we continue to listen to our customers - al rajhi bank · saeed bin omar al issaea board of...

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Contents

Board of Directors

Board of Directors' report

Summary of year's activity

Consolidated financial statements

Notes to the financial statements

Auditor's report

Annual disclosure of Basel II

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We continue to listen to our customers

1 BOARD OF DIRECTORS

4

Suleiman bin Abdulaziz Al Rajhi

Abdullah bin Suleiman Al Rajhi

Abdullah bin Abdulaziz Al Rajhi

Salah bin Ali Aba Al Khail

Mohammed bin Abdulaziz Al Rajhi

Mohammed bin Abdullah Al Rajhi

Suleiman bin Saleh Al Rajhi

Ali bin Ahmed Al Shidi

Saeed bin Omar Al Issaea

Mohammed bin Othman Al Bishr

Abdulaziz bin Khaled Al Ghfayli

Chairman, Board of Directors

Managing Director & CEO

Board of Directors Member









BOARD OF DIRECTORS

2

We continue to unleash the potential within our community

2 BOARD OF DIRECTORS’ REPORT

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BOARD OF DIRECTORS’ REPORT

Distinguished Shareholders,May peace be upon you, The Board of Directors is pleased to share with you its annual report, which highlights the activities of the Bank for the fiscal year ending December 31, 2010. In this year the Bank succeeded, despite the global financial crisis, to achieve a noticeable growth and to record good results, which were in line with local economic trends. Throughout the year the Bank worked diligently to take ad-vantage of and benefit from the Kingdom’s positive growth, acting according to economic indicators reflecting the expansion and diversification of the national economic base. Moreover, the economic projections for the year, 2011 indicate continuous growth of all the various economic sectors, including the financial sector.

The Bank celebrated its 23rd anniversary in 2010 with many achievements that included developing banking services, providing financial products to meet the expectations of corporate and individual customers, and reinforcing the pioneering role of the Bank in its many activities.

1. Financial results In 2010, the Bank made SR 6,771 million in net profit, compared to the SR 6,767 million of 2009, which is an increase of 0.06%.The financing net income and return on investment amounted to SR 8,861 million compared to SR 8,390 million in 2009 with an increase of 5.6%.

The revenue on banking services got to SR 1,634 million in contrast to the 2009 amount of SR 1,427 million with an increase of over 14.5%. The total operating income amounted to SR 11,661 million compared to SR 11,505 million in 2009 with an increase of 1.4%.The financing portfolio diversified into a variety of trading products such as Mutajara, Istisnaa, Ijara, Murabaha and Installment Sale. Its net asset amounted to SR 120 billion in contrast to the SR 112 billion of 2009 with an increased rate of 7%. In the same con-text, the shareholders’ equity increased to SR 30 billion compared to SR 29 billion with a rise of 3.5%. The total assets also increased by 8.19% from SR 171 billion in 2009 to SR 185 billion.

At the same time, the customers’ balances got to SR 143 billion compared to the SR 123 billion of 2009 with an escalation of 16%, which reflects the customers’ confidence in the Bank and the remarkable growth of its market share in the banking sector.

In addition, the Bank achieved a high average return on assets of 4% while the return on shareholders’ equity amounted to 23% and the share’s profit reached SR 4.51 .

Total Assets SR Millions Assets Growth

Return on Assets

184,841

3.8%

9

Outside KSAInside KSA

(6,978)6,777,807

1-1 Impact of the Bank's major activitiesThe following analyzes the Bank’s total assets and liabilities, operating income, expenses and net income of the two years ending on December 31, 2010-2009.

1-2 Geographical analysis of revenuesThe Bank’s revenues are derived from both its local and international activities. The following table describes this fact:

Retail Corporate Treasury Investment Total

Total assets 82,397,368 47,568,053 54,072,844 802,645 184,840,910

Total liabilities 106,730,123 42,679,043 2,993,084 2,120,871 154,523,121

Total income from operations 7,881,379 2,380,340 1,117,325 282,088 11,661,132

Total operational expenses )3,183,364) )1,422,435) )76,485) )208,019) )4,890,303)

Net income 4,698,015 957,905 1,040,840 74,069 6,770,829

Retail Corporate Treasury Investment Total

Total assets 69,770,859 50,978,976 49,561,176 418,718 170,729,729


Total income from operations 7,153,842 2,167,224 1,721,536 462,690 11,505,292

Total operational expenses )3,007,312) )1,269,168) )237,421) )224,163) )4,738,064)

Net income 4,146,530 898,056 1,484,115 238,527 6,767,228

(SR’000)

(SR’000)

2010

2009

2010 2009 2008 2007 2006

Total assets 184,840,910 170,729,729 163,373,224 124,886,482 105,208,744

Net investment 148,952,109 139,286,715 142,287,129 104,875,445 89,563,188


Total equity 30,317,789 28,740,884 27,031,799 23,606,112 20,179,476

Deposits 143,064,037 122,861,840 116,611,043 89,725,167 73,397,980

Net profit 6,770,829 6,767,228 6,524,604 6,449,657 7,301,891

Share profit 4.51 4.51 4.35 4.30 5.41

Summary of net results of operations for the past five years (SR 000)

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3. Dividend distribution After deduction of all overhead expenses, Zakat and other costs, the Bank distributes its net profits under article 41 provision of the Bank and related laws and regulations. The Board of Directors, as a result of the outstanding performance and net profits of the present year, recommends that profits be distributed as follows:

Year's profit 6,770,829

Profit from last year 377,783

Interim dividend distribution during the first half of the year, at the rate of SR 1.25 per share )2,250,000)

Proposed dividend distribution during the second half of the year, at the rate of SR 1.50 per share )2,250,000)

Transfer to legal reserve )1,692,707)

General reserve -

Zakkat accruals )750,000)

Profit to be transferred to next year 205,905

(SR’000)

2. Subsidiary companies The Bank owns several affiliated companies that help manage its business activities and diversify its revenues; the following table shows the ownership percentages of these companies.

% ownership Activity’s typeCountry (place of operations)

Country (place of es-tablishment)

2010 2009 2010

Al Rajhi Development Co. Ltd., Riyadh 100% 99% Real estate KSA KSA

AL Rajhi Banking Investment Company Ltd., Malaysia 100% 100% Banking services Malaysia Malaysia

Al Rajhi Financial Services Company 99% 99% Financial services KSA KSA

AL Rajhi Banking Investment Company, Kuwait 100% - Banking services Kuwait KSA

AL Rajhi Banking Investment Company, Jordan 100% - Banking services Jordan KSA

Al Rajhi Takaful Agency 99% - Insurance services KSA KSA

6,771

0%

Net Income SR Millions Net Income Growth

11

4. Board of Directors The Board of Directors consists of 11 members elected by the Ordinary General Assembly every three years. Each member can be re-elected after completing his term, in accordance with the Bank’s regulations. According to the definitions mentioned in article 2 of the Corporate Governance Act of Saudi Arabia, issued by the Capital Market Authority, members are classified as follows:

4-1 Board of Directors members classification

Name Functions Membership type Membership in other joint stock companies

Suleiman bin Abdulaziz Al Rajhi Chairman, Board of Directors Non-executive member Yanbu Cement Companies NADEC Agricultural Company

Abdullah bin Suleiman Al Rajhi Managing Director & CEO Executive member Al Rajhi Takaful Agency

Suleiman bin Saleh Al Rajhi Board of Directors Non-executive member

Abdullah bin Abdulaziz Al Rajhi Board of Directors Non-executive member Tabuk Agricultural Company

Salah bin Ali Aba Al Khail Board of Directors Non-executive member

Mohammed bin Abdulaziz Al Rajhi Board of Directors Independent member National Gypsum Company

Mohammed bin Abdullah Al Rajhi Board of Directors Non-executive member Tabuk Agricultural Company

Ali bin Ahmed Al Shidi Board of Directors Independent member

Saeed bin Omar Al Issaea Board of Directors Independent member

Mohammed bin Othman Al Bishr Board of Directors Independent member

Abdulaziz bin Khaled Al Ghfayli Board of Directors Member )Reprensentative of General Or-ganization for Social Insurance)

Non-executive member Savola Company

4-2 The Board of Directors held the following 7 meetings in 2010

No. Date Number of attendees

% attended Absent members

1 18/01/2010 10 91% Mohammed bin Abdulaziz Al Rajhi2 27/02/2010 10 91% Mohammed bin Abdulaziz Al Rajhi3 16/05/2010 10 91% Mohammed bin Abdulaziz Al Rajhi4 23/06/2010 9 82% Mohammed bin Abdulaziz Al Rajhi & Saeed bin Omar Al Issaea5 08/08/2010 9 82% Mohammed bin Abdulaziz Al Rajhi & Saeed bin Omar Al Issaea6 10/10/2010 10 91% Mohammed bin Abdulaziz Al Rajhi7 14/12/2010 10 91% Mohammed bin Abdulaziz Al Rajhi

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Number of sessions attended by each member during 2010:

4-3 Board of Directors committeesThe Board of Directors executes its functions and missions through major committees formed by Board members, except the Audit Committee that consists of five non-executive independent Board members.

4-3-1 Executive Committee:The Executive Committee, headed by the CEO, carries out all the functions and authorities the Bank entrusts it with, such as the credit facilities approval, the amortizations, the cancelation of debts and all losses that go beyond the competence of the Bank’s high committee of credit, the selling of real estate guarantees destined to complicated facilities, and the approval of contracts that goes beyond the competence of the Bank’s working committees and the CEO. It also studies all matters that require a Board recommendation or decision.

The Committee held 7 sessions in 2010 and its members are: Suleiman bin Abdulaziz Al Rajhi, Abdullah bin Suleiman Al Rajhi, Salah bin Ali Aba AlKhail, Suleiman bin Saleh Al Rajhi, Ahmed bin Saleh Al Khlaify (as secretary).

4-3-2 The Remuneration and Rewards Committee:This Committee is formed by 3 members and is in charge of functions assigned to it through executive by-laws. The members are: Suleiman bin Saleh Al Rajhi (as President), Salah bin Ali Aba AlKhail and Abdulaziz Al Ghfayli.

The Remuneration & Rewards Committee’s main function is to recommend the selection of Board members, Committee members or vacancies according to the adopted policies and criteria and the designation of senior executives, and to determine their salaries and remunerations. It also conducts the annual review to define the required needs of new skilled and suitable members to the Board as well as its weak and strong aspects and presents recommendations regarding them. This Committee held 7 sessions in 2010.

4-3-3 Audit Committee:The Audit Committee plays a fundamental role in helping the Board of Directors meet its regulatory financial and accounting ob-ligations. In addition, it performs all matters related to financial audit, and coordinates with external auditors. It also works on improving and developing supervision norms and subsequently the protection of shareholders and investors' equity through the following:

Study of consolidated financial statements, accountability policies, internal supervision system, recommendations, management of internal review, reports study, recommendation to designate external auditors, study their plans, define their salaries and de-cide on their dismissal.

Name Attended sessions

Suleiman bin Abdulaziz Al Rajhi Seven sessions

Abdullah bin Suleiman Al Rajhi Seven sessions

Suleiman bin Saleh Al Rajhi Seven sessions

Abdullah bin Abdulaziz Al Rajhi Seven sessions

Salah bin Ali Aba Al Khail Seven sessions

Mohammed bin Abdulaziz Al Rajhi -

Mohammed bin Abdullah Al Rajhi Seven sessions

Ali bin Ahmed Al Shidi Seven sessions

Saeed bin Omar Al Issaea Five sessions

Mohammed bin Othman Al Bishr Seven sessions

Abdulaziz bin Khaled Al Ghfayli Seven sessions

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The Audit Committee held 5 sessions in 2010 and its members consist of: Suleiman bin Saleh Al Rajhi (as President), Sultan bin Mohamed Al Sultan, Ali bin Ahmad Al Shaddi, Abdullah bin Ibrahim Al Sayyari, Abdulrahman bin Saleh Al Fiz.

4-4 Ownership of Board members and senior executives

• Description of changes in shares’ ownership for the CEO, Board members and their families (wives and children)

No. Name No. of shares beginning of year

No. of shares end of year

Net change % of change

1 Suleiman bin Abdulaziz Al Rajhi 374,067,025 324,880,431 -49,186,594 -13.15%

2 Abdullah bin Suleiman Al Rajhi 30,165,983 30,165,983 0 0%

3 Abdullah bin Abdulaziz Al Rajhi 89,808,734 89,903,020 94,286 0.10%

4 Salah bin Ali Aba Al Khail 1,260,000 1,260,000 0 0%

5 Mohammed bin Abdulaziz Al Rajhi 125,849 44,004 -81,845 -65.03%

6 Mohammed bin Abdullah Al Rajhi 17,418 16,333 -1,085 -6.23%

7 Suleiman bin Saleh Al Rajhi 4,141 54,141 50,000 1207.44%

8 Ali bin Ahmed Al Shidi 278,111 278,111 0 0%

9 Saeed bin Omar Al Issaea 394,722 1,889,355 1,494,633 378.65%

10 Mohammed bin Othman Al Bishr 504,777 399,777 -105,000 -20.80%

11 Abdulaziz bin Khaled Al Ghfayli 0 0 0 0%

12 General Organization for Social Insurance

148,694,166 148,694,166 0 0%

No. Name No. of shares beginning of year

No. of shares end of year

Net change

% of change

1 Saeed Mohammed Al Ghamdi 0 1,894 1,894 0%

2 Waleed Abdullah Al Moqbel 0 0 0 0%

3 Khaldon Abdullah Al Fakhri Assumed his position after the beginning of the year

0 0 0%

4 Dori Anand 0 1,894 - 0%

5 Adnan Abdullah Al Olayan Assumed his position after the beginning of the year

633 - 0%

6 Damyan Philippe White 0 0 0 0%

7 Suleiman Abdulaziz Al Zabn Assumed his position after the beginning of the year

0 - -

8 Constantinos Constantinedos 0 1,704 1,704 0%

9 Ahmed Saleh Al Kholifi 0 0 0 0%

10 Joseph Qamblo 1,150 Resigned before end of year

11 Martin Dicederio 0 Resigned before end of year

• Description of changes in shares’ ownership for the CEO, Board members and their families (wives and children)

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5. Remunerations and compensationsThe Bank pays the expenses and remunerations of Board members who attend the sessions, as well as that of the subsidiary com-mittees under article 19 provision of the Bank Article of Association. It also pays salaries, remunerations and compensations to senior executives in accordance with their respective contracts and SAMA list of remunerations and compensations. The following is a detailed description of all expenses, remunerations and salaries paid to Board members and the seven senior executives of the Bank, including the CEO and the Financial Director.

6. Penalties and fines imposed on the BankThe Bank was not subjected to any significant penalty procedures or fines in 2010. Mostly, all penalties imposed were related to operational processes and were successfully treated.

7. Contracts with related partiesContrary to information mentioned in note no. (29), the Board members, CEO, Deputy CEO and the Financial Director have no other substantial interests.

Description Executive Board Members

Non-executive Board Members

Senior Executives)including CEO & Financial Director)

Salaries & remunerations 3,680,500 0 5,129,212

Allowances 36,000 138,000 1,422,199

Periodic bonuses 2,598,000 2,400,000 5,712,605

Incentive plans 0 0 604,120

Other remunerations or benefits paid on a monthly or annual basis

0 0 0

Total 6,314,500 2,538,000 12,868,136

9%

154,523

Liabilities GrowthTotal Liabilities SR Millions

Total Owners' Equity SR Millions Owners' Equity Growth

5%

30,318

6%

15%17%

50%

15

8. Regulatory paymentsThey consist of Zakat due on shareholders; amounts paid to the general organization for social insurance; deductible debts im-posed on foreign investors. The following table explains the regulatory payments:

9. Employee benefits and plansThe employees’ benefits and plans are paid in the Bank during or at the end of their services, according to Saudi Labour Laws and Bank policies. The balance for the allocations of end of service reached SR 477,301 million at the end of 2010. The Bank also offers a number of benefits to its employees, such as:

• Employees’ Fund:The Employees’ Fund is treated as an autonomous entity with independent financial statements that are therefore, not included in the consolidated financial statements of the Bank. This Fund grants a personal soft loan to employees, up to six fixed salaries without any profit margin, in order for the employees to develop their relationships with the Bank. Moreover, the Fund offers hu-manitarian contributions to cases not covered by the Bank’s HR policies but after the Fund’s approval.

• The program of granting Bank free shares to the Fund:It is a special program dedicated to the Bank’s employees and its affiliated local companies. It offers free shares to seniors judged by the Board as important members of HR that should be retained. This action enhances the long-term functional relationships and provides suitable incentives to recognize their distinguished contribution.

• The Employees’ Fund participation program to own sharesIt invests the amount deducted from the employee’s salary during the program term in an investment fund. If the employee contin-ues his participation untill the end of the program term, the Bank promises to enable him to own shares according to their respec-tive prices at the beginning of the program and to the number possible to buy using the original participation amount, along with getting the profit of his participation in the commodities fund, if any. However, if the employee canceled his participation during the program, he gets the total of his investment in the commodities fund, if any.

10. Accounting recordsThe Board of Directors assures the following:

• Accounting records have been properly prepared in accordance with applicable accounting policies and criteria• There are no doubts regarding the Bank’s capability to carry on with its activities

Party (SR,000)

Zakat from shareholders 750,000

General Organization for Social Insurance 151,461

Taxes or fees or any other due payments 5,855

T0tal907,316

22.9%

Return on Shareholders' Equity

16

• There are no loans on the Bank, whether due on demand or other• There is no contract where the Bank is represented as a party and has or had any substantial interest for any of the Board members or the CEO or the Financial Director or any other related person, except what is mentioned as note no. 29 in the annual report.

11. Annual audit results of the Internal Control System’s effectiveness• The Internal Control System has been properly prepared to meet the required effectiveness due to the following:

- Existence of departments specialized in fields of audit, compliance control and risk management- Existence of the Audit Committee in order to ensure the adoption of the best governance practices and to contribute to reinforcing

the independence of internal and external auditors. This Committee, by receiving regular reports about the departments’ activi-ties that need auditing, provides a continuous assessment of the Internal Control System and its effectiveness

• Internal Control Management supervises the efficiency and sufficiency of the Internal Control System based on an annual plan approved by the Audit Committee. At the same time, some aspects of Internal Control are regularly supervised by the auditors and through SAMA tests.• Great attention is paid to the Internal Control System's results and every remark mentioned is seriously taken into consideration in order to avoid any repetitive mistakes.

