Global Research Equities

Global Research Equities
Bahrain Islamic Bank

October 2003
Global Investment House KSCC
Economic Research
Souk Al-Safat Bldg., 2nd Floor
P.O. Box 28807 Safat
13149 Kuwait
Tel: (965) 240 0551
Fax: (965) 240 0661
Email: research@global.com.kw
http://www.globalinv.net
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from the Bloomberg page GLOH
and from Reuters Page GLOB
Omar M. El-Quqa, CFA

Executive Vice President
omar@global.com.kw
Shailesh Dash
Senior Financial Analyst
shaileshdash@global.com.kw
Pravin Bokade
Financial Analyst
pravin@global.com.kw
Srikanth Ramanathan
Financial Analyst
srikanth@global.com.kw
Chandresh Bhatt
Financial Analyst
cbhatt@global.com.kw
Global Research - Bahrain Global Investment House
Bahrain Islamic Bank B.S.C.

Reuters Code :
BISB.BH October 2003
Listing:
Bahrain Stock Exchange
Current Price :
BUY
250 fils
Investment Summary
● Bahrain Islamic Bank (BISB) was incorporated in 1979 to carry out banking and
other financial trading activities in accordance with the Islamic Shari’a principles.
● The bank has a 22.75% stake in the Bahrain based Takaful International Company
and a 25% stake in the Liquidity Management Centre.
● BISB has a very conservative management style which has proved to be beneficial for
the bank in limiting its NPAs.
● BISB’s shareholding is widely spread with Investors Bank holding nearly 15.8% stake,
followed by Islamic Development Bank and Kuwait Finance House with 13% each.
● Since the past two years, the bank has undertaken a major restructuring program
under its pro-active management. We believe that this should help the bank to
improve its organizational structure, streamline processes and cut costs while
improving profitability in the medium to long term.
● The bank is in the process of bank-wide computerisation project, aimed at automating

as many processes as possible at an estimated cost of BD5mn.
● BISB is trying to create a niche for itself and plans to double its overall banking
market share over the next 5 years period.
● There was a marked improvement in the performance of the bank in its 1H2003. The
total assets of the bank stood at BD223.48mn representing an increase of 6.5% over
its Dec 2002 level.
● In the first six months of the current financial year, BISB’s net profit surged to
BD1.364mn representing a 36.8% increase over the same period last year.
● We believe that the bank, with its restructuring exercise in process, is strategically
positioned to exploit the future opportunities created by Islamic banking industry in
Bahrain.
● We initiate our coverage of BISB with a Buy rating and value the Company’s share at
an intrinsic value of 286fils based on the Discounted Dividend method (DDM).
October 2003 Bahrain Islamic Bank B.S.C. 1

Bahrain Islamic Bank at a Glance

Price October 10, 2003 Shares in Issue Market Cap (BD) 52-week price range
250 fils 230,000,000 57,500,000 250 fils / 170 fils
Year Operating Net Profit EPS Book ROAE P/E * P/BV *

Income BD’000 in fils Value
BD ‘000 in fils
2004F 10,223 3,750 16.3 173.4 9.54% 15.3 1.44

2003F 8,728 2,891 12.6 168.6 7.50% 19.9 1.48
2002A 7,884 2,053 8.9 166.5 5.34% 19.6 1.05
2001A 10,027 2,650 11.5 167.9 6.82% 16.6 1.14
* Historical P/E & P/BV multiples pertain to respective year-end prices, while those for future years are based on market price in
the Bahrain Stock Exchange as on 10 Oct, 2003.
Source : BISB & "Global" Research
Share Price Performance Chart
General Index BISB Share price

3000 0.350
2500 0.300
0.250
2000
0.200
1500
0.150
1000
0.100
500
0.050
0 0.000
May-97 Nov-97 May-98 Nov-98 May-99 Nov-99 May-00 Nov-00 May-01 Nov-01May-02 Nov-02 May-01
General Index BISB Price
Source : Bahrain Stock Exchange
2 Bahrain Islamic Bank B.S.C. October 2003

Bahrain Islamic Bank (B.S.C.)

Company Background
Bahrain Islamic Bank (BISB) was incorporated in 1979 to carry out banking and other
financial trading activities in accordance with the Islamic Shari’a principles. The bank
is considered to be the first Islamic institution established in Bahrain and the third bank BISB is considered to be
the first Islamic institution
to carry out such kind of business in the Gulf region. The bank operates under an established in Bahrain
onshore domestic commercial banking license granted by the Bahrain Monetary
Agency (BMA). Since its inception, the bank has been using the Hijra year calendar.
However, on 30.12.1420 Hijra, corresponding to 5.4.2000, the bank switched to the
Gregorian calendar as directed by the Bahrain Monetary Agency. As a result, all the
financials for the year 1999 and 2000 are available from April 28, 1998 to April 16,
1999 and April 17, 1999 to December 2000 respectively, hence making year-on-year
comparison difficult for the previous years.
BISB provides a broad range of retail and corporate services to its clients. The bank,
which was listed on the Bahrain Stock Exchange in 1989, doubled its paid up capital to
BD23mn in 1999 through a rights issue. As at the end of FY2002 the bank had 8
branches including its head office branch and 175 employees. In recognition of the its
long standing achievement, the bank was awarded the best commercial bank in the
GCC region in 2002 by the Euromoney magazine. The bank has a 22.75% stake in the
Bahrain based Takaful International Company, which carries out all types of Takaful
and retakaful activities in accordance with Islamic Shari’a principles. In 2002, BISB
was involved in setting up of Liquidity Management Centre with 25% stake. In
addition, the Bank has participated in the establishment of several other Islamic
investment and financial institutions in Bahrain, Egypt, Kuwait, Turkey, Sudan,
Bangladesh and Yemen. BISB has investments in six other offshore Islamic financial
institutions registered in Bahrain.
Management
BISB’s management, which was elected in 2001, comprises of a ten member Board of
Directors with Mr. Mohammed Abdullah Al-Zamil as the Chairman and Mr. Khalid The board includes many
experienced and high
Rashid Al-Zayani as the Vice Chairman of the bank. The board includes many profile local and regional
experienced and distinguished local and regional businessmen, which gives a businessmen
competitive advantage to the bank. The day to day management of the bank is looked
after by the Chief Executive Officer Mr. Adnan Ahmed Yousif. Since the past three
years the management has initiated a restructuring process in the bank that comprises a
number of complementary strategies, which is likely to result in improved
performance by the bank in the medium to long term. As a part of the restructuring
process, a new lean organisation structure has been put in place.
Shareholding & Liquidity
Currently, BISB has 230mn shares outstanding. As of December 2002, Investors bank

BISB’s shareholding is owns 15.8% stake in the bank followed by Islamic Development Bank and Kuwait Finance
widely spread House with each having 13% stake. Other major shareholders of the bank include Kuwait
based International Investment Group (10.2%) and the Gulf Finance Group (9.2%). The
directors of the bank held a 0.5% stake, through direct and indirect investments. This leaves
only 21.17% as the free float available for trading of the bank’s stock.
Table 01: Major Shareholders of BISB

Name of the shareholder % Stake
Investors Bank 15.8%
Islamic Development Bank 13.0%
Kuwait Finance House 13.0%
Gulf Finance Group 9.2%
International Investment Group 10.2%
Dubai Islamic Bank 4.35%
Ministry of Justice, Bahrain 2.48%
Ministry of Awqaf, Kuwait 8.7%
Ministry of Justice, Kuwait 2.1%
Total 78.83%
Source: BISB
Bank’s market BISB has 230mn shares outstanding and going by the actual trading volume, the
capitalisation witnessed
improvement in recent stock’s liquidity seems to have slowed down in the past two years. This was mainly
periods. owed to a sharp decline in the bank’s profitability over the last few years. The share
turnover during the year 2002 was 0.9% down from 1.91% witnessed in 2001. But the
sentiment in the stock improved in the first seven months of the current fiscal with the
bank’s business strategy started to show positive outcome. As of June 2003, bank’s
market capitalisation stood at BD42.5mn.
Table 02: Liquidity of the BISB stock

2001 2002 1H2003
Volume of share traded (’000) 4,328 2,041 550
Shares turnover (%) 1.91 0.90 0.24
Value traded (’000 BD) 840 363 102
No. of transactions 242 137 --
Market Capitalisation (’000 BD) 43,930 40,250 42,550
Source: Bahrain Stock Exchange
Key Areas of Operations
Bank to focus on The bank’s key performance sectors are divisions like Retail banking, Corporate
corporate banking,
private banking & retail banking and Private banking with other key divisions like the treasury, operations, risk
banking for its future management group, etc. offering support services to these divisions. The management
growth.
of BISB has instituted a plan which would help the bank to grow their businesses
aggressively in the next three years aimed at garnering substantial market share. The
functioning of some of the key divisions of the bank and how they are going to add to
the future profitability of the bank have been enumerated below:

A) Corporate Banking : Corporate banking division has always been one of the key
divisions of the bank, but as result of the very conservative policies of the bank it has
not grown to its full potential. The bank has not been very aggressive in increasing its
credit portfolio and gives a lot of emphasis on reducing the risk involved in its lending
business. Even though most of the corporate banking products provided by BISB are
more or less similar to those available with the other local Islamic banks, but it has a
loyal business clientele which helps it having a secured business.
B) Treasury and Overseas Investments Division: The bank has a profitable

treasury and Overseas Investments division. The department is equipped with the
state-of-the-art technologies and has high calibre personnel. It has made several
profitable investments locally and internationally. The treasury division ensures that the
surplus funds invested by the bank in the government Islamic securities (Sukok) are
done in such a manner which would provide it greater flexibility in managing and
financing various activities. It also ensures that the bank maintains the liquidity
parameters prescribed by Bahrain Monetary Agency.
C) Retail Banking : Over the years, BISB has created a strong niche for itself
especially in the retail segment. The bank has been trying to further develop a market
segmentation scheme which will allow an inherent flexibility to accommodate market
dynamics and future demands. The bank has been adopting an integrated distribution
strategy and has been trying to achieve larger market coverage via both direct and
indirect channels. It currently has 9 branches including its new branch at Hidd and its
head office branch. The bank is currently developing its branch network throughout the
kingdom. These branches are currently being supplemented by ATM’s, and telephone
banking. With the new delivery channels such as ATMs and telephone banking, BISB
does not require to have a physical presence in a location to achieve coverage, with the
branch level transactions slowly migrating from the counter to alternative channels.
The retail banking products of the bank are well devised though they have not been
aggressively marketed. The bank has devised a host of investment products for both its
retail and high net worth individuals and plans to market its products aggressively in
the current year.
D) Banking Services & Support Group: BISB has initiated a bank-wide Bank is in the process of
implementing automation
computerisation project since 2000, which is aimed at automating as many systems and program.
processes as possible. This would enable the bank to better measure and track each
customer’s account and also better target its marketing efforts. This new technological
platform also makes the development of new products easier and faster. BISB would
introduce its internet banking services in the near future, thus enhancing its customer
service. The bank also revealed plans of launching instant services call centre, which
will place the bank at the forefront of electronic banking in the local market. The bank
has invested a substantial amount in its technology upgradation and automation project
and is likely to spend another US$5mn in the next couple of years.
E) Risk Management: In compliance with the bank’s strategy designed to further

enhance the risk management culture in the bank and to meet BMA’s requirements, the

