricultural 1,005 - Electricity, gas and water supply 1,407 - Transportation 403 50,239 Finance services 4,220 5,357 Real estate 52,244 36,084 Research & Development 17,540 - Other business 5,612 - 2,914,359 1,896,916

(vii) Movements in non performing financing and advances

2008 2007 RM’000 RM’000 At 1 January 3,017 - Classified as non-performing 12,456 3,038 Reclassified as performing (902) (21) Accrued profit 1,235 - Amount recovered (65) - 15,741 3,017 Less: Specific allowance (10,486) (1,777) Net non-performing financing and advances 5,255 1,240

Ratio of net non-performing financing and advances to total net financing and advances 0.2% 0.1%




39


(viii) Movements in the allowances for bad and doubtful financing

2008 2007 RM’000 RM’000 General allowance At 1 January 28,360 36 Allowance made during the year 15,165 28,324 At 31 December 43,525 28,360

As % of total gross financing and advances less specific allowance

1.5%

1.5%

Specific allowance At 1 January 1,777 - Allowance made during the year 10,980 1,787 Amount recovered (2,271) (10) At 31 December 10,486 1,777

As % of total gross financing and advances less specific allowance 0.4% 0.1%

(ix) Non-performing financing by purpose

2008 2007 RM’000 RM’000 Personal use 12,187 3,017 Working Capital 3,554 - 15,741 3,017

4. SECURITIES HELD-TO-MATURITY

2008 2007 RM’000 RM’000 At amortised cost Unquoted : Islamic private debt securities 79,721 -




40

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2008 (cont’d) 5. OTHER ASSETS

2008 2007 RM’000 RM’000 Sundry deposits 2,484 2,274 Income receivable 1,352 213 Inventories held for sale 4,006 4,792 Other debtors and deposits 5,891 8,678 Amount due from fund manager 3,180 - Amount due from holding company 999 82 17,912 16,039

The amount due from holding company and fund manager are unsecured and have no fixed terms of

repayment. 6. STATUTORY DEPOSITS WITH BANK NEGARA MALAYSIA The non-interest bearing statutory deposits are maintained with Bank Negara Malaysia in compliance with

Section 37(1) (c) of the Central Bank of Malaysia Act 1958 (Revised 1994), the amounts of which are determined as set percentages to total eligible liabilities.

7. INVESTMENT PROPERTIES

Freehold Office

buildings RM’000 At 1 January - Addition 95,000 Fair value adjustments - At 31 December 95,000

The investment properties are valued annually at fair value based on market values determined by independent qualified valuers. The following amounts have been reflected in the income statement: 2008 2007 RM’000 RM’000 Rental income 455 - Direct operating expenses 312 -




41

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2008 (cont’d) 8. PROPERTY AND EQUIPMENT

Renovations

Furniture & Fittings

Office Equipment

Computer Equipment

Work-in-progress

Total

Cost RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 At 1 January 2008 16,638 1,933 4,013 47,646 18,496 88,726 Additions 4,250 188 350 4,381 - 9,169 Disposals - - - - - Reclassification 1,563 - 47 (559) (1,051) - At 31 December 2008 22,451 2,121 4,410 51,468 17,445 97,895 Accumulated depreciation At 1 January 2008 3,691 219 430 10,713 - 15,053 Charge for the year 3,868 228 235 10,033 - 14,364 Disposal - - - - - - Reclassification - - - - - -

At 31 December 2008 7,559 447 665 20,746 - 29,417

Net book value At 31 December 2008 14,892 1,674 3,745 30,722 17,445 68,478

At 31 December 2007 12,947 1,714 3,583 36,933 18,496 73,673 Depreciation charge for 2007 3,125 184 383 8,860 - 12,552

9. INTANGIBLE ASSETS

Computer Software 2008 2007 RM’000 RM’000

Cost At 1 January 27,501 17,193 Additions 11,497 10,308 At 31 December 38,998 27,501 Accumulated amortisation At 1 January 5,321 758 Amortisation for the year 7,232 4,563 At 31 December 12,553 5,321 26,445 22,180




42

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2008 (cont’d) 10. DEFERRED TAX

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set-off current tax assets against current tax liabilities and when the deferred taxes relate to the same authority. The following amounts determined after appropriate offsetting, are shown in the balance sheet.

