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Islamic Bank Britain (IBB)

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Thursday 25 March, 2010

Islamic Bank Britain

Final Results

RNS Number : 2269J
Islamic Bank of Britain Plc
25 March 2010
 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Islamic Bank of Britain PLC

Annual Report and Financial Statements

 

Registered number 4483430

 

31 December 2009


 

 


Chairman's statement

 

The Bank's financial performance for the year ended 31 December 2009 has continued to be impacted by the challenging economic environment. The UK was in recession for the majority of 2009, negatively impacting the housing market, unemployment, disposable incomes and market yields. In addition, there has been increased regulatory focus on minimum liquidity and capital adequacy requirements.

Despite the difficult conditions, the past twelve months have seen strong growth in both customer finance assets and customer deposits.

 

Highlights

·              Customer financing increased by 97% to £46.2m

·              Deposits increased by 18% to £186.6m

·              Customer numbers increased by 6% to just under 50,000

·              Launch of 12, 18 and 24 month term deposits

·              Enhancements to the Home Purchase Plan product range

·              Winner of Global Finance Best UK Islamic Financial Institution 2009 award

 

Current environment and trading performance

The major impact of the ongoing market conditions has been to reduce the Bank's revenues throughout the year.

A significant source of revenue for the Bank is the return earned from investing customer deposits on the Islamic interbank market. Yields in the interbank markets declined during the first half of 2009 and have since remained at historic low levels, resulting in a reduction in operating income to £1.6m (2008: £4.9m) and a loss for the year of £9.5m (2008: £5.9m).

The directors implemented specific actions during the year to mitigate the decline in revenues. These included growth in higher yielding customer finance assets and achieving cost reductions through operational efficiencies that regrettably involved a number of redundancies at the Bank's head office at the end of 2009. These actions have continued in 2010.

 

Products

The Home Purchase Plan ("HPP") product achieved strong growth, resulting in a near 100% increase in the Bank's customer finance assets. The HPP range was expanded during the year with a fixed rental product and a product adapted for the Scottish market. It is also pleasing to note that this new business was achieved in accordance with prudent credit policies, with currently no arrears within the HPP and commercial property finance portfolios.

The Bank continues to use retail deposits to fund all customer finance assets and has no reliance on wholesale funding. Growth in longer-term savings products was achieved during the year with the launch of a wider range of term deposits in July 2009 and continued growth in the Notice Savings account launched in the prior year.

 

Capital

As noted in the Interim Report, the Bank raised new capital of £7.5m via a placing of new shares in January 2009. While the Bank continues to have sufficient capital for its current requirements, the Board is in ongoing discussions with its advisors and interested parties regarding the raising of additional capital to support planned future growth. If additional capital is not raised, the Bank will need to scale back its growth plans and operations during 2010 in order to ensure that regulatory capital requirements continue to be achieved.

 

 

Outlook

The challenging market conditions look set to persist into 2010 and the directors and management will continue to identify opportunities to mitigate the adverse effects. We will maintain tight cost control and focus on growth in low risk secured customer finance assets funded by longer-term savings deposits.

 

Finally, I would like to extend my thanks and gratitude to Islamic Bank of Britain's customers, employees, Sharia Supervisory Committee scholars and shareholders for their continued support and commitment to the Bank.

 

 

 

 

Mohsen Moustafa

Chairman

24 March 2010

 



Report of the Sharia Supervisory Committee

 

بسم الله الرحمن الرحيم

 (In the name of Allah, the Most Gracious, the Most Merciful)

 

To the Members of the Islamic Bank of Britain PLC

For the period from 1 January 2009 to 31 December 2009

 

 

السلام عليكم ورحمة الله و بركاته

 

In compliance with the Terms of Reference of the Bank's Sharia Supervisory Committee, we submit the following report:

We have reviewed the documentation relating to the products and transactions entered into by the Islamic Bank of Britain PLC for the period from 1 January 2009 to 31 December 2009.

According to Management, the Sharia Compliance Officer of the Bank and documents evidencing the facts, the Bank's funds were raised and invested during this period on the basis of agreements approved by us.

Therefore, based on the report of our representative and representations received from Management, in our opinion, the transactions and the products entered into by the Bank during the period from 1 January 2009 to 31 December 2009 are in compliance with the Islamic Sharia rules and principles and fulfil the specific directives, rulings and guidelines issued by us.

We beg Allah the Almighty to grant us all the success and straightforwardness.

 

و السلام عليكم ورحمة الله و بركاته

 

 

 

 

 

Dr Abdul Sattar Abu Ghuddah

Chairman of the Sharia Supervisory Committee

24 March 2010

 

                                               



Directors' report

 

The directors present their report and financial statements for the year ended 31 December 2009.

 

Principal activities

Islamic Bank of Britain PLC (the 'Company' or the 'Bank') is the only independent Islamic retail bank in the United Kingdom established and managed on a wholly Sharia compliant basis.

The Bank offers a range of Sharia compliant banking solutions for both individual and business customers including current accounts, savings accounts, and consumer and business financing.  These are delivered through the Bank's branch network, which is complemented by internet, telephone and postal banking channels.

Financial Results

These financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the EU.

The financial statements for the year ended 31 December 2009 are shown on pages 9 to 37. The loss for the year amounts to £9,492,744 (2008: £5,910,700).  Details of the Company's performance and prospects are given within the Chairman's statement on pages 1 and 2.

The directors do not recommend the payment of a dividend (2008: £nil).

Risks

The Bank has exposure to the following risks arising from its use of financial instruments:

·       Credit risk: Credit risk is the risk arising from the failure of a customer or counterparty to meet their contractual obligations.  The risk arises from the Bank's secured and unsecured finance provided to customers and the investment of surplus funds in Sharia compliant wholesale deposits with bank counterparties;

·       Liquidity risk: Liquidity risk is the risk that the Bank does not have sufficient resources to meet its commitments when they fall due, or can secure them only at excessive cost. The risk arises from the mismatch of the Bank's financial assets and financial liabilities;

·       Market risk: Market risk is the risk of loss of income arising from unfavourable market movements, including foreign exchange rates and profit rates.  The Bank does not operate a trading book and therefore market risk arises only within the banking book;

·       Operational risk: Operational risk is the risk of loss arising from inadequate or failed internal processes, people and systems or from external events.  It includes risks arising from product and service failures, legal and regulatory risks, poor customer treatment, theft and fraud, the impact of change, the use of third party suppliers and information technology failure;

·       Concentration risk: Concentration risk is the risk of loss arising from inadequate diversification of credit risk across sectors.  The risk arises due to exposure to particular geographic locations, industry sectors or particular customers or institutions; and

·       Sharia compliance risk: Sharia compliance risk is the risk of loss arising from products or services not complying with Sharia requirements or in accordance with Islamic principals. 

A detailed explanation of the Bank's approach to financial and operational risk management is set out in note 4 to the financial statements.

 

Creditor payment policy

The Company seeks to settle trade invoices in line with their payment terms.  The amount due to the Company's trade creditors as at 31 December 2009 represented 30 days (2008: 40 days) average daily purchases of goods and services calculated in accordance with the Companies Act 2006.

 

Capital

On 19 December 2008, an ordinary resolution was passed at an extraordinary general meeting increasing the authorised share capital of the Company from £5,000,000 to £7,250,000 by the creation of an additional 225,000,000 new Ordinary Shares. On 23 January 2009, an additional 127,470,000 shares were allotted for consideration of £7,488,863 before expenses.

 

Directors and directors' interests

The directors who held office during the year were as follows:

 

 

Mr. Mohsen Moustafa (Chairman) (c)

 

Mr. Abdulaziz Al-Khulaifi

Resigned 19 January 2009

Mr. Robert Owen (a) (b) (c)

 

Mr. Abdul Hakim Al-Adhamy (a) (b)

 

Mr. Gerry Deegan (c)

 

Mr. Sultan Choudhury

 

 

(a)           Denotes member of Audit Committee

(b)           Denotes member of Remuneration Committee

(c)           Denotes member of Nomination Committee

The directors who held office at the end of the financial year had the following interests in the ordinary shares of the Company according to the register of directors' interests:

 

 

 


       Class of share

Interest at start

and end of year

Mr. Mohsen Moustafa


Ordinary

100,000

Mr. Gerry Deegan


Ordinary

20,000

Mr. Sultan Choudhury


Ordinary

34,000

 

Details of the Executive Director's options to subscribe for ordinary shares are given below.  Further information on the share options is provided in note 22.

 

 

 

 

Interest

 at start of year

Interest

 at end of year

Earliest exercise

 date

Latest exercise

date

Exercise

price

Mr. Gerry Deegan

157,894

157,894

5 Nov 2010

4 Nov 2017

9.5p

Mr. Sultan Choudhury

157,894

157,894

5 Nov 2010

4 Nov 2017

9.5p

 

No options were granted or exercised during the year by the directors. 