BISB set up a new bank set up a new department for the review and evaluation of the various risks to the
department for the review
and evaluation of the bank associated with its core banking business activities. The risk review process is
various risks to the bank based upon maintaining a balance between profitability and risk levels. Several
initiatives have been undertaken by this department to further strengthen the banks risk
level. The risk management unit develops and sets up criteria for defining the Bank’s
risk threshold in terms of credit, market, operational and legal risks.
Credit Risks
To guard against credit risks, the bank has laid out policies and procedures to ensure
high quality of credit. The bank controls the credit risk by monitoring credit exposures,
and continually assessing the creditworthiness of the counterparties. The process
involves a comprehensive review to ensure compliance with the bank’s conditions and
customer creditworthiness before finance is provided. All financing contracts are
secured by the mortgage of the object of the financing contracts and personal
guarantees of the counterparty. Thus, the risk of non-payment is limited to the
opportunity of reinvesting the instalments in cases of non-payment on the due date. In
addition, the bank seeks to manage credit risk exposures through diversification of
financing activities to avoid undue concentration of risks with individuals or groups of
customers in specific geographic location or industry sector.
Liquidity Risks
The bank is following prudent liquidity management policies. To guard against the
liquidity risk, the bank has a large customer base and assets are managed with liquidity
in mind, maintaining a healthy balance of cash, cash equivalents, and international
commodity Murabahas. The bank determines the contractual maturities of assets and
liabilities on the basis of the remaining period at the balance sheet date to the
contractual maturity date. The bank do not take account of the effective maturities as
indicated by the bank’s deposit retention history and the availability of liquid funds.
Profit Sharing Risks
The bank only has a minimal risk to changes in profit sharing risk arising from the
possibility that the changes in profit shares will affect the value of the financial
instruments that mature or reprice in a given period. This is due to the fact that the
majority of the funding is by investment account holders. The return payable to the
investment account holders by the bank is based on the principle of the Mudaraba
contract by which the investment account holders agree to share the profit or loss made
by the bank over a given period. Except for specific investment deposits, the bank is
not liable to pay any predetermined returns to the investment account holders.
Other Risks
In addition to the above risks, the bank is also exposed to other kind of risks with
varying degrees that includes operational risks, market risks, exchange risks, etc. The

bank seems to have taken the necessary action to control and minimise their impact. In
the banks legal risks, the banks procedure require that the contract should be reviewed
by a legal consultant before commitment. The currency risk of the bank is likewise
limited given that the bank had no significant foreign currency exposures.
The risk management activities at the bank help it face the competition arising as a
result of the financial deregulation and widening banking activities. Given the fact that
more than 92% of the Bank’s assets and 100% of its liabilities are concentrated in the
Middle East region, its risk is fairly limited to the movements in the local market.
Strategy (New Developments)
BISB has followed several strategies in the recent past which would help it in
rationalizing its operating costs and grow aggressively at the same time. As part of the BISB plans to gain
substantial market share
bank’s pursuit to develop its operations and to enhance competitiveness in the market, in the next 5 years.
the bank conducted a comprehensive review of its strategy for the next five years. The
bank had appointed Ernst & Young, the international management consultants, to carry
out a business strategy review, in order to assess the continued relevance of its business
strategies in the current dynamic business environment. The original strategy carried
out in 2000, highlighted the need to invest in the operational infrastructure of the bank.
Hence, the strategy outlined the higher spending road map that was considered
essential to reposition the bank for long-term sustained growth. The banks revised
strategy emphasised the following:
- Focusing on the strengthening of the foundation strategies by high investments in

the near term, to achieve operational excellence. This includes considerable
operational and capital expenditure that would be critical to sustain the current
business levels and set the platform for future growth.
- Enhancing the quality and composition of earning asset base thus improving profit
margins. This would require significant financial commitment towards instituting
the requisite infrastructure. Hence, the bank has outlined a more conservative
evolution phase than was envisaged in the original strategy.
- Developing a segment based business approach. This involved identifying the
profitable customer segments, an enhanced product offering including wholesale,
retail and investment management business lines, and the requisite operational
resources and financial targets for each segment.
- The financial strategy projected high initial investment in the operational
infrastructure of the bank that would translate into steady growth in operating
revenues. The strategy was intended to reinforce the bank’s competitive edge in the
local market and to set the platform for long-term sustained growth.
The study resulted in identifying areas of strength and weaknesses in the bank’s
operations, in addition to the associated opportunities and risks. The bank realised that
it is essential to develop the infrastructure and systems of the bank while consolidating
the bank’s strategy for asset management. The review of its strategy should help the
bank to improve its organizational structure, streamline processes and cut costs.

BISB has allocated The bank has allocated significant investment for human resources, organisational
significant investment for
infrastructure structure, restructuring the bank’s operations, computer infrastructure, risk
developments management, areas of product development and developing credit regulations and
policies. To enhance the asset management policy the strategy calls for the need to
develop the business methods on sectoral basis. This involves identification of
profitable sectors and improvement of the products on offer, including corporate and
retail finance, investment management business, the necessary operating resources
and the targeted financial results for each sector. The strategy highlights that
investment in infrastructure is likely to translate into a steady growth in the bank’s
revenues and its competitiveness in the local and international markets, hence
creating a sound basis for long-term growth. The bank has launched major initiatives
in the following areas:
A) Core Banking Systems
The bank conducted a comprehensive review to identify the best alternatives for
developing and upgrading its core banking system to keep pace with the technological
developments in this field. Presently, the bank is in the process of analysing all
plausible alternatives to decide the best alternative. The bank is expected to implement
its strategy within the next two years. The budget for this purpose has already been set
aside covering the hardware, software and systems to be set up in 2003. The core
banking system is expected to further enhance the bank’s ability to process data and
will give the bank competitive edge in facilitating and diversifying its banking services
to its customers.
B) Development of Financing Portfolio
As part of efforts to develop its corporate finance business, the bank drew up the
policies and plans aimed at attracting more number of customers. This is in line with
the plan contemplated by the bank’s strategy. For this purpose, the bank launched
advertising campaigns aimed at enhancing awareness of the various products on
offer. In addition, the bank strengthened its marketing team by adding new members
to attract new customers, to service existing customers and by understanding and
meeting customers requirements within the framework of the banks current credit
policies.
BISB is in the process of conducting a market survey, aimed at finding out the extent
of customers satisfaction with the services being offered. Meanwhile, the bank has
already started the process of strengthening the existing staff by recruitment of new
employees for the development of its operations. This will clearly reflect on the quality
and speed of services provided by the bank to its customers. In addition, the bank in
co-operation with other Islamic banks launched a study of the available investment
opportunities taking into account the risk levels and expected regular earnings to the
bank. All these initiatives are likely to result in better performance by the bank in terms
of its financing portfolio.

C) Human Resource Development
As part of the restructuring exercise, the bank has taken notable initiatives in the areas BISB has taken notable
initiatives to develop its
of human resources. A number of new and qualified staff have been recruited since human resources
2000. Various functional areas like marketing and internal audit have been
strengthened either through reallocation of existing staff or through recruitment of
specialist staff. The bank continued its policy of developing its human resources by
allowing many of its employees to join training courses to develop their skills and to
keep them abreast of the latest banking developments. Staff were extensively educated
about the Shari’a aspects related to the banks business activities to enhance their
understanding of Islamic products.
D) New Products
The bank carried out a study of the market requirements and ways of creating new and
innovative products to meet such needs. The bank reviewed 16 contracts for new The bank is in the process
products in order to launch them in the current year. Commercial papers (Tawaruq) is of launching new and
innovative products to its
one of the product likely to be offered to the customers in the near future. The other customers
new products expected to be launched are leasing for medical equipments, mortgage
financing for 15 years, products like Istisna etc. All these new products are expected to
enable the bank’s customers to obtain their cash requirements for business that cannot
be handled by other finance methods. The other new products which are in various
stages of implementation include real estate investment fund, Islamic credit card
scheme in collaboration with VISA and the introduction of new Istisna’a based
products.
E) Branch Expansion
As part of the bank’s expansion programme, the bank has drawn up plans to open 15 to
18 branches in the next five years in other areas of the kingdom that are not covered by The bank is planning to
open a separate branch
the existing branches. In 2002, the bank opened a new branch in Sitra to meet the for ladies in 2003
banking needs of the local customers. The latest entrant to its branch network is the
opening up of the branch in Hidd region in September 2003. In a step that is the first of
its kind, the management is contemplating opening a separate branch for ladies in 2003.
The proposed branch will be dedicated to serve ladies and businesswomen and meet all
their business requirements. A number of special purpose branches or kiosks are also
likely to be set up in the near future. The management is expected to carry out further
development and upgrading of the majority of existing branches to further enhance the
bank’s image and its ability to attract more customers.
To ensure that the bank’s services are available to the largest possible number of
customers, plans are in the pipeline to install a number of stand-alone ATMs in various
areas of the kingdom and in popular locations. The bank is also contemplating opening
branches in the other GCC countries to boost the bank’s status and competitiveness.
The expansion to other GCC markets will take a while to take place as the management
believes that the bank is too small to cover other regional markets and at this moment it

may not have the adequate strength to substantially penetrate the well established GCC
markets. In the medium term and after acquiring the requisite operational
sophistication and strong marketing network the bank is contemplating to expand its
operations to include Saudi Arabia. Saudi Arabia is the single largest GCC market, and
some of the commercial banks in Bahrain regularly source clients residing in the
eastern province of the country. The bank believes that it may provide a good venue to
diversify its operations. The management expects the expansion in branch network to
positively contribute to its financing portfolio.
F) Establishing Liquidity Management Centre
As part of the bank’s efforts to support joint Islamic banking activities, BISB
The bank participated in participated in the establishment of the Liquidity Management Centre that represents a
the establishment of the
Liquidity Management tool for the creation of an international Islamic financial market for liquidity
Centre in 2002 management. LMC is responsible for the management of liquidity for various Islamic
banks, by introducing and devising new investment vehicles and channels thus
enabling the Islamic banks to effectively invest their surplus liquidity. LMC is
planning to launch sukuks representing ownership of viable assets that can be traded in
secondary markets. The bank has acquired a 25% stake in the liquidity management
centre at a cost of BD1.9mn, that raised the bank’s investments in associated
companies to BD2.8mn compared with BD1.1mn at the end of 2001.
G) Combating Money Laundering
To actively participate in the international efforts aimed at combating money

laundering, the bank focused its efforts on co-operation with and meeting the BMA
requirements in this regard. The bank has tightened its policies and procedures for
discovering and preventing money laundering transactions. In addition, the bank
introduced new policies focusing on obtaining comprehensive information about its
customers and their sources of funds.
H) Other New Initiatives
The bank plans to actively pursue a number of new initiatives under its pro-active
management. These include
- Implementation of a new accounting and management reporting system that would
allow the bank to measure the profitability of individual customer segments. The
system would use separate pools for the shareholders and the customers’ accounts.
This should allow for distinct accounting for bank’s unrestricted investment account
holders funds and for shareholders funds, including allocation of specific income
from the bank’s operations. The management expects that the new information
systems to result in increased allocation of profits to the shareholders.
- The management has also undertaken a comprehensive review of its fees charged
on various products and services. The objective is to systematically enhance fee
based income from specific customer segments. This initiative will be further
facilitated by the enhanced information system.