2008 2007 RM’000 RM’000

Deferred tax assets 35,910 32,402 Deferred tax liabilities (12,591) (13,312) 23,319 19,090

The movements in deferred tax assets and liabilities during the financial year comprise the following: Deferred tax liabilities

Excess of capital allowances over

depreciation

Total RM’000 RM’000 At 1 January 2008 (13,312) (13,312) Transfer to income statement 721 721 At 31 December 2008 (12,591) (12,591)

At 1 January 2007 (8,204) (8,204) Transfer to income statement (5,108) (5,108) At 31 December 2007 (13,312) (13,312)

Deferred tax assets

Provisions

Unabsorbed capital

allowances

Unutilised

losses

Total RM’000 RM’000 RM’000 RM’000

At 1 January 2008 7,373 9,470 15,559 32,402 Transfer from income statement 3,508 - - 3,508

At 31 December 2008 10,881 9,470 15,559 35,910

At 1 January 2007 8 8,904 8,965 17,877 Transfer from income statement 7,365 566 6,594 14,525

At 31 December 2007 7,373 9,470 15,559 32,402

Deferred tax assets have not been recognised in respect of these items because it is not probable that future taxable profit will be available against which the Bank can utilise the benefits.




43

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2008 (cont’d) 11. DEPOSITS FROM CUSTOMERS

(i) By type of deposit

2008 2007 RM’000 RM’000 Non-Mudharabah Funds Demand deposits 208,906 93,242 Savings deposits 35,051 26,459 Commodity Murabaha 1,503,697 821,983 Others 533 486 1,748,187 942,170 Mudharabah Funds General investment deposits 2,471,238 1,131,662 Saving deposits 27,716 - 4,247,141 2,073,832

(ii) By type of customer

2008 2007 RM’000 RM’000 Business enterprises 2,255,821 1,515,529 Government and statutory bodies 834,438 92,676 Individuals 220,664 113,399 Others 936,218 352,228 4,247,141 2,073,832

12. DEPOSITS AND PLACEMENTS OF BANKS AND OTHER FINANCIAL INSTITUTIONS

2008 2007 RM’000 RM’000 Non-Mudharabah Funds Licensed Islamic banks 120,000 - 120,000 -




44

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2008 (cont’d) 13. OTHER LIABILITIES

2008 2007 RM’000 RM’000 Profit payable 5,164 1,773 Dividend payable 6,105 2,902 Other accruals and payables 42,770 29,159 54,039 33,834

Included in other liabilties are charities (“hibah”) received from financial institutions amounted to RM61,000 (2007: RM52,000), which has been excluded from the Bank’s income.

14. SHARE CAPITAL

2008 2007 RM’000 RM’000 Authorised: Ordinary shares of RM1.00 each At 1 January 600,000 300,000 Created during the year - 300,000 At 31 December 600,000 600,000

Issued and fully paid: Ordinary shares of RM1.00 each At 1 January 600,000 300,000 Issuance during the year - 300,000 At 31 December 600,000 600,000

* RM3 at incorporation date

Subsequent to the end of the financial year, the Bank increased its authorised and its issued and paid-up capital by way of issuance of additional 400,000,000 new ordinary shares at RM1 per share. The new ordinary shares are for working capital purposes and rank pari passu in all respects with the existing ordinary shares of the Bank.




45

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2008 (cont’d) 15. OPERATING REVENUE

Operating revenue of the Bank comprises financing income, fee and commission income and other income as derived from the banking operations.

16. INCOME DERIVED FROM INVESTMENT OF DEPOSITORS’ FUNDS AND OTHERS

2008 2007 RM’000 RM’000 Income derived from investment of: (i) General investment deposits 96,640 21,456 (ii) Other deposits 59,409 2,319 156,049 23,775

(i) Income derived from investment of general investment deposits

2008 2007 RM’000 RM’000 Finance income and hibah Financing and advances 82,460 11,276 Money at call and deposit with financial institutions 14,180 9,148 Total finance income and hibah 96,640 20,424 Other income

- Service charges - 1,032 96,640 21,456

(ii) Income derived from investment of other deposits

2008 2007 RM’000 RM’000 Finance income and hibah Financing and advances 47,720 898 Securities held-to-maturity 320 - Money at call and deposit with financial institutions

