His Majesty Sultan Qaboos Bin Said...Switchboard / Extn. Direct Fax 2470444 / 1111 24708951 24798802...

His Majesty Sultan Qaboos Bin Said

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ContentsContentsHead Office, Bank Branches 4

Head Office Departments 5

Stockholders 7

Board of Directors 8

Board Report 9

Report of the Auditors 19

Balance Sheet 20

Income Statement 21

Statement of changes in Equity 22

Cash Flow Statement 23

Notes to the Financial Statements 24-40

O M A N H O U S I N G B A N K4

Bank Branches

Head OfficePost Box: 2555, Ruwi, Postal code: 112, Sultanate of Oman.Telephone: 24704444 (10 lines), Telex: 3077 ISKAN ONEmail: [email protected]: www.ohb.co.om

Main BranchP.O. Box -2555, Postal Code - 112,Sultanate of OmanTel: 24704713/24703963 , Telefax: 24704060

Salalah BranchP.O. Box -966, Postal Code - 211,Sultanate of Oman, Tel: 23291431,23292337, Telefax: 295652

Sohar BranchP.O. Box -252, Postal Code - 311,Sultanate of OmanTel: 26840366, 26842366, Telefax: 26841366

Sur BranchP.O. Box -300, Postal Code - 411,Sultanate of OmanTel: 25540324, 25540242, Telefax: 25543324

Nizwa BranchP.O. Box -711, Postal Code - 611,Sultanate of OmanTel: 25410375, 25410465, Telefax: 25410075

Khasab BranchP.O. Box -28, Postal Code - 811,Sultanate of OmanTel: 26830448, Telefax: 26830449

Buraimi BranchP.O. Box -370, Postal Code - 512,Sultanate of OmanTel: 25650706, Telefax: 25650707

Rustraq BranchP.O. Box -222, Postal Code - 318,Sultanate of OmanTel: 26875800, 26875799, Telefax: 26878820

Ibra BranchP.O. Box -262, Postal Code - 413,Sultanate of OmanTel: 25570630, 25571304, Telefax: 25570830

General Manager and Branch Managers.

O M A N H O U S I N G B A N K 5

Office of Director General

Switchboard / Extn. Direct Fax

2470444 / 1414 24703767 24704071

Studies & Development


2470444 / 1550 24702887 24795323

Computer Department


2470444 / 1511 24708995 24795323

Internal Auditing


2470444 / 1505 24796976 24797382

Engineering Affairs


2470444 / 1313 24786380 24797380

Collection Department


2470444 / 1316 24708994 24797381

Administration Affairs


2470444 / 1300 24708994 24797382

Loan Department


2470444 / 1200 24707480 24704050

Finance & Banking Affairs


2470444 / 1111 24708951 24798802

General Manager and Department Heads.

OMAN HOUSING BANK S.A.O.C.w w w . o h b . c o . o m


Stock holders No. of Shares Authorised Paid-up-value PercentageCapital RO. RO.

Government of the Sultanate of Oman 18,270,000 18,270,000 18,270,000 60.9%

Internal Security Services Pension Fund 1,950,000 1,950,000 1,950,000 6.5%

Royal Guard of Oman Pension Fund 1,950,000 1,950,000 1,950,000 6.5%

Ministry of Defence Pension Fund 1,950,000 1,950,000 1,950,000 6.5%

Royal Oman Police Fund 1,950,000 1,950,000 1,950,000 6.5%

Civil Service Employees Pension Fund 1,950,000 1,950,000 1,950,000 6.5%

Public Authority for Social Insurance 1,950,000 1,950,000 1,950,000 6.5%

Oman Development Bank 30,000 30,000 30,000 0.1%

Total 30,000,000 30,000,000 30,000,000 100%

Government of the Sultanate of Oman

Internal Security Services Pension Fund

Royal Guard of Oman Pension Fund

Ministry of Defence Pension Fund

Royal Oman Police Fund

Civil Service Employees Pension Fund

Public Authority for Social Insurance

Oman Development Bank SAOG

Stockholders


Acting ChairmanH E Darwish bin Ismail bin Ali Al BulushiUndersecratery Ministry of Finance

Deputy ChairmanMr. Aimen Bin Ahmed Al-HosniGeneral Manager of Administrative and Finance Affairs ofMinistry of Civil Services

Members

Mr. Moh’d Jawad bin Hassan bin Suleiman

Director General of General Treasury and

Accounts Representative of Ministry of Finances

Captain Said Bin Abdullah bin Said Al Hsani

Representative of internal Security services Pension

Funds & Royal Oman Police Pension Funds

Mr. Sultan bin Moh’d bin Sultan Al Mahrouqi

Director General , Administration & Finance Affairs

Representative of Ministry of Finances

Secretary

Mr. Adnan bin Haider bin Darwish

General Manager

Engineer, Abdullah bin Rashid bin Sleim

Al Kumy

Director General of Land & Housing

Ministry of Housing, Electricity & Water

Representative of Ministry of Finances

Mr. Nooh Bin Mohammed Bin Morad

Al- Zedjaly

Member,Executive Commitee

MOD Pension Fund

Auditors

Deloitte & Touche (M.E.)

Legal Consultant

Abdullah Al Saidi Legal Firm

Board Meeting

Board of Directors


Dear Shareholders

On behalf of the Board of Directors, It gives me great pleasure to welcome you

on behalf of the members of the Board of Directors to the 30th general meeting

and to put forward the banks annual report including the various activities of the

bank, final accounts, and the auditors' report for the financial year ending 31

Dec 2005,.

1. Lending Activities

One of the major aims for which this bank was established is to make available

suitable & comfortable house for each & every Omani family in line with a clear

and transparent vision in actualizing our customer present and futuristic needs

and requirement for owning decent houses .