- The bank is planning to enhance financing portfolio by targeting strategic and

profitable customer segments. For example, the management intends to target the
women segment in Bahrain by introducing dedicated branches for them.
- Additionally, the management has identified specific strategies for consumers,
commercial and corporate sectors in Bahrain with a view to enhance its profitability
from financing activities. The management intends to pursue growth in consumer
financing through extensive advertising campaigns and changes in operational set
up to effectively manage the envisaged increase in volume. By separately focusing
on commercial (more than BD100,000) and corporate clients (more than
BD500,000), the management expects steady increase in market share for these
segments.
- The bank is planning to re-organise its operations to ensure optimal utilisation of its
resources. The management intends to centralise the risk management and credit
administration functions at the head office. Further, marketing to certain customer
segments such as corporate customers would also be managed from the head office.
The aim is to focus the branches exclusively on servicing the retail segment of the
market. It should also result in consistent back office practices across the bank,
single point of contact via relationship managers for corporate customers, and
reducedoverheads.
- With the strengthening of the banks foundation strategies, the bank intends to
launch special purpose investment funds for its customers. To begin with the bank
is planning to launch two funds, namely equity generated fund and leased fund. The
funds will have a maturity of 4 years and its corpus will be invested abroad.
With its pro-active management, the bank is ideally placed to implement its business
plan over the next five years. Although the bank lagged behind in implementing its
actual target in many areas, it should be appreciated that certain elements that impacted
the banks performance like the weak market trends in the past few years, were outside
its control. However, we believe that there are other measures within the banks domain
that can assist in further strengthening of its operating environment and financial
results.
Other issues such as IT infrastructure, re-organisation, business process re-engineering,

product development and risk management still require considerable efforts to conform
to targets set out in the original business strategy. Furthermore, the absence of a
structured, measured approach to implementing the original strategy may have led to
the marginal realisation of benefits envisaged in the business plan. The bank needs to
chalk out a monitoring strategy to effectively implement and to achieve the targets
enumerated in the business plan.

Industry
The current developments in the region and the global economic and geo-political
situation have significantly altered the financial services industry in the region. In
addition, the impact of the new market forces have also changed the competitive
landscape for conventional and Islamic banking in Bahrain. Large amounts of Arab
and Islamic money that was invested in US and European equity markets are being
repatriated back to the Middle East, the main reason for the buoyant regional markets.
The new found interest in the regional markets are expected to give a further fillip to
the Islamic banking industry in the region and particularly in Bahrain.
The Islamic banking industry in Bahrain has grown considerably over the years,
satisfying a growing desire of customers to transact their financial activities in
accordance with the Islamic Sharia principles. Bahrain, which has spearheaded the
Islamic banking activities in the region has become the natural and convenient location
for Islamic finance in the Middle East region with 26 Islamic financial institutions. No
other country in the region has created an environment or the legal framework for the
operations of Islamic banks. Bahrain is the only country to have created a legal
framework for Islamic banks and is one of the few markets that allows dual banking
system.
Growth in Islamic finance has largely come from the ability of private sector Islamic
bankers to devise innovative products that meet their customers’ needs while
Islamic banks in the complying with Islamic law. One of these innovations has been in the area of Islamic
region are rethinking
their strategies and they collective investments schemes. There are a number of Islamic financial institutions in
are trying to reposition Bahrain which have specialised in Islamic collective investment schemes. Examples of
themselves.
such institutions which manage a number of collective investments schemes are Al
Amin Bank and ABC Islamic Bank. There is surge in Tawaruq based contracts within
the Islamic banking industry in the GCC region. More recently, Islamic commercial
banks have been able to leverage the structure to offer indirect working capital
financing as well as for short-term liquidity management. Islamic project finance is one
area that has caught the attention of Islamic banks in recent years. Two recent Bahrain
transactions, which involves financing for the expansion of Alba and Al-Hidd Water
plant provide examples of the increased use of Islamic funds. All the above indicators
point to the fact that, while for quite a number of years there has been a considerable
talk of the potential Islamic finance, it now appears that the door to such potential has
finally been unlocked.
In recent years, it has become acceptable to invest in shares, Islamic credit cards have
been introduced, and the insurance business is starting to grow. There is even a talk of
creating Islamically compatible hedge funds. All these new initiatives are expected to
bring new dynamism to the Islamic banking industry in the region and especially in
Bahrain.
The Islamic banking and finance industry in Bahrain encompasses a unique blend of
institutions of different categories. Some banks such as Bahrain Islamic Bank, Shamil

Bank of Bahrain and Al Baraka Islamic Bank are dedicated fully to Islamic banking
services like. Other Islamic banks are resident banks with originally conventional
banking activities like Arab Banking Corporation, which saw potentially profitable
opportunities in diversifying their activities to Islamic banking. A final category of
Islamic banks operating in Bahrain is represented by multinational banks like Citi
Islamic Bank, a subsidiary of Citicorp.
The strong growth of Islamic banking and its impact on financial markets has prompted Number of multinational
banks are entering
a number of traditional local and international banks to seek stronger relationships and Islamic banking arena
joint project financing arrangements with their Islamic counterparts. The Islamic
banking industry in Bahrain is becoming highly competitive and more and more
multinational banks are entering in the Islamic banking arena, thus changing the
competitive setting of the commercial banking sector in Bahrain. Recently, a French
major BNP Paribas announced its intention to exploit business opportunities created by
the growing Islamic market in Bahrain. BNP Paribas is setting up a dedicated Islamic
banking team in Bahrain. BNP Paribas is the latest addition to a growing list of
financial powerhouses joining the Islamic banking ranks from Bahrain. Earlier this
year, Geneva based UBS launched its Islamic private banking subsidiary, Noriba,
which is also based in Bahrain and is likely to focus on high net-worth individuals.
Other major global players includes Citigroup and First Islamic Investment Bank. The
multinational banks involvement has grown with the better regulations and the
introduction of internationally accepted accounting standards. Banks have also been
attracted by the specifically structured regulatory systems and the presence of a number
of organisations, including AAOIFI (Accounting and Auditing Organisation For
Islamic Financial Institutions), the International Islamic Financial Market, the Liquidity
Management Centre and the First Islamic Rating Agency. The strengthening and
development of Islamic banking has been, and remains, an important aspects in the
governments policy in maintaining and enhancing Bahrain’s status as the region’s
pre-eminent international centre.
Islamic banks, although growing, do not yet offer all the conveniences and choices
available from conventional banks. The Islamic banking industry needs to develop
more innovative new products to meet the customers varied demands. In addition, more
Islamic instruments are needed to aid risk management, including Islamic alternatives
to derivatives and insurance. Thus, these challenges need to be overcome if Islamic
banking is to fulfil its true potential. More and more countries need to adopt common
standards for auditing and reporting systems to ensure the transparency demanded by
global regulators and to make comparisons easier
Market Size
The Islamic banking industry has gained momentum in recent years and as per one Islamic banking is
growing at the rate of
estimate it is growing at the rate of 15% per annum. Islamic banking and finance is 15% per annum
now established industry sector in Bahrain and the government considers it as a growth
industry of the future. The consolidated total assets (excluding restricted investments
accounts) of the Islamic banks operating in Bahrain as of end-2002 stood at

US$2.91bn, an increase of 18.5% over the previous year. The total assets of the Islamic
banks grew at a CAGR of impressive 21.2% for the last five years, and it almost
doubled in the past three years. The significant growth in the assets of Islamic banks
reflects their increasing popularity among customers. On the other hand, the restricted
investment accounts (which are off-balance sheet) registered an increase of 24.3% over
the previous year to US$3.13bn. In recent years, more and more customers are seeking
to conduct their financial affairs in accordance with the Islamic Sharia.
Figure 1: Total Assets and Restricted Investment Accounts of Consolidated

Islamic Banks
US$ bn
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
1998 1999 2000 2001 2002
Assets Restricted Investment Accounts
Source: Bahrain Monetary Agency
The total assets of listed commercial banks (except The Bahraini Saudi Bank) stood at
BD4.36mn as at the end of 2002. The highest growth in assets was recorded by Ahli United
Bank followed by Bank of Bahrain & Kuwait. BISB also performed reasonably well in
terms of its asset growth. BISB is still minor player in the Bahrain’s commercial banking
sector, as its assets remained at around 5% of the total assets of the listed commercial banks
in the country. However, BISB has launched an intense marketing programme in the past
18 months aimed at penetrating the market to gain larger market share.
Table 3: Assets of Listed Commercial Banks, 2002

Name of the Banks Amount (BD mn) % Change on year
National Bank of Bahrain 1,104.4 2.4
Bank of Bahrain & Kuwait 1,214.6 10.3
Bahrain Islamic Bank 209.74 9.7
Ahli United Bank* 1,831.1 25.2
Total 4,359.8
Source : Bank’s Annual Reports & Global Research
* AUB assets converted at exchange rate of 0.376 BD per US$
Regional banks increased In aggregate, the Bahrain’s listed commercial banking sector (excluding The Bahraini
their profits by 16.8% in
2002 Saudi Bank) generated profits of BD63.75mn for the financial year 2002, a 14.4 per
cent improvement over the previous year. A large share of this increase in earnings

growth was provided by Ahli United Bank and the Bank of Bahrain & Kuwait who
contributed nearly 66.6 per cent of the overall earnings of the banks. BISB contributed
to around 3% of the total profitability of the commercial banks in 2002.
Table 4: Net Profits of Listed Commercial Banks, 2002

Name of the Banks Amount (BD mn) % Change on year
National Bank of Bahrain 19.25 6.0
Bank of Bahrain & Kuwait 20.00 19.7
Bahrain Islamic Bank 2.05 (22.5)
Ahli United Bank* 22.45 23.5
Total 63.75
Source : Bank’s Annual Reports & Global Research
* AUB net profits converted at exchange rate of 0.376 BD per US$
Industry Outlook
The outlook for the Islamic banking industry in Bahrain looks bright as it is a growing
market, the keenness is there and the very crucial thing is that the demand is there. The outlook for an Islamic
banking industry in
Islamic banking is becoming more popular with the regional customers, who are Bahrain looks bright in
attracted by the flexibility of its financing packages and the growing competitiveness of view of the potential
involve
its products. Ethical investors are also interested, since there investment criteria are
similar to those impose on Islamic investments.
There is expected to be a further growth as Islamic banks in Bahrain develop more

creative business plans and diversify away from low-risk, low-return products to
moderate risks and high-return products. At this pivotal stage of their development,
Islamic banking industry in Bahrain is looking forward to enter the maturity stage of
their life cycle. The implementation of a cohesive, harmonizing regulatory strategy is
important, indeed imperative, for the Islamic banking industry in order to support its
future growth and enhance its credibility and competitiveness in a global market place.