None of the other directors who held office at the end of the financial year had any disclosable interest in the shares of the Company.

 

Significant Shareholders

The following shareholders had interests in the ordinary shares of the Company in excess of 3% as at 31 December 2009 (comparatives only shown if holding as at 31 December 2008 was greater than 3%):

 

 

2009

(%)

 

                2008

(%)

 

HE Sheikh Thani Bin Abdulla Bin Thani Jasim Al Thani

29.99

 

8.69

HRH Sheikh Hamad Bin Khalifa Bin Hamad Al Thani

13.32

 

17.37

Qatar International Islamic Bank

11.22

 

14.63

Vidacos Nominees Limited

6.77

 

8.67

DCD London & Mutual PLC

5.50

 

7.17

Lynchwood Nominees Limited

4.69

 

9.26

Qatar Islamic Insurance Company

3.78

 

4.93

UBS Private Banking Nominees Limited

3.51

 

-

 

Sharia Supervisory Committee members

The Sharia Supervisory Committee members during the year were as follows:

Dr. Abdul Sattar Abu Ghuddah (Chairman)

Sheikh Nizam Yaqoobi

Mufti Abdul Kadir Barkatullah

The report of the Sharia Supervisory Committee is set out on page 3.

 

Political and charitable contributions

The Company made no political contributions during the year (2008: £nil).  Donations to UK charities amounted to £1,200 (2008: £2,023) and consisted of late payment fees received on personal finance accounts that were paid to charity in accordance with product terms as agreed with the Sharia Supervisory Committee. 

 

Disclosure of information to auditors

The directors who held office at the date of approval of this directors' report confirm that, so far as they are each aware, there is no relevant audit information of which the Company's auditors are unaware; and each director has taken all the steps that they ought to have taken as a director to make themselves aware of any relevant audit information and to establish that the Company's auditors are aware of that information.

 

Auditors

In accordance with Section 489 of the Companies Act 2006, a resolution for the re-appointment of KPMG Audit Plc as auditors of the Company is to be proposed at the forthcoming Annual General Meeting.

 

By order of the board

 

 

 

 

 

Gerry Deegan

Managing Director

Islamic Bank of Britain PLC

Edgbaston House

3 Duchess Place

Birmingham

B16 8NH

 

24 March 2010



Statement of directors' responsibilities in respect of the Annual Report and the Financial Statements

 

The directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations.

Company law requires the directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with IFRSs as adopted by the EU and applicable law.

Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.  In preparing these financial statements the directors are required to:

·              select suitable accounting policies and then apply them consistently;

·              make judgments and estimates that are reasonable and prudent;

·              state whether they have been prepared in accordance with IFRSs as adopted by the EU; and

·              prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.

The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

 

 

 



Independent auditors' report to the Members of Islamic Bank of Britain PLC

 

We have audited the financial statements of Islamic Bank of Britain PLC for the year ended 31 December 2009 set out on pages 9 to 37.  The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the EU.

 

This report is made solely to the Company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's members as a body, for our audit work, for this report, or for the opinions we have formed.

 

Respective responsibilities of directors and auditors

 

As explained more fully in the Director's Responsibilities Statement set out on page 7, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view.  Our responsibility is to audit the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland).  Those standards require us to comply with the Auditing Practices Board's (APB's) Ethical Standards for Auditors.

 

Scope of the audit of the financial statements

 

A description of the scope of an audit of financial statements is provided on the APB's web-site at www.frc.org.uk/apb/scope/UKNP.

 

Opinion on financial statements

 

In our opinion the financial statements:

 

·              give a true and fair view of the state of the Company's affairs as at 31 December 2009 and of its loss for the year then ended;

·              have been properly prepared in accordance with IFRSs as adopted by the EU; and

·              have been prepared in accordance with the requirements of the Companies Act 2006.

 

Opinion on other matter prescribed by the Companies Act 2006

 

In our opinion the information given in the Directors' Report for the financial year for which the financial statements are prepared is consistent with the financial statements.

 

Matters on which we are required to report by exception

 

We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:

 

·              adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us; or

·              the financial statements are not in agreement with the accounting records and returns; or

·              certain disclosures of directors' remuneration required by law are not made; or

·              we have not received all of the information and explanations required for our audit.

 

 

 

 

 

Ian A Dewar (Senior Statutory Auditor)

24 March 2010

for and on behalf of KPMG Audit Plc, Statutory Auditor


Chartered Accountants


One Canada Square

London

E14 5AG

Statement of comprehensive income

 

For the year ended 31 December 2009

 

 


Note

2009


2008



£


£











Income receivable from Islamic financing transactions

6

3,017,012


        8,307,297

Returns payable to customers and banks

6

(1,807,271)


     (3,811,516)






Net income from Islamic financing transactions


1,209,741


4,495,781






Fee and commission income

7

480,591


527,212

Fee and commission expense

7

(86,939)


(94,783)






Net fee and commission income


393,652


432,429






Operating income


1,603,393


4,928,210






Net impairment loss on financial assets

14

(408,939)


(325,971)

Personnel expenses

9

(5,241,104)


(4,831,978)

General and administrative expenses


(4,314,807)


(4,017,168)

Depreciation

15

(724,477)


(775,007)

Amortisation

16

(406,810)


(888,786)






Total operating expenses


(11,096,137)


(10,838,910)






Loss before income tax


(9,492,744)


(5,910,700)






Income tax expense

11

-


-






Loss for the year


(9,492,744)


(5,910,700)











Total comprehensive income for the year


(9,492,744)


(5,910,700)






Loss attributable to owners of the Company


(9,492,744)


(5,910,700)






Total comprehensive income attributable to owners of the Company

(9,492,744)


(5,910,700)






Loss per ordinary share





Basic and diluted (pence)

24

(1.8)


(1.4)

 





 

The notes on pages 13 to 37 are an integral part of these financial statements.

 

 

 

 



Statement of financial position

 

As at 31 December 2009

 

 

 


Note

2009


2008

 



£


£

Assets






Cash



577,273


546,953

Commodity Murabaha and Wakala receivables and other advances to banks


13

155,951,375


151,687,736

Consumer finance accounts and other advances to customers


14

4,488,744


7,878,292

Net investment in home purchase plans


14

33,077,501


6,980,840

Net investment in commercial property finance


14

8,611,393


8,597,893

Property and equipment


15

2,660,754


3,265,745

Intangible assets


16

315,541


578,713

Other assets


17

1,340,277


1,263,128







Total assets



207,022,858


180,799,300







Liabilities and equity












Liabilities






Deposits from banks


18

609,292


5,094,119

Deposits from customers


19

185,975,992


153,280,754

Other liabilities


20

3,623,541


3,480,891







Total liabilities



190,208,825


161,855,764







Equity






Called up share capital


22

5,464,700


4,190,000

Share premium



54,806,652


48,747,255

Retained deficit



(43,502,640)


(34,046,165)

Profit stabilisation reserve



45,321


52,446







Total equity



16,814,033


18,943,536







Total equity and liabilities



207,022,858


180,799,300







 

The notes on pages 13 to 37 are an integral part of these financial statements.

These financial statements were approved by the Board of Directors on 24 March 2010 and were signed on its behalf by:

 

 

 

 

Gerry Deegan

Managing Director

 

Islamic Bank of Britain PLC

Registration number: 4483430

Statement of changes in equity

 

For the year ended 31 December 2009

 

 


Share

capital


Share

premium

account


Profit

and loss

account


Profit

stabilisation

reserve


Total


£


£


£


£


£





















Balance at 1 January 2008

4,190,000


48,747,255


(28,137,072)


25,126


24,825,309

Total comprehensive income for the year

-


-


(5,910,700)


-


(5,910,700)

Credit in respect of share based payments charge

-


-


28,927


-


28,927

Transfer to profit stabilisation reserve

-


-


(27,320)


27,320


-











Balance at 31 December 2008

4,190,000


48,747,255


(34,046,165)


52,446


18,943,536





















Balance at 1 January 2009

4,190,000


48,747,255


(34,046,165)


52,446


18,943,536

Total comprehensive income for the year

-


-


(9,492,744)


-


(9,492,744)

Credit in respect of share based payments charge

-


-


29,144


-


29,144

Transfer from profit stabilisation reserve

-


-


7,125


(7,125)


-

Issue of ordinary share capital

1,274,700


6,059,397


-


-


7,334,097











Balance at 31 December 2009

5,464,700


54,806,652


(43,502,640)


45,321


16,814,033


                 


                   


                   




                   

 

The notes on pages 13 to 37 are an integral part of these financial statements.

