Exchange Rate as at 31 August 1999 1 KD = 3.28 US Dollars Financial Trends

Ownership and Legal Status

ABC Islamic Bank (E.C.) is an exempt joint stock company incorporated in Bahrain in 1985, and is a wholly owned subsidiary of Arab Banking Corporation (B.S.C.). It operated as an investment bank up to 31 December 1997. The Company now engages exclusively in Islamic banking activities. Authorised share capital at 31 December 1998 was US$52.5 million, of which US$42.5 million is issued, subscribed and fully paid.

The Year in Brief

1998 was an extremely important year for the Company as it underwent a complete change in its fundamental operations and objectives. In an Extraordinary General Assembly meeting held in 1997, the shareholders resolved that the Company henceforth would be engaged only in Islamic Banking activities. Consequently, in March 1998, all the assets and liabilities, with the exception of Islamic Financing contracts and the related assets and liabilities, were transferred to the parent company at their respective carrying values.

In its first year as a fully fledged Islamic bank, the Company generated total operating income of US$7.003 million and a net profit of US$3.808 million, giving a return on average shareholders’ funds of 8.2%. Total operating expenses were US$3.195 million, (46% of operating income). Figures for 1997 are not directly comparable due to the change in activities that took place. However, in that year, its last year as an investment bank, the Company had total income of US$16.037 million, total operating costs of US$4.165 million, (26% of operating income) giving a net profit for the year of US$11.872 million.

Total assets at year end were US$168 million (1997: US$169 million) of which 2.9% represented investment in Islamic securities, 59.7 % Murabaha financing, 26.4% Ijara receivables and 8.1% investments in managed Mudaraba. Funds under management rose 1.26% to US$167.6 million (1997: US$165.5 million).

Business Highlights

The Bank adopted three core strategies to accomplish its mission and objectives:

1.       Product development: emphasis will be placed upon the development of new and the enhancement of existing Shari’a compliant products, motivated by the need to satisfy an increasingly demanding, sophisticated and price-sensitive market.

2.       Opening new markets: using the parent company’s extensive international network, Islamic products will be marketed to existing and potential customers around the world. Products will also be marketed to clients of conventional banks who may prefer Islamic alternatives.

3.       Providing access: the plan is to operate as an international Islamic bank, combining products and services with ABC’s broad geographical presence in 38 countries across the world, complementing the local and regional activities of other Islamic financial institutions.

Total Assets Type US$mm % Murabaha 100 59.7 Ijara 44.4 26.4 Mudaraba 13.6 8.1 Islamic Securities 4.9 2.9 Other 4.9 2.9

The Bank has two subsidiary companies:

1. ABC Clearing Company, incorporated in the Cayman Islands. The company takes credit balances of client clearing accounts on a daily basis and purchases blocks of participating shares in the company. The shares are valued daily, with guarantee provided by ABC that a client’s purchase price will be the minimum value on redemption.

2. ABC Islamic Fund (E.C.) is registered in Bahrain with the objective of channeling client funds into Islamic investments, consisting primarily of a portfolio of short to medium term Islamic investments allowing both liquidity and security.