Financial Performance
The Bahrain Islamic Bank (BISB) is one of the smallest of Bahrain’s listed
commercial banks. The shareholding of the bank is widely spread among different
domestic and foreign financial institutions and hence, the bank does not seems to
be enjoying any extra leverage out of its relationship with its major shareholders.
Since the last few years, the bank seems to have lost focus on its operating
activities as it is not generated expected earnings. However, the current
restructuring process is expected to provide a new dynamism to the bank and
strategically reposition it to face the increasing competition from both the
conventional as well as Islamic banks in Bahrain. We have analysed the
performance of BISB based on various key parameters, which have been
enumerated below:
Credit Portfolio & Credit Income
BISB’s credit grew at a BISB’s credit portfolio, which comprises Murabaha, Mudaraba and Musharaka
CAGR of 5.3% over the
last 4 years. financing achieved a CAGR of 5.3% over the period FY99-02. This is slightly lower
than the CAGR of 6.5% achieved by the commercial banking sector in Bahrain during
the same period. The lower credit growth could be attributed to the small deposit base
that the bank has and lower activity in the economy due to deflationary pressure.
However, we believe that BISB should benefit from the improved macro-economic
conditions and its own restructuring process and hence, should be able to achieve
higher credit growth in the years ahead.
Figure 2: Credit Portfolio of BISB as against Total Lending by

Commercial Banks
BD mn
1,800
1,600
1,400
1,200
1,000
800
600
400
200
-
1998 1999 2000 2001 2002 1Q2003
BISB Total Bank Lending
Source: Bahrain Monetary Agency & Company Reports

BISB had a negative growth in its lending activities in 2001 but rebounded back in BISB’s lending activities
2002 and in the first half of the current fiscal credit portfolio recorded impressive in the year 2002 recorded
a growth rate of 2.8%.
growth and stood at BD156mn. In the last five years, the share of BISB’s credit
portfolio has remained almost constant at nearly 10-11% of the total lending by the
commercial banks in Bahrain.
A) Murabaha Financing
The bank finances Murabaha transactions through buying a commodity which

represent the object of the Murabaha and then resells this commodity to the Murabeh
(beneficiary) after computing a margin of profit over cost. The cost plus the profit
margin is repaid in instalments by the Murabeh over the agreed period. The
beneficiary pays a down payment of the sale price upon signing the Murabaha
contract. The object of the Murabaha is secured in the name of the bank until the full
settlement.
Due to its nature of business, Murabaha receivables portfolio always dominated the
total credit portfolio of the bank and accounted for around 88% of the total credit
portfolio in 2002, down from 93.3% recorded in 1999. However, since 1999, Mudaraba
and Musharaka financing has also been introduced by the bank and their share in the
total receivables portfolio is constantly increasing, while that of the Murabaha
financing is gradually declining. The new found focus on the Mudaraba and Musharaka
financing was primarily attributed to the fact that the bank was not able to get attractive
returns on its Murabaha receivables in recent years. The banks Murabaha portfolio
stood at BD138.8mn at the end of 2002 down by 2.1% over 2001. Although the total
Murabaha portfolio witnessed negative growth in 2002, the bank actually increases its
Murabahas with customers (except for commodity Murabahas) by 32.9% to BD34.9mn
compared with BD26.3mn at the end of 2001.
Figure 3: Activity-wise Credit Portfolio of BISB

BD mn
160
140
120
100
80
60
40
20
0
1998 1999 2000 2001 2002 2Q2003
Murabaha Mudaraba Musharaka
Source: Bank Reports

In 2002, the bank was bullish about the real estate and construction industry in
Bahrain as its building material Murabahas jumped by 71% to BD8mn and Land
Murabahas surged by 34% to BD8.5mn. The substantial increase in Murabaha with
customers was attributed to the banks policy of focusing on finance for the small
investors and the corporate sector, as well as its continuous efforts to attract new
customers. In compliance with the banks new strategy of investing funds in assets
that yield attractive returns, international commodity Murabahas with banks were
reduced by 10% to BD103.9mn at the end of 2002 compared with BD115.6mn
registered in the previous year. In 2002, the bank was particularly affected by a
sharp decline in the returns on international commodity Murabahas, both in US
Dollars and in BD, owing to the successive cuts in interest rates in that year.
Around 94.5% of the Murabaha receivables portfolio of the bank in 2002, was
concentrated in the Arab world, up from 91.4% in 2001. The increase in
concentration of Murabaha receivable in the Arab world is owed to the changing
economic scenario and the booming regional markets.
Figure 4: Income From Murabaha, Mudaraba & Musharaka Financing

25%
20%
15%
10%
5%
0%
1998 1999 2000 2001 2002
Murabaha Musharaka Mudaraba
Source: Bank Reports
Income from Murabaha The income from Murabaha financing witnessed sharp decline since the last few
financing declined
sharply in recent years years, which is in tune with the consistent fall in interest rates over the years. It has
recorded a negative CAGR of 13.4% since 1998. It registered a record high of
BD15mn in 2000 but then declined to a five year low of BD4.59mn in 2002, thus
severely affecting the bottomline of the bank. However, it should be noted that the
portfolio of Murabaha receivable has also declined during the same period.

B) Mudaraba Financing
The banks Mudaraba financing transactions mainly consists of investment in funds Mudaraba financing grew
at a CAGR of 46.7% in
operated by other banks and financial institutions and participation in the financing the last 4 years
transactions through other banks and financial institutions for a definite period of time.
The portfolio of Mudaraba financing gained importance since 1999 and it grew at a
CAGR of 46.7% in the last 4 years. In 2002, the Mudaraba receivable portfolio jumped
by 118% to BD15.38mn.
Historically, the income (Please refer Figure 4 above) from Mudaraba portfolio has
always been higher than that of the income from Murabaha receivable, the main
reason behind the banks increasing thrust on it in recent years. The income from
Mudaraba financing reached its zenith in 2000 at BD0.975mn, however, since then
with the fall in interest rates it is also declined sharply and stood at BD0.402mn as
of 2002.
C) Musharaka Financing
The bank enters into Musharaka transactions with individuals and commercial
entities by buying the object of the Musharaka. The Musharek, under the terms of the
contract, buys back the bank’s share in Musharaka over the agreed period. The title
of the object is only transferred to Musharek on full settlement of the bank’s share.
The portfolio of Musharaka financing, which comprises real estate financing has
hovered in the range of BD3.5mn to BD4mn in the past 4 years. The bank was able
to achieve impressive returns on its Musharaka portfolio, with the highest income of
20% recorded in 2000. In 2002, income from Musharaka financing saw an
improvement as compared to the previous year and it stood at BD0.23mn.
Non Credit Income
The non-credit income of BISB has recorded a compounded annual growth rate of
44.7% in the last five years. This augurs well for the bank as it tries to diversify its The non-credit income of
BISB has recorded a
income base. Fees and commission which stood at BD0.304mn for the FY2002 CAGR of 44.7% in the
accounted for almost 11.5% of the total non-credit income. It has recorded a CAGR last five years.
of 21.8% in the last 4 years and grew at 20.3% between FY2001 and FY2002. The
bank is looking forward to aggressively increase its fees and commission income in
future. However, for the bank with its current infrastructure it would take some
time to achieve aggressive growth in fees and commission.
The bank has recorded good performance in its income from investment securities
on the back of good market conditions. The investment income constituted 16.9%
of the total operating income of the bank in 2002. The income from investment in
securities grew at a CAGR of 81% in the last 5 years and stood at BD1.33mn as of
2002, an increase of 49.7% over the previous year. The future growth in
profitability of the bank would depend to a large extent on its ability to increase its
own non-credit income.

Unrestricted Investment Accounts & Customers’ Current Accounts
The bank enjoyed strong capital position in the form of unrestricted investment
accounts, which grew at a CAGR of 5.2% in the last 4 years and stood at BD147.4mn
at the end of 2002. Customers investments accounts comprised 83% of the Unrestricted
Investment Accounts in 2002 while the rest were investment by banks and financial
institutions. The customers’ investment accounts recorded a modest CAGR of 3.8%
while the investments by banks and financial institutions grew at a compounded annual
growth rate of 13.2% in the last 4 years.
Figure 5: Unrestricted Investment Accounts

BD mn
150
145
140
135
130
125
120
115
1998 1999 2000 2001 2002
Source: Company Reports
The banking sector in Bahrain witnessed severe competition between commercial

banks prompted by heavy promotional campaigns for attracting customers by offering
them various kinds of facilities and incentives. As a result, in 2000 and 2001 BISB
recorded much lower growth in its customers deposits as compared to the total deposit
growth of commercial banks in Bahrain. However, in 2002 BISB bounced back with a
deposit growth rate of 13.5% as compared to 5.4% recorded by the commercial
banking sector in Bahrain. This is due to the fact that in 2002, despite the competition
BISB attracted a good number of customers from various sectors while retaining its
existing regular customers.

Figure 6: Deposit Growth of BISB Vis-à-Vis Commercial Banking Deposit

Growth
16%
14%
12%
10%
8%
6%
4%
2%
0%
-2%
-4%
2000 2001 2002
Commercial Banks BISB
Source: Bahrain Monetary Agency & Global Research
The return on unrestricted investment accounts of the bank declined by an average

compounded rate of 25.7% in the last 4 years. This was mainly because of the fact that Return on unrestricted
investment accounts
in the last couple of years most of the deposits of the bank has been in less than 6 declined by a CAGR of
month category. Since this particular category bears the lowest interest, it has helped in 25.7% in the last 4 years.
the reduction of the return on unrestricted investment accounts for the bank. In
addition, declining interest rates has its role in the diminishing return on unrestricted
investment accounts. Similarly, the deposits from the financial institutions have also
increased substantially since 1999. The bank’s share as a mudarib (managing trustee) in
the profits of unrestricted investment accounts amounted to 14.2% in 2002 against a
contribution of 18.3% in the previous period.
Figure 7: Return on Customers Investment Accounts

7%
6%
5%
4%
3%
2%
1%
0%
1999 2000 2001 2002
Source: Company Reports & Global Research

The customers current accounts of the bank grew at a compounded rate of 19.8% in the
past 5 years and stood at BD21.3mn in 2002, representing a growth of 42% over the
previousyear.
Deposit Quality
BISB seems to be having stable retail deposit base even though the bank has been
BISB seems to be having lagging behind in the sector growth rates in deposits. BISB’s customer deposit base
stable retail deposit base
consisted of 85% of the unrestricted investment accounts in FY2002 while deposits
from banks & financial institutions accounted for the remaining. The deposits from
customers are considered low cost and would tend to decrease the return on
unrestricted investment accounts of the bank. BISB’s dependence on the deposits from
customers has remained stable in the last couple of years.
BISB Asset Structure
The asset profile of BISB is spread over a wide array of asset categories similar to the
The asset profile of BISB other commercial banks in Bahrain. This has enabled the bank to minimise its risk
is spread over a wide
array of asset categories exposure, yet achieve the expected returns. Due to the bank’s nature of operations,
receivables portfolio and non-trading investments account for the two largest asset
categories. Cash and cash balances with the BMA also accounts for a substantial
portion of the total assets. In 2002, the majority of the bank’s cash liquidity was kept in
short term placements to avoid any liquidity shortages. The total assets of the bank
grew at a CAGR of 7.68% in the last 5 years and stood at BD209.73mn at the end of
2002 representing an increase of 9.7% over 2001.
The total receivables portfolio of the bank grew at a CAGR of 5.3% in the last 4 years
and stood at BD159.68mn at the end of 2002. The bank currently has significant
portfolio of short term investments and commodity Murabahas. The bank intends to
progressively elongate the tenor of these transactions for up to two years. This should
results in an enhanced yield by up to 0.5% per annum.
The most significant change in the asset structure took placed in Murabaha
financing, whose share in the total assets declined from 80% (BD125mn) in FY1998
to 66% (BD138mn) in FY2002 and further to 60% (BD133.77mn) by June 2003. The
decline was more prominent in international Murabaha, while the customers
Murabaha witnessed consistent increase over the same period. This is in tune with
the banks strategy of minimizing its dependence on low yielding assets and focusing
on high return investments. In recent years, the bank has also been increasingly
relying on Mudaraba financing, which grew at a CAGR of 47% in the last 4 years to
reached at BD15.38mn in 2002. Going forward, the bank is expected to capitalise on
the booming real estate market in Bahrain and push for major receivables growth in
this sector.