As housing requirements are increasing day by day, our banks lending initiative

of granting loans is also increasing day by day, our banks lending initiative of

granting loans is also increasing day by day.

To comply with the bank polices, (656) loans were granted by the fully utilization

of subsidized loans allotment for the year 2005 amounting to R.O (12) million, of

which (475) loans, amounting to RO 7,270,200 representing (72,4%) of the total

loans and (60,6%) of their value, were allotted to limited income citizen.

Its worth mentioning that the bank targeted this category, since establishment

until 31 Dec 2005, with a (23549) loans from the total approved loans of (26608).

Loans allotted to the category in question amounted to R.O 368,133,429 from

the total loan value of R.O 441,275 687.

HE Darwish bin Ismail bin Ali Al Bulushi Acting Chairman of the Board of Directors

Board Report

O M A N H O U S I N G B A N K

Monthly Loans approved during 2004 Loans approved during 2005Income RO No % Amount(RO) % No % Amount %

Income Up to 200 58 9.2 553,300 4.6 78 11,9 769.000 6,4

Above200 to 400 341 53.9 5,570,500 46.4 397 60,5 6,501,200 54,2

Above 400 to 600 211 33.4 5,217,000 43.5 167 25,5 4,346,400 36,2

Above 600 to 800 22 3.5 659,200 5.5 14 2,1 383,400 3,2

Total 632 100 12,000,000 100% 656 100 12,00,000 100%

The following table shows the distribution of subsidized loans approved by the

bank (branch wise) for various areas within the Sultanate during 2005 and since

the establishment of each branch up to the end of 2005.

Branches Loans approved during 2005 Loans approved since Est up to 2005

No % Amount(RO) % No % Amount(RO) %

Main 214 32.6 4,382,300 36.6 13853 52.1 241,155,391 54.6

Salalah 53 8.1 982,400 8.2 3917 14.7 61,741,751 14.0

Sohar 72 10.9 1,189,600 9.9 2310 8.7 33,396,142 7.6

Sur 38 5.8 687,500 5.7 1655 6.2 24,940,996 5.7

Nizwa 71 10.8 1,263,600 10.5 1921 7.2 30,899,752 7.0

Khasab 22 3.4 314,500 2.6 403 1.5 5,993 ,500 1.4

Buraimi 26 4,0 447,900 3.7 555 2.1 9,715,555 2.2

Rustaq 116 17.7 2,063,400 17.2 1382 5.2 23,852 ,900 5.4

Ibra 44 6.7 668,800 5.6 612 2.3 9,579,700 2,1

Total 656 100% 12,000,000 100% 26608 100% 441,275,687 100%

The following table shows the distribution of subsidized loans approved to the

different income category borrowers during the years (2004-2005)

10

Numbers of Loan approved during year 2004 - 2005 Amount of Loan approved during year 2004 - 2005


The following table shows the received loan applications, the primaryapprovals, cancelled applications and applications on the waiting list from thebeginning of the year 2004 to 31/12/2005..

year 2004 2005No Amount No Amount

Applications atthe beginning ofthe year 1268 23,602,100 1513 28,044,300

Applicationsreceived duringthe year 1029 18,994,700 772 14,187,744

Approved loans 632 12,000,000 656 12,000,000

Cancelled application 152 2,552,500 313 6.352,844

Applications at theend of the year 1513 28,044,300 1316 23,879,200

11

No. of loans approved up to 2005

Amount of loans up to 2005

The above statement shows applications received during the 2005 stand at (51%)

of the total application on the waiting list as per the situation at the end of the

year 2004 a rate of 50.6% of the total value . Accordingly, as per available bank


resources and its loan planning,, Waiting period shall be less than ( 2 years ) while

it was almost ( 2 fi) years in 2004.

As this is the situation, the bank shall seek support and explore other possible

ways and procedures, during its fourth coming meeting, to make the waiting list

within the range of one year .

During the year 2005, the board of directors has adopted optimal loan policy

system to meet the demand of large segment of the citizens, whose urgent

situation do not allow them to wait in queue , by making them pay extra.

Administrative and bank service charges to be defined in line with their monthly

income a matter that made to reducing the waiting period and eventually

enhanced the financial situation of the bank.

The bank has also approved a reduction in charges on the commercial loans as

of 1/07/2005 to make it (8%) instead of (10%) a matter that attracted many to

taking the loans. Even those who do not meet the terms of the subsidized loans

can avail of this news system . This action helped to utilizing the whole amount

of R.O 8 million making to the improve of the commercial loan portfolio.

During the year 2005, the bank approved commercial loans amounting to (313)

applications, making the total of approved extra charged applications , since

applying the new system , 1864 applications at R.O 46, 125, 335.

The following table shows unsubsidized loans approved by the bank during 2005

and also those approved from 1/1/1993, when the system was established, to

the end of 2005.

Branches Un subsidized loans approved during Un subsidized loans approved

the year 2005 from 1/1/1993 to the end of year 2005

No % Amount(RO) % No % Amount %

Main 141 45.0 4,287,075 53.6 1034 55.5 28,538,510 61.9

Salalah 33 10.1 811,400 10.1 203 10,9 5,033,800 10.9

Sohar 28 9.0 670,300 8.4 110 5,9 2,413,600 5.2

Sur 14 4.5 264,100 3.3 99 5.3 2,020,200 4.4

Nizwa 14 4.5 339,300 4.2 109 5.8 2,070,500 4.5

Khasab 11 3.5 240,200 3.0 27 1.5 424,800 0.9

Buraimi 12 3.8 208,825 2.6 71 3,8 1,487,925 3.2

Rustaq 46 14.7 934,700 11.7 159 8.5 3,196,900 7.0

Ibra 14 4.5 244,100 3.1 52 2.8 939,100 2

Total 313 100 8,000,000 100 1864 100 46,125,335 100


2) Financial Position

1) Assets: The assets of the bank were (RO162, 634,656) by 31/12/2005 compared to (RO

166,416,868) by the end of the year 2004 with a decrease of (RO 3,782,212) or

(2.3%) The decrease of the assets mainly attributed to the fall in the mortgage loan

amount during the year of 2005 by(RO 5,257,048) to be reached (RO 159,297,827)

compared to (RO 164, 554,875) by the end of the year 2004.