 

 



Statement of cash flows

 

For the year ended 31 December 2009

 

 


 

Note

2009


2008


 


£


£

Cash flows from operating activities






Loss for the year



(9,492,744)


(5,910,700)

Adjustments for:






   Depreciation


15

724,477


775,007

   Amortisation


16

406,810


888,786

   Impairment on financial assets


14

408,939


325,971

   Share based payments charge


22

29,144


28,927













Change in Commodity Murabaha and Wakala receivables



(3,151,765)


(12,784,885)

Change in consumer finance accounts and other advances to customers



2,980,609


1,459,032

Change in net investment in commercial property finance



(13,500)


(2,506,011)

Change in net investment in home purchase plans



(26,096,661)


(6,980,840)

Change in other assets



(77,149)


934,696

Change in deposits from banks



(4,484,827)


2,601,729

Change in deposits from customers



32,695,238


18,634,228

Change in other liabilities



142,650


508,289







Net cash used in operating activities



(5,928,779)


(2,025,771)







Cash flows from investing activities






Purchase of property and equipment

 

15

(119,486)


(597,397)

Purchase of intangible assets

 

16

(143,638)


(205,268)







Net cash used in investing activities



(263,124)


(802,665)







Cash flows from financing activities






Issue of ordinary share capital



7,334,097


-







Net cash generated from financing activities



7,334,097


-







Net change in cash and cash equivalents



1,142,194


(2,828,436)







Foreign exchange gains



(4,716)


(221,586)

Cash and cash equivalents at 1 January



2,614,484


5,664,506







Cash and cash equivalents at 31 December


12

3,751,962


2,614,484







 

The notes on pages 13 to 37 are an integral part of these financial statements.

 

 



Notes to the financial statements

1              Reporting entity

Islamic Bank of Britain PLC (the 'Company' or the 'Bank') is a company domiciled in the UK.  The address of the Company's registered office is Edgbaston House, 3 Duchess Place, Hagley Road, Birmingham B16 8NH.  The financial statements of the Company are presented as at and for the year ended 31 December 2009.  The Company is a retail bank offering Sharia compliant banking products and services.

 

2              Basis of preparation

(a)           Statement of compliance

These financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU and approved by the directors.

These financial statements were approved by the Board of Directors on 24 March 2010.

The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these financial statements.

 

(b)           Basis of measurement

The financial statements of the Company have been prepared on the going concern basis.  In making the going concern assessment, the directors have prepared detailed financial forecasts for the Company, including its funding and capital position, for the twelve months from the date of approval of these financial statements.

As noted in the Chairman's statement, the Board is in ongoing discussions with its advisors and interested parties regarding the raising of additional capital to support planned future growth.  The directors have considered the effect upon the Company of more pessimistic scenarios on its business, in particular the worsening of the economic environment and if new capital is not raised as planned.  The scenarios show that if new capital is not raised, the directors will need to scale back the Bank's growth plans and operations during 2010 in order to ensure that regulatory requirements continue to be achieved.  The directors are prepared to implement as appropriate management actions to address any potential regulatory capital deficit as required, including a cost reduction exercise.

Based on the forecasts, the directors are confident that the Company has adequate resources to continue in operational existence and will continue to comply with all relevant regulatory requirements for a period of at least the next 12 months.  Accordingly, they continue to adopt the going concern basis in preparing the financial statements. 

The financial statements have been prepared on the historical cost basis.

 

(c)           Functional and presentation currency

The financial statements are presented in Sterling, which is the Company's functional currency.

 

(d)           Use of estimates and judgements

The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses.  Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis.  Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected.

In particular, information about significant areas of estimation, uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amount recognised in the financial statements are described in note 5.

 

 

3              Significant accounting policies

(a)           Property and equipment

(i)           Recognition and measurement

Items of property and equipment are measured at cost less accumulated depreciation and accumulated impairment losses.  Cost includes expenditure that is directly attributable to the acquisition of the asset.

(ii)          Subsequent costs

The cost of replacing part of an item of property or equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Company and its cost can be measured reliably.  The costs of the day-to-day servicing of property and equipment are recognised in the income statement as incurred.

(iii)         Depreciation

Depreciation is recognised in the income statement on a straight line basis over the estimated useful lives of each part of an item of property and equipment as follows: 

 

Computer equipment

3

Years

Fixtures, fittings and office equipment

5

Years

Leasehold improvements

10

years or over the life of the lease whichever is shorter

Depreciation methods, useful lives and residual values are reassessed at each reporting date.

 

(b)           Intangible assets

Software and computer licences acquired by the Company are stated at cost less accumulated amortisation and accumulated impairment losses.

Expenditure on internally developed software is recognised as an asset when the Company is able to complete the development and use the software in a manner that will generate future economic benefits, and can reliably measure the costs to complete the development.  The capitalised costs of internally developed software include all costs directly attributable to developing the software, and are amortised over its estimated useful life.  Internally developed software is stated at capitalised cost less accumulated amortisation and impairment.

Subsequent expenditure on software assets and computer licences is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates.  All other expenditure on software or computer licences is expensed as incurred.

Amortisation is recognised in the income statement on a straight line basis over the estimated useful life of the software or the licence term, from the date that it becomes available for use.  The estimated useful life of software is three years.

 

 (c)          Commodity Murabaha and Wakala receivables and other advances to banks

Commodity Murabaha is an Islamic financing transaction, which represents an agreement whereby the Company buys a commodity and sells it to a counterparty based on a promise received from that counterparty to buy the commodity according to specific terms and conditions.  The selling price comprises of the cost of the commodity and a pre-agreed profit margin.

Wakala is an Islamic financing transaction, which represents an agreement whereby the Company provides a certain sum of money to an agent, who invests it according to specific conditions in order to achieve a certain specified return.  The agent is obliged to return the invested amount in case of default, negligence or violation of any of the terms and conditions of the Wakala.

Commodity Murabaha receivables are recognised upon the sale of the commodity to the counterparty.  Wakala receivables are recognised upon placement of funds with other institutions. 

Income on both Commodity Murabaha and Wakala receivables is recognised on an effective yield basis.  The effective yield rate is the rate that exactly discounts the estimated future cash payments and receipts through the agreed payment term of the contract to the carrying amount of the receivable.  The effective yield is established on initial recognition of the asset and is not revised subsequently.

The calculation of the effective yield rate includes all fees paid or received, transaction costs, and discounts or premiums that are an integral part of the effective yield rate.  Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or liability.

Commodity Murabaha and Wakala receivables are initially recorded at fair value and are subsequently measured at amortised cost using the effective yield method, less impairment losses.  The accrued income receivable is classified under other assets.

Other advances to banks are stated at cost and are non-return bearing.

 

(d)           Consumer finance accounts

Islamic consumer financing transactions represent an agreement whereby the Company buys a commodity or goods and then sells it to the customer with an agreed profit mark-up with settlement of the sale price being deferred for an agreed period.  The customer may subsequently sell the commodity purchased to generate cash.

Consumer finance assets will be recognised on the date that the commodity or good is sold by the Company.  Consumer finance account balances are initially recorded at fair value and are subsequently measured at amortised cost.  The amortised cost is the amount at which the asset is measured at initial recognition, minus repayments received relating to the initial recognised amount, plus the cumulative amortisation using an effective yield method of any difference between the initial amount recognised and the agreed sales price to the customer, minus any reduction for impairment.

Income is recognised on an effective yield basis over the period of the contract.  The effective yield rate is the rate that exactly discounts the estimated future cash payments and receipts through the agreed payment term of the contract to the carrying amount of the receivable.  The effective yield is established on initial recognition of the asset and is not revised subsequently.

The calculation of the effective yield rate includes all fees paid or received, transaction costs, and discounts or premiums that are an integral part of the effective yield rate.  Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or liability.

The accrued income receivable from the customer is classified under other assets.

 

 (e)          Commercial property finance and home purchase plans

Commercial property finance and home purchase plans are provided using the Diminishing Musharaka (reducing partnership) principle of Islamic financing.  The Company will enter into an agreement to jointly purchase a property and rental income will be received by the Company relating to that proportion of the property owned by the Company at any point in time.  The other party to the agreement will make separate payments to purchase additional proportions of the property from the Company, thereby reducing the Company's effective share. 

The transaction is recognised as a financial asset upon legal completion of the property purchase and the amount receivable is recognised at an amount equal to the net investment in the transaction.  Where initial direct costs are incurred by the Company such as commissions, legal fees and internal costs that are incremental and directly attributable to negotiating and arranging the transaction, these costs are included in the initial measurement of the receivable and the amount of income over the term will be reduced.  Rental income is recognised to provide a constant periodic rate of return on the Company's net investment.

 

(f)            Deposits from customers

Profit sharing accounts are based on the principle of Mudaraba whereby the Company and the customer share an agreed percentage of any profit earned on the customer's deposit.  The customer's share of profit is paid in accordance with the terms and conditions of the account.  The profit calculation is undertaken at the end of each calendar month.  