Table 5: Asset Profile of BISB

28/4/1998 to 17/4/1999 to
(BD’000) 16/4/1999 31/12/ 2000 2001 2002
Bank & cash 5,904.61 11,994.63 7,314.62 9,019.31
% total 3.8% 6.2% 3.8% 4.3%
% increase -10.4% 103.1% -39.0% 23.3%
Murabaha Financing 125,029.75 144,132.87 141,805.68 138,805.51

% total 79.9% 74.2% 74.2% 66.2%
% increase -0.7% 15.3% -1.6% -2.1%
Mudaraba Financing 4,869.04 8,827.97 7,065.93 15,381.33

% total 3.1% 4.5% 3.7% 7.3%
% increase 3.1% 4.5% 3.7% 7.3%
Musharaka Financing 3,808.99 4,054.64 3,894.05 3,561.60

% total 2.4% 2.1% 2.0% 1.7%
% increase 6.4% -3.9% -8.5%
Non-trading Investments 4,300.5 10,779.0 18,431.3 26,903.8

% total 2.7% 5.5% 9.6% 12.8%
% increase 151.0% 71.0% 46.0%
Investments in Associates 2,624.35 1,210.27 1,134.75 2,855.00

% total 1.7% 0.6% 0.6% 1.4%
% increase 0.9% -53.9% -6.2% 151.6%
Investments in Ijarah Assets 6,455.86 6,131.00 5,920.93 5,536.01

% total 4.1% 3.2% 3.1% 2.6%
% increase -5.0% -3.4% -6.5%
Ijara Muntahia Bittamleek 1500.0

% total 0.7%
% increase
in Properties 1944.2 5297.2 4028.7 4376.3

% total 1.2% 2.7% 2.1% 2.1%
% increase -76.3% 172.5% -23.9% 8.6%
Equipment 1034.4 1307.9 1198.0 1033.4

% total 0.7% 0.7% 0.6% 0.5%
% increase 523.0% 26.0% -8.0% -14.0%
Other Assets 436.7 597.0 387.8 767.4

% total 0.3% 0.3% 0.2% 0.4%
% increase -67.0% 37.0% -35.0% 98.0%
Total 156,408 194,332 191,182 209,740


In terms of credit In terms of credit receivables BISB has approx. 10% per cent market share in Bahrain.
receivables BISB has
approx. 10% per cent
Therefore, there is a lot of scope for further improvement by the bank to increase its
market share in Bahrain receivables portfolio. We believe that the future growth in lending activity would come
from the bank’s ability to mobilize more number of customers by offering innovative
products and services. Although BISB is a not a big player in the banking sector in
Bahrain, it seems to have very stable and profitable businesses with its clients and at
the same time has been able to keep a tight control on its non performing loans. We
believe loans and advances would continue to contribute substantially to the total assets
of the bank.
The bank’s non-trading investments, which was the second highest asset portfolio after
Murabaha receivable in 2002, grew at a CAGR of 84.2% in the last 4 years. It rose by
The bank witnessed 46.2% to BD26.9mn compared with BD18.4mn at the end of 2001. The rise in
substantial increase in the
investments in non-trading investments was mainly attributed to the substantial increase in the
Government sukoks in investments in Government Sukok. BISB has been fairly aggressive in its investment
2002
policy as investments in equity shares historically comprised substantial portion of its
investments. In 2002, 42% of the banks non-trading investments was in equity shares
while the rest was in Government Sukoks. The Government’s Islamic Sukok have
become the major investment destination for the bank in recent years. The bank is
subscribing for medium term Ijara Sukoks and short term Salam Sukoks that were
launched by the Bahrain Monetary Agency since 2001. Accordingly, the banks
investments in these Sukoks reached BD15.8mn at the end of 2002. These sukoks have
distinct advantage of attractive returns combined with limited risks and are easily
convertible into cash in the secondary market. We believe that higher dependence on
low interest yielding debt instruments like government sukoks would affect the total
investment income of the bank in the near future.
In its efforts to launch new products, the bank introduced Ijara for the first time during
2002. The bank entered into an Ijara Muntahia Bittamleek transaction of BD1.5mn.
The Ijara transactions will mature in 2007 upon which the title will be transferred to
the lessee. Moreover, in 2002, 16 contracts for new Islamic products were also
introduced by the bank.
BISB Funding Structure
Over the last 5 years, the funding structure of BISB remained almost the same barring
some decline in the unrestricted investment accounts as a percentage of the total
liabilities which has been compensated by increase in shareholders equity. The bank
boosted its capital structure with a rights issue in 1999, which doubled its paid up
capital to BD23mn.
The unrestricted investments accounts, which grew at a CAGR of 5.2% in the last 4
Unrestricted investments years stood at BD147.44mn at the end of 2002 representing an increase of 8.5% over
accounts grew at a CAGR
of 5.2% in the last 4 years
2001. Customers investments accounts grew at a modest CAGR of 3.8% in the last 4
years, comprised 83% of the unrestricted investment accounts while investment by
banks and financial institutions accounted for the rest. In 2002, despite stiff

competition from commercial banks and adverse economic scenario, BISB attracted
number of customers as the customers investment accounts increased by 9.6% to
BD122.47mn.
The unrestricted investments accounts from customers as a percentage of total funds

deployed has declined from 82.3% in FY1998 to 70.3% in FY2002, whereas the
contribution of customers current accounts has grown from 6.7% in FY1998 to 10.2%
in FY2002. The customers current account posted an increase of 42% to BD21.3mn
reflecting the bank’s ability to attract new customers during the year. The current
paid-up capital of the bank appears to be sufficient to meet the banks current scope of
activities as well as its medium term strategies. However, in the long term given that
the bank intends to evolve into a significant regional player, there may be a need to
mobilize new resources to the fund the expansion. We believe that the company is
expected to optimize its capital structure by prudently increasing its customer deposits
and shareholders equity.
Table 6: Funding Structure of BISB

28/4/1998 17/4/1999
(BD’000) to 16/4/1999 to 31/12/2000 2001 2002
Customers' current accounts 10,695.37 17,472.72 15,018.48 21,341.02
% total 6.8% 9.0% 7.9% 10.2%
% increase 3.5% 63.4% -14.0% 42.1%
Unrestricted Investment Accounts 126,730.74 136,148.74 135,957.92 147,448.65

% total 81.0% 70.1% 71.1% 70.3%
% increase -0.5% 7.4% -0.1% 8.5%
Other liabilities 2,669.57 1,588.43 1,595.05 2,659.91

% total 1.7% 0.8% 0.8% 1.3%
% increase 9.7% -40.5% 0.4% 66.8%
Shareholders Equity 16,312.81 39,122.49 38,610.41 38,290.44

% total 10.4% 20.1% 20.2% 18.3%
% increase 11.0% 139.8% -1.3% -0.8%
Total 156,408.50 194,332.37 191,181.86 209,740.03
Non-Performing Receivables
After increasing by 50% in FY2000 and 68% in FY01, BISB’s non-performing loans BISB’s non-performing
loans fell by approx. 40%
(NPL) actually fell by approx. 40% in FY2002. The decline in NPLs could be in FY 2002.
attributed to improved liquidity as a result of improved economic conditions. With the
economic upturn and liquidity levels likely to remain positive in the next couple of
years, should benefit the bank in keeping its NPLs down. The bank has been able to
manage its receivables portfolio prudently to contain its NPL as a percentage of gross
Murabaha, Mudaraba and Musharaka to below 2% in the past 4 years, except in 2001

when it touched 3.2%. It shows that the bank has taken strong measures in recent years
to improve recoveries and reduce its NPA levels. The bank’s recovery process has been
aided by a major IT programme and focus on client segmentation, product development
and delivery.
Figure 8: Non-performing Murabaha, Mudaraba and Musharaka Receivables

BD mn
3.0
2.5
2.0
1.5
1.0
0.5
0.0
1999 2000 2001 2002
Source: Company Reports
Though the banks total non-performing loans were under control, it was the
non-performing Musharaka receivables which were the matter of concern for the bank.
The non-performing Musharaka receivables has always been high touching 66% of
total Musharaka receivables in 2001 while declining substantially to 26% in 2002.
However, in absolute terms non-performing Musharaka receivables were lowest as
compared to non-performing Murabaha and Mudaraba receivables.
Provisions cover for The provisions for NPL’s covered almost 64.3% of the total non-performing loans in
almost 64% of the total
non-performing 2002, which is very prudent as compared to the 50% provided in 2001. The higher
receivables. provisions in 2002 should improve the investors’ confidence on the functioning of the
bank. The bank needs to increase its NPL coverage further from the present position.
Accordingly the Loan loss provisioning cover, measured as loan loss provisions to
gross loans, was comfortable at 1.2% in FY2002.
Table 7: Asset Quality - Visible Improvements for BISB

28/4/1998 17/4/1999
(BD’000) to 16/4/1999 to 31/12/ 2000 2001 2002
Gross Receivables 136,607 159,515 155,300 159,680
Non Performing Loans 1,993 2,994 5,035 3,001
Provision For Losses 2,900 2,500 2,535 1,932
NPL to Gross Loans (%) 1.46 1.88 3.24 1.88
Provision to Gross Receivables (%) 2.12 1.57 1.63 1.21
NPL coverage (%) 146 83 50 64

Efficiency Analysis
BISB’s operating efficiency does not compare well with the standards of other
commercial banks in Bahrain. In addition, BISB’s performance when compared with BISB’s operating
efficiency deteriorated in
its last four years performance doesn’t show any substantial improvement. Operating the last 4 years.
expenses of the bank grew at a CAGR of 20% in the last 4 years to reach BD4mn at the
end of 2002, an increase of 6.5% over the previous year. The gross income per staff has
also declined consistently over the past three years and stood at BD33,000 representing
a decline of 20.4% over 2001. BISB’s operating expense to gross income was the
highest at approx. 69.3% during FY2002. BISB’s operating expenses to assets ratio is
also comparatively high with respect to other commercial banks at 1.91%. But looking
at it from the positive side the bank is very well positioned to increase its profitability
by reducing its operating costs and refocusing its business strategy.
Table 8: Operating Efficiency of BISB