2) Liabilities: The total liabilities of the bank has reached (RO 84,176,443) by 31/12/2005 in

comparison to (RO 94,719,094) by the end of the year 2004 at a decrease of

amount of (RO10, 542,651) a percentage of 11 %. The decrease is mainly due

to the decrease in the net loan balance from banks & financial institutions.

Total shareholders equity has reached (RO 78, 458,213) In 2005 (RO71,697,774)

by end of 2004. The increase is attributed to the increase in reserves and

retained earnings.

3) Profits: A total net profit achieved amount to (RO 8,557,939) compared to ( R.O

5,366,602) by the end of the year 2004 at an increase of (RO3,191,337) at the

rate of (59.5%) leading to an increase in the percent of return on paid up

capital (17.9%)to (28.5 %).

Accordingly, The Board of Directors recommended the distribution of

the dividend for the year 2005 as follows:

Transfer an amount of (R.O 855,794), equal to (10%) of the net profits for

the year 2005, to the legal reserve.

An amount of (R.O 2,400,000) to the shareholder as cash profits. Equal to

8% a return to the amount of paid up capital.

An amount of (R.O 2,651,073) as a special reserve.

The reminder of (RO 2,651,072) as retained earnings.


0

14

The following table shows the growing assets of the bank, mortgage accounts

and net profits during the last five years from 2001 to 2005.

Year Assets R.O Loans R.O.

2001 165,020, 376 158.794,651

2002 162,822,317 160,785,705

2003 172,159,148 170,240,324

2004 166,416,868 164,554,875

2005 162,634,656 159,297,827

Year Net profit of Bank

2001 3,769.379

2002 7,048,836

2003 8,167,852

2004 5,366,602

2005 8,557,939

Increase in profit in 2004 is mainly due to the policy of forming allotments for

managing loan risk in the context of final statements for the year 2004 instead

of the (3) year round. This lead the bank to having a relaxed status as to the

allotments of doubtful loans after forming extra allotments for the loan risks

during 2005 in addition to retained allotments generating from the difference

of the inertest value on government loans from 8% to 5% yearly.


3) Recruitment and Training

The bank gives vital important to the omanization policy by recruiting Oman's

and qualify them. The human resources qualifying issue is always highlighted by

way of intensive training courses at the training centre of the bank and through

other local and foreign institutes and colleges. The training courses all areas &

disciplines of the bank to produce quality staff. The omaniztion rate stands at

(96.9%)

4) Information Technology

The bank is keeping pace with the latest development in technology and

computer applications, where wide steps are taken in the area of adopting I.T

procedures, the most important of which is the e -mail exchange of transactions

between the managements and the branches through e-mail and internal

internet systems. A matter leading to a quick exchange of data with positive

reflection on bank, services and operation charges. The bank has also established

a full-fledged with an integral system that can be fed with data on daily basis. This

has helped the bank to carry out its business with great essay and comfort in case

of any short comings or defect in the main centre of the information.

5) Buildings for the Bank Branches

As part of 2004 plan, the construction project of Sohar branch building, is now

been executed and was officially open on Tuesday , November 29 , 2005 under

the auspices of HE Al Said Mohamamed bin Ahmed Al Busaidi , the wali of Sohar.

The board of director has in the 2006 budget, confirmed the establishing of a

branch for the bank in Nizwa and will continue the policy of establishing branches

in the different parts of the Sultanate of the Oman in a bid to provide better

services to all and in every part of the Sultanate. Bank services shall contribute to

the development of the economy sectors in those parts and shall as well as

activate contracting business, building materials trade, engraving services ,

insurance works and real estate investments.

6) Internal Regulations

The finance committee carries out the task of reviewing the systems and panels

while also studies financial status of the bank and prepares , where necessary,


C

studies and submits suitable recommendation to the board of directors.

The auditing committee maintances the auditing business enhancing internal

control while also submitting relevance studies and observations related to the

auditing system, to the board of directors

At the end, the board of directors has the honors to thank His Majesty Sultan

Qaboos Bin Said for his valuable directives and continuous support to the bank.

His Majesty Sultans vision is the power inspiring the people to have a better life and

be provided with the most modern services.

The shall all time be willing to provide it social services by making available

modern houses to each and every Omani family.

Our thank are also due to the wise government of Oman represented by the

ministry of finance for it support to the bank.

The Board of Directors extends thanks and appreciation to all who contributed to

the growth and progress of this bank. A Special thanks to the central bank of

Oman, all ministries, government and Ahlia bodies as well as financial institutes for

the loyal co- operation with the bank.

A special acknowledgement is paid to valued staff for their productive effort to

serve our bank and improve our performance and service as well.

May the Almighty Allah give us the ability to serve better our beloved Oman under

the wise leadership of His Majesty Sultan Qaboos bin Said.