12. Future risks for the fiscal year 2011Despite the global financial crisis, it is expected for the Saudi economy to witness a positive growth in 2011. This is thanks to the international financial projections that reflect a containment of inflation, budget surplus and increase of oil prices in addition to the governmental spending, which remains a vital trigger of growth, along with the limited contribution of the private sector. This contribution counts on the availability of Banking Credit and the confidence margin of businessmen and consumers. The increase of oil prices is due to the strong demand of the growing markets, despite the expected calm on the level of internationally devel-oped economies. Thus, it is expected for Al Rajhi Bank to have promising chances of growth thanks to its capabilities that enable it to benefit from its local privileges. The Bank will continue to focus on increasing its customers’ base by promoting both banking sectors, retail and corporate, expanding its international presence and offering products suitable to the customers’ needs. The Bank is also going to enhance its services by expanding its communication channels with the customers through the branches’ network, the ATMs, the call centers and e-services etc.

Based on what is mentioned above, Al Rajhi Bank is expected to face financial risks to achieve these activities that require analysis, assessment and management of one type or more financial risks. This is why the fact of being aware of the banking risks, which are inevitable when it comes to entering the stock market, is substantial for the Bank.

In this context, the Bank is asked to balance its potential risks/returns and to minimize any given negative aspect that might affect its financial performance. It usually sets policies, procedures and regulations related to risks management in order to define and analyze these risks then set the right procedures to minimize them and review them permanently to meet all the market and prod-uct changes and adopt the best banking practices. The Credit and Risk Management will strive to manage the risks according to the Board's adopted policies and continue to define and assess the financial risks in collaboration with all the Bank's departments. Credit risks, operational risks, liquidity risks and market risks, which also include currency risks, and profit and rate risks are the most important risks defined by the Bank.

17%

140,430

Customer Deposits SR Millions Customer Deposits Growth

17

13. The Corporate Governance ActIn general, the Bank works under the terms, by-laws and guidelines of the Corporate Governance Act, which is issued by the Capital Market Authority. The Bank's management has applied the Act’s obligatory by-laws and most of the guidelines. Some of the guide-lines mentioned in the Act that were not applied by the Bank in 2010 are as follows:

The Bank is actually preparing its own Governance Act with respect to the requirements of the Governance Act issued by the Capital Market Authority. It is also adopting a new policy of remunerations and compensations to meet the respective SAMA Act issued in mid 2010. This policy is considered one of the fundamental components the Bank depends on while applying the Governance system.

Moreover, the Bank will prepare a written policy that includes clear criteria for the Board and reflects the Bank’s financial and legal aspects to be shared with the members. This policy is expected to be effective after the General Assembly’s approval (God willing).

The Bank is preparing another policy to organize relations with business owners. It is meant to be comprehensive, meaningful, able to protect all fields and reflect the Bank’s policy concerning Social Responsibility, which is one of the main pillars of the Bank’s current activities. It is impotant to note that the Bank already has an independent department “Social Service Department”, which is related to the CEO and focuses on enhancing the Bank’s social role.

The Bank’s main system decides on the right of normal voting, according to the Saudi corporate system. This is why it did not yet work in the Accumulative Voting requirements, since it needs the extraordinary General Assembly’s approval because it is consid-ered a change in the main system. Besides, the Bank cannot oblige the shareholders, who have a legal personal and act on behalf of others, to disclose their voting policies. In addition, the main system does not mention the right for shareholders to get a part of the corporate assets in case of liquidation, since everything related to their rights are subject to the special regulations of every corporation and liquidation.

The date of the General Assembly was announced 21 calender days before its meeting and the invitation was published on Tadawul (the Saudi Financial Market) website and in two renowned newspapers. In 2011, the Bank will respect the decided period of time, which is 20 working days, and publish the invitation for the General Assembly on its official website (God willing).

14. AuditorsDuring the Ordinary General Assembly of shareholders, dated 27/02/2010 G, Ernest & Young and Price Waterhouse Coopers have been re-appointed auditors of the Bank’s accounts for the fiscal year of 2010. The next Ordinary General Assembly is going to re-designate the current auditors or choose other ones for the fiscal year of 2011, (God willing), based on a recommendation from the Audit Committee.

15. Conclusion The Board of Directors is pleased to express their pride in the positive results achieved by the Bank in 2010. On this occasion, they want to express their appreciation to the Custodian of the two Holy Mosques, King Abdullah bin Abdulaziz Al Saud; the Crown Prince, the Deputy Premier and Minister of Defense & Aviation and Inspector General, HRH Prince Sultan bin Abdulaziz Al Saud; the Crown Prince, the second Deputy Premier and Minister of Interior, HRH Prince Naif bin Abdulaziz Al Saud; and to our prudent government.

The Board would also like to express their sincere appreciation to the Ministry of Finance, Ministry of Commerce & Industry, Saudi Arabian Monetary Agency (SAMA) and the Capital Market Authority for their constant cooperation and support in developing the banking sector, which manifested itself in the reinforcement of the national economy.

The Board members present their gratitude to their eminence the Chairman and the members of the Bank’s Shariah Board for their efforts and contributions in the form of advice, patience and explanations on all issues presented to them with regards to the banking and investment activities and services that the Bank offers its customers. The Board wishes that Almighty Allah would best reward them for their efforts.

The Board would like to cease this opportunity to express their gratitude and appreciation to the honorable shareholders, cor-respondents and customers for their support, trust and cooperation, which led to the achievement of further advancement and prosperity for the Bank.

Last, but not least, the Board would like to present their sincere appreciation to all the loyal Bank employees for their genuine ef-forts and devotion in accomplishing their obligations and tasks.

Board of Directors

Our status as a leading bank stems from our customers' trust

3SUMMARY OF THE YEAR’S ACTIVITY

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SUMMARY OF THE YEAR’S ACTIVITY

Shariah GroupSince its early inception, the Bank established an independent Shariah Board, formed and ratified by the Constituent General As-sembly with the objective of ensuring that all Bank activities are subject to the approval of said Board and subsequently exercising the necessary controls through the Shariah Control Department that reports directly to this Board.

Since its commencement and up to the close of 2010, decisions issued by the Shariah Board amounted to (931) decisions, of which (30) were issued in the course of this year alone. During the year 2010, the Board also held (38) sessions to approve a large number of contracts, agreements and forms, and to tackle a number of remarks while also responding to a large number of inquiries.

The Shariah Group is comprised of the following departments:• Secretariat Department: The secretariat of the Shariah Board is in charge of preparing subjects of discussion to be presented to that Board and preparing for Board meetings. During this year, the Shariah Board prepared more than (260) subjects for presen-tation and deliberation. Additionally, the Board’s Secretariat has developed the necessary tools for juristic research through the implementation of a number of accounting application softwares in this field.

• Juristic Control Department: The Juristic Control Department is in charge of supervising the activities of the Bank with regards to verifying the implementation of the Shariah Board’s decisions. In this regard, the Juristic Control Department conducted more than (210) controlled visits to the Bank’s Head Office and branches, transfer centers, trading rooms, dealing rooms, etc. The Juristic Control Department adopted a comprehensive awareness and training project and made it available to all Bank employees. The Department put together an implementation policy based on a number of training sessions, awareness publications and the issu-ance of juristic publications.

Retail Banking GroupThe Retail Banking Group offers a wide spectrum of financing products and banking services to individual customers, including current accounts, Personal Finance, Home Finance and Car Finance products. These products and services are provided through the Bank’s Kingdom wide branch network.

In 2010, the Bank gave more focus to the affluent segment where more Affluent lounges were deployed and renovated. Also, to cope with the increasing number of customers joining the segment, more Relationship Managers and VIP Tellers were hired.

In the course of expanding the Bank’s branch network, 9 new branches were opened, while 36 existing branches were renovated and developed.

Tahweel Al Rajhi is another important component of the retail banking offerings. Tahweel offers remittance products and services to a broad customer base. These remittance services cover more than 52 destination countries. During 2010, 9 new dedicated remit-tance centers were opened.

The usage of Al Mubasher online for retail customers increased and the Bank maintained its leadership in the local market. A total of 1.2 million customers performed over 30 million transactions. The usage of Al Rajhi SMS banking increased to record over 325,000 users, making it the most used SMS Banking application in the Kingdom. The Bank successfully implemented SAMA mandated multifactor authentication for Al Mubasher online banking. The solution provided an extra layer of security to both domestic users and those beyond the boundaries of the Kingdom. Being the largest channel provider in the Kingdom, the Bank introduced more than 300 new ATMs and 3000 Point of Sale terminals. This year, transactions worth SR 17 billion were traded on the Al Rajhi POS network. The Bank has also earned the Payment Card Industry’s PCI DSS Certification, which is the international standard for card payment security.

To enhance and foster our communication with customers, we introduced the following in 2010:• A new sales and service model in retail branches using TCR technology• The ‘Passion to Serve’ Program for retail branches

Corporate Banking GroupAl Rajhi Bank is a market pioneer for supplying innovative Shariah compliant Trade Finance solutions. During the year 2010, cus-

21

tomers experienced superb service standards delivered via Al Rajhi Bank’s widely spread physical distribution channels. Existing products documentations and processes were simplified for ease of use. New Trade Finance products (Import Finance for Docu-mentary Collections, Import Finance for Documentary Letters of Credit, Pre-shipment and Post-shipment Export Finance) added to complete the overall Trade Finance supply chain cycle. Moreover, the sophisticated e-Trade platform launched last year upgraded to run a complete trade cycle support. The Bank's cus-tomers can initiate the full range of Trade Finance transactions including Letters of Credit, Guarantees, collections, remittances and finance. Cash Management succeeded to increase the number of e-Corporate transactions to more than 1,000,000, thereby doubling the number of transactions from the preceding year.The number of new customers in payroll, payroll cards and e-Corporate has more than doubled from the previous year.Electronic exit entry visas were added to e-Corporate with the introduction of Muqeem services for corporate customers.

The Financial Institution (FI) Department plays an important role in managing the international relationships we have with our global partners, 250 correspondent banks, for a smooth business traffic flow in both directions. International trade being a focus area, FI marketed our trade products with correspondent banks by focusing on the enhancement of our market share in the Export LC business and our Export Trade has shown an upward trend. The new strategy of FI is to finance the bilateral trade of the Kingdom of Saudi Arabia through Shariah compliant suppliers/buyers’ credit products and create trade backed asset books.

A new business unit has been created to develop the relationships and to provide banking solutions to Non-bank Financial In-stitutions (NBFIs), such as insurance companies, brokerage firms, investment companies, semi-government institutions, foreign embassies, etc.

Realizing the importance of the SME segment and looking towards growing SMEs in the global scenario, the SME Banking Depart-ment at Al Rajhi Bank developed models to enable faster customer selection for the “Kafalah” Program, by the Saudi Industrial De-velopment Fund (SIDF). A simplified credit process was put in place to track deal processing, improve the overall turnaround time and serve the customer better. This has resulted in substantial increases in the number of “Kafalah” done in 2010 compared to 2009.

Treasury GroupThe Treasury Group offers a range of funding and foreign exchange services to their customers and other departments within the Bank. The Group plays a leading role in local, regional and offshore foreign exchange markets, and has achieved significant market shares as a result of the Bank’s strong retail and growing corporate banking franchises.

The Funding and Investment Team focuses on satisfying the Bank’s market funding requirements and implementing strategies to manage liquidity. The Team takes advantage of the comparative margin of profit between accrued assets and liabilities in an effective manner. This is done with the objective of optimizing profitability and satisfying prudential liquidity standards. The low profit rate environment of 2010 did not support the yields enjoyed in earlier years, but was to some extent mitigated with selective investments and market timings.

The Cash Management Team manages the Bank’s own accounts in over 40 different countries, which contributes to providing a seamless remittance and Trade Finance services for retail and corporate customers.The Foreign Exchange trading desk provides the sales force with the competitive rates that assist the Bank in maintaining a high market share.

During the year 2010, the Treasury Sales Team focused on building new corporate relationships while maintaining its dedicated service to existing customers. The Team seeks to establish long-term relationships with its loyal client base, offering them high quality services based on a philosophy of partnership that supports the near and long-term needs of customer businesses. It pro-vides its customers with a timely supply of information on market movements and events by e-mail, short messages (SMS) and telephone calls. This keeps our customers acquainted with the market and assists them in making timely decisions.

AlRajhi CapitalAl Rajhi Capital comprises the following three core divisions: Asset Management, Brokerage and Investment Banking.ARC Asset Management specializes in investment strategies for institutions, pension funds, foundations and individual investors. They have established track records in strategies across the risk/return spectrum including equity, commodity Murabaha and multi asset class solutions.

The current economic conditions, rising oil prices, strengthening corporate results and increased government spending drove MENA markets to perform better than peer markets.

22

The Assets Management business at Al Rajhi Capital has recorded a successful year, where overall growth of assets under manage-ment increased by 99.8% during the year. The performances of all in-house managed funds have been positive and generating alpha, i.e. outperforming the relevant benchmarks. Focused sales approach, strong performance and enhanced services resulted in the substantial growth of assets under management.

Al Rajhi Capital launched two new funds for investors in KSA, while one fund was launched in Luxembourg during the year. The Luxembourg fund will provide access to the Saudi equity market for international investors who wish to participate through a managed fund.

While the performance of products is consistent and moving forward, focus continues to be on expanding the product range with innovative new mutual funds and discretionary portfolio management solutions for high net worth and institutional investors. The ARC Brokerage Division market share has increased by more than 10% from year to year in 2010. This is due to a range of cus-tomer-focused initiatives implemented during the year, which allowed ARC to achieve the 1st position in the Saudi stock exchange for 6 months in 2010.

A range of planned initiatives was implemented in 2010 focusing on Internet registration modules, Murabaha enhancement and the optimization of investment centers. The plan focused on services and customers’ trading functions based on their needs and demands. A 60% increase in Internet users and 40% increase in Murabaha production year to year is evidence that ARC Brokerage has appropriately enhanced its e-Channels modules, which opened up a large range of trading functions for its customers.The Investment Banking vertical at ARC provides strategic financial advisory services to a selected target market. Services offered include advisory and arranging services for fund raisings, covering the entire debt and equity spectrum. The business also supplies advisory services for M&A activity and is an established player in lead managing, underwriting and receiving bankroll for public offerings (IPOs and rights issues).

During 2010, a combined value of SR 951 million was underwritten. This translates into market shares in excess of 22%.ARC maintained its position as the leading receiving Bank in terms of subscriber numbers and amounts received for initial public offerings and rights issues during 2010.

Performance overview 2010The financial year 2010 saw the Bank improving its performance, recording a higher profit compared to the previous year.

The Bank’s achievement, through its participation in MEPS, had enabled it to offer greater banking conveniences to its customers via wider transaction touch points and cash withdrawal facilities. The Bank is operating in multiple segments and the launch of the recent “Sukuk” shall make the Bank foray into the Islamic debt capital market and allow them to build intermediate tools to create a pipeline for the easy flow of funds from the Middle East to Malaysia.

The launch of the Affluent Banking Centre in 2010’s last quarter resulted in the Bank offering deposits, delivering on financing and investment needs under one roof to its Affluent customers. Despite the challenges and deterioration in some corporate financing, the Bank has achieved its milestone in reporting an improved performance during the year 2010.

The year 2011 will see the expansion of the Bank’s footprints with the opening of another 10 branches outside (Klang Valley). How-ever, it will continue to face keen competition amid further industry liberalization and the potential new bank entrants and two mega banks, which will add to the already competitive landscape.

The economies in Malaysia and major countries are expected to grow strongly in 2011. This shall provide an opportunity for the Bank to continue to leverage its growth engines with emphasis on strengthening asset quality and to grow its business with focus on selected target markets. We also seek to increase market share in the business segments to increase revenue whilst maintaining margins.

Total Finance & Investment SR Millions Investment Growth

6%

24%27%

3%7%

68,635

85,441

108,775 112,148120,065

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Financial GroupThe Financial Group sets the Bank’s financial policies and procedures according to the criteria of local and international account-ability. It abides by all the systems and instructions issued by SAMA, along with the application of the Bank’s internal regulations, under its general policy and Shariah.

The Financial Group encompasses the following departments: the Financial & Regular Reports Department, the Administrative Reports Department, the Accounting Department, the Financial Supervision Department and the Corporate Supervision Depart-ment.The Group continued its work and efforts to establish the best systems, policies, procedures, and financial and administrative practices. To do so, it focused particularly on computerizing the procedures’ environment, which in turn decreased manual inter-ference.

Believing in its effective role to realize the success of the Bank’s different sectors, the Financial Group offered its complete and nec-essary support to study the policy relevant to improving the Bank’s products. It closely observes the external financial procedures that affect the Bank’s productivity and profit and suggests the necessary corrective means.

Credit & Risk Management GroupThe various financial activities and products, as well as the increasing competitive rate, made it necessary for the Bank to apply effective risk management. The Board of Directors, therefore, deals with Risk Management as a major banking activity due to its direct effect on the Bank’s work, performance and future success.

The Credit & Risk Management Group was founded in order to be able to apply Effective Risk Management, which is an integral part of the Bank’s sensible management. The Croup achieved a series of development activities vital to the size and nature of the Bank’s work.

The Bank adopted “three defense plans” in its risk management strategy. The Senior Management Department is responsible of applying the risks control policies in general. The Risk Management Department has to assume the responsibility of all the Bank’s entities, while each entity takes on the responsibility of its own risks. This leads to the efficient identification, analysis, evaluation and control of any risk the Bank may encounter.

The Bank will continue its strategy to improve the practices of risk management in order to perfectly comply with SAMA and Basel II requirements and the international banking practices. The Bank will also strive to improve its potential risk revenue/return, maintain its leading position in market, achieve profit rates under the criteria of “levels of acceptable risks” and in accordance with the Board of Directors’ instructions.

Strategy & International Business Development GroupThe long-term vision of Al Rajhi Bank is to become a leading regional financial services organization and deliver strong shareholder value. The Group’s Management is anticipating the continued presence of growth opportunities for institutions that have a strong capital base and the right business focus and delivery commitment. In that regard, the Group’s future strategy is based on the fol-lowing goals:• Expand and diversify its Retail Banking services so as to solidify the Bank’s leadership position• Achieve a leading position in Corporate Banking while addressing the needs of different segments by offering the right set of

products and services for each one• Enhance the technology platforms by investing in new technologies that will support strong customer acquisition and retention• Create a closer relationship with the Bank’s clients and strive to offer efficient and high quality services at all times• Develop distinctive capabilities in Performance and Risk Management to support the anticipated business growth

In the year 2010, the Bank extended its commercial operations to Kuwait. In addition, the team is at the final stage of setting up its presence in Jordan, where commercial operations will start by the end of the first quarter of 2011. In the coming years, it will focus on stabilizing these operations and turning them profitable while continuing to offer regional corporate and individual clients integrated financial services. With the addition of Kuwait and Jordan, the Bank will be operating in 3 foreign countries and thus an International Business Group is being set up.