11,369 1,421

59,409 2,319




46

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2008 (cont’d) 17. INCOME DERIVED FROM INVESTMENT OF SHAREHOLDERS’ FUNDS

2008 2007 RM’000 RM’000 Finance income and hibah Financing and advances - - Money at call and deposit with financial institutions 5,467 8,714 Total finance income and hibah 5,467 8,714 Other operating income

- Gain from foreign exchange translations 3,662 1,295 - Rental Income 455 - - Others 1,209 2 Other income

- Service charges 5,422 1,263 - Commission received 8,710 1,233 24,925 12,507

18. ALLOWANCE FOR LOSSES ON FINANCING 2008 2007 RM’000 RM’000 Allowance for bad and doubtful financing: (a) General allowance - made during the year 15,165 28,324 (b) Specific allowance - made during the year 10,980 1,787 - written back during the year (2,271) (10) 23,874 30,101

19. INCOME ATTRIBUTABLE TO DEPOSITORS

2008 2007 RM’000 RM’000 Deposits from customers - Mudharabah 55,557 13,082 - Non-Mudharabah 39,760 3,598 95,317 16,680 Deposits and placements of banks and other financial institutions - Non-Mudharabah 5,083 - 100,400 16,680




47

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2008 (cont’d) 20. PERSONNEL EXPENSES

2008 2007 RM’000 RM’000 Salaries and wages 30,728 25,430 Statutory contributions 7,190 5,086 Allowance and bonuses 11,842 10,287 Others 3,268 4,167 53,028 44,970

21. OTHER OVERHEADS AND EXPENDITURES

2008 2007 RM’000 RM’000 Marketing Advertisement and publicity 2,234 5,428 Establishment Office rental 6,176 4,933 Depreciation of property and equipment 21,596 17,115 EDP expenses 15,179 11,376 General expenses Auditors’ remuneration - statutory audit fees 68 68 - others 134 30 Takaful and insurance 286 826 Professional fees 1,285 (1,747) Premises 2,655 1,635 Marketing - 1,059 Security Service Charges 2,779 2,243 Communication 1,785 1,308 Others 5,888 2,394 60,065 46,668




48

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2008 (cont’d) 22. CEO, DIRECTORS AND SHARIAH COMMITTEE MEMBERS’ REMUNERATION

2008 2007 RM’000 RM’000 Chief Executive Officer Salary and other remuneration including

benefits-in-kind 3,315 3,107 3,315 3,107 Non-executive Directors Fees 182 180 3,497 3,287 Shariah Committee Members 406 788 3,903 4,075

The number of Directors of the Bank whose total remuneration during the financial year fell within the following bands is analysed below:

Number of directors Bank 2008 2007 Executive Director: RM2,750,000 to RM2,850,000 1 1 1 1 Non-executive Directors: Less than RM50,000 - - RM50,001 to RM100,000 2 2

2 2

3 3

23. TAXATION

2008 2007 RM’000 RM’000 Tax expense for the period: - Malaysian income tax - - Deferred tax: - Relating to origination of temporary differences

(Note 10) (4,229) (9,417)

(4,229) (9,417)




49

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2008 (cont’d) 23. TAXATION (Cont’d)

A reconciliation of income tax expense applicable to profit before tax at the statutory income tax rate to income tax expense at the effective income tax rate of the Bank are as follows: 2008 2007 RM’000 RM’000 Loss before zakat and taxation

(63,937)

(106,222)

Income tax using Malaysian tax rate of 26% (2007: 27%) Tax effects from:

(16,623)

(28,680)

- change in tax rate 197 734 - expense not deductible for tax purposes 12,197 18,529 (4,229) (9,417)

24. LOSS PER SHARE

The basic loss per ordinary share is calculated by dividing the Bank’s loss after taxation for the financial year by the weighted average number of ordinary shares outstanding during the financial year. 2008 2007 RM’000 RM’000 Net loss for the financial year (RM’000)

(59,708)

(96,805)

Average shares issued during the year (‘000)

600,000 368,500

Basic loss per share (sen) (9.95) (26.27)

25. SIGNIFICANT RELATED PARTY BALANCES AND TRANSACTIONS

a) Related parties and relationships

Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions, or if one other party controls both.