Board of Directors

16


Independent auditor's report 19

Balance sheet 20

Income statement 21

Statement of changes in equity 22

Statement of cash flows 23

Notes to the financial statements 24 - 40

F I N A N C I A L S T A T E M E N T SFOR THE YEAR ENDED 31 DECEMBER 2005

ContentsContents

OMAN HOUSING BANK S.A.O.C.w w w . o h b . c o . o m


Independent auditor's report to the shareholdersof Oman Housing Bank SAOC

We have audited the accompanying balance sheet of Oman Housing Bank SAOC as

of 31 December 2005 and the related statements of income, changes in equity and

and cash flows for the year then ended as set out on pages 20 to 40. These financial

statements are the responsibility of the Bank's management. Our responsibility is to

express an opinion on these financial statements based on our audit. The financial

statements for the year ended 31 December 2004 were audited by another auditor

whose report dated 23 March 2005 expressed an unqualified audit opinion.

We conducted our audit in accordance with International Standards on Auditing.

Those Standards require that we plan and perform the audit to obtain reasonable

assurance about whether the financial statements are free of material misstatement.

An audit includes examining on a test basis, evidence supporting the amounts and

disclosures in the financial statements. An audit also includes assessing the accounting

principles used and significant estimates made by the management, as well as

evaluating the overall financial statement presentation. We believe that our audit

provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material

respects, the financial position of Oman Housing Bank SAOC as of 31 December 2005

and the results of its operations and its cash flows for the year then ended in

conformity with International Financial Reporting Standards and the relevant

disclosure requirements of the Commercial Law of 1974, and its amendments.

11 March 2006

BALANCE SHEET AT 31 DECEMBER 2005

2005 2004Note RO RO

ASSETS

Cash and balances with banks 140,990 111,436

Term deposits 4 1,580,000 200,000

Mortgage loan accounts 5 159,297,827 164,554,875

Property and equipment 6 1,206,206 1,118,713

Other assets 7 409,633 431,844

Total assets 162,634,656 166,416,868

LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES

Due to other banks 8 8,000,000 9,100,000

Customers' deposits 9 6,528,672 6,699,287

Term loans from financial institutions 10 - 9,063,236

Loans from the Government of Oman 11 64,830,142 64,830,142

Other liabilities 12 4,817,629 5,026,429

Total liabilities 84,176,443 94,719,094

CAPITAL AND RESERVES

Share capital 13 30,000,000 30,000,000

Legal reserve 14 8,541,928 7,686,134

Special reserve 15 28,696,142 26,045,069

Revaluation reserve 16 189,200 204,200

Retained earnings 11,030,943 7,762,371

Total capital and reserves 78,458,213 71,697,774

Total liabilities and shareholders' equity 162,634,656 166,416,868

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


INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2005

2005 2004Note RO RO

REVENUE

Banking and administrative service fees on mortgage accounts 7,235,463 7,293,352

Government administrative and service fee contribution receivable 18 6,000,000 5,500,000

Provision for impairment of loans written back - specific 505,149 154,367

Provision for impairment loans written back - General 71,834 -

Other income 19 1,239,080 898,128

Interest on short term deposits 5,595 732

Total Income 15,057,121 13,846,579

EXPENSES

Interest on loans from the Government 2,041,507 2,407,497

Interest on customers' deposits and due from banks 357,908 165,810

Interest on term loans 129,995 282,241

General and administrative expenses 20 3,412,533 3,085,676

Loan impairment expense - General 10,048 1,650,927

Loan impairment expense - Specific 306,262 627,731

Bad debt written off - 4,127

Staff housing loan interest expenses 79,804 85,639

Depreciation 161,125 170,329

Total expenses 6,499,182 8,479,977

Profit for the year 8,557,939 5,366,602

Basic earnings per share 21 0.285 0.179



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CASH FLOW STATEMENTFOR THE YEAR ENDED 31 DECEMBER 2005

Note 2005 2004RO RO

Operating activities

Profit for the year 8,557,939 5,366,602Adjustments:Depreciation of property and equipment 161,125 170,329Loss / (profit) on sale of property and equipment 17,992 (5,330)Provision for impairment of loan written back (576,983) (154,367)Loan impairment expense - General 10,048 1,650,927Loan impairment expense - Specific 306,262 627,731Other provisions written back (362,895) (43,840)

Operating profit before changes in operating assetsand liabilities 8,113,488 7,612,052

Changes in operating assets and liabilities

Term deposits due after 3 months (500,000) -Mortgage loan accounts 5,517,721 3,561,158Other assets 23,088 38,015Due to other banks (1,100,000) (1,600,000)Customers' deposits (170,615) 104,312Repayment of term loans to financial institutions (9,063,236) (7,360,489)Other liabilities 153,218 147,295Net cash from operating activities 2,973,664 2,502,343

Investing activities

Purchase of property and equipment (273,702) (195,429)Proceeds from sale of property and equipment 9,592 8,541Net cash used in investing activities (264,110) (186,888)

Financing activities

Dividend paid (1,800,000) (2,400,000)

Net change in cash and cash equivalents 909,554 (84,545)Cash and cash equivalents, at the beginning of the year 311,436 395,981

Cash and cash equivalents at end of year (Note 23) 1,220,990 311,436



NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 31 DECEMBER 2005

Basis of presentation

1. Legal status and principal activities

Oman Housing Bank SAOC ("the Bank") was established as a closely held jointstock company in the Sultanate of Oman under the Royal Decree 51/77. Theregistered address is at P.O Box 2555 Ruwi, Postal code 112.

The principal activity of the Bank is to provide housing loans to Omani Nationalsthrough a network of branches in the Sultanate of Oman.

As per the Articles of Association of the Bank, a minimum dividend of 6% of thepaid-up share capital should be paid to the shareholders. In the event ofinsufficient profits, available to meet the minimum dividend requirement aftertransfers to legal and special reserve, the short fall will be paid to the bank bythe Government of the Sultanate of Oman. As the profit for the year aftertransfers to legal and special reserve has exceeded the minimum dividend,there is no contribution from the Government of the Sultanate of Oman.