28/4/1998 17/4/1999
to 16/4/1999 to 31/12 /2000 2001 2002
Operating Exp./ Gross Income (%) 58.0 60.1 60.1 69.3
Operating Exp./ Assets (%) 1.48 2.69 1.97 1.91
Gross Income per staff (BD’000) 26.9 58.8 41.6 33.1
BISB’s performance was not upto the standard and the bank consistently lost
Average ROE declined
substantial ground to the new players in the last 4 years. The bank witnessed decline in from 11.5% in 1999 to
its return on average assets (ROA) and return on average equity (ROE) in the last 4 5.34% in 2002
years. As per the figure shown below, the return on average equity for BISB has
declined from 11.5% for 12 months ended 16 April 1999 to 5.34% in FY2002, while
the return on average assets declined from 1.14% to 1 % during the same period.
Table 9: Profitability of BISB

28/4/1998 17/4/1999
Year Ending to 16/4/1999 to 31/12 /2000 2001 2002
Net Earnings (BD mn) 1.782 3.905 2.650 2.053
% Change 16.4 119 32.1 22.5
ROA (%) 1.14 2.23 1.37 1.02
ROE (%) 11.50 14.09 6.82 5.34
First Half Results – 2003
The first half results of the bank have been encouraging with its net profit sharing
income improving by almost 20% to BD1.74mn in the first half of the current year
compared to the BD1.44mn for the first half last year. In the first half of 2003, the total
profit sharing income of the bank declined by 4.6% over 1H2002 to BD2.6mn, which is
keeping in line with the current soft interest rate environment. But at the same time

depositors profit sharing has also been reduced by almost 33% to BD0.86mn during
the same period which has lead to the above increase in the net profit sharing income.
Another positive aspect is the fact that BISB’s income from forex trading increased by
In the first half of the an impressive 212% over the 1H2002 while its income from properties surged by
current fiscal net profit 141% to BD0.28mn during the same period. The operating costs still remain a concern
surged by 36.8% over
2001 to BD1.36mn for the bank’s management as the bank has not been very successful containing its
operating expenses which grew by 6.2% over 1H2002 to reach at BD1.988mn. The
substantial increase in revenues has helped the bank to increase its net profits to
BD1.364mn in the first half of the current financial year, an improvement of 36.8%
over the profit of BD0.997mn posted for the same period last year. It has lead to the
increase in the earnings per share from 4.3fils recorded as of end June 2002, to 5.9fils
in the first half of the current financial year. These results had been achieved despite
the unusual circumstances that the region had gone through and the sharp decline in
internationalfinancingrates.
The credit receivables portfolio of BISB declined marginally by 1.12% to

Credit receivables BD155.98mn during the first six months of the current year over Dec 2002. This small
portfolio of BISB stood at decrease in the receivables portfolio is owed to the bank’s strategy of reducing its
BD156mn at the end of
June 2003. international commodity Murabahas. The bank has, however, succeeded in increasing
its Murabahas, Musharaka and other financing except for international commodity
Murabaha. The increase in Musharaka and other financing is especially important
taking into account the fact that liquidity levels are high and most of the corporates
have been reducing their borrowing to save on their interest costs. As part of its
strategy to diversify its assets and enhance profitability, BISB increased its investments
in Islamic bonds floated by BMA. As a result, the banks investment in these Sukooks
reached BD26.9mn in the first half of the current year as against BD15.8mn recorded
as of Dec 2002, an increase of 70% during that period.
Despite stiff competition, the bank was able to attract new customers and increase its
customer deposits base. The banks unrestricted investments accounts posted a growth
of 3.4% over Dec 2002 to reach BD152.47mn while customers current accounts stood
at BD29.48mn registering a growth of 38% during the same period. The growth in
customers deposits reflects the bank’s strategy aimed at expanding its retail and
corporate customers base and boosting the financial facilities provided to them. The
overall assets of the bank have grown by 6.55% in the first six months of the current
financial year.
Outlook
The outlook for Islamic banking continues to look optimistic with the positive
macroeconomic environment and the growing demand from customers for Islamic
products. The Government considers Islamic banking industry as a growth industry,
and this is likely at act as a catalyst for further demand for Islamic products. All these
factors are likely to provide the much needed fillip to the banks earnings.

BISB is obviously in a transition stage in terms of rebalancing its product portfolio and
faces a number of challenges, paramount to which is the successful implementation of
its business strategies. The bank has around 10% market share in Bahrain and the
management is exploring all opportunities to diversify its income stream and increase
its fee based income. The bank has its non performing assets under control which is
extremely important for a bank. However, we believe that the bank can only break into
the big league by increasing its deposit base and its corresponding asset size. It would
need a lot of innovative planning and execution of its business plans on the part of the
bank’s management to achieve these targets.
Even though the performance of the bank was moderate in the past few years, the new
management of the bank, which is in place since 2001, is taking stringent measures to
improve the bank’s performance. The effect of the new strategy is clearly reflected in
the performance of the bank during the first half of 2003, in which BISB posted
excellent results as compared to the same period last year. Going forward, we believe
that the bank is ideally placed to exploit improved business sentiments and with a more
pro-active management than some of its peer groups, the outlook for profitability and
growth seems bright.
Swot Analysis
Strengths
● Loyal and strong customer base
● Established track record of operations in Bahrain
● Low NPA levels
Weakness
● Smaller deposit growth hampers in the growth of its asset size
● High operating cost
● Smaller deposit base of the bank hampers in the growth of its asset size
● Financial performance is heavily dependent on commodity Murabaha transactions,
though the bank is now diversifying its income stream
Opportunities
● Increasing demand for Islamic products likely to result in the higher deposit and
credit growth rates for the banks
● Scope to enhance fee based income
Threats
● Increasing competition constraining the growth of the deposits

Valuation & Recommendation

For arriving at the fair value of BISB, we have in our valuation assumed DDM as the
primary valuation methodology. The peer group valuation could not be used as there is
no comparable listed Islamic bank in Bahrain.
DDM
While valuing the banks we have consistently been using the dividend discounting
method in our earlier researches as we believe it is the most suitable method to value
banks because of the nature of banking business. The enterprise value method of
calculating discounted cash flow (DCF) value for the banks is difficult to estimate as
one of the sources of financing is non-profit sharing/low profit sharing bearing
customer deposits raised through a retail bank, not borrowing in capital markets. The
cost of capital of these borrowings is difficult to estimate and might vary significantly
at different time periods. This makes it difficult to value the bank’s equity by first
valuing its assets (that is, its lending function) by discounting profit sharing income
less administrative expenses at the weighted average cost of capital, then subtracting
the present value of its deposit business (profit sharing expense plus consumer bank
administrative costs, discounted at the cost of debt). Still another problem with the
enterprise approach for banks is that the spread between the profit sharing received on
loans and the cost of capital is so low that small errors in estimating the cost of capital
can result in huge swings in the value of the bank.
In addition to being easier to use, there is a conceptual reason for using the equity
approach for valuing banks. The deposit franchise given by the government to the bank
potentially allows the bank to create value on the liabilities side of the balance sheet. If
the cost of issuing deposits (e.g., profit sharing expense, check clearing and tellers) is
less than cost of raising an equivalent amount of funds with equal risk in the open
market, then a positive spread is created that creates value for shareholders. Thus,
liabilities management is a part of the business operations of the bank and is not purely
financing. If it were pure financing, there would be no spread. The bank would be
paying market rates for funds received and no value would be created for shareholders.
Therefore, in case of banks we prefer the dividend discounting method which is much
easier to understand. In case of DDM the cash flows for the investor includes dividend
paid plus potential dividends plus equity repurchases minus equity issues. We have not
assumed any equity repurchases or issues for BISB. Therefore, our valuation of BISB
is based on discounting the present and future stream of dividends. We have assumed a
conservative 3% growth in dividends for the bank beyond 2006.
The DDM model constructed by us is based on a 4-year forecast of dividends as cash

flows (2003-06) for BISB. The free cash flow for the forecast period and the terminal
value is then discounted back at the discount rate generated, to provide the total net
present value (NPV) of BISB. In our calculations, we have made the following
assumptions in order to arrive at the equity value of BISB.

● Risk free rate of 3.75%, as per the 5-year bond issued by the Bahrain Government Assumed equity risk
in March 2003. premium of 6.25% and a
terminal growth rate of
● Terminal growth rate of 3%. The terminal value is based on the 4th year free cash 3% for BISB.
flow.
● Equity risk premium of 6.25%.
● Beta of 1 for last 5 years of BISB. The actual beta for the bank is low, but to more
appropriately reflect the market risk we have taken it as 1.
● Based on the above assumptions and the capital asset pricing model we have
derived the cost of equity for BISB at 10%.
Table 10: BISB : Dividend discounted method and Valuation (BD)

Terminal
2003F 2004F 2005F 2006F Value
Dividends Expected 2,530,000 3,220,000 4,140,000 4,945,000 72,762,143
NPV of Dividends expected 12,297,475
NPV of terminal value 53,380,084
NPV of the Firm 65,677,559
Estimated Fair Value of Equity 65,677,559
No. of Shares Outstanding 230,000,000
Estimated Fair Value per share (fils) 286
Current Share Price (fils) 250
Upside potential (%) 14.4
Based on the above method and assumptions, the DDM model gives a value of 286 fils Based on the DDM the
Fair Value per share is
per share of BISB, which is around 14.4% higher than the current market price of estimated at 286fils.
250fils.
Sensitivity Analysis
A sensitivity analysis for different estimated long-run future growth rates and cost of
capital is provided in Table 11. While the table provides a broad selection of potential
inputs and accordingly yields a wide range of estimated fair values for BISB shares, we
believe the shaded portion shows the most plausible alternatives to our estimates.
Table 11: Sensitivity Analysis

Estimated Long Run Future Growth Rate
1% 2% 3% 4% 5%
7.0% 347 408 501 655 962
8.0% 297 340 400 491 641
Cost
9.0% 260 291 333 392 481
Of
10.0% 230 255 286 327 385
Equity
11.0% 207 226 250 280 321
12.0% 188 203 222 245 275
Source: Global Research

Keeping in line with the improved performance of the BISB and our expectations
about its future potential, we have valued BISB’s share price at 286fils. The stock
currently trades at around 250fils, which implies that the value arrived at using the
DDM method is around 14.4% higher than the current market price. Currently, BISB is
trading at a price-earnings multiple of 21.2x its annualised earnings of the six months
of the current year. At 286fils, BISB would be trading at an estimated FY2003F and
FY 2004F P/E of 22.7x times and 17.5x times respectively.
Considering the significant improvement in the bank’s operations after the

restructuring exercise and the potential for further improvement in profitability, we feel
that BISB’s shares have the potential to appreciate significantly over the medium term.
This is despite the fact that the stock witnessed 42% run up in its price since the
beginning of this year. We expect the stock to appreciate by around 14-15% from
current levels in the short to medium term. Hence we recommend a BUY on the stock
with a medium term perspective.