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Human ResourcesAl Rajhi Bank still records the lowest overall turnover rate, 6%, in the banking sector in Saudi Arabia.

The third element of the Saudization plan was the commencement of ‘LEAD 2’ (Leadership Evaluation and Development Program 2). Where 52 young Saudi managers with the potential to grow within the Bank were selected and who conducted the ’Develop-ment Centre’. Based on the outcome of this diagnostic, a two and a half year development plan was designed, which began in August and will continue until mid 2012. The LEAD program exposes managers to a series of leadership, managerial, technical and cross-functional programs to be conducted by world-class facilitators and organizations.The impetus for the ‘Passion to Serve’ campaign was given by the training team to rejuvenate our employees’ drive to serve our customers professionally and efficiently through branch networks. The Training Department meticulously planned and expedited training programs to enhance employee skills and familiarize Kuwait’s new team to help them kick-start their operations.

In order to increase the drive to enhance productivity and service quality standards by Human Resources, a number of new mea-sures were introduced this year: the full-scale launch of the Internal Communication Portal “Bawabaty”, a number of e-learning modules, a major exercise to revise the grading structure resulted in broad banding the 18 grades into 8 bands, which streamlined and simplified a number of processes.

Shared servicesWithin Shared Services we are responsible for the following areas of operation: IT, Call Centres, Property Management and Secu-rity, Banking Operations and Cash Centres, purchasing on behalf of the Bank and the Bank's overall Disaster Recovery and Busi-ness Continuity programs.

Our main focus has been in proving a stable and secure platform to support the business growth. Throughout the year we contin-ued to roll out the ITIL framework to support our IT operations, this has led to significant improvement in all our available system whilst at the same time supporting record levels of transactions across all of our customer channels.

In 2010 we completed fitting out our Business Continuity capabilities and are now able to run critical functions at our Disaster Re-covery site in the event our Head Office location suffers a disaster.

In the same year, we began the design of a new production data centre and operations centre to be built over the next 2 years. This new data centre is being designed to meet the future needs of the Bank for the next 15- 20 years.

In our Call Centre we handled more than 90 million calls in 2010, with service levels well above standard industry norms.

Within IT, key projects delivered in 2010 included the Payment Card Certification project, ensuring a more secure and safe environ-ment for our customers, the implementation of the e-Remittance Card, the roll out of new industry EMV standards for credit and debit cards, the systems and infrastructure to support Kuwait, as well as enhancements to our infrastructure to support the overall business growth.

In addition, we continued our program to electronically scan key banking lending documents with a another 80 million documents scanned.

Compliance Department Our role in the Compliance Department is to help our Bank achieve its goals while following the Regulators’ requirements to pro-tect the Bank from violations and penalties. This is reflected in our motto “Comply to protect our growth!”

The year 2010 was full of achievements for the Compliance Department in terms of increasing the level of compliance with the rules and regulations in the Bank. The Department has adopted a hands-on approach in dealing with compliance related initiatives and areas of improvement. Owning and delivering the message “Compliance is every employee’s responsibility” through all the appro-priate channels and working as a team with the relevant Departments to implement that message achieved this.

Our approach to propagate compliance throughout the Bank has two dimensions: preventive and corrective. On the preventive dimension, the Department has launched several initiatives to promote the compliance culture. This campaign has 4 pillars: es-tablishing a comprehensive database archive for all SAMA requirements, sending compliance awareness messages, providing e-Learning training on compliance and Anti-money Laundering (AML) to all Bank employees and establishing an interface with the whole Bank to receive compliance related inquiries and requests through the e-mail address.

Moreover, new requirements from SAMA were managed and treated as projects. High levels of compliance were achieved in the e-Banking rules and multi-factor authentication by assigning a compliance project manager to lead the implementation of these

25

rules. A Compliance Program was also launched through a collaborative system to manage the Program interactively and to obtain evidence.

On the corrective dimension, when the Department received violations from SAMA, it held root cause analysis sessions with the relevant Departments to drive recommendations and agree on corrective action plans. The Department has followed up on the execution of these plans and updated Senior Management on the progress of completing the agreed upon actions.

The Department will increase its efforts towards value creation as additional team members join to complement the initiatives started by the existing team.

Anti-money Laundering DepartmentThe AML Department supervises all the Bank’s customer transactions in order to avoid any illegal or suspicious dealings. It aims to safeguard the integrity of the national economy and provide the social fairness necessary to protect the customers’ rights.

The Department also contributes by establishing the policies and procedures that help in the implementation of all the regulations issued by the National Compliance Authorities.

It regularly explores the latest local and international developments in combating money laundering and terrorism finance, as well as ways to apply them in daily practices.

The Department renovated all the systems that help in detecting money laundering and terrorism finance transactions. It adopted a “self-test” approach to make sure all the Bank’s departments are abiding by the updated policies, systems and regulations.

Based on the above mentioned, the Department offered its complete support to all the external branches in a way that ensures the implementation of systems, internal and external regulations and instructions, as well as the prevention of any conflict of interest.The AML Department offers continuous training to its own employees, in addition to the necessary general training of the Bank’s employees.

CSR summary report - 2010The Bank intensified the meaning behind and the application of the comprehensive social responsibility concept inside and out-side its departments. It also deepened awareness of the culture of individual social responsibility based on a variety of programs tailored to meet a clear social care policy. In this context, the Bank realized a lot of distinguished achievements and received sev-eral rewards and honors.

From within the work environment, the Bank organized different events relevant to social care awareness, electricity conservation campaigns, water use campaigns and paper waste recycling. It also contributed to increasing the employment rate of Saudization as compared to the last two years.

Moreover, the Bank is honored to have realized accomplishments in other different social responsibility fields by sponsoring so-cial care events; enhancing students’ skills; supporting small enterprises for producing families; participating in cultural events; contributing to decreasing the unemployment rate by handling training programs for recruitment purposes; encouraging female talents; sponsoring reading programs for children; organizing special needs programs; distance hiring of women; as well as imple-menting summer training for high school students and cooperative training with educational institutions.

We continue to invest intomorrow’s technology today

4 CONSOLIDATED FINANCIAL STATEMENTS

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CONSOLIDATED FINANCIAL STATEMENTS

Notes 2010 2009

ASSETS:

Cash and balances with Saudi Arabian Monetary Agency (“SAMA”)

4 19,475,196 11,413,020

Due from banks and other financial institutions 5 11,117,539 14,334,760

Financing, net 6 120,064,667 112,147,659

Investments 7 28,887,442 27,139,056

Customer debit current accounts, net 8 312,062 695,791

Property and equipment, net 9 3,394,863 3,182,157

Other assets, net 10 1,589,141 1,817,286

Total assets 184,840,910 170,729,729

LIABILITIES AND SHAREHOLDERS’ EQUITY:

LIABILITIES:Due to banks and other financial institutions 11 5,414,181 6,102,073

Customer deposits 12 143,064,037 122,861,840

Other liabilities 13 6,044,903 13,024,932

Total liabilities 154,523,121 141,988,845

SHAREHOLDERS’ EQUITY:

Share capital 14 15,000,000 15,000,000

Statutory reserve 15 12,111,884 10,419,177

Retained earnings 205,905 744,248

Proposed gross dividends 23 3,000,000 2,577,459

Total shareholders’ equity 30,317,789 28,740,884

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 184,840,910 170,729,729

AL RAJHI BANKING AND INVESTMENT CORPORATIONCONSOLIDATED STATEMENTS OF FINANCIAL POSITION

OF THE YEARS ENDED DECEMBER 31, 2010 AND 2009

The accompanying notes from 1 to 38 form an integral part of these consolidated financial statements.

(SR’000)

29

AL RAJHI BANKING AND INVESTMENT CORPORATIONCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009


(SR’000)

Notes 2010 2009

INCOME:

Gross financing income 9,091,350 8,959,963

Income paid to customers on time investments (230,348) (529,816)

Income paid on syndicated Murabaha financing from banks - (40,447)

Net financing income17 8,861,002 8,389,700

Investments income 18 250,031 964,332

Fees from banking services, net 19 1,634,384 1,427,305

Exchange income, net 636,672 582,322

Other operating income 20 279,043 141,633

Total operating income 11,661,132 11,505,292

EXPENSES:

Salaries and employee related benefits 21 1,731,529 1,718,725

Rent and premises related expenses 154,686 144,438

Impairment charge for financing 6-2 1,908,818 1,760,727

Other general and administrative expenses 742,941 788,584

Depreciation and amortization 349,239 322,619

Board of directors’ remuneration 29 3,090 2,971

Total operating expenses 4,890,303 4,738,064

Net Income 6,770,829 6,767,228

COMPREHENSIVE INCOME - -

Net comprehensive income 6,770,829 6,767,228

Weighted average number of shares outstanding 14 & 22 1,500 million 1,500 million

EARNINGS PER SHARE (IN SR) 22 4,51 4,51

30

AL RAJHI BANKING AND INVESTMENT CORPORATIONCONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY



(SR’000)

NotesSharecapital

StatutoryReserve

General reserve

Retained earnings

Proposed gross dividends Total

2010

Balance at January 1, 2010 15,000,000 10,419,177 - 744,248 2,577,459 28,740,884

Dividends paid for the prior year - - - - (2,250,000) (2,250,000)

Transfer to general reserve 15 - - 366,465 (366,465) - -

Net comprehensive income - - - 6,770,829 - 6,770,829

Transfer to statutory reserve - 1,692,707 - (1,692,707) - -

Interim dividends paid for the 1st half of the current year

23 - - - (2,250,000) - (2,250,000)

Proposed gross dividends 15&23 - - - (3,000,000) 3,000,000 -

Transfer to accrued zakat 23 - - (366,465) - (327,459) (693,924)

Balance at December 31, 2010 15,000,000 12,111,884 - 205,905 3,000,000 30,317,789

2009

Balance at January 1, 2009 15,000,000 8,727,370 - 121,286 3,183,143 27,031,799

Dividends paid for the prior year - - - - (2,625,000) (2,625,000)

Transfer to general reserve 15 - - - - - -

Net comprehensive income - - - 6,767,228 - 6,767,228

Transfer to statutory reserve - 1,691,807 - (1,691,807) - -

Interim dividends paid for the first half of the current year 23 - - - (1,875,000) - (1,875,000)

Proposed gross dividends 15&23 - - - (2,577,459) 2,577,459 -

Transfer to accrued Zakat 23 - - - - (558,143) (558,143)

Balance at December 31, 2009 15,000,000 10,419,177 - 744,248 2,577,459 28,740,884

31

AL RAJHI BANKING AND INVESTMENT CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS


(SR’000)

2010 2009

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income 6,770,829 6,767,228

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization 349,239 322,619

Loss (gain) on sale of property and equipment 3,874 (17,872)

Impairment charge for financing 1,908,818 1,760,727

Net (increase) decrease in operating assets:

Statutory deposit with SAMA (note 4) (1,397,697) (291,772)

Due from banks and other financial institutions (1,006,783) -

Financing (9,825,826) (5,115,897)

Investments (1,748,386) (162,222)

Customer debit current accounts 383,729 200,961

Other assets 228,145 (57,906)

Net increase (decrease) in operating liabilities:

Due to banks and other financial institutions (687,892) (1,799,557)

Customer deposits 20,202,197 4,120,798

Other liabilities (7,673,953) 4,643,036

Net cash provided by operating activities 7,506,294 10,370,143

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchase of property and equipment (572,948) (905,880)

Proceeds from disposal of property and equipment 7,129 287,136

Net cash used in investing activities (565,819) (618,744)

CASH FLOWS FROM FINANCING ACTIVITIES:

Syndicated Murabaha financing from banks - (1,875,000)

Dividends paid (4,500,000) (4,500,000)

Net cash used in financing activities (4,500,000) (6,375,000)

NET INCREASE IN CASH AND CASH EQUIVALENTS 2,440,475 3,376,399

Cash and cash equivalents at beginning of year 17,784,205 14,407,806

CASH AND CASH EQUIVALENTS AT END OF YEAR (note 24) 20,224,680 17,784,205


Taking considered steps tostrengthen our expansion footprint

5NOTES OF CONSOLIDATED FINANCIAL STATEMENTS

34

AL RAJHI BANKING AND INVESTMENT CORPORATIONNOTES OF CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

1. Generala) Incorporation and operationsAl Rajhi Banking and Investment Corporation, a Saudi Joint Stock Company, (the “Bank”), was formed and licensed pursuant to Royal Decree No. M/59 dated 3 Dhul Qadah 1407H (corresponding to June 29, 1987) and in accordance with Article 6 of the Council of Ministers’ Resolution No. 245, dated 26 Shawal 1407H (corresponding to June 23, 1987).

The Bank operates under Commercial Registration No. 1010000096 and its Head Office is located at the following address:

Al Rajhi BankOlaya StreetP.O. Box 28Riyadh 11411Kingdom of Saudi Arabia

The objectives of the Bank are to carry out banking and investment activities in accordance with its Articles of Association and By-laws, the Banking Control Law and the Council of Ministers’ Resolution referred to above. The Bank is engaged in banking and investment activities for its own account and on behalf of others inside and outside the Kingdom of Saudi Arabia through 487 branches including the branches outside the Kingdom as at December 31, 2010 (2009: 477 branches) and 8,527 employees as at December 31, 2010 (2009: 8,307 employees). The Bank has established a number of wholly or substantially owned subsidiaries as set out below:

Subsidiaries Shareholding %

2010 2009

Al Rajhi Company for Development Limited - Riyadh 100% 99%

Al Rajhi Corporation Limited - Malaysia 100% 100%

Al Rajhi Capital Company 99% 99%

Al Rajhi Bank - Kuwait 100% -

Al Rajhi Bank - Kuwait was formed during 2010. All the above-mentioned subsidiaries were consolidated.

b) Shariah AuthorityAs a commitment from the Bank for its activities to be in compliance with Islamic Shariah legislations, the Bank has, since its inception, established a Shariah Authority to ascertain that the Bank’s activities are subject to its approval and control. The Shariah Authority had reviewed several of the Bank’s activities and issued the required decisions thereon.

2. Basis of presentationa) Statement of complianceThe consolidated financial statements are prepared in accordance with the Accounting Standards for Financial Institutions pro-mulgated by the Saudi Arabian Monetary Agency (“SAMA”) and International Financial Reporting Standards (“IFRS”). The Bank also prepares its consolidated financial statements to comply with the Banking Control Law and the Regulations of Companies in the Kingdom of Saudi Arabia and the Bank’s articles of association.

35

b) Basis of measurementThe consolidated financial statements are prepared under the historical cost convention as modified for the measurement at fair value of investments held as fair value through income statement (“FVIS”).

c) Functional and presentation currencyThe consolidated financial statements are presented in Saudi Riyals (“SR”), the Bank’s functional currency, and are rounded off to the nearest thousand.

d) Critical accounting judgments, estimates and assumptionsThe preparation of consolidated financial statements in conformity with IFRS requires the use of certain critical accounting es-timates and assumptions that affect the reported amounts of assets and liabilities. It also requires management to exercise its judgments in the process of applying the Bank’s accounting policies. Such estimates, assumptions and judgments are continu-ally evaluated and are based on historical experience and other factors, including obtaining professional advice and expecta-tions of future events that are believed to be reasonable under the circumstances. Significant areas where management has used estimates, assumptions or exercised judgements is as follows:

1- Impairment for credit losses on financingThe Bank reviews its financing portfolios to assess specific and collective impairment on a quarterly basis. In determining whether an impairment loss should be recorded, the Bank makes judgements as to whether there is any observable data indi-cating that there is a measurable decrease in the estimated future cash flows. This evidence may include observable data indi-cating that there has been an adverse change in the payment status of clients in a group. Management uses estimates based on historical loss experience for financing with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when estimating its cash flows. The methodology and assumptions used for estimating both the amount and the timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experiences.

2- Going concernThe Bank’s management has made an assessment of the Bank’s ability to continue as a going concern and is satisfied that the Bank has the resources to continue in business for the foreseeable future. Furthermore, the management is not aware of any material uncertainties that may cast significant doubt upon the Bank’s ability to continue as a going concern. Therefore, the financial statements continue to be prepared on the going concern basis.

3. Summary of significant accounting policiesThe significant accounting policies used in preparing these consolidated financial statements are set out below. The accounting policies used in the preparation of these consolidated financial statements are consistent with those of the prior year.

a) The preparation basis of consolidated financial statementsThese consolidated financial statements include the accounts of Al Rajhi Bank and its subsidiaries in which, the Bank’s share-holdings exceed 50% of their share capital and the Bank has the power to govern their financial and operational policies. The financial statements of subsidiaries are prepared for the same reporting year as that of the Bank, using consistent accounting policies.

Subsidiaries are all entities over which the Bank has the power to govern financial and operating policies, so as to obtain benefits from its activities, generally accompanying a shareholding of more than one half of the voting rights. Subsidiaries are consolidated from the date on which control is transferred to the Bank and cease to be consolidated from the date on which control is transferred from the Bank. The results of subsidiaries acquired or disposed of during the year, if any, are included in the consolidated statement of comprehensive income statement from the date of the acquisition or up to the date of disposal, as appropriate.

Inter-group balances and any income and expenses arising from intra-group transactions, are eliminated in preparing these consolidated financial statements. As of December 31, 2010 and 2009 interests in subsidiaries not directly owned by the Bank are owned by representative shareholders for the beneficial interest of the Bank and hence are not separately disclosed on the consolidated statement of financial position or statement of comprehensive income.

b) ZakatZakat is calculated based on the Zakat rules and regulations in the Kingdom of Saudi Arabia and is considered as a liability on the shareholders to be deducted from dividends. In case of any differences between the Bank’s calculation and the Department of Zakat and Income Tax’s (“DZIT”) assessment, such differences will be charged to the general reserve.