Customer Murabaha deposits consist of an Islamic financing transaction involving the Company arranging the purchase of an asset on behalf of the customer and the purchase thereof from the same customer by the Company at cost plus an agreed profit mark-up with settlement on a deferred payment basis.  Customer Murabaha deposit balances are included in the balance sheet under deposits from customers and the accrued returns payable to the customer are classified under other liabilities.  Returns payable on customer Murabaha deposits are recognised on an effective yield basis over the period of the contract.

Customer Wakala deposits consist of an Islamic financing transaction, which represents an agreement whereby the customer appoints the Company as agent to invest a certain sum of money, according to specific conditions in order to achieve a certain specified return.  The Company, as agent, is obliged to return the invested amount in case of default, negligence or violation of any of the terms and conditions of the Wakala.

 

(g)           Profit stabilisation reserve

The profit stabilisation reserve is used to maintain returns payable to customers on Mudaraba based savings accounts. Returns payable on these profit sharing accounts are credited to customers in accordance with the terms and conditions of the account. Any surplus returns arising from the investment of funds are then credited to this reserve. In the case of inadequate returns generated by these funds, the Company will maintain the return to depositors by utilising this reserve.

 

(h)           Derecognition of financial assets and liabilities

The Company derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards or ownership of the financial asset are transferred.  Any remaining interest in transferred financial assets that is created or retained by the Company is recognised as a separate asset or liability.

The Company derecognises a financial liability when its contractual obligations are discharged or cancelled or have expired.

 

 (i)           Impairment of financial assets

At each balance sheet date the Company assesses whether there is objective evidence that financial assets are impaired.  Financial assets are impaired when objective evidence demonstrates that a loss event has occurred after the initial recognition of the asset, and that the loss event has an impact on the future cash flows of the asset that can be estimated reliably. 

The Company considers evidence of impairment at both a specific asset and collective level.  All individually significant financial assets are assessed for specific impairment.  All significant assets found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified.  Assets that are not individually significant are then collectively assessed for impairment by grouping together financial assets (carried at amortised cost) with similar risk characteristics.

Objective evidence that financial assets are impaired include default or delinquency by the counterparty, extending or changing repayment terms, indications that a counterparty may go into bankruptcy, or other observable data relating to the group of assets such as adverse changes in the payment status of counterparties, or economic conditions that correlate with defaults in the group.

In assessing collective impairment the Company uses analysis of historical trends to identify the probability of default, timing of recoveries and the amount of loss incurred, adjusted for management's judgement as to whether current economic conditions are such that actual losses are likely to be greater or less than suggested by historical analysis.  Default rates, loss rates and the expected timing of future recoveries are regularly benchmarked against actual outcomes to ensure that they remain appropriate. 

Impairment losses on assets carried at amortised cost are measured as the difference between the carrying amount of the financial asset and the present value of the estimated cash flows discounted at the assets' original effective yield rate.  Losses are recognised in the income statement and reflected against the assets carrying value.

When a subsequent event causes the amount of expected impairment losses to decrease, the impairment loss is reversed through the income statement.

 

(j)            Impairment of non-financial assets

The carrying amounts of the Company's non-financial assets are reviewed at each reporting date to determine whether there is any indication of impairment.  If any such indication exists then the asset's recoverable amount is estimated.

An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount.  A cash-generating unit is the smallest identifiable asset group that generates cash flows that largely are independent from other assets and groups.  Impairment losses are recognised in the income statement.

The recoverable amount of an asset is the greater of its value in use and its fair value less costs to resell.  In assessing value in use, the estimated future cash flows are discounted to their present value.  An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount.  An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

 

(k)          Provisions

A provision is recognised if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation.  Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of cost of funds and, where appropriate, the risks specific to the liability.

 

 (l)           Fees and commissions

Fee and commission income that relates mainly to transaction and service fees are recognised as the related services are performed.  Fees and commission expenses that relate mainly to transaction and service fees are expensed as incurred.

Arrangement fees for commercial property finance deals and home purchase plans are amortised over the expected life of the transaction.

 

(m)          Income tax expense

Income tax expense comprises current and deferred tax.  Income tax expense is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.

Deferred tax is provided using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes.  Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on laws that have been enacted or substantively enacted by the reporting date.

A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised.  Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

 

(n)           Lease payments made

Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease.  Lease incentives received are recognised as an integral part of the total lease expense over the term of the lease.

 

(o)           Employee benefits

Obligations for contributions to defined contribution pension plans are recognised as an expense in the income statement when they are due.

Short-term employee benefits, such as salaries, paid absences, and other benefits, are accounted for on an accruals basis over the period for which employees have provided services.  Bonuses are recognised to the extent that the Company has a present obligation to its employees that can be measured reliably.

 

(p)             Cash and cash equivalents

Cash and cash equivalents include notes and coins in hand, unrestricted balances held with central banks and highly liquid financial assets with original maturities of less than three months, which are subject to insignificant risk of changes in their fair value, and are used by the Company in the management of its short-term commitments. 

Commodity Murabaha and Wakala transactions, used by the Company for investment purposes, are not included within cash and cash equivalents. Cash and cash equivalents are carried at amortised cost in the balance sheet.

 

(q)           Other receivables

Trade and other receivables are stated at their nominal amount (discounted if material) less impairment losses.

 

 (r)          Earnings per share

The Company presents basic and diluted earnings per share (EPS) data for its ordinary shares.  Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the period.  Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares.

 

(s)           Foreign currency transactions

Transactions in foreign currencies are translated to the functional currency at exchange rates ruling at the date of the transaction.  Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate ruling at that date.  The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the period and the amortised cost in foreign currency translated at the exchange rate ruling at the end of the period. Foreign currency differences arising on retranslation are recognised in the income statement.

 

(t)            Share based payments

The cost of equity-settled transactions with employees is measured by reference to the fair value at the date on which they are granted. The fair value is determined by an external valuer using an option pricing model, taking into account the terms and conditions upon which the options were granted.

The cost of equity-settled transactions is expensed on a straight-line basis, together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award ('the vesting date'). The cumulative expense recognised for equity settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Company's best estimate of the number of equity instruments that will ultimately vest. The income statement charge or credit for a period represents the movement in cumulative expense recognised as at the beginning and end of that period.

Any dilutive effect of outstanding options is reflected as additional share dilution in the computation of earnings per share.

 

 (u)          New standards and interpretations effective in 2009

·              IAS 1 (Revised), 'Presentation of Financial Statements'.  This standard revises the overall requirements for the presentation of financial statements and provides guidance for their structure and minimum content requirement.  The revised standard requires the presentation of all non-owner changes in equity within a statement of comprehensive income.

·              IFRS 2 (Amendment), 'Share Based Payment'.  This amendment restricts the definition of vesting conditions to include only service conditions and performance conditions and deals with the accounting consequences of a failure to meet a condition other than a vesting condition including how to deal with cancellations by the counterparty and the circumstances where neither the entity nor the counterparty is in a position to choose whether or not to meet a vesting condition.

·              IAS 32 (Amendment), 'Financial Instruments: Presentation', and IAS 1 (Amendment), 'Presentation of Financial Statements - Puttable Financial Instruments and Obligations Arising on Liquidation'.  The amended standards require entities to classify puttable financial instruments and instruments, or components of instruments, that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation as equity, provided the financial instruments have particular features and meet specific conditions.

·              IFRS 7 (Amendment), 'Financial Instruments: Disclosure'.  This amendment requires enhanced disclosures about the fair value measurements and liquidity risks in respect of financial instruments.  The main change relates to fair value measurements which should now be disclosed in a three level hierarchy that reflects the significance of model inputs.  Specific disclosures are required for Level 3 (significant unobservable inputs), movements between level 1 and 2, and around changes in valuation techniques between different periods. As all of the Company's financial assets are carried at amortised cost the requirement to provide hierarchy disclosures has no impact on these financial statements.

·              IFRS 8, 'Operating Segments'.  IFRS 8 replaces IAS 14 'Segment Reporting' and requires a 'management approach', under which segment information is presented on the same basis as that used for internal reporting purposes.

·              Improvements to IFRSs.  This sets out minor amendments to IFRS standards as part of an annual improvements process.

(v)            New standards and interpretations not yet adopted

A number of new standards, amendments to standards and interpretations relevant to the Company have been issued, but are not yet effective within the EU and have not been applied in preparing these financial statements.

·              IAS 24 (Revised), 'Related Party Disclosures' (effective from 1 January 2011).  This revised standard includes an exemption from the disclosure requirements for related transactions between "state-controlled" entities and includes a revised definition for related parties.  The revised standard will not have a material impact on the Company's financial results. (*)

·              IFRS 9, 'Financial Instruments' (effective from 1 January 2013).  This standard deals with the classification and measurement of financial assets and will replace IAS 39.  The requirements of this standard represent a significant change from the existing requirements in IAS 39.  The standard contains two primary measurement categories for financial assets: amortised cost and fair value.  The standard eliminates the existing IAS 39 categories of 'held to maturity' and 'loans and receivables'.  The potential effect of this standard is currently being evaluated. (*)

* - The revised IAS 24 and IFRS 9 have not yet been endorsed by the EU.   