BALANCE SHEET Bahrain Islamic Bank B.S.C.
28/4/1998 17/4/1999
Amount in BD to 16/4/1999 to 31/12/2000 2001 2002 2003(F) 2004(F) 2005(F) 2006(F)
Assets:
Cash and Balances with the BMA and other Banks 5,904,614 11,994,627 7,314,624 9,019,308 9,963,135 9,529,040 8,617,496 5,113,192
Funds Joined with Islamic banks
October 2003
Murabaha Financing 127,421,747 145,952,873 143,777,683 140,451,652 136,238,102 134,535,126 132,853,437 131,790,610
Mudaraba Financing 4,869,042 9,227,969 7,215,928 15,431,327 19,289,159 24,111,448 30,139,311 37,674,138
Musharaka financing 4,316,986 4,334,636 4,307,054 3,797,416 3,816,403 3,854,567 3,896,967 3,943,731
Non-trading investments 4,300,545 10,778,950 18,431,329 26,903,813 40,624,758 45,499,729 50,049,701 55,054,672
Investments in associates 2,624,353 1,210,265 1,134,750 2,854,997 2,883,547 2,970,053 3,059,155 3,150,930
Global Research - Bahrain
Investments in Ijarah Assets 6,455,864 6,130,999 5,920,927 5,536,009 5,480,649 5,425,842 5,371,584 5,317,868
Investment in Securities - - - -
Ijarah Muntahia Bittamleek - - - 1,500,000 2,895,000 3,474,000 3,995,100 4,594,365
Investments in Properties 1,944,211 5,297,150 4,028,728 4,376,271 4,770,135 5,056,344 5,359,724 5,681,308
Equipment 1,034,428 1,307,930 1,198,002 1,033,418 1,043,752 1,075,065 1,107,317 1,140,536
Other assets 436,709 596,972 387,833 767,374 1,212,451 1,333,696 1,467,066 1,613,772
Less: Provision (2,900,000) (2,500,000) (2,535,000) (1,931,956) (1,991,796) (2,031,264) (2,086,121) (2,167,606)
Total Assets 156,408,499 194,332,371 191,181,858 209,739,629 226,225,296 234,833,646 243,830,737 252,907,515
Liabilities, Unrestricted Investment Accounts and Equity

Liabilities:
Customers' current accounts 10,695,369 17,472,715 15,018,477 21,341,021 29,877,429 31,072,527 32,315,428 33,608,045
Other liabilities 2,669,574 1,588,426 1,595,054 2,659,914 4,229,263 4,398,434 4,574,371 4,757,346
Total Liabilities 13,364,943 19,061,141 16,613,531 24,000,535 34,106,693 35,470,960 36,889,799 38,365,391
Unrestricted Investment Accounts 126,730,743 136,148,740 135,957,918 147,448,653 153,346,599 159,480,463 165,859,682 172,494,069
Equity:
Share Capital 11,500,000 23,000,000 23,000,000 23,000,000 23,000,000 23,000,000 23,000,000 23,000,000
Share Premium - 8,050,000 8,050,000 8,061,604 8,061,604 8,061,604 8,061,604 8,061,604
Treasury stock - (186,614) (56,289) - - - - -
Statutory Reserve 2,011,501 2,402,003 2,667,035 2,872,359 3,161,515 3,536,537 3,989,441 4,511,120
General Reserve 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000
33
Global Investment House
Revaluation Surplus - 2,056,395 - -

Cumulative changes in fair values - - 115,268 80,788 80,788 80,788 80,788 80,788
Retained earnings 651,312 740,251 1,537,780 975,690 938,097 983,293 809,424 449,543
Proposed Dividends 1,150,000 2,060,455 2,296,615 2,300,000 2,530,000 3,220,000 4,140,000 4,945,000
Total Equity 16,312,813 39,122,490 38,610,409 38,290,441 38,772,004 39,882,222 41,081,256 42,048,055
Total Liabilities, Unrestricted investment accounts and Equity 156,408,499 194,332,371 191,181,858 209,739,629 226,225,296 234,833,646 243,830,737 252,907,515
Commitments and Contingent Liabilities 6,148,221 6,112,983 6,929,227 5,154,979 11,356,706 11,618,260 11,961,937 10,680,171
Operating Statement Bahrain Islamic Bank B.S.C.
28/4/1998 17/4/1999
Income from Murabaha financing 7,566,494 15,143,349 7,561,419 4,592,678 4,632,095 5,381,405 6,111,258 6,470,919
Income from Mudaraba financing 408,932 975,298 545,059 402,835 540,096 868,012 1,265,851 1,695,336
34
Income from Musharaka financing 176,458 893,407 195,160 230,436 248,066 277,529 280,582 283,949
Income from investments in securities 277,726 273,822 892,193 1,335,994 1,624,990 1,910,989 2,102,087 2,312,296
Ijarah income 248,201 839,391 575,310 698,934 602,871 596,843 590,874 584,965
Ijarah Muntahia Bittamleek Income - - - 10,286 27,503 33,003 39,951 55,132
Gain on fair value adjustment for investments in properties - - - 94,066 - - - -
Income from Properties - - - 234,858 540,173 577,986 619,600 664,212
Net fee and commission income 168,312 311,990 252,848 304,215 340,721 385,015 442,767 518,037
Bank's share in the associates 158,096 (549,830) (75,515) (164,753) - - - -

Net gains from foreign currency transactions 80,179 176,020 81,072 145,094 232,150 232,150 232,150 232,150
Less: Provision (59,840) (39,468) (54,857) (81,485)
Operating Income 9,084,398 18,063,447 10,027,546 7,884,643 8,728,827 10,223,462 11,630,264 12,735,512
Return on unrestricted investment account

before Bank's share as a Mudarib 6,475,540 9,753,472 4,592,020 2,442,948 2,177,522 2,711,168 3,234,264 3,708,622
Bank's share as a Mudarib (1,372,276) 152,730 (842,705) (348,846) (337,363) (398,701) (414,649) (431,235)
Return on unrestricted investment accounts 5,103,264 9,906,202 3,749,315 2,094,102 1,840,159 2,312,467 2,819,615 3,277,387
Bank's share in operating income (as a Mudarib and Rabalmal) 3,981,134 8,157,245 6,278,231 5,790,541 6,888,668 7,910,996 8,810,649 9,458,125
Staff costs 1,356,720 3,015,863 2,287,349 2,344,310 2,138,563 2,351,396 2,442,355 2,419,747
Depreciation 293,031 681,180 517,920 470,374 525,013 526,094 538,347 552,225
Expenses on Ijarah assets 136,084 338,104 123,554 123,347 120,574 119,369 118,175 116,993
Expenses on premises and equipment 103,735 143,388 179,699 176,429 215,114 214,599 226,346 238,765
Other operating expenses 418,093 1,053,064 662,624 900,692 872,883 817,877 814,118 764,131
Write back of provisions against financing contracts 21,316 (400,000) (250,000) (412,000)
Write back of provisions against investments in properties (210,000) (192,000) - -
OPERATING EXPENSES 2,118,979 4,639,599 3,521,146 3,603,152 3,872,146 4,029,335 4,139,342 4,091,860

PROFIT ON ORDINARY ACTIVITIES BEFORE PROVISIONS
Provisions for islamic financing contracts
Provision for Zakat
OPERATING PROFIT BEFORE OTHER INCOME AND
ZAKAH 1,862,155 3,517,646 2,757,085 2,187,389 3,016,522 3,881,661 4,671,308 5,366,265
Other income - 549,444 - - - - -
Zakah (79,761) (162,069) (106,767) (134,155) (124,958) (131,443) (142,274) (149,466)
NET PROFIT FOR THE YEAR 1,782,394 3,905,021 2,650,318 2,053,234 2,891,563 3,750,218 4,529,034 5,216,799
P&L Appropriation Account:

Op Balance of Retained Earnings 457,157 651,312 740,251 1,537,780 975,690 938,097 983,293 809,424
Adjst arising on application of IAS 40 925,378
Adjst arising on application of IAS 39 (38,520)
Net Profit for the year 1,782,394 3,905,021 2,650,318 2,053,234 2,891,563 3,750,218 4,529,034 5,216,799
Trfr to Statutory reserves (178,239) (390,502) (265,032) (205,324) (289,156) (375,022) (452,903) (521,680)
October 2003
Trfr to General reserves (100,000)
Director's Remuneration (70,000) (125,125) (88,000) (70,000) (70,000) (70,000) (70,000) (70,000)
Charitable Contributions (90,000) (90,000) (90,000) (40,000) (40,000) (40,000) (40,000) (40,000)
Interim Dividend (1,150,000)
Proposed Dividends (1,150,000) (2,060,455) (2,296,615) (2,300,000) (2,530,000) (3,220,000) (4,140,000) (4,945,000)
Cl Balance of Retained Earnings 651,312 740,251 1,537,780 975,690 938,097 983,293 809,424 449,543
CASH FLOW STATEMENT Bahrain Islamic Bank B.S.C.
28/4/1998 17/4/1999
Operating Activities
Net profit 1,782,394 3,905,021 2,650,318 2,053,234 2,891,563 3,750,218 4,529,034 5,216,799
Adjustments for non-cash items:
Depreciation 293,031 681,180 517,920 470,374 525,013 526,094 538,347 552,225
October 2003
Provisions for Islamic Financing activities - - - - 59,840 39,468 54,857 81,485
Write back of provisions-net (188,684) (592,000) (250,000) (412,000)
Bank's share in the loss of an associate (158,096) 549,830 75,515 164,753 - - - -
Gain on fair value adjustment for investments in properties - - - (94,066) -
Gain on sale of investments in properties and Ijarah assets - (51,272) (177,163) (234,858)
Operating profit before changes in op. assets and liabilities - 4,492,759 2,816,590 1,947,437 3,476,416 4,315,780 5,122,238 5,850,508
Changes in:
Murabaha receivables (1,613,263) (18,531,126) 2,288,670 3,000,170 4,213,550 1,702,976 1,681,689 1,062,827
Mudaraba Financing 1,883,650 (4,358,927) 2,012,041 (8,315,399) (3,857,832) (4,822,290) (6,027,862) (7,534,828)
Musharaka financing (568,286) (17,650) 160,582 332,455 (18,987) (38,164) (42,400) (46,764)
(Increase) in funds jointly managed with Islamic banks - - - -
Increase in unrestricted investment accounts - - - -
Ijarah Muntahia Bittamleek - - - (1,500,000) (1,395,000) (579,000) (521,100) (599,265)
Other assets 162,007 160,263 209,139 (379,541) (445,077) (121,245) (133,370) (146,707)
Other liabilities 126,514 (1,210,677) (39,642) 1,064,460 1,569,349 169,171 175,937 182,975
Customer' current accounts 362,812 6,777,346 (2,454,238) 6,322,544 8,536,408 1,195,097 1,242,901 1,292,617
Directors' renumeration and charitable contribution (50,000) (151,149) (132,125) (158,380) (110,000) (110,000) (110,000) (110,000)

Net Cash From Operating Activities 2,032,079 (13,159,687) 4,861,017 2,313,746 11,968,827 1,712,326 1,388,033 (48,635)
Investing Activities
Investment in Ijarah assets (24,943) - - - 55,360 54,806 54,258 53,716
Dividends received from associated companies 133,594 - - -
Disposal of investment in properties 64,862 (1,104,544) 1,268,422 563,122
Purchase of investment properties - - - - (393,864) (286,208) (303,381) (321,583)
Purchase of non-trading investments (1,440,281) (5,562,875) (7,359,948) (10,192,731) (13,720,945) (4,874,971) (4,549,973) (5,004,970)
Sale of investment in securities 724,403
Investment in Associates (28,550) (86,506) (89,102) (91,775)
Purchase of equipment (373,784) 629,817 (197,920) (181,349) (535,347) (557,406) (570,599) (585,444)
Net Cash (used in) Investing activities (916,149) (7,297,236) (6,289,446) (9,810,958) (14,623,346) (5,750,285) (5,458,795) (5,950,056)
Financing Activities
35
Increase (decrease) in unrestricted investment accounts (650,138) 9,417,997 (1,321,839) 11,490,735 5,897,946 6,133,864 6,379,219 6,634,387
Dividends paid (1,150,000) (2,234,447) (2,060,060) (2,345,128) (2,300,000) (2,530,000) (3,220,000) (4,140,000)
Issue of share capital - 19,550,000 - -
Sale of treasury stock - (186,614) 130,325 56,289
Net Cash (used in) Financing activities (1,800,138) 26,546,936 (3,251,574) 9,201,896 3,598,346 3,603,864 3,159,219 2,494,387
NET INCREASE (DECREASE) IN CASH (684,208) 6,090,013 (4,680,003) 1,704,684 943,827 (434,096) (911,543) (3,504,304)
Cash and cash equivalents at 1 January 6,588,822 5,904,614 11,994,627 7,314,624 9,019,308 9,963,135 9,529,040 8,617,496
CASH AND CASH EQUIVALENTS at 1 January 5,904,614 11,994,627 7,314,624 9,019,308 9,963,135 9,529,040 8,617,496 5,113,192
Key Ratios Bahrain Islamic Bank B.S.C.

