Faysal Islamic Bank of Bahrain E.C. Financial & Business Analysis For the Year to 31 December 1998 "Events in Pakistan lead to a sharp drop in profitability, but deposit base 14% higher as a result of innovative product development"

Ownership and Legal Status

Faysal Islamic Bank of Bahrain E.C. (FIBB) was incorporated in Bahrain as an exempt company on 14 July 1982, having obtained an offshore banking license from the Bahrain Monetary Agency (BMA). A commercial banking license was obtained from the BMA in 1993. The Bank's shares are listed on the Bahrain Stock exchange, while the shares of Faysal Bank Limited, a subsidiary, are listed on stock exchanges in Pakistan. The Bank has fully paid capital of US$100 million, held at 31 December 1998 53% by Dar Al-Maal Al-Islami Trust, a pan-Islamic organisation with over 25 financial and business companies represented in 15 companies of the world. Other investors own the remaining 47% of the Company.

The Year in Brief

Total Assets decreased by 6.5% to US$289 million at 31 December 1998 (1997: US$309 million), while Net Income for the year decreased sharply by 76% to US$4.0 million (1997: US$16.5 million). Total deposits (including restricted investment accounts) grew by 14% to US$1,430 million (1997: US$1,251 million). Net Income from investments and Islamic financing decreased by 43% to US$20.3 million (1997: US$35.3 million), while fee income from management of funds decreased by 52% to US$9.4 million (1997: US$19.5 million). Provisions were doubled from the previous year at US$22.3 million (1997: US$11.2 million). Earnings per share were US$0.04 (1997: US$0.17). Expenses for the year were US$29.23 million, up 12% from US$26.06 million in 1997. As a percentage of operating income, expenses were 62% (1998: 39%). No dividend or Directors' remuneration was recommended for the year.

Business Highlights

• FIBB has a mandate of mobilising funds and investments in Islamic countries. With the exception of the equities portfolio, which is global in nature, FIBB's financing and investment activities concentrate mainly in GCC, Pakistan, Bangladesh, Indonesia,
  Yemen, Turkey and Egypt.

• The events in Pakistan resulting in economic sanctions being imposed had a major impact on the results of the subsidiary, Faysal Bank Limited, requiring exceptional provisions totalling US$22 million. This was the main factor relating to sharply reduced net profit.

• In the GCC, the Bank's Offshore Banking Unit launched two new funds (Makkah Real Estate Fund 2 and Faysal Energy Fund) raising over US$94 million. An innovative product, Faysal Investment Participation Certificates, was launched. These certificates, which represent assets invested in a diversified range of Islamic assets with an emphasis on leasing, benefit from FIBB's willingness to create a secondary market, thus providing liquidity for the holder.

• In the Yemen, FIBB received a license to operate a branch in Sana'a, planned to be operational in 1999.

• In Bangladesh, the branch generated very satisfactory profit in its first full year, with total customer deposits of US$12.5 million at year end.

• In Indonesia, economic and political instability and extreme exchange rate volatility of the Indonesian Rupiah caused the Company to determine that the bank's operations be frozen until conditions become more conducive to resume business.

• On the Research and Development side, the Bank continued to participate in technical research undertaken by Accounting and Auditing organisation for Islamic Financial Institutions. FIBB is also working closely with the Bahrain Monetary Agency with a view to introducing Islamic bonds as Shari'a acceptable liquidity instruments.