 

4              Financial risk management

The Company has exposure to the following risks arising from its use of financial instruments:

·              Credit risk

·              Liquidity risk

·              Market risk

·              Operational risk

·              Sharia compliance risk

·              Concentration risk

This note presents information about the Company's exposure to each of the above risks, its objectives, policies and processes for measuring and managing these risks, and its management of capital.

Risk management framework

The Board of Directors has overall responsibility for the establishment and oversight of the Company's risk management framework.  The Company has established the Asset & Liability (ALCO), Credit and Risk Committees, which are responsible for developing and monitoring risk management policies in their specific areas.

The Company's risk management policies are established to identify and analyse the risks faced by the Company, to set appropriate risk limits and controls, and to monitor risks and adherence to limits.  Risk management policies and systems are reviewed regularly to reflect changes in market conditions, products and services offered.  The Company, through its training and procedures, aims to develop a disciplined and constructive control environment, in which all employees understand their roles and obligations.

Risk management controls and procedures are reviewed by Internal Audit, both as part of the regular audit review programme and through ad-hoc reviews.  The results of these reviews are reported to the Audit Committee.

 

(a)           Credit risk

Credit risk is the risk of loss arising from the failure of a customer or counterparty to meet their contractual obligations.  The risk arises from the Company's secured and unsecured finance provided to customers and the investment of surplus funds in Sharia compliant wholesale deposits with bank counterparties.

 

(i)           Management of credit risk

The Board of Directors has delegated responsibility for the management of credit risk to the Credit Committee.  A separate Credit department, reporting to the Credit Committee is responsible for oversight of the Company's credit risk, including:

·              Formulating credit policies in consultation with other business units, covering credit assessments, collateral requirements, risk reporting, legal requirements and compliance with regulatory and statutory requirements.

·              Establishing authorisation limits and structures for the approval and renewal of credit exposure limits.

·              Reviewing and assessing credit risk prior to agreements being entered into with customers.

·              Limiting concentrations of exposure to counterparties, countries or sectors and reviewing these limits.

·              Ongoing assessment of exposure and implementation of procedures to reduce this exposure.

·              Providing advice, guidance and specialist skills to all business areas to promote best practice throughout the Company in the management of credit risk.

Adherence to country and counterparty limits, for amounts due from other banks, is monitored on an ongoing basis by the Company's Treasury department, with a detailed review of all limits at least annually.  Senior management receive regular reports on the utilisation of these limits.

 

 (ii)         Exposure to credit risk

 


Note

Commodity Murabaha and Wakala receivables and other advances to banks

Consumer finance accounts and other advances to customers

Net investment in commercial property finance

Net investment in home purchase plans

Total

 

2009


£

£

£

£

£

Investment grade financial assets

13

155,951,375

-

-

-

155,951,375

Unrated financial assets

14

-

5,300,564

8,611,393

33,077,501

46,989,458

Specific allowances for impairment

14

-

(18,481)

-

-

(18,481)

Collective allowances for impairment

14

-

(793,339)

-

-

(793,339)








Carrying amount


155,951,375

4,488,744

8,611,393

33,077,501

202,129,013

 

2008







Investment grade financial assets

13

151,687,736

-

-

-

151,687,736

Unrated financial assets

14

-

8,963,907

8,597,893

6,980,840

24,542,640

Specific allowances for impairment

14

-

(145,707)

-

-

(145,707)

Collective allowances for impairment

14

-

(939,908)

-

-

(939,908)








Carrying amount


151,687,736

7,878,292

8,597,893

6,980,840

175,144,761

 

Investment grade financial assets have a minimum rating of BBB. As at 31 December 2009, the amount of unimpaired balances stood at £201,997,391 (2008: £174,587,812).  The maximum exposure to credit risk is the carrying amount of the financial asset receivable balances as at 31 December 2009 and 31 December 2008.

 

(iii)         Write-off policy

The Company writes off a balance (and any related allowances for impairment) when the Credit department determines that the balance is uncollectible.  This determination is reached after considering information such as the occurrence of significant changes in the counterparty's financial position such that the counterparty can no longer pay the obligation, or that proceeds from collateral will not be sufficient to pay back the entire exposure.

 

(iv)         Collateral

The Company holds collateral against secured advances made to businesses and individuals in the form of charges over properties, other registered securities over assets, and guarantees.  Estimates of fair value are based on the value of collateral assessed at the time of financing and are updated on a periodic basis.  The estimated fair value of collateral held against financial assets as at 31 December 2009 is £68.0m (2008: £27.4m).  None of this amount was held against impaired assets.

 

(v)           Concentration of credit risk

The Company monitors concentrations of credit risk by sector and geographical location.  An analysis of concentrations of credit risk at the reporting date is shown below.

 


Commodity Murabaha and Wakala receivables and other advances to banks

Consumer finance accounts and other advances to customers

Net investment in commercial property finance

Net investment in home purchase plan finance


2009

£

2008

£

2009

£

2008

£

2009

£

2008

£

2009

£

2008

£

Concentration by sector:









Individuals

-

-

4,433,965

7,777,873

3,787,954

3,530,190

33,077,501

6,980,840

Corporate

-

-

54,779

100,419

4,823,439

5,067,703

-

-

Bank

155,951,375

151,687,736

-

-

-

-

-

-


155,951,375

151,687,736

4,488,744

7,878,292

8,611,393

8,597,893

33,077,501

6,980,840

Concentration by location:









United Kingdom

30,797,199

8,758,617

4,488,744

7,878,292

8,611,393

8,597,893

33,077,501

6,980,840

Europe

63,369,582

65,248,731

-

-

-

-

-

-

Middle East

61,784,594

77,680,388

-

-

-

-

-

-


155,951,375

151,687,736

4,488,744

7,878,292

8,611,393

8,597,893

33,077,501

6,980,840

The asset quality underlying the commercial property finance and home purchase plan portfolios is high, with financing decisions based on clear affordability assessments and prudent finance-to-value (FTV) ratios.  As at 31 December 2009 none of the facilities within the secured finance portfolios were in arrears.

 

(b)           Liquidity risk

Liquidity risk is the risk that the Company does not have sufficient financial resources to meet its commitments when they fall due, or can secure them only at excessive cost.  The Company's approach to managing liquidity is to ensure that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company's reputation.

The Treasury department is responsible for monitoring the liquidity profile of financial assets and liabilities and preparing details of projected cash flows arising from projected future business.  The Treasury department maintains a portfolio of short-term liquid assets, made up of cash on demand and short term Commodity Murabaha and Wakala transactions to ensure that sufficient liquidity is maintained.  All liquidity policies and procedures are subject to review and approval by ALCO.

The key measure used by the Company for managing liquidity risk is the comparison of the maturity of assets and customer deposits.  This analysis is completed and monitored on a daily basis and reports are submitted each month for review by ALCO.  A similar calculation of mismatches is submitted to the Financial Services Authority (the 'FSA') as part of the Company's quarterly regulatory reporting.

 

Residual contractual maturities of financial liabilities

The following table shows the undiscounted cash flows on the Company's financial liabilities on the basis of their earliest possible contractual maturity.  However, based on behavioural experience demand deposits from customers are expected to maintain an increasing balance.

 

 

 

 

 

2009

Note

Carrying

amount

£

Gross maturity outflow

£

Less than 1 month

£

1 - 3

months

£

3 months -

1 year

£

1 year - 2 years   

£

Deposits from banks

18

609,292

609,449

609,449

-

-

-

Deposits from customers

19

185,975,992

187,755,526

108,533,978

43,074,152

19,029,148

17,118,248



186,585,284

188,364,975

109,143,427

43,074,152

19,029,148

17,118,248









2008








Deposits from banks

18

5,094,119

5,096,561

5,096,561

-

-

-

Deposits from customers

19

153,280,754

154,167,388

94,232,980

45,899,805

14,034,603

-



158,374,873

159,263,949

99,329,541

45,899,805

14,034,603

-

A breakdown of the Company's Commodity Murabaha and Wakala receivables by maturity date is shown in note 13.

(c)           Market risk

Market risk is the risk of loss of income arising from unfavourable market movements, including foreign exchange rates and profit rates.  The objective of market risk management is to manage and control exposures within acceptable parameters, whilst optimising returns.  The Company is not exposed to any material foreign currency risk. Given the Company's current profile of financial instruments, the principle exposure is the risk of loss arising from fluctuations in the future cash flows or fair values of these financial instruments because of a change in achievable rates.  This is managed principally through monitoring gaps between effective profit and rental rates and reviewing approved rates and bands at regular re-pricing meetings:

·              Profit rates for Commodity Murabaha and Wakala receivables are agreed with the counterparty bank at the time of each transaction and the profit mark-up and effective yield rate is consequently fixed for the duration of the contract.  Risk exposure is managed by reviewing the maturity profiles of transactions entered into.