36

c) Trade date All regular purchases and sales of financial assets are recognized and derecognized on the trade date (i.e. the date that the Bank commits to purchase or sell the assets). Regular way purchases or sales of financial assets require delivery of those assets within the time frame generally established by regulation or convention in the market place.

d) Foreign currencies Transactions in foreign currencies are translated into Saudi Riyals at the exchange rates prevailing on the dates of the transac-tions. Monetary assets and liabilities at the end of the year, denominated in foreign currencies, are translated into Saudi Riyals at exchange rates prevailing on the date of the consolidated statement of financial position.

Realized and unrealized gains or losses on exchange are credited or charged to the consolidated statement of comprehensive income.

The monetary assets and liabilities of foreign subsidiaries are translated at the rates of exchange prevailing on the date of the consolidated statement of financial position. The statements of income of foreign subsidiaries are translated at the average exchange rates for the year.

e) Offsetting of financial assets and liabilitiesFinancial assets and liabilities are offset and are reported net in the consolidated statement of financial position when there is a legally enforceable right to set off the recognized amounts, and when the Bank intends to settle on a net basis, or to realize the asset and settle the liability simultaneously.

f) Revenue recognition• Income from Mutajara, Murabaha, investments held at amortized costs, installment sales, Istisnaa financing and Visa services

are recognized based on an effective yield basis on the outstanding balances

• Fees and commission are recognized when the service has been provided. Financing commitment fees that are likely to be drawn down are deferred and, together with the related direct cost, are recognized as an adjustment to the effective yield on the financing. Portfolio and other management advisory and service fees are recognized based on the applicable service con-tracts, usually on a time-proportionate basis. Fees received on asset management, wealth management, financial planning, custody services and other similar services that are provided over an extended period of time, are recognized over the period when the service is being provided. When a financing commitment is not expected to result in the draw-down of a financing, financing commitment fees are recognised on a straight-line basis over the commitment period:

• Dividend income is recognised when the right to receive income is established

• Exchange income/loss is recognized when earned/incurred

g) Financing and investmentsThe Bank offers non-interest based products including Mutajara, installment sales, Murabaha and Istisnaa to its customers in compliance with Shariah rules.

The Bank classifies its principal financing and investments as follows:

1. Held at amortized cost Such financings and certain investments that meet the definition of loans and receivables under IAS 39, are measured at amortized cost and are comprised of Mutajara, installment sale, Istisnaa, Murabaha and Visa operations account balances.

2. Held as FVIS Investments in this category are classified as either investments held for trading or those designated as FVIS on initial recogni-tion. Such investments are measured at fair value and are comprised of land, real estate, mutual funds, and other investments.

Financing held at amortized cost are initially recognized at fair value and subsequently measured at amortized cost minus any written-off amounts and provision for impairment value.

Investments held as FVIS are initially recognized at fair value and are subsequently measured at fair value. Any change in fair value is charged to the consolidated statement of comprehensive income.

h) Impairment of financial assetsAn assessment is made at the date of each statement of financial position to determine whether there is objective evidence that

37

a financial asset or a group of financial assets may be impaired. If such evidence exists, the difference between the assets carrying amount and the present value of estimated future cash flows is calculated and any impairment loss is recognized for changes in the asset’s carrying amount. The carrying amount of the financial assets held at amortized cost is adjusted either directly or through the use of a provision account; the amount of the adjustment is included in the consolidated statement of comprehensive income.

Specific provisions are evaluated individually. Considerable judgment by management is required in the estimation of the amount and timing of future cash flows when determining the level of provision required. Such estimates are essentially based on assump-tions about several factors involving varying degrees of judgment and uncertainty, and actual results may differ resulting in future changes to such provisions. In addition to the specific provisions described above, the Bank also makes collective impairment pro-visions, which are evaluated on a group basis and are created for losses, where there is objective evidence that unidentified losses exist at the reporting date. The amount of the provision is estimated based on the historical default patterns of the investment and financing counter-parties as well as their credit ratings, taking into account the current economic climate.

The criteria the Bank uses to determine whether there is objective evidence of an impairment loss include:

• Delinquency in contractual payments of principal or profit• Cash flow difficulties experienced by the customer• Breach of repayment covenants or conditions• Initiation of bankruptcy proceedings against the customer• Deterioration of the customer’s competitive position• Deterioration in the value of collateral

When the financing amount is uncollectible, it is written-off against the related provision for impairment. Such financing is written-off after all necessary procedures have been completed and the amount of the loss has been determined.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the customer’s credit rating), the previously recognized impairment loss is reversed by adjusting the provision account. The amount of the reversal is recognized in the statement of com-prehensive income in impairment charge.

Financial assets are written-off only in circumstances where effectively all possible means of recovery have been exhausted.

i) De-recognition of financial assets and liabilitiesA financial asset is de-recognized when the contractual rights to the cash flows from the financial asset expire or if the Bank has not retained control on the financial asset.

A financial liability can be only de-recognized when it is extinguished, that is when the obligation specified in the contract is either discharged, cancelled or expires.

j) Customer debit current accountsAll non-commission bearing customers’ debit current accounts are stated at amortized cost, minus doubtful amounts and provi-sion for impairment value, if any.

k) Property and equipmentProperty and equipment are stated at cost, net of accumulated depreciation and amortization. Land is not depreciated. The cost of other property and equipment is depreciated or amortized using the straight-line method over the estimated useful lives of the assets, as follows:

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each statement of financial position date.

Gains and losses on disposals are determined by comparing proceeds with the carrying amount. These are included in the consoli-dated statement of comprehensive income.

All assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Any carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount.

Leasehold land improvements Over the period of the lease

Buildings 33 years

Leasehold building improvements 3 years

Equipment and furniture 3 to 10 years

38

l) Customer depositsNon-commission bearing customer deposits are initially recognized at fair value, being the fair value of the consideration received, and are subsequently measured at amortized cost.

m) GuaranteesIn the ordinary course of business the Bank gives guarantees, which include letters of credit, letters of guarantee and acceptances. Initially, the received margins are recognized as liabilities and are included in customers’ deposits in the consolidated financial statements. The Bank’s obligation towards each guarantee is measured through the increase of amortized margins or the best es-timate for the required payments to meet the financial commitments resulting from the guarantees. Any increase in the financial commitments related to the guarantees is recognized in the consolidated statement of comprehensive income.

n) ProvisionsProvisions are recognized when the Bank has a present legal obligation or a constructive obligation as a result of past events; it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable esti-mate of the amount of the obligation can be made.

o) Accounting for leasesLeases entered into by the Bank as a lessee are all operating leases. Accordingly, payments are charged to the consolidated state-ment of comprehensive income on a straight-line basis over the period of the lease. Leases entered into by the Bank as a lessor are all operating leases.

p) Cash and cash equivalentsFor the purposes of the consolidated statement of cash flows, cash and cash equivalents are defined as those amounts included in cash and balances with SAMA, excluding the statutory deposit and due from banks maturing within ninety days from the acquisi-tion date.

q) Special commission excluded from the consolidated statement of incomeIn accordance with the Shariah Authority’s resolutions, special commission income received by the Bank is excluded from the determination of income and is recorded as other liabilities in the consolidated statement of financial position and is paid as chari-ties.

r) Provisions for employees’ end of service benefitsThe provision for employees’ end of service benefits is calculated through an actuarial basis according to the regulations of Saudi Labor Law and local regulatory requirements.

s) Mudaraba fundsThe Bank carries out Mudaraba transactions on behalf of its customers and are treated by the Bank as being restricted invest-ments. These are included as off-balance sheet items. The Bank’s share of profits from managing such funds is included in the consolidated statement of comprehensive income.

t) Investment management servicesThe Bank provides investment management services to its customers through its subsidiaries, which include the management of certain mutual funds. Assets held in trust or in a fiduciary capacity are not treated as assets of the Bank and, accordingly, are not included in the consolidated financial statements.

The Bank’s share of these funds is included under FVIS investments. The fees earned are disclosed under related party transactions.

u) Collaterals against financingIn the ordinary course of business and through financing activities, the Bank holds collaterals as securities to mitigate credit risks. Such collaterals include mortgages on commercial and personal real estates, cash, shares, general customer assets and shares Murabaha deals (shares Murabaha covered by collateral). Those collaterals are held primarily against commercial and real estate credit facilities and are managed against the relevant balances of their net reliable values.

39

v) Definition of the Bank’s productsThe Bank provides its customers with banking products based on the interest avoidance concept and in accordance with Shariah regulations. The following is a description of some of the financing products:

Mutajara Financing: It is a financing agreement whereby the Bank purchases a commodity or an asset and sells it to the client based on a purchase promise from the client, with a deferred price higher than the cash price. Accordingly the client becomes debtor to the Bank with the sale amount and for the period agreed on in the contract.

Installment Sales Financing: It is a financing agreement whereby the Bank purchases a commodity or an asset and sells it to the client based on a purchase promise from the client with a deferred price higher than the cash price. Accordingly the client becomes debtor to the Bank with the sale amount to be paid through installments as agreed upon in the contract.

Istisnaa Financing: It is a financing agreement whereby the Bank manufactures a commodity with certain specifications accord-ing to the client’s request. The client becomes debtor to the Bank with the manufacturing price, which includes cost plus profit.

Murabaha Financing: It is a financing agreement whereby the Bank purchases a commodity or asset and sells it to the client with a price representing the purchase price plus a profit known and agreed upon by the client, which means he should be aware of the cost and profit separately.

4.Cash and balances with SAMACash and balances with SAMA as at December 31, comprise the following:

In accordance with the Banking Control Law and Regulations issued by SAMA, the Bank is required to maintain a statutory deposit with SAMA at the stipulated percentages of its customer deposits, customers’ time investment and other customers’ accounts calculated at the end of each Gregorian month.

5. Due from banks and other financial institutions

Due from banks and other financial institutions as at December 31, comprise the following:

The above dues from banks and other financial institutions do not include any past dues or impaired balances as at December 31, 2010.

2010 2009

Cash on hand 5,329,888 3,449,155

Statutory deposit 9,361,272 7,963,575

Current accounts 4,784,036 290

Total 19,475,196 11,413,020

2010 2009

Current accounts 1,440,118 1,281,444

Mutajara 9,677,421 13,053,316

Total 11,117,539 14,334,760

(SR’000)

(SR’000)

40

6. Financing, net6-1 Financing

a) Financing as at December 31, comprise the following:

b) The net financing by location, inside and outside the Kingdom, are as follows as at December 31:

2010 2009

Gross Provision Net Net

Held at amortized cost:

Corporate Mutajara 31,157,077 )1,542,310) 29,614,767 32,257,917

Installment Sale 78,289,043 )1,329,246) 76,959,797 65,845,312

Istisnaa 476,897 - 476,897 901,282

Murabaha 13,069,847 )743,003) 12,326,844 12,584,945

Visa Cards 687,876 )1,514) 686,362 558,203

Total 123,680,740 (3,616,073) 120,064,667 112,147,659

(SR’000)

(SR’000)

2010 2009

DescriptionCorporateMutajara

Installment Sale Istisnaa Murabaha Visa Total Total

Inside the Kingdom 30,657,088 78,289,043 476,897 6,221,551 687,876 116,332,455 110,308,781

Outside the Kingdom 499,989 - - 6,848,296 - 7,348,285 6,031,126

Total 31,157,077 78,289,043 476,897 13,069,847 687,876 123,680,740 116,339,907

Provision (1,542,310) (1,329,246) - (743,003) (1,514) (3,616,073) (4,192,248)

Net 29,614,767 76,959,797 476,897 12,326,844 686,362 120,064,667 112,147,659

41

c) The net financing concentration risks and the related provision by major economic sectors, at December 31, are as follows:

(SR’000)

(SR’000)

2010

2009

Description Performing Non-performing Provision Net

Commercial 22,391,211 1,904,211 (802,984) 23,492,438

Industrial 7,974,369 - - 7,974,369

Public (government) 512,606 - - 512,606

Services 9,809,206 - - 9,809,206

Agriculture and fishing 1,674,734 - - 1,674,734

Building and construction 12,151,974 41,438 (15,249) 12,178,163

Personal 65,060,527 716,521 (249,728) 65,527,320

Other 1,443,943 - - 1,443,943

Total 121,018,570 2,662,170 (1,067,961) 122,612,779

Additional portfolio provision (2,548,112) (2,548,112)

Balance (3,616,073) 120,064,667

Description Performing Non-performing Provision Net

Commercial 25,831,149 2,738,419 (1,171,763) 27,397,805

Industrial 10,904,170 - - 10,904,170

Public (government) 15,989 - - 15,989

Services 4,990,253 - - 4,990,253

Agriculture and fishing 1,664,214 - - 1,664,214

Building and construction 8,814,820 12,032 (151) 8,826,701

Personal 58,538,140 1,115,930 (1,015,676) 58,638,394

Other 1,714,791 - - 1,714,791

Total 112,473,526 3,866,381 (2,187,590) 114,152,317

Additional portfolio provision (2,004,658) (2,004,658)

Balance (4,192,248) 112,147,659

42

d) The table below depicts the categories of financing as shown in the statement of financial position, as per main business segments, at December 31:

(SR’000)

(SR’000)

2010

2009

Retail Corporate Total

Corporate Mutajara - 31,157,077 31,157,077

Installment Sale 71,260,471 7,028,572 78,289,043

Istisnaa - 476,897 476,897

Murabaha 3,054,799 10,015,048 13,069,847

Visa 687,876 - 687,876

Total 75,003,146 48,677,594 123,680,740

Less: provision (2,049,188) (1,566,885) (3,616,073)

Financing, net 72,953,958 47,110,709 120,064,667


Corporate Mutajara - 34,246,989 34,246,989

Installment Sale 61,517,480 5,848,447 67,365,927

Istisnaa - 901,282 901,282

Murabaha 2,217,083 11,043,257 13,260,340

Visa 565,369 - 565,369

Total 64,299,932 52,039,975 116,339,907

Less: provision (2,178,601) (2,013,647) (4,192,248)

Financing, net 62,121,331 50,026,328 112,147,659

43

e) The table below summarizes financing balances at December 31 that are neither past due nor impaired, past due but not impaired and impaired, as per the main business segments of the Bank:

Financing that is past due for less than 90 days are not treated as impaired, unless other available information provides otherwise.Neither past due nor impaired and past due but not impaired comprise the total performing financing.

f) The tables below depict the quality of financing past due (up to 90 days) but not impaired at December 31:

Financing under the standard performing category, have sound fundamental characteristics and include those that exhibit neither actual nor potential weaknesses.

The special mention category includes financings that are also performing, current and up to date in terms of principal and profit payments. However, they require the close attention of management as they may have potential weaknesses, both financial and non-financial, that may at some future date result in the deterioration of the repayment prospects or either the principal or the profit payments. The special mention financing would not expose the Bank to sufficient risk to warrant a worse classification.

(SR’000)

(SR’000)

(SR’000)

(SR’000)

2010

2010

2009

2009

Neither past due nor impaired

Past due but not impaired Impaired Total Provision Net

Retail 73,602,616 145,098 1,255,432 75,003,146 (2,049,188) 72,953,958

Corporate 46,626,818 644,038 1,406,738 48,677,594 (1,566,885) 47,110,709

Total 120,229,434 789,136 2,662,170 123,680,740 (3,616,073) 120,064,667

Neither past due nor impaired

Past due but not impaired Impaired Total Provision Net

Retail 63,070,563 113,439 1,115,930 64,299,932 (2,178,601) 62,121,331

Corporate 48,740,446 549,078 2,750,451 52,039,975 (2,013,647) 50,026,328

Total 111,811,009 662,517 3,866,381 116,339,907 (4,192,248) 112,147,659


Standard 130,741 640,911 771,652

Special mention 14,357 3,127 17,484

Total 145,098 644,038 789,136


Standard 106,300 363,072 469,372

Special mention 7,139 186,006 193,145

Total 113,439 549,078 662,517

44

g) The tables below set out the aging of financing past due but not impaired as at December 31:

The fair value of collateral is based on valuation techniques and quoted prices (wherever available).

h) The table below sets out gross balances of individually impaired financing, together with the fair value of related collaterals held by the Bank as at December 31:

In the ordinary course of financing activities, the Bank holds collaterals as security to mitigate credit risk in financing. These collat-erals mostly include customer deposits and other cash deposits, financial guarantees, local and international equities, real estate and other property and equipment. The collaterals are held mainly against commercial and consumer financing and are managed against relevant exposures at their net realizable values.

(SR’000)

(SR’000)

(SR’000)

(SR’000)

2010

2010

2009

2009


Age

Up to 30 days 111,050 492,272 603,322

31 to 60 days 19,691 148,639 168,330

61 to 90 days 14,357 3,127 17,484

Total 145,098 644,038 789,136

Fair value of collateral - 491,351 491,351


Age

Up to 30 days 58,787 173,885 232,672

31 to 60 days 47,513 189,187 236,700

61 to 90 days 7,139 186,006 193,145

Total 113,439 549,078 662,517



Individually impaired financing - 1,406,738 1,406,738



Individually impaired financing - 2,750,451 2,750,451


45

i) The tables below depict the quality of neither past due nor impaired:

Risk rating 1 - ExceptionalObligors of unquestioned credit standing at the pinnacle of credit quality.

Risk rating 2 - ExcellentObligors of the highest quality, presently and prospectively. Virtually no risk in lending to this class. Cash flows reflect exception-ally large and stable margins of protection. Projected cash flows, including anticipated credit extensions, indicate strong liquidity levels and debt service coverage. Balance Sheet parameters are strong, with excellent asset quality in terms of value and liquidity.

Risk rating 3 - SuperiorTypically obligors at the lower end of the high quality range with excellent prospects. Very good asset quality and liquidity. Con-sistently strong debt capacity and coverage. There could however be some elements, which could with a low likelihood impair performance in the future.

Risk rating 4 - GoodTypically obligors in the high end of the medium range who are definitely sound, with minor risk characteristics. Elements of strength are present in such areas as liquidity, stability of margins, cash flows, diversity of assets and lack of dependence on one type of business.

Risk rating 5 - SatisfactoryThese are obligors with smaller margins of debt service coverage and with some elements of reduced strength. Satisfactory asset quality, liquidity, and good debt capacity and coverage. A loss year or declining earnings trend may occur, but the borrowers have sufficient strength and financial flexibility to offset these issues.

Risk rating 6 - AdequateObligors with declining earnings, strained cash flow, increasing leverage and/or weakening market fundamentals that indicate above average risk. Such borrowers have limited additional debt capacity, modest coverage, average or below average asset qual-ity and market share. Present borrower performance is satisfactory, but could be adversely affected by developing collateral qual-ity/adequacy, etc.