2. Basis of preparation

The financial statements have been prepared in accordance with theInternational Financial Reporting Standards (IFRS) and applicable requirementsof the Oman Commercial Companies Law.

The financial statements have been prepared on the historical cost basis exceptfor the measurement of certain assets which are remeasured at fair value.

Adoption of new and revised International Financial Reporting Standards (IFRS)

In the current year, the bank has adopted all of the new and revised standardsand interpretations issued by the International Accounting Standards Board(IASB) and the International Financial Reporting Interpretations Committee(IFRIC) of the IASB that are relevant to its operations and effective for periodsbeginning on 1 January 2005.

The adoptions of these standards and interpretations has not resulted changesto the Bank's accounting policies and has not affected the amounts reportedfor the current or prior years

3. Summary of significant accounting policies

The significant accounting policies adopted in the preparation of the financialstatements are as follows:

Recognition of banking and administrative service fees on mortgage accounts



3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Banking and administrative service fees accrues on a time proportion basis JNtaking into account the fees related to the loan and rate applicable. If therecovery of banking and administrative service fees on mortgage accounts isdoubtful, its recognition in the income statement is deferred until it is received.

Recognition of interest income and expense

Interest income and expense are recognised in the income statement on anaccruals basis using the effective yield method on the principal outstanding orthe actual purchase price as applicable.

Recognition of commission and fees

Commission and fees are recognised in the income statement at the time ofeffecting the transaction to which they relate.

Recognition of Government subsidy

The proportion of banking and administrative services fees borne by theGovernment of the Sultanate of Oman is recognised on a daily basis andclaimed at monthly intervals until the maximum ceiling is reached.

Mortgage loan accounts

Mortgage accounts originated by providing money directly to the borrowerare categorised as originated loans and are stated at cost less any amountswritten off, provision for loan impairment and reserved banking andadministrative service fees.

Provisions for loan impairment comprised both specific provision as well asprovision for potential losses not specifically identified but which experienceindicates are present in the mortgage accounts portfolio. A loan impairmentprovision represents the difference between the carrying amount of the loanand the recoverable amount, which is the current value of any expected cashflow, including amounts recoverable from collateral, discounted based atinception interest rates.

Property and equipment

Property and equipment except land are stated at cost less accumulateddepreciation less impairment losses, if any. Land is stated at revalued amount.The cost of property and equipment is the purchase cost, together with anyincidental expenses of acquisition.




Depreciation is calculated so as to write off the cost of property andequipment on a straight line basis over the expected useful economic lives ofthe assets concerned. The principal annual rates used for this purpose are:

YearsBuildings 25 Furniture and fixtures and office equipments 5-10 Other equipments 5Motor vehicles 5

Capital work in progress is not depreciated until the asset is put to use, and willbe depreciated based on the rates applicable to its particular category uponcapitalisation.

Gains and losses on disposal of property and equipment is determined as thedifference between the carrying amount of the asset and its selling price anddealt in the income statement.

Impairment

At each balance sheet date, the Bank reviews the carrying amounts of itstangible assets (or cash-generating unit) to determine whether there is anyindication that those assets have suffered an impairment loss. If any suchindication exists, the recoverable amount of the asset is estimated in order todetermine the extent of the impairment loss (if any).

The loss arising on an impairment of an asset is determined as the differencebetween the recoverable amount and carrying amount of the asset and isrecognised immediately in the income statement.

Where an impairment loss subsequently reverses, the carrying amount of theasset is increased to the revised estimate of its recoverable amount, but so thatthe increased carrying amount does not exceed the carrying amount thatwould have been determined had no impairment loss been recognized for theasset in prior years. A reversal of an impairment loss is recognized as incomeimmediately, unless the relevant asset is carried at a revalued amount, in whichcase the reversal of the impairment loss is treated as a revaluation increase.

Borrowings

Bank borrowings, term loans and Government loans are recognized initially atcost less attributable transaction costs. Subsequent to initial recognition, thereare stated at amortised cost with any difference between proceeds, net oftransaction costs, and the redemption value recognized in the incomestatement over the years of the borrowings on an effective interest basis.


0

27



End of service benefits

End of service benefits are accrued in accordance with the terms of

employment of the bank's employee having regard to the requirements of the

Oman labour Law. For Omani employees the contributions are transferred to

the Public Authority for Social Insurance in accordance with the terms of the

Royal Decree 72/91.

Foreign currencies

Transactions in foreign currencies are translated to Rials Omani at the rate of

exchange prevailing on the date of the transactions. Monetary assets and

liabilities denominated in foreign currencies are translated at the exchange

rates prevailing at the balance sheet date. The exchange gains and losses are

included in the statement of income.

Cash and cash equivalents

Cash and cash equivalents comprise cash on hand, and all balances with

banks with a maturity of three months or less from the date of placement.

Use of estimates

The preparation of the financial statements requires management to make

estimates and assumptions that affect the reported amount of financial assets

and liabilities at the date of the financial statements and the resultant

provisions and changes in fair value for the year. Such estimates are necessarily

based on assumptions about several factors involving varying, and possibly

significant, degrees of judgment and uncertainty and actual results may differ

from management's estimates resulting in future changes in estimated liabilities.

4. Term Deposits2005 2004

RO RO

Term Deposits 1,580,000 200,000

Term deposits comprise a Rial Omani deposits maturing within 3 months and a

deposit maturing within one year from the date of placement. These deposits

carry an interest at 1.75% to 2% per annum (2004: 0.5% per annum) and 3.25%

per annum respectively.


NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 31 DECEMBER 2005 (continued)

5. Mortgage loan accounts2005 2004

RO RO

Gross mortgage loan accounts, as at 1 January 167,690,154 171,172,247

Loans distributed during the year 14,400,770 17,811,208

Principal repayments during the year (19,839,218) (21,293,301)

Gross mortgage loan accounts, as at 31 December 162,251,706 167,690,154

Provision for impairment (Refer "a" below) (2,488,775) (2,749,448)

Reserved banking and administrative services

fees (Refer "b" below) (465,104) (385,831)

Net mortgage loan accounts as at 31 December 159,297,827 164,554,875

a) The movement in the provision for impairment during the year is as follows:

2005 2004

RO RO

Balance at the beginning of the year 2,749,448 625,157

Loan impairment expense - Specific 306,262 627,731

Loan impairment expense - General 10,048 1,650,927

Provision written back during the year - Specific (505,149) (154,367)

Provision written back during the year - General (71,834) -

Balance at the end of the year 2,488,775 2,749,448

At 31 December 2005 the provision for loan impairment represents 68% of

gross non-performing mortgage accounts (2004 - 93%).

b) The movement in the reserved banking and administrative services fees

during the year is as follows:

2005 2004

RO RO

Balance at the beginning of the year 385,831 306,766

Reserved during the year 139,680 131,184

Written back during the year (58,937) (44,231)

Written off during the year (1,470) (7,888)

Balance at the end of the year 465,104 385,831

28


c) At 31 December 2005, mortgage accounts on which banking andadministrative service fees have been reserved amounted to RO 3,636,256(2004 - RO 2,970,229).

d) The banking and administrative service fees rates varied from 1% to 9% perannum (2004 - 1% to 10% per annum) in addition to the contributionreceived from the Government of the Sultanate of Oman.

6. Property and equipment

Land and Furniture Other Motor Capital Total buildings & fixtures equipment vehicles work in

RO RO RO RO progress RORO

Cost / revaluationAt 1 January 2004 1,815,892 1,123,676 844,654 191,617 79,680 4,055,519Additions - 42,722 57,623 20,000 75,084 195,429Transfer - - 79,680 - (79,680) -Disposals - (120,364) (291,015) (25,855) - (437,234)

At 1 January 2005 1,815,892 1,046,034 690,942 185,762 75,084 3,813,714Additions 110,806 65,548 52,498 44,850 - 273,702Transfer 71,550 - 1,426 - (72,976) -Disposals (17,500) (27,410) (14,769) (27,145) - (86,824)Revaluation andother adjustments 2,500 (6,949) - - (2,108) (6,557)At 31 December 2005 1,983,248 1,077,223 730,097 203,467 - 3,994,035

Accumulated depreciationAt 1 January 2004 986,480 1,084,046 711,355 176,814 - 2,958,695Charge for the year 60,822 14,314 86,423 8,770 - 170,329Disposals - (120,032) (288,136) (25,855) - (434,023)

At 1 January 2005 1,047,302 978,328 509,642 159,729 - 2,695,001Charge for the year 64,200 20,172 60,422 16,331 - 161,125Disposals - (26,997) (14,155) (27,145) - (68,297)

At 31 December 2005 1,111,502 971,503 555,909 148,915 - 2,787,829Carrying amountAt 31 December 2005 871,746 105,720 174,188 54,552 - 1,206,206At 31 December 2004 768,590 67,706 181,300 26,033 75,084 1,118,713

Land and buildings includes land given by the Government of Sultanate of Oman free of cost

which have been valued at RO 189,200 (2004: RO 204,200). (Note 16). The bank revalues its land

on a regular basis.




7. Other assets

2005 2004RO RO

Prepayments 33,058 21,560

Staff personal loans 283 9,626

Other receivables 356,663 378,134

Stationary inventory 19,629 22,524

409,633 431,844

Included in other receivables are advances to terminated employees

amounting to RO 109,436 (2004: RO 99,259) for which full provision have

been made.

Other receivables are net of provision for doubtful receivables and reserved

interest of RO 50,700 (2004: RO 44,176)

8. Due to others banks

Due to other banks represents a short term deposit in Rials Omani from a

local commercial bank carrying interest at 3% per annum (2004: 1.5% to 2%

per annum) and maturing within 1 year from the date of placement.

9. Customers' deposits

2005 2004RO RO

Savings accounts 2,853,669 3,021,511

Term deposits 3,675,003 3,677,776

6,528,672 6,699,287

Interest rates on savings accounts varied between 1% to 2% (2004: 1% to

2%) per annum. Interest rates on term deposits varied between 2% to 3.5%

(2004: 0.5% to 1.5%) per annum. Customers' accounts include deposits

denominated in US dollars with an equivalent Rial Omani Value of RO

1,651,536 (2004: RO 1,643,289).

10. Term loans from financial institutions

At 31 December 2004, the entire amount of loans represented borrowings in

US dollars from financial institutions situated in Kingdom of Bahrain. Interest

rates on these loans are at a fixed margin over the LIBOR prevailing on as

the date of renewal. These loans were fully settled during the current year.

30



11. Loans from the Government2005 2004

RO RO

Government loan - 1 34,830,142 34,830,142

Government loan - 2 10,000,000 10,000,000

Subordinated loan 20,000,000 20,000,000

Total loans from the Government 64,830,142 64,830,142

Loans 1 and 2 from the Government of the Sultanate of Oman are

denominated in Rials Omani and carry interest rates of 5% and 3% per

annum respectively (2004: 5% to 3%) per annum. These loans are repayable

in 2011.

During 2001, the Government approved a subordinated loan of RO

20,000,000 to the bank, of which RO 12,000,000 was disbursed during year

2001, RO 2,000,000 was disbursed during 2002, and the balance of RO

6,000,000 was disbursed during 2003. There are no fixed repayment terms for

this loan.