The related party and their relationship with the Bank are as follows:

Related party Relationship

(i) Al Rajhi Banking and Investment

Corporation, Saudi Joint Stock Company, Kingdom of Saudi Arabia

Holding company

(ii) Key Management Personnel

Defined as those persons having authority and responsibility for planning, directing and controlling the activities of the Bank either directly or indirectly. The key management personnel of the Bank includes all Directors of the Bank and the Management Committee members of the Bank




50

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2008 (cont’d) 25. SIGNIFICANT RELATED PARTY BALANCES AND TRANSACTIONS (cont’d) b) Significant related party transactions and balances are as follows:

2008

Holding Company

Key Management Personnel

RM’000 RM’000 Profit income from - Financing and advances - 84 Amount due from Commodity Deferred Sales Agreement Financing and advances Inter-company billings

138,094

- 999

-

9,053 -

Amount due to - Current accounts – i - Savings Account - i - Fixed Investments - Commodity Murabaha Deposit Investment

- - -

407,387

40 11

6 -

Corporate Guarantee 1,508,445 -

2007

Holding Company

Key Management Personnel

RM’000 RM’000 Expenditure - Professional fees - 62 Amount due from Financing and advances Inter-company billings

-

82

131

-

Amount due to - Current accounts – i - Savings Account

- -

187 197

Corporate Guarantee 1,508,445 -

The above transactions have been entered into in the normal course of business and have been established under terms and conditions that are no less favourable than those arranged with independent parties.




51

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2008 (cont’d) 26. PROFIT RATE RISK

The Bank is exposed to various risks associated with the effects of fluctuations in the prevailing levels of yield/profit rate on its financial position. The rate of return risk is the potential impact of market factors affecting rates on returns in comparison with the expected rates of return for investment account holders. Yield/profit rate is monitored and managed by the ALCO to protect the income of its operations. The assets and liabilities at carrying amount are categorised by the earlier of the next contractual repricing dates and maturity dates as follows:

Non-trading book

Up to 1 month

>1-3

months

>3-12

months

1 to 5 years

> 5 years

Non- profit

sensitive

Trading

book

Total

Effective

profit rate

RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 % 2008 Assets Cash and short term funds 1,309,364 - - - - 220,581 - 1,529,945 3.43 Securities held-to-maturity - - - 79,721 - - - 79,721 5.34

Financing and advances - performing 32,701 273,969 422,372 331,033 1,835,065 3,478 - 2,898,618 5.76 - non performing

(1) - - - - - (38,270) - (38,270) -

Other assets(2)

- - - - - 329,347 - 329,347 -

Total assets 1,342,065 273,969 422,372 410,754 1,835,065 515,136 - 4,799,361

Liabilities

Deposits from customers 1,035,328 1,655,308 490,608 821,407 - 244,490 - 4,247,141 3.31 Deposits and placements of banks and other financial institutions

-

-

120,000

-

-

-

-

120,000 3.69

Bills and acceptance payable - - - - - 9,807 - 9,807 - Other liabilities - - - - - 54,039 - 54,039 -

Total liabilities 1,035,328 1,655,308 610,608 821,407 - 308,336 - 4,430,987

Shareholders’ fund - - - - - 368,374 - 368,374

Total liabilities and shareholders’ fund 1,035,328 1,655,308 610,608 821,407 - 676,710 - 4,799,361

On-balance sheet profit sensitivity gap 306,737 (1,381,339) (188,236) (410,653) 1,835,065 (161,574) - - Off-balance sheet profit sensitivity gap - - - - - - - -

Total profit sensitivity gap 306,737 (1,381,339) (188,236) (410,653) 1,835,065 (161,574) - -

Note: (1) This is arrived at after deducting the general allowance and specific allowance from the outstanding gross non performing

financing. (2) Other assets include property and equipment, and deferred tax assets.