Risk rating 7 - Very high riskGenerally undesirable business, constituting an undue and unwarranted credit risk but not to the point of justifying a substandard classification. No loss of principal or interest has taken place. Potential weakness might include a weakening financial condition, an unrealistic repayment program, inadequate sources of funds or a lack of adequate collateral, credit information or documen-tation. The entity is undistinguished and mediocre. No new or incremental credits will generally be considered for this category.

2010 2009

Risk rating 1 - -

Risk rating 2 - -

Risk rating 3 9,283,000 10,202,708

Risk rating 4 36,062,000 27,314,174

Risk rating 5 47,563,000 51,158,744

Risk rating 6 20,066,000 15,287,185

Risk rating 7 7,255,434 7,848,198

Total 120,229,434 111,811,009

46

6-2 Impairment charge for financing:

The movement in the impairment provision for financing for the years ended December 31, is as follows:

7. Investments

Investments comprise the following as at December 31:


Balance at the beginning of the year 2,178,601 2,013,647 4,192,248

Provided during the year 705,116 1,203,702 1,908,818

Disposals (bad debts written-off) (834,529) (1,650,464) (2,484,993)

Balance at the end of the year 2,049,188 1,566,885 3,616,073


Balance at the beginning of the year 2,766,411 1,183,919 3,950,330

Provided during the year 707,166 1,053,561 1,760,727

Disposals (bad debts written-off) (1,294,976) (223,833) (1,518,809)

Balance at the end of the year 2,178,601 2,013,647 4,192,248

(SR’000)

(SR’000)

(SR’000)

2010

2009

2010 2009

Investments held at amortized costs

Murabaha with SAMA 25,598,479 24,250,711

Total investments held at amortized costs 25,598,479 24,250,711

FVIS investments

Investments in land, real estate, vehicles and others 1,169,547 1,187,262

Investment in Sukuk 1,007,539 703,531

Equity investments 651,054 685,040

Investments in mutual funds 400,537 243,945

Total FVIS investments 3,228,677 2,819,778

Available for sales investments

Equity shares 60,286 68,567

Total available for sales investments 60,286 68,567

Total investments 28,887,442 27,139,056

47

The designated FVIS investments included above are so designated when the financial instruments are being evaluated on a fair value basis and are in accordance with the documented risk management strategy of the Bank. Equity investments include traded investments amounting to SR 688 million as at December 31, 2010 (2009: SR 730 million). Investments do not include balances that are past due or impaired as at December 31, 2010.

The following is an analysis of investment according to counter-parties:

(SR’000)

(SR’000)

2010 2009

Government and qausi government 25,598,479 24,250,711

Companies 674,587 708,607

Banks and other financial institutions 36,753 45,000

Others 2,577,623 2,134,738

Total investments 28,887,442 27,139,056

2010 2009

Customer debit current accounts (inside the Kingdom) 362,062 741,023

Less: provision (50,000) (45,232)

Customer debit current accounts, net 312,062 695,791

8. Customer debit current accounts, net

Customer debit current accounts, net comprise the following as at December 31:

48

9. Property and equipment, net

Property and equipment, net comprise the following as at December 31:

10. Other assets, net

Other assets, net comprise the following as at December 31:

Buildings include work-in-progress amounting to SR 195 million as at December 31, 2010 (2009: SR 387 million).

Land BuildingsLand & leasehold improvements

Equipment and furniture

Total2010

Total2009

COSTAt January 1 1,271,853 1,125,436 518,772 2,003,301 4,919,362 4,663,343

Additions for the year 78,330 163,386 57,120 274,112 572,948 905,880

Disposals (2,103) (1,670) - (264,705) (268,478) (649,861)

At December 31 1,348,080 1,287,152 575,892 2,012,708 5,223,832 4,919,362

ACCUMULATED DEPRECIATION and AMORTIZATION

At January 1 - 80,474 284,897 1,371,834 1,737,205 1,795,183

Additions for the year - 27,688 111,711 209,840 349,239 322,619

Disposals - (803) - (256,672) (257,475) (380,597)

At December 31 - 107,359 396,608 1,325,002 1,828,969 1,737,205

NET BOOK VALUE

At December 31, 2010 1,348,080 1,179,793 179,284 687,706 3,394,863

At December 31, 2009 1,271,853 1,044,962 233,875 631,467 3,182,157

(SR’000)

(SR’000)

2010 2009

Advances to others 302,463 280,980

Cheques under collection 311,569 153,491

Prepaid expenses 167,344 198,887

Other receivables 194,332 202,540

Accrued income 118,911 114,292

Others 514,488 887,062

Total 1,609,107 1,837,252

Less: provision (19,966) (19,966)

Other assets, net 1,589,141 1,817,286

49

11. Due to banks and other financial institutions

Due to banks and other financial institutions comprise the following as at December 31:

12. Customer deposits

Customer deposits by currency comprise the following, as at December 31:

Due to banks by location, inside and outside the Kingdom, as at December 31, are as follows:

Customer deposits by type comprise the following, as at December 31:

The balance of the other customer accounts includes margins on letters of credit and guarantees, checks under clearance and transfers.

2010 2009

Current accounts 3,273,606 2,113,327

Banks’ time investments 2,140,575 3,988,746

Total 5,414,181 6,102,073

2010 2009

Saudi Riyals 139,069,069 117,867,514

Foreign currencies 3,994,968 4,994,326

Total 143,064,037 122,861,840

2010 2009

Inside the Kingdom 1,059,993 3,649,873

Outside the Kingdom 4,354,188 2,452,200

Total 5,414,181 6,102,073

2010 2009

Demand deposits 130,902,994 107,004,245

Customer time investments 9,527,096 13,528,775

Other customer accounts 2,633,947 2,328,820

Total 143,064,037 122,861,840

(SR’000)

(SR’000)

(SR’000)

(SR’000)

50

13. Other liabilities

Other liabilities comprise the following as at December 31:

The balance due to SAMA represents the amount utilized by the Bank for a short-term period as per the agreement with SAMA.

14. Share capital

The authorized, issued and fully paid share capital of the Bank as at December 31, 2010 and 2009 consists of 1,500 million shares of SR 10 each.

15. Statutory and general reserves

The Banking Control Law in Saudi Arabia and the By-laws of the Bank require a transfer of a minimum of 25% of net income to the statutory reserve for the year. The Bank may discontinue such transfers when the reserve equals the paid up share capital. This reserve is presently not available for distribution.

In addition, the Bank makes an appropriation to the general reserve for general banking risks, Zakat and others, if any.

At the General Assembly meeting held on 13 Rabie Awal 1431H (corresponding to February 27, 2010), the shareholders approved the transfer of SR 366.5 million from the retained earnings to the general reserve. The Bank has utilized this amount to meet Zakat commitments.

16. Commitments and contingencies

a) Legal proceedingsAs at December 31, 2010, there were certain legal proceedings outstanding against the Bank. Provisions have been made for some of these legal cases based on the assessment of the Bank’s legal advisors.

b) Capital commitmentsAs at December 31, 2010, the Bank had capital commitments of SR 119.7 million (2009: SR 82.9 million) relating to contracts for com-puter software updates and developments, and SR 46 million (2009:SR 74 million) relating to developments and improvements of branches.

c) Credit related commitments and contingenciesThe primary purpose of these instruments is to ensure that funds are available to customers as required. Credit related commit-ments and contingencies are mainly comprised of letters of guarantee, standby letters of credit, acceptances and unused commit-ments to extend credit. Guarantees and standby letters of credit, which represent irrevocable assurances that the Bank will make payments in the event that a customer cannot meet his obligations to third parties, carry the same credit risk as financing.

Letters of credit, which are written undertakings by the Bank on behalf of a customer authorizing a third party to draw drafts on the Bank up to a stipulated amount under specific terms and conditions, are collateralized by the underlying shipments of goods

2010 2009

Due to SAMA - 7,518,000

Accounts payable 3,417,895 2,880,621

Provision for employees’ end of service benefits 477,301 557,558

Charities (see note 31) 4,923 78,206

Other 2,144,784 1,990,547

Total 6,044,903 13,024,932

(SR’000)

51

to which they relate and therefore, carry less risk. Acceptances comprise undertakings by the Bank to pay bills of exchange drawn on customers.

Cash requirements under guarantees and letters of credit are considerably less than the amount of the commitment because the Bank does not expect the third party to draw funds under the agreement.

Commitments to extend credit represent unused portions of authorization to extended credit, principally in the form of financing, guarantees and letters of credit. With respect to credit risk relating to commitments to extend unused credit, the Bank is potentially exposed to a loss in an amount that is equal to the total unused commitments. The likely amount of loss, which cannot be reason-ably estimated, is expected to be considerably less than the total unused commitments, since most commitments to extend credit are contingent upon customers maintaining specific credit standards. The total outstanding commitments to extend credit do not necessarily represent future cash requirements, as many of these commitments could expire or terminate without being funded.

1. The contractual maturities of commitments and contingencies liabilities are as follows at December 31:

2. The analysis of commitments and contingencies by counterparties is as follows as at December 31:

Less than3 months

From 3 to 12 months

From 1 to 5 years

Over 5 years Total

Letters of credit and acceptances 3,978,724 609,319 45,687 - 4,633,730

Letters of guarantee 4,326,727 979,001 967,392 90,474 6,363,594

Irrevocable commitments to extend credit 1,424,075 1,502,051 2,162,094 2,079,649 7,167,869

Total 9,729,526 3,090,371 3,175,173 2,170,123 18,165,193

Less than3 months

From 3 to 12 months

From 1 to 5 years

Over 5 years Total

Letters of credit and acceptances 2,387,295 546,455 245,767 1,684,565 4,864,082

Letters of guarantee 4,353,113 1,194,322 1,895,828 111,901 7,555,164

Irrevocable commitments to extend credit 437,387 678,145 6,380,553 4,081,861 11,577,946

Total 7,177,795 2,418,922 8,522,148 5,878,327 23,997,192

(SR’000)

(SR’000)

(SR’000)

2010

2009

2010 2009

Corporate 13,624,861 8,450,877

Banks and other financial institutions 4,540,332 15,546,315

Total 18,165,193 23,997,192

52

d) Operating lease commitments

The future minimum lease payments under non-cancelable operating leases where the Bank is the lessee, are as follows:

(SR’000)

2010 2009

Less than 1 year 21,845 11,028

From 1 to 5 years 86,399 98,597

Over 5 years 35,459 26,077

Total 143,703 135,702

17. Net financing income

Net Financing income for the years ended December 31, comprise the following:

2010 2009

Corporate Mutajara 1,619,716 2,002,859

Installment Sale 6,714,292 6,266,509

Istisnaa 65,413 108,141

Murabaha 691,929 582,454

Gross financing income 9,091,350 8,959,963

Income paid to customers on time investments (230,348) (529,816)

Income paid on syndicated Murabaha financing from banks - (40,447)

Net financing income 8,861,002 8,389,700

(SR’000)

53

18. Investment income

Investment income for the years ended December 31, comprise the following:

19. Fees from banking services, net

Fees from banking services, net for the years ended December 31, comprise the following:

(SR’000)

(SR’000)

2010 2009

Investment held at amortized cost

Income from Murabaha with SAMA 141,829 780,543

Income from Murabaha with Bank 100,945 61,819

Total income from investments held at amortized cost 242,774 842,362

FVIS investment

Income from Sukuk 18,641 22,806

Change in investment’s fair value (24,664) 99,164

Total (loss) income from FVIS investment (6,023) 121,970

Available for sale investments

Impairment of investment (8,820) -

Dividends 22,100 -

Total income from available for sale investments 13,280 -

Total investment income 250,031 964,332

2010 2009

Fee income

Fees from share trading services 223,052 319,745

Fees from payment service systems 387,903 320,413

Fees from the remittance business 273,646 250,378

Fees from credit cards 117,354 155,174

Mudaraba fee income 50,073 36,325

Other 1,076,404 827,797

Total fee income 2,128,432 1,909,832

Fee expense

Fees for share trading services (64,616) (108,577)

Fees for payment service systems (429,432) (373,950)

Total fee expense (494,048) (482,527)

Fees from banking services, net 1,634,384 1,427,305

54

20. Other operating income

Other operating income for the years ended December 31, comprise the following:

21. Salaries and employee related benefits

The following tables provide an analysis of the salaries and employee related benefits for the years ended December 31:

(SR’000)

2010 2009

Income from sale of vehicles 12,364 13,167

Recovery of written-off debts 155,231 24,690

Other income, net 111,448 103,776

Total fee income 279,043 141,633

Compensations Form of payments

Number of employees Fixed Variable Total Cash In kind

Executives 34 40,215 18,134 58,349 3

Monitoring, compliance, Legal Depart-ment and Risk Management employees

263 65,518 5,494 71,012 3

Other employees 8,230 1,332,778 140,051 1,472,829 3

External employees 1,051 129,339 - 129,339 3

Total 9,578 1,567,850 163,679 1,731,529 3

Compensations Form of payments

Number of employees Fixed Variable Total Cash In kind

Executives 12 20,889 9,665 30,554 3

Monitoring, compliance, Legal Depart-ment and Risk Management employees

233 60,213 4,677 64,890 3

Other employees 8,062 1,371,870 135,639 1,507,509 3

External employees 904 115,772 - 115,772 3

Total 9,211 1,568,744 149,981 1,718,725 3

(SR’000)

(SR’000)

2010

2009

55

As the Kingdom of Saudi Arabia is part of the G-20, instructions were given to all financial institutions in the Kingdom to comply with the standards and principles of Basel II and the financial stability board.

And as SAMA is the regulator for the financial institutions in Saudi Arabia, it issued regulations on compensations and bonuses in accordance with the standards and principles of Basel II and the financial stability board.

In light of the SAMA instructions related to the compensations and bonuses, the Bank issued compensation and bonus policies, which were implemented after the Board of Directors’ approval.

The scope of this policy is extended to include the Bank and its subsidiary companies (local and international) that are operating in the financial sector. Accordingly it includes all official employees, permanent and temporary contracted employees and service providers (contribution in risk position if SAMA allows the use of external resources).

For consistency with other banking institutions in the Kingdom of Saudi Arabia, the Bank has used a combination of fixed and vari-able compensation to attract and maintain talents. The fixed compensation is assessed on a yearly basis by comparing it to other local banks in the Kingdom of Saudi Arabia, including the basic salaries, allowances and benefits that are related to employees’ ranks.

The variable compensation is related to employees performances and their compatibility to achieve the agreed upon objectives. It includes incentives, performance bonuses and other. Incentives are mainly paid to branch employees whereby the performance payments are paid to head office employees and others who are not qualified for incentives.

These bonuses and compensations should be approved by the board of directors as a percentage of the Bank’s income.

22. Earnings per share

Earnings per share are calculated by dividing the net income for the year by the weighted average number of shares outstanding during the year (Note 14).

23. Paid and proposed gross dividends and Zakat

The Bank distributed dividends for the first half of 2010 amounting to SR 2,250,000 thousand (i.e. SR 1.50 per share). Also the Board proposed gross dividends for the second half of 2010 amounting to SR 3,000,000 thousand (2009: SR 2,577,459 thousand) of which SR 750,000 thousand (2009: SR 327,459 thousand) was deducted for Zakat from the proposed gross dividends, resulting in a net dividend of SR 3 per share for 2010 (2009: SR 2.75 per share).

The Zakat assessments for the years through 1997 have been finalized with the Department of Zakat and Income Tax (“DZIT”). The DZIT issued assessments for the years of 1998 through 2006, which were appealed by the Bank. Adequate provisions have been made for the above mentioned years.

The Bank submitted the zakat assessment for the years from 2007 until 2009 and paid the Zakat due accordingly. The DZIT did not yet issue the final Zakat assessments for these years.

24. Cash and cash equivalents

Cash and cash equivalents included in the consolidated statement of cash flows comprise the following as at December 31:

(SR’000)

2010 2009

Cash 5,329,888 3,449,155

Due from banks (current accounts and Murabaha) 10,110,756 14,334,760

Balances with SAMA (current accounts) 4,784,036 290

Total 20,224,680 17,784,205

56

25. Segmental information

The Bank identifies operating segments on the basis of internal reports about components of the Bank that are regularly reviewed by the chief operating decision maker, principally the Chief Executive Officer, in order to allocate resources to the segments and to assess its performance.

For management purposes, the Bank is organized into the following four main business segments:

Transactions between the above segments are on normal commercial terms and conditions. There are no material items of income or expenses between the above segments. Assets and liabilities for the segments comprise operating assets and liabilities, which represent the majority of the Bank’s assets and liabilities.

The Bank carries out its activities principally in the Kingdom of Saudi Arabia, and has four subsidiaries as at December 31, 2010 (2009: three), as listed in note 1-a, of which two operate outside the Kingdom of Saudi Arabia (2009: one).

The total assets, liabilities, commitments, contingencies and results of operations of these subsidiaries are not material to the Bank’s consolidated financial statements as a whole.

Retail segment: Includes individual customer deposits, credit facilities, customer debit current accounts (overdrafts), fees from banking services and remit-tance business.

Corporate segment:Incorporates deposits of VIP, corporate customer deposits, credit facili-ties, and debit current accounts (overdrafts).

Treasury segment:Incorporates treasury services, Murabaha with SAMA and internation-al Mutajara portfolios.

Investment services and brokerage seg-ments:

Incorporates investments of individuals and corporate in mutual funds, local and international share trading services and investment portfolios.