Fair value of loan 1 and 2 from the Government as of the balance sheet

date is RO 40,452,652 (2004: RO 39,714,167). No fair value can be

determined for the subordinated loan in the absence of a fixed repayment

schedule.

12.Other liabilities

2005 2004RO RO

Accrued interest 1,478,367 1,729,943

Customers' insurance payable 942,713 1,033,412

Retention payable to contractors 783,268 1,168,444

End of service benefits 66,575 63,947

Other payables 1,546,706 1,030,683

4,817,629 5,026,429



13. Share capital

The share capital of the Bank is divided into 30,000,000 shares (2004 -

30,000,000 shares) fully paid shares of RO 1 each. The shareholding pattern

is as follows:

Government of the Sultanate of Oman 60.9%

Internal Security Service Pension Fund 6.5%

Royal Guard of Oman Pension Fund 6.5%

Ministry of Defence Pension Fund 6.5%

Royal Oman Police Pension Fund 6.5%

Civil Service Employees Pension Fund 6.5%

Public Authority for Social Insurance 6.5%

Oman Development Bank SAOG 0.1%

14. Legal reserve

In accordance with the Bank's Articles of Association, the Bank is required to

transfer 10% of its profit for the year, to a legal reserve until the accumulated

balance of the reserve equals at least one half of the Bank's paid up share

capital. The legal reserve is not available for distribution.

15. Special reserve

In accordance with the Articles of Association of the Bank, after

appropriation of legal reserve, an amount to be determined by the Board

of Directors is transferred to special reserve. This reserve may be utilized to

cover written off debts.

16. Revaluation reserve

The surpluses arising on revaluation of land by independent valuers have

been credited to a non-distributable revolution reserve. During the year,

land was revalued and an amount of RO 2,500 has been credited to the

reserve.

17. Proposed dividend

A dividend of 8% of share capital has been proposed by the Bank's Board of

Directors and will be submitted for formal approval at the annual general

meeting.



18. Government administrative and services fee contribution receivable In

accordance with Article 6 of the Royal Decree No. 51/77, borrowers are

charged a proportion of the prevailing total rate of banking and adminis

trative service fees, determined in accordance with their monthly income.

The Government of the Sultanate of Oman bears the difference between

the prevailing total rate of banking and administrative service fees and the

reduced rate of banking and administrative service fees, up to a maximum

limit of RO 6,000,000 for the year ended 31 December 2005 (2004 : RO

5,500,000). The full amount of subsidy would have been RO 6,812,413 for the

year ended 31 December 2005 (2004: RO 7,237,381), had there been no

maximum limit as mentioned above.

19. Other income

2005 2004RO RO

Fees and commissions 699,603 756,797

Rental income 55,926 55,926

(Loss) / profit on disposal of fixed assets (8,935) 5,330

Reversal of provision 362,018 -

Miscellaneous income 130,468 80,075

1,239,080 898,128

The reversal of provision represent the excess interest accrued on a

government loan in previous year consequent to reduction of interest rate

from 8% to 5%.

20. General and administrative expenses2005 2004

RO RO

Staff expenses 2,850,408 2,611,628

Training expenses 94,079 107,233

Utilities and rent 81,028 62,588

Professional fees 42,774 57,231

Communication costs 53,126 51,042

Maintenance 30,452 31,006

Travelling expenses 24,235 25,148

Board of Directors' meeting expenses 24,950 20,550

and sitting fees

Board of Directors' remuneration - proposed 70,000 40,000

Miscellaneous expenses 141,481 79,250

3,412,533 3,085,676

33



21. Basic earnings per share

The basic earnings per share has been derived by dividing the profit for the

year attributable to the shareholders by the weighted average number of

shares outstanding. As there are no dilutive potential shares, the diluted

earnings per share is identical to the basic earnings per share.

2005 2004RO RO

Profit for the year 8,557,939 5,366,602

Weighted average number of shares on issue 30,000,000 30,000,000

Basic earnings per share 0.285 0.179

22.Commitments

2005 2004RO RO

Mortgage accounts - Approved but 8,319,526 6,169,366

not disbursed

Mortgage accounts - Preliminary approval 6,336,725 3,182,600

given but notdisbursed

Total Loan Commitments 14,656,251 9,351,966

Capital Commitments - 107,635

23. Cash and cash equivalents

Cash and balances with banks 140,990 111,436

Term deposits 1,580,000 200,000

1,720,990 311,436

Less: Term deposits with a maturity of more (500,000) -

than 3 months from the date of placement

1,220,990 311,436

24. Related parties

In accordance with IAS 24 the Government of the Sultanate of Oman is not

a related party for the purposes of this note.

The Bank enters into transactions with related parties in the normal course

of business at the Bank's normal terms. All loans to related parties are

performing loans and no provision for impairment have been made

against these loans.

34

0

35O M A N H O U S I N G B A N K


24. Related parties(continued)

At balance sheet, the following related party balances are included in the

financial statements:

2005 2004RO RO

Mortgage accounts 14,355 16,585

Proposed Board of Director's remuneration is RO 70,000 (2004: 40,000).

25. Assets and liabilities analysis

a) The maturity profile of assets and liabilities determined on the basis of the

period remaining to maturity as at 31 December 2005 is as set out below:.