28/4/98 17/4/99
to 16/4/99 to 31/12/ 00 2001 2002 2003F 2004F 2005F 2006F
Profitability
- Return on Average Assets 1.14% 2.23% 1.37% 1.02% 1.33% 1.63% 1.89% 2.10%
- Return on Average Equity 11.50% 14.09% 6.82% 5.34% 7.50% 9.54% 11.19% 12.55%
- Net profit sharing income/ Gross Income 76.58% 81.61% 72.51% 54.26% 51.92% 53.42% 55.02% 54.80%
- Non-profit sharing income/ Gross Income 23.4% 18.4% 27.5% 45.7% 48.1% 46.6% 45.0% 45.2%
- Dividend payout ratio 64.5% 82.2% 86.7% 112.0% 87.5% 85.9% 91.4% 94.8%
- Operating Expenses / Gross Income 58.0% 60.1% 60.1% 69.3% 55.7% 50.7% 46.7% 42.9%
- Operating Expenses / Profit Sharing 28.3% 30.8% 45.4% 76.7% 71.1% 61.4% 53.8% 48.1%
- Gross Income Per Staff (BD) 26,900 58,829 41,578 33,089 39,706 45,431 50,660 54,512
- Operating Expenses / Assets 1.48% 2.98% 1.96% 2.00% 1.78% 1.75% 1.73% 1.65%
Margins
- Net Profit Sharing / Revenues 37.4% 41.8% 54.8% 60.0% 66.2% 64.7% 63.4% 61.5%
- Gross Income / Revenues 48.8% 51.2% 75.6% 110.6% 127.5% 121.2% 115.2% 112.2%
- Depositors Profit Sharing to Profit Sharing Income 62.6% 58.2% 45.2% 40.0% 33.8% 35.3% 36.6% 38.5%
- Profit Sharing to Profit Sharing Income Earning
Assets 6.1% 11.5% 5.3% 3.3% 3.4% 4.0% 4.6% 4.9%
- Depositors Profit Sharing to Depositors Profit
Sharing Liabilities 3.7% 6.8% 2.5% 1.3% 1.0% 1.2% 1.5% 1.6%
- Investment Income to Investment Assets 3.3% -1.4% 3.1% 4.3% 4.6% 4.4% 4.4% 4.5%
- Net Spread 2.43% 4.68% 2.81% 2.00% 2.32% 2.76% 3.12% 3.25%
- Net Profit Sharing Margin 2.3% 4.8% 2.9% 2.0% 2.3% 2.6% 3.0% 3.1%
Efficiency
- Operating Expenses to Gross Income 58.0% 60.1% 60.1% 69.3% 55.7% 50.7% 46.7% 42.9%
- Staff Expense to Gross Income 34.1% 34.6% 36.4% 40.5% 30.8% 29.6% 27.5% 25.4%
- Operating Expenses to Average Total Assets 1.5% 3.0% 2.0% 2.0% 1.8% 1.7% 1.7% 1.6%
Liquidity
- Gross Loans to Total Deposits 99.4% 103.8% 102.9% 94.6% 87.0% 85.3% 84.2% 84.1%
- Net Loans to Total Customer Deposits 111% 121% 121% 110% 100% 98% 97% 97%
- Customer Deposits to Equity 737% 331% 328% 376% 405% 410% 414% 420%
- Customer Deposits to Total Deposits 87% 84% 84% 85% 86% 86% 86% 86%
Credit Quality
- Non Performing Loans BD 1,993 2,994 5,035 3,001 2,823 2,718 2,693 2,706
- Loan Loss Reserve BD (000'BD) 2,900 2,500 2,535 1,932 1,992 2,031 2,086 2,168
- NPL's to Gross Loans 1.46% 1.88% 3.24% 1.88% 1.77% 1.67% 1.61% 1.56%
- NPL's to (Equity+Loan loss reserve) 10.4% 7.2% 12.2% 7.5% 6.9% 6.5% 6.2% 6.1%
- Loan Loss Reserve to Gross Loans 2.1% 1.6% 1.6% 1.2% 1.3% 1.3% 1.3% 1.3%
Capital Adequacy
- Equity to Total Assets 10.4% 20.1% 20.2% 18.3% 17.1% 17.0% 16.8% 16.6%
- Equity to (Total Assets + Cont. Liabilities) 10.0% 19.5% 19.5% 17.8% 16.3% 16.2% 16.1% 16.0%
- Equity to Gross Loans 11.9% 24.5% 24.9% 24.0% 24.3% 24.5% 24.6% 24.2%
Constitution of Total Income

- Net Profit Sharing Income to Gross Income 76.6% 81.6% 72.5% 54.3% 51.9% 53.4% 55.0% 54.8%
- Fees & Comm. to Gross Income 4.2% 3.6% 4.0% 5.3% 4.9% 4.8% 5.0% 5.4%
- Investment Income to Gross Income 17.2% 6.5% 22.2% 38.0% 39.8% 38.8% 37.4% 37.3%
- FX Income to Gross Income 2.0% 2.0% 1.3% 2.5% 3.3% 2.9% 2.6% 2.4%
Operating Performance
- Change in Net Profit Sharing Income 6% 133% -36% -31% 15% 18% 15% 7%
- Change in Fees and Commission 11% 85% -19% 20% 12% 13% 15% 17%
- Change in Investment Income 109.2% -17.6% 147.1% 58.0% 25.9% 11.5% 7.3% 7.5%
- Change in Fx Income 1% 120% -54% 79% 60% 0% 0% 0%
RATIOS USED FOR VALUATION

- Shares in Issue ('000) 115,000 230,000 230,000 230,000 230,000 230,000 230,000 230,000
- EPS (fils) 15.5 17.0 011.5 8.9 12.6 16.3 19.7 22.7
- Dividend 10% 9% 10% 10% 11% 14% 18% 22%
- Book Value Per Share (fils) 141.9 170.1 167.9 166.5 168.6 173.4 178.6 182.8
- Market Price Year End (fils)* 228 204 191 175 250 250 250 250
- P/E 14.7 12.0 16.6 19.6 19.9 15.3 12.7 11.0
- P/BV 1.61 1.20 1.14 1.05 1.48 1.44 1.40 1.37
* Market Price for 2003 onwards is the price as on Oct 10, 2003

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Global Research Equities - Bahrain Islamic Bank BISB Buy Rating October 2003

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Global Research Equities - Bahrain Islamic Bank BISB Buy Rating October 2003

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Bahrain Islamic Bank

Global Investment House stock market indices can be accessed

Omar M. El-Quqa, CFA

Bahrain Islamic Bank B.S.C.

● The bank is in the process of bank-wide computerisation project, aimed at automating

October 2003 Bahrain Islamic Bank B.S.C. 1

Bahrain Islamic Bank at a Glance

250 fils 230,000,000 57,500,000 250 fils / 170 fils

Year Operating Net Profit EPS Book ROAE P/E * P/BV *

2004F 10,223 3,750 16.3 173.4 9.54% 15.3 1.44

Share Price Performance Chart

General Index BISB Share price

General Index BISB Price

Source : Bahrain Stock Exchange

2 Bahrain Islamic Bank B.S.C. October 2003

Bahrain Islamic Bank (B.S.C.)

Shareholding & Liquidity

October 2003 Bahrain Islamic Bank B.S.C. 3

Table 01: Major Shareholders of BISB

Table 02: Liquidity of the BISB stock

Key Areas of Operations

4 Bahrain Islamic Bank B.S.C. October 2003

B) Treasury and Overseas Investments Division: The bank has a profitable

E) Risk Management: In compliance with the bank’s strategy designed to further

October 2003 Bahrain Islamic Bank B.S.C. 5

Profit Sharing Risks

6 Bahrain Islamic Bank B.S.C. October 2003

Strategy (New Developments)

- Focusing on the strengthening of the foundation strategies by high investments in

October 2003 Bahrain Islamic Bank B.S.C. 7

A) Core Banking Systems

B) Development of Financing Portfolio

8 Bahrain Islamic Bank B.S.C. October 2003

C) Human Resource Development

October 2003 Bahrain Islamic Bank B.S.C. 9

F) Establishing Liquidity Management Centre

G) Combating Money Laundering

To actively participate in the international efforts aimed at combating money

H) Other New Initiatives

10 Bahrain Islamic Bank B.S.C. October 2003

- The bank is planning to enhance financing portfolio by targeting strategic and

Other issues such as IT infrastructure, re-organisation, business process re-engineering,

October 2003 Bahrain Islamic Bank B.S.C. 11

12 Bahrain Islamic Bank B.S.C. October 2003

October 2003 Bahrain Islamic Bank B.S.C. 13

Figure 1: Total Assets and Restricted Investment Accounts of Consolidated

Table 3: Assets of Listed Commercial Banks, 2002

14 Bahrain Islamic Bank B.S.C. October 2003

Table 4: Net Profits of Listed Commercial Banks, 2002

There is expected to be a further growth as Islamic banks in Bahrain develop more

October 2003 Bahrain Islamic Bank B.S.C. 15

Credit Portfolio & Credit Income

Figure 2: Credit Portfolio of BISB as against Total Lending by

Source: Bahrain Monetary Agency & Company Reports

16 Bahrain Islamic Bank B.S.C. October 2003

The bank finances Murabaha transactions through buying a commodity which

Figure 3: Activity-wise Credit Portfolio of BISB

Source: Bank Reports

October 2003 Bahrain Islamic Bank B.S.C. 17

Figure 4: Income From Murabaha, Mudaraba & Musharaka Financing

Murabaha Musharaka Mudaraba