57

a) The Bank’s total assets and liabilities, together with its total operating income and expenses, and net income for the years ended December 31, for each segment are as follows:

RetailSegment

Corporate segment

Treasury segment

Investment services and brokerage segment Total

Total assets 82,397,368 47,568,053 54,072,844 802,645 184,840,910

Capital expenditures 571,630 - 1,318 - 572,948


Gross financing and investment income 6,525,109 2,449,836 343,994 22,442 9,341,381

Income paid to customers on time investments (38,432) (9,412) (182,504) - (230,348)

Income paid on syndicated Murabaha financ-ing from banks

- - - - -

Total operating income 7,881,379 2,380,340 1,117,325 282,088 11,661,132

Impairment charge for financing and other, net (705,116) (1,203,702) - - (1,908,818)

Deprecation and amortization (328,154) (6,515) (687) (13,883) (349,239)

Other operating expenses (2,150,094) (212,218) (75,798) (194,136) (2,632,246)

Total operating expenses (3,183,364) (1,422,435) (76,485) (208,019) (4,890,303)

Net income 4,698,015 957,905 1,040,840 74,069 6,770,829

RetailSegment

Corporate segment

Treasury segment

Investment services and brokerage segment Total

Total assets 69,770,859 50,978,976 49,561,176 418,718 170,729,729

Capital expenditures 553,359 7,348 345,173 - 905,880


Gross financing and investment income 6,048,622 2,842,664 840,353 192,656 9,924,295

Income paid to customers on time investments (91,424) (3,977) (372,013) (62,402) (529,816)

Income paid on syndicated Murabaha financ-ing from banks

- - (40,447) - (40,447)

Total operating income 7,153,842 2,167,224 1,721,536 462,690 11,505,292

Impairment charge for financing and other, net (707,166) (1,053,561) - - (1,760,727)

Deprecation and amortization (222,395) (7,439) (72,922) (19,863) (322,619)

Other operating expenses (2,077,751) (208,168) (164,499) (204,300) (2,654,718)

Total operating expenses (3,007,312) (1,269,168) (237,421) (224,163) (4,738,064)

Net income 4,146,530 898,056 1,484,115 238,527 6,767,228

(SR’000)

(SR’000)

2010

2009

58

b) The Bank’s credit exposure by business segments as at December 31, is as follows:

Credit risks comprise the carrying value of the consolidated statement of financial position, except for cash and balances with SAMA, property and equipment, and other assets.

26. Financial Risk ManagementThe Bank's activities expose it to a variety of financial risks and those activities involve the analysis, evaluation, acceptance and management of some degree of risk or combination of risks. Taking risk is core to the banking business, and these risks are an in-evitable consequence of participating in financial markets. The Bank's aim is therefore to achieve an appropriate balance between risk and return and minimize potential adverse effects on the Bank’s financial performance.

The Bank's risk management policies, procedures and systems are designed to identify and analyze these risks and to set appropri-ate risk mitigants and controls. The Bank reviews its Risk Management policies and systems on an ongoing basis to reflect changes in markets, products and emerging best practices.

Risk Management is performed by the Credit and Risk Management Group (“CRMG”) under policies approved by the Board of Directors. The CRMG identifies and evaluates financial risks in close co-operation with the Bank's operating units. The most im-portant types of risks identified by the Bank are credit risk, operational risk, liquidity risk and market risk. Market risk includes currency risk, profit rate risk and price risk.

26-1 Credit riskCredit risk is considered to be the most significant and pervasive risk for the Bank. The Bank takes on exposure to credit risk, which is the risk that the counter-party to a financial transaction will fail to discharge an obligation causing the Bank to incur a financial loss. Credit risk arises principally from financing (credit facilities provided to customers) and from cash and deposits held with other banks. Further, there is credit risk in certain off-balance sheet financial instruments, including guarantees relating to the purchase and sale of foreign currencies, letters of credit, acceptances and commitments to extend credit. Credit risk monitoring and control is performed by the CRMG, which sets parameters and thresholds for the Bank's financing activities.

a. Credit risk measurementFinancingThe Bank has structured a number of financial products, which are in accordance with Shariah law, in order to meet the customers’ demands. These products are all classified as financing assets in the Bank's consolidated statement of financial position. In mea-

RetailSegment

Corporate segment

Treasury segment

Investment ser-vices and broker-age segment Total

Consolidated balance sheet assets 72,914,628 47,174,521 39,732,833 559,728 160,381,710

Commitments and contingencies excluding irrevocable commitments to extend credit

2,792,759 7,889,348 315,217 - 10,997,324

RetailSegment

Corporate segment

Treasury segment

Investment ser-vices and broker-age segment Total

Consolidated balance sheet assets 62,676,278 50,899,268 40,469,295 272,425 154,317,266

Commitments and contingencies excluding irrevocable commitments to extend credit

7,856,286 4,562,960 - - 12,419,246

(SR’000)

(SR’000)

2010

2009

59

suring the credit risk of financing at a counter-party level, the Bank considers the overall credit worthiness of the customer based on a proprietary risk methodology. This risk rating methodology utilizes a 10 point scale based on quantitative and qualitative factors with seven performing categories (rated 1 to 7) and three non-performing categories (rated 8-10). The risk rating process is intended to advise the various independent approval authorities of the inherent risks associated with the counter-party and assist in determining suitable pricing commensurates with the associated risk.

This process also enables the Bank to detect any weakness in the portfolio quality and make appropriate adjustments to credit risk allowances, where credit quality has deteriorated and where losses are likely to arise. The Bank evaluates individual corporate customer balances, which are past due to make appropriate allowances against financings. For the remaining (performing) cor-porate portfolios, the Bank applies a loss rate to determine an appropriate collective allowance. The loss rate is determined based on historical experience of credit losses.

Settlement riskThe Bank is also exposed to settlement risk in its dealings with other financial institutions. These risks arise when the Bank pays away its side of the transaction to the other bank or counter-party before receiving payment from the third party. The risk is that the third party may not pay its obligation. While these exposures are short in duration they can be significant. The risk is mitigated by dealing with highly rated counter-parties, holding collateral and limiting the size of the exposures according to the risk rating of the counter-party.

b. Risk limit control and mitigation policiesThe responsibility for credit risk management is enterprise wide in scope. Strong Risk Management is integrated into daily pro-cesses, decision making and strategy setting, thereby making the understanding and management of credit risk the responsibility of every business segment.

The following business units within the Bank assist in the credit control process: • Corporate Credit Unit• Credit Administration Monitoring and Control Unit• Remedial Unit• Credit Policy Unit • Retail Credit Unit

The monitoring and management of the credit risk associated with these financings are done through the setting of approved credit limits. The Bank manages limits and controls concentrations of credit risk wherever they are identified - in particular, to individual customers and groups, and to industries and countries.

Concentrations of credit risks arise when a number of customers are engaged in similar business activities, activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentrations of credit risks indicate the relative sensitivity of the Bank's performance to developments affecting a particular industry or geographical location.

The Bank seeks to manage its credit risk exposure through the diversification of its financings to ensure there is no undue concen-tration of risks with individuals or groups of customers in specific geographical locations or economic sectors.

The Bank manages credit risk by placing limits on the amount of risk accepted in relation to individual customers and groups, and to geographic and economic segments. Such risks are monitored on a regular basis and are subject to an annual or more frequent review when considered necessary. Limits on the level of credit risk by product, economic sector and by country are reviewed at least annually.

Exposure to credit risk is also managed through the regular analysis of the ability of customers and potential customers to meet financial and contractual repayment obligations and by revising credit limits where appropriate.

Some other specific control and mitigation measures are outlined below.

b-1) Collateral

The Bank implements guidelines on the level and quality of specific classes of collateral. The principal collateral types are:• Mortgages over residential and commercial properties• Cash, shares and general assets for customers• Shares for Murabaha transactions (collateralized share trading)

b-2) Collateralized credit - related commitmentsThe primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit carry the same credit risk as the traditional banking products of the Bank.

Documentary and commercial letters of credit - which are written undertakings by the Bank on behalf of a customer authorizing a third party to draw drafts on the Bank up to a stipulated amount under specific terms and conditions, are collateralized by the underlying goods to which they relate and therefore, risk is partially mitigated.

60

Commitments to extend credit represent unused portions of authorizations to extend credit in the form of further financing prod-ucts, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Bank is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commit-ments, as most commitments to extend credit are contingent upon customers maintaining specific credit standards.

c.Impairment and provisioning policiesImpairment provisions are recognized for financial reporting purposes only for losses that have been incurred at the statement of financial position date, based on objective evidence of impairment and management judgment.

Management determines whether objective evidence of impairment exists under IAS 39, based on the following criteria, as defined by the Bank:• Delinquency in contractual payments of principal or profit• Cash flow difficulties experienced by the customer• Breach of repayment covenants or conditions• Initiation of bankruptcy proceedings against the customer• Deterioration of the customer’s competitive position• Deterioration in the value of collateral

The Bank's policy requires the review of each individual corporate customer at least annually or more regularly when individual circumstances require. Impairment allowances on individually assessed accounts are determined by an evaluation of incurred losses at the statement of financial position date on a case-by-case basis, and by using management judgment.

The assessment normally encompasses the collateral held (including re-confirmation of its enforceability) and the anticipated re-ceipts for that individual account.

Collectively assessed impairment allowances are provided for:• Portfolios of homogenous assets mainly relating to the retail financing portfolios that are individually not significant• On the corporate portfolio for financing where losses have been incurred, but not yet identified, by using historical experience,

judgment and statistical techniques

The table below sets out the maximum exposure to credit risk at the reporting date without considering collateral or other credit enhancements and includes the off-balance sheet financial instruments involving credit risks.

The above table represents a worst-case scenario of credit risk exposure to the Bank at December 31, 2010 and 2009, without taking account of any collateral held or other credit enhancements attached. For on-balance sheet assets, the exposures set out above are based on net carrying amounts as reported in the consolidated statement of financial position.

2010 2009

On-balance sheet items:

Due from banks and other financial institutions 11,117,539 14,334,760

Financing, net

Corporate 47,110,709 50,026,328

Retail 72,953,958 62,121,331

Customer debit current accounts, net 312,062 695,791

Other assets, net 1,589,141 1,817,286

Total on-balance sheet items 133,083,409 128,995,496

Off-balance sheet items:

Letters of credit and acceptances 4,633,730 4,864,082

Letters of guarantee 6,363,594 7,555,164

Irrevocable commitments to extend credit 7,167,869 11,577,946

Total off-balance sheet items 18,165,193 23,997,192

Maximum exposure to credit risk 151,248,602 152,992,688

(SR’000)

61

26-2 Liquidity risksLiquidity risk is the risk that the Bank will be unable to meet its payment obligations associated with its financial liabilities when they fall due and to replace funds when they are withdrawn. The consequence may be the failure to meet obligations to repay depositors and financing parties and fulfill financing commitments. Liquidity risk can be caused by market disruptions or by credit downgrades, which may cause certain sources of funding to become unavailable immediately. Diverse funding sources available to the Bank help mitigate this risk. Assets are managed with liquidity in mind, maintaining a conservative balance of cash and cash equivalents.

Liquidity risk management processThe Bank’s liquidity management process, as monitored by the Bank’s Assets and Liabilities Committee (ALCO), includes:• Day-to-day funding, managed by Treasury to ensure that requirements can be met and this includes the replenishment of funds

as they mature or are invested• Monitoring balance sheet liquidity ratios against internal and regulatory requirements • Managing the concentration and profile of debt maturities• Maintaining diversified funding sources• Liquidity management and asset and liability mismatching

Monitoring and reporting take the form of analyzing cash flows of items with both contractual and non-contractual maturities. The net cash flows are measured and ensured that they are within acceptable ranges. The Treasury/ALCO also monitors the level and type of undrawn lending commitments, usage of overdraft facilities and the potential impact contingent liabilities, such as standby letters of credit and guarantees, may have on the Bank’s liquidity position.

The tables below summarize the maturity profile of the Bank’s assets and liabilities on the basis of the remaining maturity as of the consolidated statement of financial position date to the contractual maturity date.

Management monitors the maturity profile to ensure that adequate liquidity is maintained. Assets available to meet all of the liabilities and to cover outstanding financing commitments include cash, balances with SAMA and dues from banks. Further, in accordance with the Banking Control Law and Regulations issued by SAMA, the Bank maintains a statutory deposit equal to a sum not less than 7% of total customer deposits, and 4% of the total of other customer accounts. In addition to the statutory deposit, the Bank maintains a liquid reserve of not less than 20% of the deposit liabilities in the form of cash, gold or assets, which can be converted into cash within a period not exceeding 30 days. Also, the Bank has the ability to raise additional funds through special financing arrangements with SAMA, including deferred sales transactions.

The contractual maturities of assets, liabilities and shareholders’ equity as at December 31, based on discounted cash flows, are as follows:

(SR’000)

Less than 3 months

3 To 12 months

1 To 5 years

Over 5 years

No fixed maturity Total

Assets

Cash and balance with SAMA 13,241,041 1,650,217 2,750,363 1,833,575 - 19,475,196

Due from banks and other financial institutions 11,117,539 - - - - 11,117,539

Financing, net 18,300,313 22,229,443 63,541,315 15,993,596 - 120,064,667

Investments 18,378,915 10,508,527 - - - 28,887,442

Customer debit current accounts, net 100,075 149,613 - 62,374 - 312,062

Property and equipment, net - - - - 3,394,863 3,394,863

Other assets, net 341,330 972,722 275,089 - - 1,589,141

Total 61,479,213 35,510,522 66,566,767 17,889,545 3,394,863 184,840,910

Liabilities and shareholders’ equity

Due to banks and other financial institutions 5,414,181 - - - - 5,414,181

Customer deposits 131,322,236 9,064,659 - 2,677,142 - 143,064,037

Other liabilities - - - - 6,044,903 6,044,903

Shareholders' equity - - - - 30,317,789 30,317,789

Total 136,736,417 9,064,659 - 2,677,142 36,362,692 184,840,910

2010

62

(SR’000)

(SR’000)

(SR’000)

Less than 3 months

3 To 12 months

1 To 5 years

Over 5 years


Assets

Cash and balances with SAMA 6,144,303 1,242,318 - 4,026,399 - 11,413,020

Due from banks and other financial institutions 14,334,760 - - - - 14,334,760

Financing, net 30,709,269 13,288,011 54,873,596 13,276,783 - 112,147,659

Investments 2,667,980 24,471,076 - - - 27,139,056

Customer debit current accounts, net 591,422 20,874 83,495 - - 695,791

Property and equipment, net - - - - 3,182,157 3,182,157

Other assets, net 301,338 248,179 69,726 1,198,043 - 1,817,286

Total 54,749,072 39,270,458 55,026,817 18,501,225 3,182,157 170,729,729

Liabilities and shareholders’ equity

Due to banks and other financial institutions 2,113,327 3,988,746 - - - 6,102,073

Customer deposits 109,333,065 - - 13,528,775 - 122,861,840

Other liabilities 10,559,000 - - - 2,465,932 13,024,932

Shareholders' equity - - - - 28,740,884 28,740,884

Total 122,005,392 3,988,746 - 13,528,775 31,206,816 170,729,729

Less than 3 months

3 To 12 months

1 To 5 years

Over 5 years


Due to banks and other financial institutions 5,425,897 - - - - 5,425,897

Customer deposits 131,358,236 9,067,659 - 2,678,492 - 143,104,387

Other liabilities - - - - 6,044,903 6,044,903

Total 136,784,133 9,067,659 - 2,678,492 6,044,903 154,575,187

Less than 3 months

3 To 12 months

1 To 5 years

Over 5 years


Due to banks and other financial institutions 2,113,327 4,010,584 - - - 6,123,911

Customer deposits 109,333,065 - - 13,603,168 - 122,936,233

Other liabilities 10,559,000 - - - 2,465,932 13,024,932

Total 122,005,392 4,010,584 - 13,603,168 2,465,932 142,085,076

The following tables disclose the maturity of contractual financial liabilities on undiscounted cash flows as at December 31:

The cumulative maturities of commitments and contingencies are given in note 16-C-1 of the financial statements.

2010

2009

2009

63

26-3 Market risksThe Bank is exposed to market risks, which is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in market prices. Market risks arise on profit rate products, foreign currency and mutual fund products, all of which are exposed to general and specific market movements and changes in the level of volatility of market rates or prices such as profit rates, foreign exchange rates and quoted market prices.

Market risk exposures are monitored by Treasury/Credit and Risk Department and reported to ALCO on a monthly basis. ALCO deliberates on the risks taken and ensures that they are appropriate.

a. Market risks - Speculative operationsThe Bank is not exposed to market risks from speculative operations. The Bank is committed to Shariah guidelines, which do not permit it to enter into contracts or speculative instruments such as hedging, options, forward contracts and derivatives.

b. Market risks - Banking operationsThe Bank is exposed to market risks, which is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in market prices. Market risks arise on profit rate products, foreign currency and mutual fund products, all of which are exposed to general and specific market movements and changes in the level of volatility of market rates or prices such as profit rates, foreign exchange rates and quoted market prices.

- Profit rate riskCash flow profit rate risk is the risk that the future cash flows of a financial instrument will fluctuate due to changes in market profit rates. The Bank does not have any significant exposure to the effects of fluctuations in the prevailing level of market profit rates on its future cash flows as a significant portion of profit earning financial assets and profit bearing liabilities are at fixed rates and are carried in the financial statements at amortized cost. In addition to this, a substantial portion of the Bank’s financial liabilities are non-interest bearing.

- Foreign currency risksThe Bank is exposed to the effects of fluctuations in foreign currency exchange rates on its financial position, results of operations and cash flows. The Bank’s management sets limits on the level of exposure by currency and in total for both overnight and intraday positions, which are monitored daily.

A substantial portion of the net foreign currency exposure to the Bank is in US Dollars, where the SR is pegged to the US Dollar. The other currency exposures are not considered significant to the Bank’s foreign currency risks and as a result the Bank is not exposed to major foreign currency risks.

The Bank has performed a sensitivity analysis for the reasonably possible changes in foreign exchange rates, other than US Dol-lars, using historical average exchange rates and has determined that there is no significant impact on its net foreign currency exposures.