Figures are in Rials OmaniLess than Four to One to More than

three months Twelve months Five years five years TotalRO RO RO RO RO

Assets

Cash and balances with banks 140,990 - - - 140,990

Term deposits 1,080,000 500,000 - - 1,580,000

Mortgage accounts 5,578,785 12,179,368 73,789,960 67,749,714 159,297,827

Property and equipment - - - 1,206,206 1,206,206

Other assets 21,268 53,180 335,185 - 409,633

Total assets 6,821,043 12,732,548 74,125,145 68,955,920 162,634,656

Liabilities and shareholders' equity

Due to other banks 1,000,000 7,000,000 - - 8,000,000

Customers' deposits 3,349,258 3,179,414 - - 6,528,672

Loans from the Government - - - 64,830,142 64,830,142

Other liabilities 2,755,885 1,957,795 66,575 37,374 4,817,629

Shareholders' equity - 2,400,000 - 76,058,213 78,458,213

Total liabilities andsharehoders equity 7,105,143 14,537,209 66,575 140,925,729 162,634,656

Net liquidity gap (284,100) (1,804,661) 74,058,570 (71,969,809) -



25.Assets and liabilities analysis (continued)

b) The maturity profile of assets and liabilities determined on the basis of the

period remaining to maturity as at 31 December 2004 is as set out below:

Figures are in Rials OmaniLess than Four to One to More than

three months Twelve months Five years five years TotalRO RO RO RO RO

Assets

Cash and balances with banks 111,436 - - - 111,436

Term deposits 200,000 - - - 200,000

Mortgage accounts 5,617,635 12,314,851 74,465,165 72,157,224 164,554,875

Property and equipment - - - 1,118,713 1,118,713

Other assets 4,547 68,135 359,162 - 431,844

Total assets 5,933,618 12,382,986 74,824,327 73,275,937 166,416,868

Liabilities and shareholders' equity

Due to other banks 9,100,000 - - - 9,100,000

Customers' deposits 822,758 5,876,529 - - 6,699,287

Term loans from financial institutions - 9,063,236 - - 9,063,236

Loans from the Government - - - 64,830,142 64,830,142

Other liabilities 2,762,062 2,160,857 63,947 39,563 5,026,429

Shareholders' equity - 1,800,000 - 69,897,774 71,697,774

Total Liabilities and 12,684,820 18,900,622 63,947 134,767,479 166,416,868

shareholders' equity

Net liquidity gap (6,751,202) (6,517,636) 74,760,380 (61,491,542) -

NO

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37


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39


27. Capital adequacy

The capital adequacy, calculated in accordance with the Bank for International Settlements guidelines, is as follows:

2005 2004RO'000 RO'000

Capital baseTier 1 49,573 45,449

Tier 2 1,209 1,252

Total capital base 50,782 46,701

Risk weighted assetsBalance sheet items 81,590 83,871

Capital adequacy ratio% 62.2% 55.7%

28. Risk management policies

Overview

The activities undertaken by the Bank expose it to various types of risks. TheBank borrows money from the Government, foreign and local financialinstitutions and local commercial banks at both fixed and floating interestrates and for various periods and seeks to earn above average interestmargins by investing these funds in providing housing loans. The Bankcontinuously reviews its policies and internal control sys tems in order toensure they include all reasonable procedures to minimise the risks as muchas possible.

Credit risk

Credit risk is the risk that the borrower of a loan fails to adhere to the terms ofborrowing, causing the Bank to incur a financial loss in terms of cash flow ormarket value.

The management of the Bank has established policies and procedures tominimise the credit risk. These procedures include mortgage over the fundedreal estate, life insurance cover for the borrower and insurance for theproperty against risks.

Liquidity risk

Liquidity risk is the risk the Bank may face in obtaining funds to meet itsobligations at any given time. The Bank's liquidity management policies aredesigned to ensure that even under adverse conditions the Bank would be ina position to meet its obligations.

The Board of Directors and the management monitor the Bank's liquidityrequirements. The Bank endeavors to obtain low cost borrowings either locallyor internationally, on both a short and long term basis to finance its loans.

Interest rate risk

Interest rate risk is the sensitivity of the Bank's net earnings to movements ininterest rates. In order to minimise this risk, the Bank borrows locally, underarrangements which have a tenor of less than one year. In addition theinterest rate on the government loans are low, which helps to minimise theinterest rate risk.




29. Segmental information

The bank operates only one business segment of the banking industry and itsoperating revenues arise from providing finance for housing in the Sultanate ofOman. All the relevant information relating to the primary segment is disclosedin the balance sheet, income statement and notes to the financial statements.

30. Taxation

In accordance with Royal Decree No. 51/77, the Bank is exempt from payingincome tax.

31. Fair values

Fair value is the amount for which an asset could be exchanged or a liabilitysettled between knowledgeable, willing parties in an arm's length transaction.Accordingly variances may arise between the historical cost and the fair value.

The Board of Directors' estimate, except for the government and housing loans,the fair value of the assets and liabilities of the Bank are not materially differentfrom their carrying amounts. The assumptions made to determine the fair valueare as follows:

Short term financial instruments

The carrying amount of cash on hand and at banks, due from other banks andthe short term financial instruments recognised in the balance sheet under otherassets and other liabilities are considered to be reasonable estimate of the fairvalues due to their short term nature.

Mortgage loan accounts

The mortgage loan accounts are expected to run to maturity. It is not practicableto determine the fair value of mortgage accounts as the subsidy received fromthe Government is capped at an amount that is determined by the Governmentannually. Consequently it is not feasible to assess the total return from theseaccounts for future periods.

Customers' deposits

The fair values of saving accounts with no stated maturity approximate is carryingvalue. The fair value of term deposits is estimated using the rates offered fordeposits having similar terms and conditions.

Term loans from banks

The fair values of term loans are estimated using the interest rates offered for loanswith similar terms and conditions.

Loans from the Government

The fair values of loans 1 and 2 (Refer note 11) from the Government areestimated using the interest rates offered for loans with similar terms andconditions. No fair value can be determined for subordinated loan in theabsence of repayment schedule.

32. Comparative figures

Certain previous year figures have been reclassified to conform with the currentyear presentation.

33. Approval of financial statements

The financial statements were approved by the Board of Directors and authorisedfor issue in their meeting held on 11 March 2006.

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