·              Effective rates applied to new consumer finance transactions are agreed on a monthly basis by ALCO and the profit mark-up will then be fixed for each individual transaction for the agreed deferred payment term.

·              Rentals for longer term commercial property financing and home purchase plans are benchmarked against a market measure, in agreement with the Company's Sharia Supervisory Committee, subject to minimum rent levels.

·              Profit rates payable on Mudaraba customer deposit accounts are calculated at each month-end in line with the profit allocation model and the customer terms and conditions. Profit rates payable on Murabaha and Wakala deposits are agreed with the customer at the time of each transaction and the profit mark-up and effective yield rate is consequently fixed for the duration of the contract.  Risk exposure is managed by reviewing the maturity profiles of transactions entered into.

All rates and re-pricings are reviewed and agreed at ALCO, which is principally responsible for monitoring market risk.  ALCO will also review sensitivities of the Company's assets and liabilities to standard and non-standard changes in achievable effective rates.  Standard scenarios that are considered on a monthly basis include a 1.00% or 0.50% rise or fall in effective average rates. An analysis of the Company's income statement sensitivity to an increase or decrease in effective rates (assuming no asymmetrical movement and a constant balance sheet position) is as follows:

 

1.00% parallel increase

1.00% parallel decrease

0.50% parallel increase

0.50% parallel decrease






31 December 2009

800,881

(800,881)

400,441

(400,441)

 

 

 

 

 

31 December 2008

756,715

(756,715)

378,358

(378,358)

 

 (d)          Operational risk

Operational risk is the risk of loss arising from inadequate or failed internal processes, people and systems or from external factors other than credit, liquidity and market risks.

The Company's objective in managing operational risk is to implement an integrated internal control structure that supports process efficiency and customer needs, whilst effectively reducing the risk of error and financial loss in a cost effective manner.  The overall operational risk framework is set by the Board of Directors.  Primary responsibility for the development and implementation of internal controls is assigned to senior management within each business department, with the assistance of the Risk department. Adherence to operational risk policies and procedures is monitored regularly by the Risk Committee, through the use of key risk indicators, control related metrics and reports from the Risk department.

(e)           Sharia compliance risk

Sharia compliance risk is the risk of loss arising from products and services not complying with Sharia requirements or in accordance with Islamic principles.  The Bank's purpose is to provide Sharia compliant banking to customers.  The Sharia compliant nature of each product and service offered is therefore critical to the success of the Bank.

The Sharia compliance of each product and service offered is achieved via the Sharia Supervisory Committee (SSC), which seeks to ensure that the Bank's operations are in compliance with Islamic law.  The SSC is comprised of experts in the interpretation of Islamic law and its application to modern day Islamic financial institutions.  The SSC meets on a regular basis to review all material contracts and agreements relating to the Bank's transactions, certifying every product and service offered.  On a day-to-day basis, the Bank's Sharia Compliance Officer oversees the adherence of transactions, processes and procedures to ensure that all are operated in accordance with Sharia requirements.

(f)            Concentration risk

Concentration risk is the risk of loss arising from inadequate diversification of credit risk across sectors. The risk arises due to exposure to particular geographical locations, industry sectors or particular customers or institutions.

The Board sets counterparty, country and regional limits in respect of treasury assets and adherence to these limits is monitored on a daily basis. Concentrations exist within the commercial property finance and home purchase plan portfolios due to their current small overall size. As these portfolios grow, such concentrations are expected to reduce.

The Credit Committee monitors both sectoral and geographic concentration for each finance asset class and regularly reviews counterparty, country and regional limits in respect of treasury assets.

(g)           Capital management

In accordance with the EU's Capital Requirements Directive (CRD) and the guidance provided in the FSA Handbook (BIPRU 2.2), the Company's Individual Capital Adequacy Assessment Process (ICAAP) is embedded in the risk management framework of the Company.  The ICAAP is reviewed on an annual basis as part of the Company's strategic planning process and more frequently if business requirements demand. 

The Company's capital requirements are set by the FSA and monitored by the Board. Regulatory capital is analysed into two tiers:

·              Tier 1 capital, which includes ordinary share capital, share premium and retained earnings, less intangible assets.

·              Tier 2 capital, which includes collective impairment allowances, restricted to a maximum amount.

The level of total capital is matched against risk-weighted assets which are determined according to specified requirements that seek to reflect the varying levels of risk attached to assets. The Company has put in place processes to monitor and manage capital adequacy.

 

The FSA has reviewed and evaluated the ICAAP, and has provided Individual Capital Guidance (ICG) to the Company. The FSA sets out ICG for all banks operating in the United Kingdom by reference to its Capital Resources Requirement.  The FSA's approach is to monitor the available capital resources in relation to the ICG requirement.

The Company's policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain the future development of the business.  The Company has complied with all externally imposed capital requirements throughout the period.

The Company's regulatory capital position as at 31 December was as follows:

 


Note

2009

£

 

2008

£

Tier 1 capital


 

 

 

Total equity


16,814,033

 

18,943,536

Less intangible assets


(315,541)

 

(578,713)



 

 

 



16,498,492

 

18,364,823



 

 

 

Tier 2 capital


 

 

 

Collective allowances for impairment (restricted to a maximum amount)


763,179

 

744,027



 

 

 

Total regulatory capital

(a)

17,261,671

 

19,108,850



 

 

 

 


 

 

 

Risk weighted assets

(b)

61,054,328

 

59,522,138

 


 

 

 

Total regulatory capital expressed as a percentage of risk weighted assets

(a)/(b)

28.27%

 

32.10%

 

 

 

 

 

 

5              Critical accounting policies

Management discussed with the Audit Committee the development, selection and disclosure of the Company's critical accounting policies and estimates, and the application of these policies and estimates.  The critical accounting policies are set out below.

(a)           Allowance for credit losses

Assets accounted for at amortised cost are evaluated for impairment on the basis described in accounting policy (i).

The specific counterparty component of the total allowances for impairment applies to claims evaluated individually for impairment and is based upon management's best estimate of the present value of the cash flows that are expected to be received.  In estimating these cash flows, management makes judgements about each counterparty's financial situation and the realisable value of any underlying collateral.  Each impaired asset is assessed on its merits, and the estimates of cash flows considered recoverable are approved by the Credit function.

Collectively assessed impairment allowances cover credit losses inherent in portfolios of claims with similar economic characteristics when there is objective evidence to suggest that they contain impaired claims, but the individual impaired items cannot yet be identified.  In assessing the need for collective loss allowances, management considers factors such as credit quality, portfolio size, concentrations, and economic factors.  In order to estimate the required allowance, assumptions are made to define the way inherent losses are modelled and to determine the required input parameters, based on historical experience and current economic conditions.

 (b)          Financial Services Compensation Scheme

Based on its share of protected deposits, the Bank, in common with all regulated UK deposit takers, pays levies to the Financial Services Compensation Scheme (FSCS) to enable the FSCS to meet claims against it. The FSCS levy consists of two parts - a management expenses levy and a compensation levy. The management expenses levy covers the costs of running the scheme and the compensation levy covers the amount of compensation the scheme pays, net of any recoveries it makes using the rights that have been assigned to it. During 2008, claims were triggered against the FSCS arising from defaults by the following deposit takers:

·              Bradford and Bingley plc (September 2008);

·              Kaupthing Singer and Friedlander's internet deposit business ('Kaupthing Edge') (October 2008);

·              Heritable Bank's deposit business, a subsidiary of Landsbanki Islands hf (October 2008);

·              Icesave, the UK branch of Landsbanki Islands hf (October 2008); and

·              London Scottish Bank plc (December 2008).

The FSCS has met the claims by way of loans received from the Bank of England and HM Treasury. The FSCS has, in turn, acquired the rights to the realisation of the assets of these banks. The FSCS is liable to pay interest on the loans from the Bank of England. The FSCS may have a further liability if there are insufficient funds available from the realisation of the assets of the banks to fully repay the respective Bank of England loans.