52

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2008 (cont’d)

26. PROFIT RATE RISK (cont’d) Non-trading book

Up to 1 month

>1-3

months

>3-12

months

1 to 5 years

> 5 years

Non- profit

sensitive

Trading

book

Total

Effective profit rate

RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 % 2007 Assets Cash and short term funds 467,578 - - - - 72,476 - 540,054 3.47 Financing and advances

- performing 20,008 65,288 93,704 154,840 1,557,390 2,669 - 1,893,899 4.50 - non performing

(1) - - - - - (27,120) - (27,120) -

Other assets(2)

- - - - - 134,162 - 134,162 -

Total assets 487,586 65,288 93,704 154,840 1,557,390 182,187 - 2,540,995

Liabilities Deposits from customers 86,128 667,922

839,005 360,590 - 120,187 - 2,073,832 3.46

Bills and acceptance payable - - - - - 5,247 - 5,247 - Other liabilities - - - - - 33,834 - 33,834 -

Total liabilities 86,128 667,922 839,005 360,590 - 159,268 - 2,112,913

Shareholders’ fund - - - - - 428,082 - 428,082

Total liabilities and shareholders’ fund 86,128 667,922 839,005 360,590 - 587,350 - 2,540,995

On-balance sheet profit sensitivity gap 401,458 (602,634) (745,301) (205,750) 1,557,390 (405,163) - - Off-balance sheet profit sensitivity gap - - - - - - - -

Total profit sensitivity gap 401,458 (602,634) (745,301) (205,750) 1,557,390 (405,163) - -

Note: (1) This is arrived at after deducting the general allowance and specific allowance from the outstanding gross non performing

financing. (2) Other assets include property and equipment, and deferred tax assets.




53

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2008 (cont’d) 27. COMMITMENTS AND CONTINGENCIES In the normal course of business, the Bank made various commitments and incurred certain contingent

liabilities with legal recourse to their customers. No material losses are anticipated as a result of these transactions.

The commitments and contingencies and the related risk-weighted exposures of the Bank as at the end of financial year are as follows:

2008 2007

Principal amount

Credit equivalent

amount

Risk weighted

amount

Principal amount

Credit equivalent

amount

Risk weighted

amount RM’00 RM’000 RM’000 RM’00 RM’000 RM’000 Direct credit substitute 53 53 40 - - - Transaction-related contingent items 17,125 8,563 6,422 662 331 331 Trade-related contingencies 4,473 895 671 - - - Irrevocable commitments to extend credit:

- Maturity not exceeding one year 317,597 63,519 62,898 67,000 - - - Maturity exceeding one year 238,132 113,868 109,237 161,031 80,516 80,516 Foreign exchange-related contracts

51,788

-

-

-

-

-

Miscellaneous 105,992 37 37 20,236 - - 735,160 186,935 179,305 248,929 80,847 80,847

* For the current financial year, the credit equivalent amount and risk-weighted were computed in

accordance with BNM’s Guidelines on Risk Weighted Capital Adequacy Framework for Credit and Market (Basel 1). For the current financial year, the CE and RWA for the Bank are computed in accordance with BNM’s Capital Adequacy Framework for Islamic Banks (CAFIB): Standardised Approach for Credit and Market Risk, and Basic Indicator Approach for Operational Risk (Basel II) respectively.

28. CAPITAL COMMITMENTS

Capital expenditure pertaining to the Bank as approved by Directors but not provided for in the financial statements is as follows: 2008 2007 RM’000 RM’000 Authorised and contracted for: Property and equipment

19,187

21,488




54

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2008 (cont’d) 29. CAPITAL ADEQUACY

(a) The capital adequacy ratios of the Bank as at 31 December 2008 are as follows:

2008 RM’000 Tier-1 capital Paid-up share capital 600,000 Accumulated losses (231,626) 368,374 Less: Deferred tax (23,319) Total Tier-1 capital 345,055 Tier-2 capital General allowance for bad and doubtful financing 43,525 Total Tier-2 capital 43,525

Capital base 388,580

Core capital ratio 11.71% Risk-weighted capital ratio 13.19%

The Bank has applied paragraph 7.2 of the Concept Paper – Risk Weighted Capital Adequacy Framework (Basel II) and CAFIB – Disclosure Requirement (Pillar 3) dated 5 December 2008, where the Bank is exempted from disclosing comparative figures of the corresponding period in previous financial year.