The following tables summarize the Bank’s exposure to foreign currency exchange rate risk at December 31, 2010 and 2009 and the concentration of currency risks. Included in the table are the Bank’s financial instruments at carrying amounts, categorized by currency:

64

UAE DIRHAM

BANGLADESH TAKA

JAPANESE YEN EURO

LEBANESE LIRA

MALAYSIAN RINGGIT

US DOLLAR

POUND STERLING OTHER TOTAL

ASSETS

Cash and cash equivalent 17,779 - 26 22,745 192 49,319 101,498 13,546 65,565 270,670

Due from banks and other financial institutions

96,603 99,002 140,331 198,407 477 1,554,705 1,534,148 5,419 907,230 4,536,322

Financing, net - - - - - 4,914,348 6,840,211 - - 11,754,559

Investments - - - 513 - 1,561,840 902,883 - 461,014 2,926,250

Customer debit current account, net

102 - - 1,375 - - 375 291 - 2,143

Other assets, net - - - 62 - 283,901 63,708 - 15,972 363,643

Total assets 114,484 99,002 140,357 223,102 669 8,364,113 9,442,823 19,256 1,449,781 19,853,587

LIABILITIES

Due to banks and other financial institutions

- - - 729 - 2,960,776 1,168,444 2,832 198,138 4,330,919

Customer deposits 6,061 - 138,570 180,648 11,922 2,914,271 682,332 15,546 45,618 3,994,968

Other liabilities 3,672 74,700 1,009 7,288 1,327 272,240 (115,874) 6,112 408,359 658,833

Total liabilities 9,733 74,700 139,579 188,665 13,249 6,147,287 1,734,902 24,490 652,115 8,984,720

Net 104,751 24,302 778 34,437 (12,580) 2,216,826 7,707,921 (5,234) 797,666 10,868,867

UAE DIRHAM

BANGLADESH TAKA

JAPANESE YEN EURO

LEBANESE LIRA

MALAYSIAN RINGGIT

US DOLLAR

POUND STERLING OTHER TOTAL

ASSETS

Cash and cash equivalent 9,585 - 8 31,665 213 35,793 108,301 13,685 44,194 243,444

Due from banks and other financial institutions

58,070 84,242 10,708 141,181 9,148 122,889 389,241 2,973 462,841 1,281,293

Financing, net - - - 232,467 - 5,801,295 10,568,647 - - 16,602,409

Investments - - - 553 - 1,135,424 291,297 - - 1,427,274

Customer debit current account, net

- - - 1,211 - - 5 8 - 1,224

Other assets, net (1,334) - (195) 61 - 92,381 149,563 - 104 240,580

Total assets 66,321 84,242 10,521 407,138 9,361 7,187,782 11,507,054 16,666 507,139 19,796,224

LIABILITIES

Due to banks and other financial institutions

5,198 - - 97,646 - 1,711,580 457,230 2,188 3,650 2,277,492

Customer deposits 11,874 - 4,742 247,722 12,011 3,701,881 1,000,006 9,296 6,794 4,994,326

Other liabilities 3,888 81,009 888 8,237 60,132 54,915 (141,529) 5,468 83,579 156,587

Total liabilities 20,960 81,009 5,630 353,605 72,143 5,468,376 1,315,707 16,952 94,023 7,428,405

Net 45,361 3,233 4,891 53,533 (62,782) 1,719,406 10,191,347 (286) 413,116 12,367,819

(SR’000)

(SR’000)

2010

2009

65

(SR’000) 2010

c. Price riskThe Bank has certain investments that are carried at fair value through the income statement and includes investments in quoted mutual funds and other investments. Price risk arises due to changes in the quoted market prices of these mutual funds.

As these investments are in a limited number of funds and are not significant to the total investment portfolio, the Bank monitors them periodically and determines the risk of holding them based on changes in market prices.

Other investments have little or no risks as these are bought for immediate sales. Investments are made only with a confirmed sale order and therefore involve minimal risk.

d. Operational riskOperational risk is the risk of loss resulting from inadequate or failed internal processes, people, systems and external events.

Operational risk is inherent in most of the Bank’s activities; this necessitates an integrated approach to the identification, mea-surement and monitoring of operational risk.

An Operational Risk Management Unit (ORMU) has been established within the Credit and Risk Management Group, which fa-cilitates the management of operational risk within the Bank. ORMU facilitates the management of operational risk by setting policies, developing systems, tools and methodologies, overseeing their implementation and use within the business units, and providing ongoing monitoring and guidance across the Bank.

The three primary operational risk management processes in the Bank are Risk Control Self Assessment, Operational Loss Data-base and eventual implementation of Key Risk Indicators, which are designed to function in a mutually reinforcing manner.

27. Geographical concentration a)The distribution by the geographical region of the major categories of assets, liabilities, commitments, contingencies and credit exposure accounts as at December 31, are as follows:

Kingdom of SaudiArabia

Other GCC andMiddle East Europe

North America

Latin America

South EastAsia

Other Countries Total

ASSETS:

Cash and balances with SAMA 19,425,698 1,187 - - - 48,311 - 19,475,196

Due from banks and other financing institutions

3,420,097 5,176,063 593,778 138,266 - 1,409,658 379,677 11,117,539

Financing, net 113,025,229 999,989 187,600 - 937,500 4,914,349 - 120,064,667

Investments 27,438,579 693,037 24,345 163,768 - 567,713 - 28,887,442

Total 163,309,603 6,870,276 805,723 302,034 937,500 6,940,031 379,677 179,544,844

LIABILITIES:

Due to banks and other financing institutions

1,059,993 1,430,344 19,091 13,775 - 2,871,692 19,286 5,414,181

Customer deposits 139,756,491 13,949 - - - 3,293,597 - 143,064,037

Total 140,816,484 1,444,293 19,091 13,775 - 6,165,289 19,286 148,478,218

Commitments and contingencies 13,042,613 585,232 1,621,882 192,710 21,217 395,559 2,305,980 18,165,193

Credit exposure (stated at credit equivalent value)Commitments and contingencies

5,874,744 585,232 1,621,882 192,710 21,217 395,559 2,305,980 10,997,324

66

(SR’000)

(SR’000)

(SR’000)

2009

2010

2009

Kingdom of SaudiArabia

Other GCC andMiddle East Europe

North America

Latin America

South EastAsia

Other Countries Total

ASSETS:

Cash and balances with SAMA 11,378,837 - - - - 34,183 - 11,413,020

Due from banks and other financing institutions

7,431,130 2,606,803 2,050,880 165,741 - 2,076,223 3,983 14,334,760

Financing, net 106,238,961 645,732 1,125,124 - - 4,137,842 - 112,147,659

Investments 26,097,357 724,437 23,039 193,157 - 101,066 - 27,139,056

Total 151,146,285 3,976,972 3,199,043 358,898 - 6,349,314 3,983 165,034,495

LIABILITIES:

Due to banks and other financing institutions

3,649,873 577,310 18,252 60,921 - 1,787,655 8,062 6,102,073

Customer deposits 119,160,019 - - - - 3,701,821 - 122,861,840

Total 122,809,892 577,310 18,252 60,921 - 5,489,476 8,062 128,963,913

Commitments and contingencies 21,810,872 153,145 222,930 67,350 - 1,667,083 75,812 23,997,192

Credit exposure (stated at credit equivalent value)Commitments and contingencies

12,267,585 107,739 22,783 5,695 - 14,867 577 12,419,246

Credit equivalent amounts reflect the amounts that result from the conversion of the Bank’s off-balance sheet liabilities relating to commitments and contingencies into the risk equivalent of financing, using the credit conversion factors prescribed by SAMA. The credit conversion factor is meant to capture the potential credit risk related to the exercise of that commitment. b) The distributions by geographical concentration of non-performing financing and the provisions for financing losses as at

December 31, are as follows:

Refer to note 6-c for performing financing.

Non-performing Provisions for financing losses Net

Kingdom of Saudi Arabia 2,416,464 (942,512) 1,473,952

South East Asia 245,706 (125,449) 120,257

Europe - - -

North America - - -

Total 2,662,170 (1,067,961) 1,594,209

Non-performing Provisions for financing losses Net

Kingdom of Saudi Arabia 3,866,381 (2,187,590) 1,678,791

South East Asia - - -

Europe - - -

North America - - -

Total 3,866,381 (2,187,590) 1,678,791

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(SR’000)

(SR’000)

2010

2009

28. Fair value of financial assets and liabilitiesDetermination of fair value and fair value hierarchy

The Bank uses the following hierarchy for determining and disclosing the fair value of financial instruments:

Level 1: quoted prices in active markets for the same instrument (i.e., without modification or repacking).

Level 2: quoted prices in active markets for similar assets and liabilities or other valuation techniques for which all significant in-puts are based on observable market data.

Level 3: valuation techniques for which any significant input is not based on observable market data.

Assets at fair values are as follows:

Fair value is the amount for which an asset could be exchanged or a liability settled between knowledgeable, willing parties in an arm’s length transaction.

The fair values of on-statements of financial position financial instruments are not significantly different from the carrying values included in the consolidated financial statements. The fair values of financing due from and due to banks, which are carried at am-ortized cost, are not significantly different from the carrying values included in the financial statements, since the current market commission rates for similar financial instruments are not significantly different from the contracted rates and for the short dura-tion of due from and due to banks.

The value obtained from the relevant valuation model may differ with the transaction price of a financial instrument. The differ-ence between the transaction price and the model value commonly referred to as ‘day one profit and loss’ is either amortized over the life of the transaction, deferred until the instrument’s fair value can be determined using market observable data, or realized through disposal. Subsequent changes in fair value are recognized immediately in the income statement, without reversal of de-ferred day one profits and losses.

Level 1 Level 2 Level 3 Total

Financial assetsFinancial assets at FVIS 1,051,591 - 2,177,086 3,228,677

Level 1 Level 2 Level 3 Total

Financial assetsFinancial assets at FVIS 928,985 - 1,890,793 2,819,778

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29. Related party transactionsIn the ordinary course of business, the Bank performs business transactions with related parties. The related party transactions are governed by limits set by the Banking Control Law and the regulations issued by SAMA. The nature and balances resulting from such transactions as at December 31, are as follows:

* = off-balance sheet

Income and expenses pertaining to transactions with related parties included in the consolidated financial statements for the years ended December 31, are as follows:

The amounts of compensations recorded in favor of or paid to the Board of Directors and the executive management personnel during the years ended December 31, are as follows:

The executive management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Bank directly or indirectly.

Related parties Type of transaction 2010 2009

Members of the Board of Directors Mutajara 2,087,694 3,073,303

Current accounts - 285,581

Contingent liabilities* 1,275,542 1,459,451

Companies and establishments guar-

anteed by members of the Board of

Directors

Mutajara 474,994 485,175

Current accounts 34,657 -

Contingent liabilities* 36,129 9,560

Mudaraba funds (note 31) Current account 15,919 6,706

Mudaraba 6,248,472 4,025,270

Investment in mutual funds 400,537 243,945

Major shareholders (above 5% equity share)

Mutajara 120,597 120,597

Direct investment 114,338 1,515,469

Current accounts 6,184 17,447

Investment in mutual funds 14,103 70,926

Other liabilities 13,523 12,928

(SR’000)

(SR’000)

(SR’000)

2010 2009

Income from financing 121,382 124,690

Employees’ salaries and benefits (travel tickets) 10,395 13,175

Rent and premises related expenses 1,526 1,526

Board of Directors’ remunerations 3,090 2,971

2010 2009

Short-term benefits 19,656 22,603

Provision for end of service benefits 1,324 1,317

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30. Mudaraba fundsMudaraba funds as at December 31, comprise the following:

31. Special commissions excluded from the consolidated statements of incomeThe following represents the movements in charity accounts, which are included in other liabilities (see note 13):

32. Investment management servicesThe Bank offers investment services to its customers. The Bank has established a number of Mudaraba funds in different invest-ment aspects. These funds are managed by the Bank’s Investment Department and a portion of the funds is also invested in par-ticipation with the Bank. Mutual funds’ financial statements are not included in the consolidated statement of financial position of the Bank. The Bank’s share of investments in these funds is included under investments and is disclosed under related party transactions. Funds invested in participation with the Bank amounted to SR 6,248,472 thousand at December 31, 2010 (2009: SR 4,025,270 thousand).

33. Capital adequacy The Bank's objectives when managing capital are to comply with the capital requirements set by SAMA to safeguard the Bank's ability to continue as a going concern and to maintain a strong capital base.

Capital adequacy and the use of regulatory capital are monitored daily by the Bank's management. SAMA requires a minimum level hold of the regulatory capital and to maintain a ratio of 8% of the total regulatory capital to the risk-weighted asset.

The Bank monitors the adequacy of its capital using ratios established by SAMA. These ratios measure capital adequacy by compar-ing the Bank’s eligible capital with its consolidated statement of financial position, and commitments and contingencies to reflect their relative risk as at December 31, 2010 and 2009.

(SR’000)

(SR’000)

2010 2009

Customers’ investments 17,079,401 8,673,643

Current accounts, metals 5,678 10,902

Total 17,085,079 8,684,545

2010 2009

Balance, beginning of the year 78,206 64,810

Additions during the year 9,550 18,912

Payments during the year (82,833) (5,516)

Balance, end of the year 4,923 78,206

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(SR’000)

2010 2009

Credit risk weighted assets 127,166,653 129,319,360

Operational risk weighted assets 19,207,023 17,946,355

Market risk weighted assets 8,262,400 11,699,738

Total Pillar I - risk weighted assets 154,636,076 158,965,453

Tier I - capital 23,546,960 21,973,656

Tier II - capital 8,360,412 8,701,577

Total Tier I & II capital 31,907,372 30,675,233

Capital adequacy ratio %

Tier I - ratio 15.23% 13.82%

Tier II - ratio 20.63% 19.30%

34. Comparative figures Certain prior year amounts have been reclassified to conform with the current year presentation.

35. Post financial position events The Bank’s Board of Directors proposed, in its meeting dated January 19, 2011, a distribution of dividends to the shareholders for the second half of the current fiscal year in the amount of SR 2.250 million. This amounts to SR 1.50 per share net of Zakat.

The Board’s proposal is subject to the approval of the Extraordinary General Assembly in its next meeting.

36.Issued IFRS but not yet effectiveThe Bank has chosen not to adopt the updates on standards mentioned below early, which have been published and are manda-tory for compliance for the Bank’s fiscal year beginning January 1, 2011 and afterwards.

• IAS 24 - disclosure on related parties• Amendments on IFRS 14 and IAS 19• IFRS 9 - financial instruments• IAS 32 - presentation of financial instruments

The adoption of the above standards and amendments will not result in any material change to consolidated financial statements other than IFRS 9. The Bank is still evaluating the implications of IFRS 9 on the Bank’s financial statements.

37. Approval of the Board of DirectorsThe consolidated financial statements were approved by the Board of Directors on 15 Safar 1432H (corresponding to January 19, 2011).

38. Basel II pillar 3 disclosures (unaudited)Under Basel II Pillar 3, certain quantitative and qualitative disclosures are required, and these disclosures will be made available on the Bank’s website www.alrajhibank.com.sa and the annual report respectively, as required by the Saudi Arabian Monetary Agency.

Reaching out to our customers….almost anywhere

6 INDEPENDENT AUDITORS' REPORT

7ANNUAL DISCLOSURE OF BASEL II REQUIREMENTS

78

Table 1: scope of application

This document is a Basel II Pillar 3 disclosure of Al Rajhi Banking and Investment Corporation, Saudi Arabia.

The financial results of all subsidiaries are fully consolidated in publishing the results of Al Rajhi Banking and Investment Corpora-tion, Saudi Arabia (Al Rajhi Bank or the Bank). Brief descriptions of the subsidiary entities in the group are as follows:

Al Rajhi Capital CompanyThe company was incorporated in 2007 in KSA as a wholly owned subsidiary of Al Rajhi Bank. The subsidiary engages in Mutual Fund Management, Brokerage and Corporate Finance. Al Rajhi Company for Development, RiyadhThe company was incorporated in 2000, for investment in land, building and real estate. It is 99% owned by Al Rajhi Bank.

Al Rajhi Banking and Investment Corporation BHD MalaysiaThe company was incorporated in 2006 providing Islamic banking services in Malaysia and is 100% owned by Al Rajhi Bank.

There are no restrictions, or other major impediments, on the transfer of funds or regulatory capital within the group. However, this is subject to the satisfaction of all internal and external approvals by relevant authorities.

Table 2: capital structure

Capital of Al Rajhi Bank consists of:

1,500,000,000 fully paid-up ordinary shares of SR 10 each.

Table 3: capital adequacy

Capital adequacy indicates the ability of the Bank to meet any contingency without compromising the interest of its depositors or the provision of credit across business cycles. Sufficient capital in relation to the risk profile of the Bank’s assets helps promote financial stability and confidence of the shareholders.

The Bank aims to maximise shareholders’ value through an optimal capital structure that protects the stakeholders’ interests un-der extreme stress conditions and provides sufficient capacity for growth whilst ensuring compliance with the regulatory require-ments and meeting shareholders’ expectations.

The objectives of capital management are threefold:Ensure stability of the Bank by holding adequate capital to cover unexpected losses.Promote the efficient use of capital by optimising risk adjusted return.Enable efficient and effective allocation of capital across the business through prudent decision making and pro-active risk management.

The Bank measures the following types of capital:Regulatory capital: Measure of capital needed to protect banks against insolvency. The regulator provides guidelines on how banks should measure regulatory capital and typically sets minimum standards for banks (e.g., 8% is set by SAMA). This approach is used for regulatory reporting in compliance with SAMA rules.

Accounting capital: Measures the equity capital as defined by accounting rules. This measure is the sum of paid-up capital, eligible reserves, interim profits and revaluation reserve.

Statutory/legal capital: Measures the required capital for a bank to meet statutory requirements. The minimum statutory capital is set by the regulator and incorporates share capital and retained earnings.

ANNUAL DISCLOSURE OF BASEL II REQUIREMENTS

79

Al Rajhi Bank has adopted the standardised approach for calculating the Capital Adequacy Ratio (CAR). This approach will be used until such time the Bank moves to the Foundation Internal Rating Based Approach (FIRB).

GENERAL QUALITATIVE DISCLOSURE REQUIREMENTSStructure and organisation of the relevant Risk Management Function

The Risk Management Function is divided into 4 key areas:Corporate governance (policies, procedures and governance structure) The Risk Management framework is integral to the operations and culture of Al Rajhi Bank. Risk is proactively managed within the Bank. However, the framework is flexible to incorporate new businesses the Bank may undertake. The framework is comprehen-sive and has been communicated from the Board of Directors down to the individual business lines. The Bank’s business strategy is to achieve the objective of being a strong financial partner with insight and transparency in risk-taking. The Risk Governance framework supports this objective.

The Risk Governance structure is comprised of the following committees: Board of Directors (the Board), Executive Committee of the Board, Audit Committee of the Board, High Management Committee, Asset and Liability Management Committee (ALCO), Credit Committee, Remedial Management Committee, Risk Management Committee and Compliance Committee.

The following guiding principles apply to all Credit and Risk Management activities:

Independence: A clear demarcation exists between Credit and Risk Management and the business divisions. All activities that commit the Bank either legally or financially to a position of risk require prior approval by authorised individuals or committees at the appropriate level from both the Credit & Risk Management Group and the business.

Transparency: Credit & Risk Management structures, policies and procedures are transparent and based on well-defined prin-ciples communicated across all levels.

Approval authority: Committee and individual approval authorities are delegated by the Board.

Dual signature: Risk taking commitments require the approval of at least two authorised individuals.

Accountability: Risk and reward from a transaction are attributed to the same business unit and form an integral part of the busi-ness performance measurement.