As a result of notifications it has received from the Financial Services Authority, the Bank recognised a provision in the prior year (within Other liabilities) to reflect the Bank's best estimate of the amount that would be payable.  This provision has been reassessed at 31 December 2009 to reflect the estimated amounts that will fall payable in respect of the 2009/10 and 2010/11 scheme years. The movement in the provision during the year is as follows:

 

 

 

 

2009

 

2008

 

 

 

 

£

 

£

Balance at 1 January

 

 

224,000

 

-

Utilised in respect of 2008/9 scheme year settlement

 

 

(59,165)

 

-

Increase in provision during year

 

 

23,034

 

224,000

 

 

 

 

 

 

Balance at 31 December

 

 

187,869

 

224,000

 

6              Net income from Islamic financing transactions

 

 

 

2009   

 

2008

 

Income received

 

 

£

 

£

Commodity Murabaha and Wakala transactions

 

 

1,239,825

 

6,860,642

Consumer finance

 

 

556,891

 

800,600

Commercial property finance

 

 

370,618

 

597,107

 

 

849,678

 

48,948

 

 

 

 

 

Total income received from Islamic financing transactions



3,017,012

 

8,307,297

 

Returns payable

 

 

 

 

 

Deposits from banks

 

 

(16,116)

 

(202,987)

Deposits from customers

 

 

(1,791,155)

 

(3,608,529)

 

 

 

 

 

 

Total returns payable to customers and banks

 

 

(1,807,271)

 

(3,811,516)

Net income from Islamic financing transactions

 

 

1,209,741

 

4,495,781

 

 

 

 

 

 

 

 

7              Net fee and commission income

 

 

 

2009   

 

2008

 

Fee and commission income

 

 

£

 

 

£

Retail customer banking fees

 

 

399,933

 

446,779

ATM commission

 

 

30,140

 

31,037

Other

 

 

25,585

 

30,685

Arrangement fees

 

 

24,933

 

18,711

 

 

 

 

 

 

Total fee and commission income

 

 

480,591

 

527,212

 

Fee and commission expense

 

 

 

 

 

ATM interchange fees

 

 

(69,704)

 

(77,440)

Electronic transaction fees         

 

 

(17,235)

 

(17,343)

 

 

 

 

 

 

Total fee and commission expense

 

 

(86,939)

 

(94,783)

Net fee and commission income

 

 

393,652

 

432,429

 

8              Auditors' remuneration

Included within operating losses are the following amounts payable to the auditors:

 

 

 

2009   

 

2008

 

 

 

£

 

£

Amounts receivable by the auditors and their associates in respect of:

 

 

 

 

 

 

 

Audit of financial statements pursuant to legislation

74,000


74,000

Other services relating to taxation

9,900


74,258

All other services

13,000


21,656


 


 

Total

96,900

 

169,914

 

9              Personnel expenses

 

 

 

2009  

 

2008

 

 

 

£

 

£

 

Wages and salaries

 

 

4,647,751

 

4,323,265

Social security costs

 

 

434,179

 

384,267

Contributions to defined contribution pension plans

 

 

116,103

 

83,003

Share based payments charge

 

 

29,144

 

28,927

Other staff costs

 

 

13,927

 

12,516

 

 

 

 

 

 

Total

 

 

5,241,104

 

4,831,978

 

 

 

 

 

 

The average number of persons employed by the Company during the year was:

 

 

147

 

                147

 

10           Directors' emoluments

 

 

 

2009   

 

2008

 

 

 

£

 

£

 

 

 

 

 

 

Directors' emoluments

 

 

525,593

 

531,893

Company contributions to pension plans

 

 

24,500

 

24,500

 

 

 

 

 

 

Total

 

 

550,093

 

556,393

 

 

 

 

 

 

The Company made contributions to money purchase pension plans in respect of 2 directors (2008: 2).

The aggregate of emoluments during 2009 of the highest paid director was £217,500 (2008: £225,000) and Company pension contributions of £15,000 (2008: £15,000) were made on his behalf.

 

11           Income tax expense

There were no taxable profits or recoverable losses for the year ended 31 December 2009 (2008: £nil) and accordingly the Company has not provided for a tax charge or a tax debtor.

 

 

 

2009

 

2008

 

 

 

£

 

£

Reconciliation of effective tax rate

 

 

 

 

 

Loss before tax

 

 

(9,492,744)

 

(5,910,700)

 

 

 

 

 

 

Income tax at UK corporation tax rate 28% (2008: 28.5%)

 

 

(2,657,968)

 

(1,684,550)

Non deductible expenses

 

 

20,938

 

21,485

Depreciation in excess of capital allowances on which deferred tax not recognised

205,162

 

261,170

Short term timing differences

(31,537)

 

-

Unutilised tax losses

 

 

2,463,405

 

 

1,401,895

Income tax expense

 

 

-

 

-

 

 

 

 

 

 

Deferred tax assets have not been recognised in respect of the following items:

Capital allowances

 

 

1,627,667

 

1,437,613

Tax losses

 

 

10,000,664

 

 

7,555,394

 

 

 

11,628,331

 

8,993,007

 

 

 

 

 

 

In respect of the recognition of deferred tax assets, for the purposes of applying the requirements of IAS 12 ('Income Taxes'), it has been considered that the Company is not currently at a sufficiently advanced stage in its development to confidently assert future offsetting tax liabilities.  Capital allowances to be claimed are being finalised and therefore the level of the asset shown above may change.

The corporation tax rate used to calculate potential deferred tax assets was 28% (2008: 28%).

 

12           Cash and cash equivalents

 



2009   

 

2008

 

 

 

£

 

£

 

 

 

 

 

 

Cash

 

 

577,273

 

546,953

Other advances to banks

 

 

3,174,689

 

2,067,531


 

 

 

 

 

Total cash and cash equivalents

 

 

3,751,962

 

2,614,484

 

13           Commodity Murabaha and Wakala receivables and other advances to banks

 



2009   

 

2008

 

 

 

£

 

£

 

 

 

 

 

 

Repayable on demand

 

 

6,174,689

 

2,067,531

3 months or less but not repayable on demand

 

 

149,154,176

 

143,756,349

1 year or less but over 3 months

 

 

622,510

 

 

5,863,856

Total Commodity Murabaha and Wakala receivables and other advances to banks

 

 

155,951,375

 

151,687,736

 

A breakdown of Commodity Murabaha and Wakala receivables and other advances to bank by geographic regions is shown in note 4.  Balances maturing in 1 year or less but over 3 months include a balance of £622,510 (2008: £691,085) representing a repayable security deposit held by a bank that has issued a guarantee to cover the Company's future customer card transactions with MasterCard.  This deposit does not earn a return.

 

14           Advances to customers

 

Gross

amount

Impairment

allowance

Carrying

amount

Gross

amount

Impairment

allowance

Carrying

amount

 

2009

2009

2009

2008

2008

2008

Retail customers:

£

£

£

£

£

£

Consumer finance accounts and other advances to customers

5,245,785

(811,820)

4,433,965

8,863,488

(1,085,615)

7,777,873

Corporate customers:

 

 

 

 

 

 

Consumer finance accounts and other advances to customers

54,779

-

54,779

100,419

-

100,419

Total consumer finance accounts and other advances to customers

5,300,564

(811,820)

4,488,744

8,963,907

(1,085,615)

7,878,292

Net investment in commercial property finance

8,611,393

-

8,611,393

8,597,893

-

8,597,893

Net investment in home purchase plans

33,077,501

-

33,077,501

6,980,840

-

6,980,840

 

 

 

 

2009

 

2008

 

Specific allowances for impairment

 

 

£

 

£

Balance at 1 January

 

 

145,707

 

194,309

   Charge for the year

 

 

-

 

64,223

   Amounts written off during the year

 

 

(127,226)

 

(112,825)

Balance at 31 December

 

 

18,481

 

145,707

 

 

 

 

 

 

Collective allowances for impairment

 

 

 

 

 

Balance at 1 January

 

 

939,908

 

818,708

   Charge for the year

 

 

408,939

 

261,748

   Amounts written off during the year

 

 

(555,508)

 

(140,548)

Balance at 31 December

 

 

793,339

 

939,908







Total allowances for impairment

 

 

 

 

 

Balance at 1 January

 

 

1,085,615

 

1,013,017

   Charge for the year

 

 

408,939

 

325,971

   Amounts written off during the year

 

 

(682,734)

 

(253,373)

Balance at 31 December

 

 

811,820

 

1,085,615

This impairment allowance relates to consumer finance accounts.

The gross investment in commercial property finance comprises:

Less than one year

 

 

594,493

 

848,175

Between one and five years

 

 

2,330,371

 

3,317,679

More than five years

 

 

8,893,311

 

12,778,920

Total gross investment in commercial property finance

 

 

11,818,175

 

16,944,774

Unearned future rental on commercial property finance

 

 

(3,206,782)

 

(8,346,881)

Net investment in commercial property finance

 

 

8,611,393

 

8,597,893

The net investment in commercial property finance comprises:

Less than one year

 

 

326,317

 

207,846

Between one and five years

 

 

1,367,151

 

935,654

More than five years

 

 

6,917,925

 

7,454,393

Net investment in commercial property finance

 

 

8,611,393

 

8,597,893

 

The gross investment in home purchase plans comprises:

 

 

2009

 

2008

 

 

 

 

£

 

£

Less than one year

 

 

2,459,386

 

552,619

Between one and five years

 

 

9,837,544

 

2,210,475

More than five years

 

 

42,286,737

 

9,894,842

Total gross investment in home purchase plans

 

 

54,583,667

 

12,657,936

Unearned future rental on home purchase plans

 

 

(21,506,166)

 

(5,677,096)

Net investment in home purchase plans

 

 

33,077,501

 

6,980,840

The net investment in home purchase plans comprises:

Less than one year

 

 

951,605

 

159,486

Between one and five years

 

 

4,264,510

 

736,042

More than five years

 

 

27,861,386

 

6,085,312

Net investment in home purchase plans

 

 

33,077,501

 

6,980,840

As at 31 December 2009 there is no material difference between the carrying value and the fair value of any financial assets or liabilities (2008: £nil).