55

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2008 (cont’d) 29. CAPITAL ADEQUACY (cont’d) 2008 Risk

Gross Net Weighted Capital Exposure Class Exposures Exposures Assets Requirements RM’000 RM’000 RM’000 RM’000 Credit Risk On-Balance Sheet Exposures Sovereigns/Central Banks 1,395,226 1,395,226 - - Banks, Development Financial Institutions & MDBs 206,541 206,541 41,308 3,305 Corporates 2,365,775 2,355,237 1,978,045 158,244 Regulatory Retail 534,459 524,284 393,213 31,457 Other assets 310,865 310,866 284,287 22,743 Defaulted Exposures 5,391 5,391 5,203 416 Total for On-Balance Sheet Exposures 4,818,257 4,797,545 2,702,056 216,165 Off-Balance Sheet Exposures Off-balance sheet exposures other than OTC derivatives or credit derivatives

186,934 178,188 171,190 13,695

Total for Off-Balance Sheet Exposures 186,934 178,188 171,190 13,695 Total On and Off-Balance Sheet Exposures 5,005,191 4,975,733 2,873,246 229,860

Large Exposures Risk Requirement - - - - Market Risk Long Position Foreign Currency Risk 7,482 - 7,482 598 Operational Risk - - 66,274 5,302 Total RWA and Capital Requirements - - 2,947,002 235,760


(Incorporated in M

alaysia)

Com

pan

y N

o. 71

905

7-X

56


29

. C

AP

ITA

L A

DE

QU

AC

Y (

cont’d)

2008

Exposures after netting and Credit Risk M

itigation

Sovereigns/Central

Banks

Banks, Development

Financial

Institutions & M

DBs

Corporates

Regulatory Retail

Other assets

Total

Exposure

Total Risk

Weighted

Assets

Risk W

eights

E

xpo

su

res

aft

er

Ne

ttin

g &

C

RM

Ris

k

We

igh

ted

A

sse

ts

Exp

osure

s

aft

er

Ne

ttin

g &

C

RM

Ris

k

Weig

hte

d

Asse

ts

Exp

osu

res

afte

r N

ett

ing

&

CR

M

Ris

k

We

igh

ted

A

sse

ts

Exp

osu

res

afte

r N

ett

ing

&

CR

M

Ris

k

Weig

hte

d

Assets

Exp

osure

s

aft

er

Ne

ttin

g &

C

RM

Ris

k

We

igh

ted

A

sse

ts

Exp

osure

s

aft

er

Ne

ttin

g

& C

RM

Ris

k

We

igh

ted

A

ssets

RM

’00

0

RM

’00

0

RM

’000

R

M’0

00

RM

’00

0

RM

’00

0

RM

’00

0

RM

’000

R

M’0

00

R

M’0

00

R

M’0

00

RM

’000

Perform

ing Exposures

0%

1,3

95

,22

6

- -

- -

- -

- 2

6,5

79

-

1,4

21

,80

5

- 20

%

- -

20

6,5

41

4

1,3

08

-

- -

- -

- 2

06

,541

4

1,3

08

75

%

- -

- -

1,5

08,7

63

1

,13

1,5

72

5

52

,27

9

414

,209

-

- 2,0

61

,04

2

1,5

45,7

82

10

0%

-

- -

- 99

6,6

67

9

96,6

67

-

- 28

4,2

87

2

84,2

87

1,2

80

,95

4

1,2

80,9

54

T

ota

l 1,3

95

,22

6

- 20

6,5

41

4

1,3

08

2

,50

5,4

30

2

,12

8,2

39

5

52

,27

9

414

,209

31

0,8

66

2

84,2

87

4,9

70

,34

2

2,8

68,0

44

Defaulted Exposures

50

%

- -

- -

- -

51

8

259

-

- 5

18

259

10

0%

-

- -

- 2,6

14

2,6

14

2

,11

8

2,1

18

-

- 4

,73

2

4,7

32

15

0%

-

- -

- -

- 14

1

212

-

- 1

41

212

T

ota

l -

- -

- 2,6

14

2,6

14

2

,77

7

2,5

89

-

- 5

,39

1

5,1

03

Total Perform

ing and Defaulted

1,3

95

,22

6

- 20

6,5

41

4

1,3

08

2

,50

8,0

44

2

,13

0,8

53

5

55

,05

6

416

,798

31

0,8

66

2

84,2

87

4,9

75

,73

3

2,8

73,2

46




57

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2008 (cont’d) 29. CAPITAL ADEQUACY (cont’d)