The functional management of risk across the Bank is undertaken by the Credit & Risk Management Group headed by the Chief Risk Officer who reports to the CEO. The Credit and Risk Management Group is comprised of Corporate Credit Management, Risk Management, Credit Policy and IT Projects and Credit Administration Monitoring and Control.

The Credit and Risk Management Group activities include the following:Evaluation and approval of risk limits/exposures within delegated authorities (or recommendation to higher approval authorities in case of large exposures), independent of the business.Development, communication, guidance and monitoring of adherence to comprehensive risk policies.In conjunction with the Business Units, recommendation of the Bank’s risk appetite to the Board.Daily management of all other risk functions, including the control, monitoring and reporting of risk limits and exposures for inter-nal control and regulatory compliance purposes.

Credit risk Credit risk is the potential risk of loss of revenue and/or return of principal as a result of default or the inability of a borrower or counter-party to meet its contractual obligation.

The Bank addresses credit risk, which is its most substantial component of risk, through the following process:

Credit processes: Approval, disbursements, administration, classification, recoveries, and write-offs are governed by the Bank’s credit policy. This policy is reviewed by the Credit and Risk Management Group and approved by the Board.

Lending proposals: All credit proposals are independently reviewed by the Credit and Risk Management Group with authority to either approve within delegated limits or recommend for approval to a higher approval authority.

Corporate lending accounts: Reviewed at a minimum on an annual basis.

Concentration of exposures to counter-parties, geographies and sectors are governed and monitored by guidelines and limits pre-scribed by the credit policy. Corporate borrowers are risk rated using an internal risk rating methodology to provide support for credit decisions.

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Market and liquidity risk Market risk is the risk of loss resulting from on-balance and off-balance sheet positions as a result of adverse movements in market prices. The management of market risk is achieved by the identification, measurement, monitoring, control, and reporting of all activities that result from transactional exposures. Market risk in the Bank is comprised of profit rate risk, foreign exchange risk, equity price risk and commodity price risk.

Profit rate risk is the potential impact on the Bank’s net income margin caused by the changes in market rates of return. The Bank manages its profit rate risk by matching repricing of assets and liabilities. It measures profit rate risk by evaluating the potential impact of a 200bps movement in market rates.

Foreign exchange risk is the impact of adverse exchange rate movements on foreign currency exposures arising from customer transactions undertaken by the Bank. Foreign currency positions are marked-to-market on a daily basis, and are monitored against approved position limits. FX customer transactions are driven primarily by customer remittances and trade finance transactions. Total exposures are small relative to market volumes.

Equity price risk is the impact of adverse price movements in the price of equities on equity positions. The Bank has limited equity open positions. These positions are regularly marked-to-market.

Commodity Price Risk is the risk to earnings or capital that results from adverse price movements in the price of commodities. The Bank engages in commodity transactions to facilitate Shariah compliant customer transactions. It does not conduct proprietary trading in commodities and its exposure is not material.

Liquidity risk refers to the Bank’s potential inability to pay its debts and obligations when due. This situation may arise because of failure to convert assets into cash, an inability to procure sufficient funds, or funds being raised at an exceptionally high cost that may adversely affect the Bank’s income and capital position. Liquidity risk may result in the Bank’s inability to unwind or offset underlying risk in its asset bases. This may force the Bank to sell its assets at a loss due to insufficient market liquidity.

The Bank considers the following three main liquidity risk types:

Term liquidity and call risk arises when there is a mismatch between incoming and outgoing cashflows. There may be unexpected delays in repayments to the Bank (term liquidity risk) or unexpectedly high payment outflows (call risk).

Structural liquidity risk refers to the cost of liquidity for the purpose of closing liquidity gaps if refinancing becomes more expensive due to a decline in the Bank's creditworthiness.

Market liquidity risk arises when a position cannot be sold within a desired time period or only at a discount. This is especially the case with securities in illiquid markets.

Operational risk Operational risk is the risk of loss resulting from inadequate or failed internal processes, human error, systems, and/or external events. The Operational Risk Management Unit (ORMU) within the Credit and Risk Management Group facilitates the manage-ment of operational risk in the Bank.

ORMU facilitates the management of operational risk by setting policies, developing systems, tools and methodologies, oversee-ing their implementation and use within the business units and providing ongoing monitoring and guidance across the Bank. The Group Operational Risk Committee reports to the Risk Management Committee.

Table 4: credit risk - general disclosures for all banksThe following are disclosures relating to the Credit Risk Management process in the Bank.

Definitions of past due and impaired

For accounting purposes: A financed asset is considered past due where a repayment is overdue for 90 days or less. If the repay-ment is overdue for more than 90 days the financed asset is considered as impaired.

For Basel II purposes, financing assets are considered impaired when: The Bank considers that the obligor is unlikely to pay its credit obligations in full, without recourse by the Bank to actions such as realising collateral (if held); or The obligor is past due more than 90 days on any material credit obligation to the Bank.

81

Description of approaches followed for specific and general allowances and statistical methodsPositions in portfolios that are individually significant, i.e. corporate bank assets, are reviewed individually for impairment and any asset with specific impairment is provisioned, taking into account the potential future recoveries net of collateral.Unimpaired individually significant assets are grouped together and a provision reserved, based on a study undertaken on the historical performance of the portfolio.Portfolios that are not considered individually significant, i.e. retail bank assets, are provisioned based on a behavioural analysis of the underlying portfolio.

Discussion of the Bank’s Credit Risk Management policyCredit risk is considered to be the most significant and pervasive risk for the Bank. The Bank takes on exposure to credit risk, which is the risk that the counter-party to a financial transaction will fail to discharge an obligation when due causing the Bank to incur a financial loss, or adversely impacting the timing of its cashflow. Credit risk arises principally from financing (credit facilities pro-vided to customers) and investments. In addition, there is credit risk in certain off-balance sheet financial instruments, including guarantees, letters of credit, acceptances and commitments to extend credit. Credit risk monitoring and control is performed by the Credit and Risk Management Group which sets parameters and establishes thresholds around the Bank's financing activities.

The Bank’s Credit Risk Management process includes:

Credit risk measurementThe Bank structures financial products in accordance with Shariah law. These products are classified as either financing assets or investments in the Bank's consolidated balance sheet. In measuring credit risk of financed assets at a counter-party level, the Bank considers the overall creditworthiness of the customer based on a proprietary risk rating methodology. For corporate customers, the risk rating methodology utilises a 22-point scale, based on quantitative and qualitative factors with 19 performing categories. The outcome of the risk rating process is intended to reflect counter-party credit quality and assist in determining suitable pricing commensurate with the associated risk.

The risk rating process assists the Bank to identify any weakness in the portfolio quality and make appropriate provisions in cases where credit quality has deteriorated and where losses are likely to arise. The Bank evaluates corporate obligors that are past due, to make appropriate allowances against impaired assets. For the remaining corporate loan portfolio, the Bank applies a loss rate to determine an appropriate allowance. The loss rate is determined based on historical experience of credit losses.

The Bank employs a retail credit scoring models using an application or behavioural score within a detailed credit program with well-defined parameters. The Bank relies on product-level quantitative and qualitative guidelines to monitor credit risk in its retail portfolio.

Risk limit control and mitigation policiesThe responsibility for Credit and Risk Management is enterprise-wide in scope. Strong Risk Management is integrated into daily processes, decision making and strategy setting, thereby making the understanding and management of credit risk the responsi-bility of every business segment.

In order to ensure objectivity and accountability, and to reinforce ownership, the following units within the Bank assist in the credit control process:Corporate Credit Unit (Credit Evaluation and Assessment)Credit Administration Monitoring and Control UnitRemedial UnitCredit Policy UnitRetail Credit Unit (Credit Evaluation and Assessment)

The monitoring and management of credit risk associated with financing or investments are enforced by setting approved credit limits. The Bank manages limits and controls concentrations of credit risk to countries, industries and to individual customers or company groups.

Concentrations of credit risk arises when a number of customers are engaged in similar business activities, activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentration of credit risk indicates the relative sensitivity of the Bank's performance to developments affecting a particular industry or geographical location.

The Bank seeks to manage its credit risk exposure through diversification of its portfolio to ensure there is no undue concentration of risk with individuals or groups of customers in specific geographical locations or economic sectors.

The Bank manages credit risk by placing limits on the level of risk acceptable in relation to individual customers, company groups, geographic and economic segments. Such risks are monitored on a regular basis and are subject to an annual or more frequent review when considered necessary. Limits on the level of credit risk by product, economic sector and by country are reviewed at least annually.

82

Exposure to credit risk is also managed through regular analysis of the ability of customers and potential customers to meet finan-cial and contractual repayment obligations and by revising credit limits where appropriate.

Credit default/counterparty riskThe Bank quantifies its credit default risk as part of Pillar 1 using the standardised approach. In this method, risk weights are defined for certain types of credit exposures primarily on the basis of external rating provided by rating agencies for obligors with no internal rating. The default risk is then quantified into the resulting capital requirement. Any additional capital required under Pillar 2 is calculated using proprietary developed internal models.

In calculating capital requirements, credit risk mitigation techniques are used to control credit risk. These include, but are not lim-ited to, financial collateral such as cash and shares, certain forms of physical collateral such as real estate and financial guarantees.

Under the guidelines of SAMA for the standardised approach, the Bank categorises exposure for capital treatment as follows:

Sovereigns: SAMA requires that banks operating in Saudi Arabia with exposures to other sovereigns (meeting the guidance criteria prescribed by Basel II) use the preferential risk weight assigned to the sovereign by the relevant national supervisory authority.Claims on banks and security firms use the preferential risk weighting prescribed under the Basel II guidelines. Claims on multilateral development banks, claims on corporate entities, claims included in the regulatory non-mortgage retail portfolios, claims secured by residential mortgages, claims secured by commercial real estate, past due loans, and off-balance sheet items are treated as per SAMA guidelines on Basel II.

Table 5: standardised approach and supervisory risk weights in the IRB approachesThe Bank uses External Credit Assessment Institutions (ECAIs) ratings to supplement its own internal credit ratings. It maps the ECAIs ratings to the standardised risk weights for corporate entities, banks, Public Sector Entities (PSEs), and sovereigns as per Basel II guidelines.

In computing capital requirements, certain types of facility exposures are assessed primarily on the basis of external rating pro-vided by rating agencies.

The following ECAIs ratings are used by the Bank:S&PMoody'sFitch

Table 6: credit risk: disclosures for portfolios subject to IRB approachesNOT APPLICABLE

Table 7: credit risk mitigation: disclosures for standardised and IRB approaches

Risk management and mitigation of credit risk is core to the way the Bank operates, and the way it does business. Listed below are key ways the Bank manages and mitigates credit risk:

Limit setting: The Bank sets limits in its credit policy to protect its capital. These include controlling credit facilities granted to com-panies based on their capital and reserves, business model, cashflow and industry. The maximum exposure limit for individual obligors is capped at a given percentage of the Bank’s economic capital and the rating of the obligor. The policy includes additional limits on tenure and sector concentration.

Tangible collateral and guarantees: Collateral requirements are determined by loan products based on acceptable collaterals such as cash, shares, realestate, other pledges, and thirdparty guarantees. There are guidelines for collateral valuation and instances where the Bank seeks additional collateral.

Credit Approval Authorities: Individual and committee approval limits are defined based on obligor risk rating, size of exposure and nature of facility.

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Credit evaluation process: A clear credit evaluation process is in place to ensure that a consistent and robust method is followed.

Measuring the quality of credit: Various models for both retail and corporate portfolio have been developed for determining obligor risk rating. The models were developed using Al Rajhi Bank specific quantitative and qualitative factors to ascertain a risk rating.

Legal Documentation: Appropriate legal documentation is duly executed to ensure that the Bank has recourse to protect itself in case of default. There are different variations of such legal documents depending on the product, facility type and credit quality of the customer.

Table 8: general disclosure for exposure related to counter-party credit riskNOT APPLICABLE

Table 9: securitisation - disclosure for standardised and IRB appoachesNOT APPLICABLE

Table 10: market risk - disclosure for banks using the standardised approachesThe Bank is exposed to market risks, the risk that the fair value of future cashflows of a financial instrument will fluctuate due to changes in market prices. Market risk arises on profit rate based products, foreign currency, mutual funds and commodities. All are exposed to general and specific market movements and changes in the level of volatility of market rates or prices. The Bank uses the standardised model to compute the capital requirement for market risk. Market risk components applicable to Al Rajhi Bank are profit rate risk, foreign exchange risk, equity risk and commodity risk.

Foreign currency riskThe Bank is exposed to the effects of fluctuations in foreign currency exchange rates on its foreign currency positions that result from operations. The Board sets limits on the level of exposure by currency and at aggregate level, which are measured and moni-tored daily. A substantial portion of the net foreign currency exposure to the Bank is in United States Dollars (USD), where the Saudi Riyal is pegged to the USD. The other currency exposures are not considered material and as a result the Bank is not exposed to major foreign currency risks.

Profit rate risk: Please see Table 14 for a detailed explanation of profit rate risk.

Equity/asset price risk: Please see Table 13 for a detailed explanation of equity/asset price risk.

Commodity risk Commodity risk refers to the risk of loss arising from adverse movements in commodity prices. The commodity portfolio is re-valued on a regular basis to capture the changes in market value due to changing economic conditions.

As an Islamic bank, the Bank buys and sells commodities to facilitate customer transactions to ensure compliance with Sharia Board rulings. The Bank does not conduct proprietary trading in commodities for its own profit. The Bank’s exposure to commodity price volatility is usually intraday and limited to a short time period. This risk is not considered material for the Bank.

Table 11: market risk - disclosures for banks using the Internal Models Approach (IMA) for trading portfoliosNOT APPLICABLE

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Table 12: operational risk

Operational risk overviewAl Rajhi Bank has adopted the standardised approach for calculating capital adequacy covering operational risk and defines op-erational risk as the risk of loss resulting from inadequate or failed internal processes, human error systems and from external events. This definition includes legal risk, but excludes strategic and reputational risk.

Sources of riskOperational risk for the Bank arises from various areas including:

Internal fraud: An act intended to defraud, misappropriate property or circumvent regulations, the law or company policy, exclud-ing diversity/discrimination events, which involve at least one internal party.

External fraud: An act intended to defraud, misappropriate property or circumvent the law by a third party.

Employment practices and workplace safety: An act inconsistent with employment, health and safety standards and agreements (e.g. payment of personal injury claims, or from diversity/discrimination events)

Clients, products, and business practices: A failure to meet a professional obligation to specific clients (including fiduciary and suit-ability requirements) either unintentionally or through negligence, or from the nature or design of a product.

Damage to physical assets: The loss or damage to physical assets from a natural disaster or other events.

Business disruption and system failures: Loss due to disruption of business or system failures.

Execution, delivery, and process management: Failed transaction processing or process management from relationships with trade counter-parties and vendors.

The Bank uses the standardised approach to calculate the minimum regulatory capital for operational risk.

Table 13: ِequities - disclosures for banking book positionsAl Rajhi Bank has adopted the standardised approach for calculating capital adequacy for its equity position.

The Bank has equity exposure in the form of mutual funds and limited direct share investments. The mutual funds exposures arise when the Bank issues new seeded funds that are administered by asset managers in Al Rajhi Capital. While the Bank markets these funds to customers, it holds the seed capital on its books. These equities are considered long-term investments and Shariah compliant. The Bank is exposed to volatility in the price of the mutual funds it has on its books.

The direct share investments are held for an unspecified period of time. They may be sold in response to liquidity needs, or signifi-cant changes to equity prices. The Bank does not actively trade these investments.

The Bank’s investments in mutual funds and direct shares are regularly marked-to-market and are not material.

Table 14: profit rate risk in the banking book

Profit rate risk predominately resides in the Bank’s assets rather than its liabilities. This is due to the nature of the Bank’s balance sheet structure.

Liabilities: The majority of the Bank’s customer deposits are in non-profit bearing current accounts. Changes to profit rates have no bearing on these accounts. The Bank, however, has a small number of corporate deposits and retail term deposits that are rate sensitive.

Assets: The Bank charges different profit rates according to the maturity of loans and risk characteristics of the customer segment being financed. Profit rates applied to customer financing are based on market rates. There are different profit rates and re-pricing terms for the Bank’s assets. Since the market rate (e.g. SAIBOR for SR, LIBOR for USD) is used as a benchmark for the profit rate; a drop in profit rate can result in reduction in future earnings.

The following describes each sub-type of profit rate risk:

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Re-pricing risk: This arises from maturity mismatch between the assets portfolio and the liabilities that fund them. The risk is that the Bank may experience reduction in future earnings when profit rates decrease. This is due to the composition of the book, which is made up of mostly non-profit bearing current account liabilities and fixed rate assets. In other words, the Bank is an asset-sensitive bank that benefits from a rise in rates and is disadvantaged by a fall in rates because the amount of re-pricing assets is larger than the re-pricing liabilities. This is the key type of profit rate risk that impacts Al Rajhi Bank. Yield curve risk: Yield curve risk occurs in cases where there are non-parallel shifts in the yield curve between the short, medium and the long ends of the term structure resulting in a steepening, flattening or inverse yield curve. This risk primarily impacts the revaluation of assets such as fixed income securities. The Bank’s exposure to this risk is not material.

Basis risk: Basis risk is related to the imperfect correlation between different yield curves on which a bank prices its assets and li-abilities. This risk is not material because the Bank's assets and liabilities are primarily dependent on SAIBOR rates.

Optionality risk: Optionality risk arises when a customer of an institution has the right but not the obligation to influence the tim-ing and magnitude of the cashflows of an asset, liability or off-balance-sheet instrument. This risk is limited in the Bank since most liabilities are non-profit bearing current accounts and not impacted by fluctuations of profit rates. In addition, assets have contrac-tually fixed maturity. In cases of early repayment, the contracts often require payment of owed profits for the full tenure of the loan.

Measurement approach:The Bank uses the Earnings-at-Risk (EaR) approach to measure the overall sensitivity to profit rate risk. The EaR perspective con-siders how changes in profit rate will affect a bank's reported earnings. This methodology focuses on the risk to earnings in the near term, typically the next one or two years. Fluctuations in profit rates generally have the greatest impact on reported earnings through changes in a bank's net financing income (that is, financing income less income paid on time investments and Murabaha financing expense). It assesses the effect of 200bps parallel drop in market rates on expected run-off rate of assets at different ten-ors to determine possible decline in earnings.

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