Disclosure on Off Balance Sheet and Counterparty Credit Risk

Principal amount Credit equivalent

amount Risk weighted

amount RM’000 RM’000 RM’000 2008 Direct credit substitutes 53 53 40 Transaction-related contingent items 17,125 8,563 6,422 Short term self liquidating trade related contingencies

4,473 895 671

Foreign exchange related contracts - One year or less 51,788 - - Credit derivative contracts - One year or less 105,992 37 37 Other commitments, such as formal standby facilities and credit lines, with an original maturity of over one year

220,803

110,402

106,638

Other commitments, such as formal standby facilities and credit lines, with an original maturity up to one year

317,597

63,519

62,898

Unutilised credit card lines 17,329 3,466 2,599 735,160 186,935 179,305




58

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2008 (cont’d) 29. CAPITAL ADEQUACY (cont’d)

The capital adequacy ratios of the Bank as at 31 December 2007 are as follows:

2007 RM’000 Tier-1 capital Paid-up share capital 600,000 Accumulated losses (171,918) 428,082 Less: Deferred tax (19,090) Total Tier-1 capital 408,992

Tier-2 capital General allowance for bad and doubtful financing 28,360 Total Tier-2 capital 28,360

Capital base 437,352

Core capital ratio 24.02% Risk-weighted capital ratio 25.69%

The breakdown of risk-weighted assets for credit risk (excluding deferred tax assets) in the various categories of risk-weights is as follows:

2007

Principal Risk-weighted RM’000 RM’000 0% 538,125 - 20% 5,705 1,141 50% 11,328 5,664 75% 1,509,118 1,131,839 100% 560,825 560,825 Risk-weighted assets for credit risk 2,625,101 1,699,469 Risk-weighted assets for market risk - 3,056 Total risk-weighted assets 2,625,101 1,702,525




59

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2008 (cont’d) 30. SEGMENTAL INFORMATION Segment information is presented in respect of the Bank’s business segments. The primary format, business segments, is prepared based on the internal financial reporting system to

reflect the Bank’s management reporting structure. The amounts of each business segment are shown after the allocation of certain centralised costs, funding income and the application of transfer pricing, where appropriate. Inter-segment pricing is determined on a negotiated basis.

The Bank comprises the following main business segments: (i) Retail Operations

Retail operations focus on providing product and services to individual customers and small- and medium- sized enterprises. The products and services offered to customers include credit facilities, charge cards, remittance services, deposit collection and investment products.

(ii) Treasury and Capital Market Operations

The treasury and capital market operations are involved in proprietary trading in treasury related products and services such as foreign exchange, money market operations and securities trading. Income from customer trading is reflected under Retail Operations.

(iii) Corporate Investment Banking

Corporate Investment Banking operations provide a full range of financial services to corporate customers as well as small and medium sized enterprises. The products and services offered include long and short term financing such as working capital financing, asset financing, project financing as well as trade financing.

Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items mainly comprise corporate assets and expenses.

The Bank operates predominantly in Malaysia and accordingly, information by geographical location on the Bank’s operation is not presented.




60

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2008 (cont’d) 30. SEGMENTAL INFORMATION (Cont’d)

Bank

Retail Banking

Treasury &

Money Market

Corporate Investment

Banking Head Office

Total

RM’000 RM’000 RM’000 RM’000 RM’000 2008 Total revenue 52,807 35,453 92,714 - 180,974 Result Segment result (17,477) (16,934) 83,567 - 49,156 Unallocated corporate expenses

(113,093) Loss before zakat and taxation

(63,937)

Zakat and taxation 4,229 Net loss for the financial year

(59,708)

Other information

Segment assets 804,600 1,407,558 2,276,330 - 4,488,488 Unallocated corporate assets

310,873

Total assets 4,799,361

Segment liabilities 2,743,443 1,623,697 - - 4,367,141 Unallocated corporate liabilities

63,846 Total liabilities 4,430,987

Other segment items

Capital expenditure 30,819 1,119

7,805 55,180 94,923

Depreciation 6,194 447 1,383 13,591 21,615

Other non-cash (income)/ expenses 19,344 -

34,667 - 54,011




61

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2008 (cont’d) 30. SEGMENTAL INFORMATION (Cont’d)

Bank

Retail Banking

Treasury &

Money Market

Corporate Investment

Banking

Head Office

Total

RM’000 RM’000 RM’000 RM’000 2007 External revenue 10,908 20,660 4,714 36,282 Inter-segment revenue - - -

-

Total revenue 10,908 20,660 4,714 36,282 Result Segment result (6,296) 12,987 (21,275) (14,584) Unallocated corporate expenses

(91,638) Loss before zakat and taxation

(106,222)

Zakat and taxation 9,417 Net loss for the financial year

(96,805)

Other information Segment assets 231,093 470,758 1,708,162 2,410,013 Unallocated corporate assets

130,982

Total assets 2,540,995

Segment liabilities 1,251,849 821,983 - 2,073,832 Unallocated corporate liabilities

39,081 Total liabilities 2,112,913

Other segment items

Capital expenditure 27,690 1,054 5,929

61,180 95,853

Depreciation 3,955 260 705 12,195 17,115

Other non-cash (income)/ expenses 4,112 - 25,989

30,101




62


31. FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES

Financial instruments comprise financial assets, financial liabilities and also off-balance sheet financial instruments. The fair value of a financial instrument is the amount at which the instrument could be exchanged or settled between knowledgeable and willing parties in an arm’s length transaction, other than in a forced or liquidation sale. The information presented herein represents estimates of fair values as at the balance sheet date. Quoted and observable market prices, where available, are used as the measure of fair values. However, for a significant portion of the financial instruments, including financing and advances to customers, such market prices do not exist as there is currently no ready market wherein exchanges between willing parties occur. Accordingly, various methodologies have been used to estimate what the approximate fair values of such instruments might be. These methodologies involve uncertainties and are significantly affected by the assumptions used and judgments made regarding risk characteristics of various financial instruments, discount rates and estimates of futures cash flows, future expected loss experience and other factors. Changes in the uncertainties and assumptions could significantly affect these estimates and the resulting fair value estimates. Where these methodologies are not able to estimate the approximate fair values, such instruments are stated at carrying amount. In addition, fair value information is not provided for non-financial instruments and financial instruments that are excluded from the scope of FRS 132 which requires fair value information to be disclosed. These include property, plant and equipment. Therefore, for a significant portion of the Bank’s financial instruments, including financing and advances to customers, their respective fair value estimates do not purport to represent, nor should they be construed to represent, the amount that the Bank could have realised in a sales transaction at the balance sheet date. The fair value information presented herein should also in no way be construed as representative of and the Bank’s underlying value as a going concern. Furthermore, it is the Bank’s intention to hold most of its financial instruments to maturity and, therefore, it is not probable that the fair value estimates shown will be realised. The face values of the financial assets and liabilities with a maturity period of less than one year are assumed to approximate their fair values. The following table summarises the carrying amounts and the estimated fair values of those financial assets not presented on the Bank balance sheet at their fair value

Carrying value Fair value

2008 RM’000 RM’000

Financial assets Financing and advances 2,860,348 1,867,281 Securities held-to-maturity 79,721 79,721 *

* The fair value is approximate to the carrying amount as the security was acquired at the end of the

financial year




63

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2007 (cont’d) 31. FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES (Cont’d)

Carrying value Fair value 2007 RM’000 RM’000

Financial assets Financing and advances 1,866,779 1,323,218

The following methods and assumptions are used to estimate the fair value of each class of financial instruments: Financial and advances For fixed rate financing and advances, the fair values are estimated by discounting the estimated future cash flows using prevailing market rates of financing with similar credit risk and maturities. The fair values of impaired fixed rates financing and advances are represented by their carrying value, net of specific allowance being the expected recoverable amount Securities held-to-maturity The estimated fair value is generally based on quoted and observable market prices. Where there is no ready market in certain securities, fair values have been assessed by reference to market indicative profit yields or net tangible asset backing of the investee. Where discounted cash flow technique is used, the estimated future cash flows are discounted using the prevailing market rates for a similar instrument at the balance sheet date.

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