15           Property and equipment

 

Computer

Equipment

 

Office

equipment

 

Leasehold

Improvements

 

Fixtures &

fittings

 

Total

 

£

 

£

 

£

 

£

 

£

Cost

 

 

 

 

 

 

 

 

 

Balance at 1 January 2009

1,754,591

 

123,877

 

4,245,070

 

330,396

 

6,453,934

Additions

100,596

 

11,365

 

2,073

 

5,452

 

119,486

Balance at 31 December 2009

1,855,187

 

135,242

 

4,247,143

 

335,848

 

6,573,420

 

 

 

 

 

 

 

 

 

 

Depreciation

 

 

 

 

 

 

 

 

 

Balance at 1 January 2009

1,338,160

 

74,383

 

1,548,256

 

227,390

 

3,188,189

Depreciation charge for the year

222,560

 

20,386

 

421,925

 

59,606

 

724,477

Balance at 31 December 2009

1,560,720

 

94,769

 

1,970,181

 

286,996

 

3,912,666

 

 

 

 

 

 

 

 

 

 

Net book value

 

 

 

 

 

 

 

 

 

At 31 December 2009

294,467

 

40,473

 

2,276,962

 

48,852

 

2,660,754

 

 

 

 

 

 

 

 

 

 

Cost

 

 

 

 

 

 

 

 

 

Balance at 1 January 2008

1,357,725

 

97,967

 

4,079,098

 

321,747

 

5,856,537

Additions

396,866

 

25,910

 

165,972

 

8,649

 

597,397

Balance at 31 December 2008

1,754,591

 

123,877

 

4,245,070

 

330,396

 

6,453,934

 

 

 

 

 

 

 

 

 

 

Depreciation

 

 

 

 

 

 

 

 

 

Balance at 1 January 2008

1,126,128

 

52,127

 

1,073,164

 

161,763

 

2,413,182

Depreciation charge for the year

212,032

 

22,256

 

475,092

 

65,627

 

775,007

Balance at 31 December 2008

1,338,160

 

74,383

 

1,548,256

 

227,390

 

3,188,189

 

 

 

 

 

 

 

 

 

 

Net book value

 

 

 

 

 

 

 

 

 

At 31 December 2008

416,431

 

49,494

 

2,696,814

 

103,006

 

3,265,745

 

 

 

 

 

 

 

 

 

 

The Company leases its branch and office premises under operating leases.  The leases typically run for 10 years, with options to renew the lease after that date.  Lease payments are reviewed after periods stipulated in the agreements to reflect market rentals.

 

16           Intangible assets

 

 

 

 

 

 

 

Computer licences

 

Purchased

& developed software

 

Total

 

£

 

                                        £

 

£

Cost

 

 

 

 

 

Balance at 1 January 2009

718,520

 

4,111,727

 

4,830,247

Additions

64,399

 

79,239

 

143,638

Balance at 31 December 2009

782,919

 

4,190,966

 

4,973,885

 

 

 

 

 

 

Amortisation

 

 

 

 

 

Balance at 1 January 2009

655,086

 

3,596,448

 

4,251,534

Amortisation charge for the year

65,862

 

340,948

 

406,810

Balance at 31 December 2009

720,948

 

3,937,396

 

4,658,344

 

 

 

 

 

 

Net book value

 

 

 

 

 

At 31 December 2009

61,971

 

253,570

 

315,541

 

 

 

 

 

 

Cost

 

 

 

 

 

Balance at 1 January 2008

684,037

 

3,940,942

 

4,624,979

Additions

34,483

 

170,785

 

205,268

Balance at 31 December 2008

718,520

 

4,111,727

 

4,830,247

 

 

 

 

 

 

Amortisation 

 

 

 

 

 

Balance at 1 January 2008

504,489

 

2,858,259

 

3,362,748

Amortisation charge for the year

150,597

 

738,189

 

888,786

Balance at 31 December 2008

655,086

 

3,596,448

 

4,251,534

 

Net book value

 

 

 

 

 

At 31 December 2008

63,434

 

515,279

 

578,713

 

 

 

 

 

 

 

17           Other assets

 

 

 

2009   

 

2008

 

 

 

£

 

£

 

 

 

 

 

 

VAT recoverable

 

 

70,565

 

190,089

Accrued income

 

 

114,393

 

238,284

Prepayments

 

 

961,319

 

834,755

Other debtors

 

 

194,000

 

-

 

 

 

 

 

 

Total

 

 

1,340,277

 

1,263,128

 

 

 

 

 

 

 

There are no receivables within other assets that are expected to be recovered in more than 12 months (2008: £nil).  Other debtors represent funds remitted to solicitors for home purchase plans that had not completed at the year-end. 

18           Deposits from banks

 



2009   

 

2008




£

 

£




 

 

 

Repayable on demand

 

 

78,652

 

94,119

3 months or less but not repayable on demand

 

 

530,640

 

5,000,000


 

 

 

 

 

Total deposits from banks

 

 

609,292

 

5,094,119

 

 

 

 

 

 

Comprising:

 

 

 

 

 

Non profit sharing accounts

 

 

78,652

 

94,119

Profit sharing / paying accounts

 

 

530,640

 

5,000,000


 

 

 

 

 

Total deposits from banks

 

 

609,292

 

5,094,119

 

19           Deposits from customers

 



2009   

 

2008




£

 

£




 

 

 

Repayable on demand

 

 

104,437,151

 

94,232,981

3 months or less but not repayable on demand

 

 

46,993,655

 

45,392,618

1 year or less but over 3 months

 

 

18,664,345

 

13,655,155

2 years or less but over 1 year

 

 

15,880,841

 

-


 

 

 

 

 

Total deposits from customers

 

 

185,975,992

 

153,280,754

 

 

 

 

 

 

Comprising:

 

 

 

 

 

Non profit sharing

 

 

34,215,366

 

24,755,496

Profit sharing / paying accounts

 

 

151,760,626

 

128,525,258


 

 

 

 

 

Total deposits from customers

 

 

185,975,992

 

153,280,754

 

20           Other liabilities

 

 

 

2009   

2008

 

 

 

£

£

 

 

 

 

 

Returns payable to customers

 

 

348,708

419,565

Trade payables

 

 

421,859

646,183

Social security and income tax

 

 

395,540

423,530

Accruals

 

 

1,125,441

975,033

Other creditors

 

 

1,331,993

1,016,580

 

 

 

 

 

Total

 

 

3,623,541

3,480,891

 

 

 

 

 

 

Included within accruals is a balance of £32,000 payable over the remaining lease term of 4 years relating to refurbishment of a branch property (2008: £40,000).  This is paid in equal annual instalments with £24,000 payable in more than 12 months.

 

21           Operating leases

Non-cancellable operating lease rentals are payable as follows:

 

 

 

2009   

 

2008

 

 

 

£

 

£

 

 

 

 

 

 

Less than one year

 

 

444,305

 

444,305

Between one and five years

 

 

1,711,735

 

1,777,218

More than five years

 

 

1,022,250

 

1,401,071

 

 

 

 

 

 

Total

 

 

3,178,290

 

3,622,594

During the year £502,085 was recognised as an expense in the income statement in respect of operating leases (2008: £476,532).  The comparative information has been restated.  In the prior year accounts the operating lease category 'Less than one year' was incorrectly disclosed as £441,805 and the 'Between one and five years' category as £2,221,523.

22           Called up share capital

 

 

 

2009   

 

2008

 

 

 

£

 

£

Authorised

 

 

 

 

 

Equity: 725,000,000 (2008: 725,000,000) ordinary shares of £0.01 each

 

 

7,250,000

 

7,250,000

 

 

 

 

 

 

Allotted, called up and fully paid

 

 

 

 

 

Issued ordinary share capital

 

 

5,464,700

 

4,190,000

 

 

 

 

 

 

On 19 December 2008, an ordinary resolution was passed at an extraordinary general meeting increasing the authorised share capital of the Company from £5,000,000 to £7,250,000 by the creation of an additional 225,000,000 new Ordinary Shares. On 23 January 2009, an additional 127,470,000 shares were allotted for consideration of £7,488,863 before expenses.

 

Company Share Option Plan

In 2007 the Company established an HMRC approved Company Share Option Plan ('CSOP') under which options to subscribe for the Company's ordinary shares of 1p each were awarded to certain employees ('Optionholders').

All options have a vesting period of 3 years, and are subject to the achievement of specific performance criteria.

Options are forfeited if they remain unexercised after a period of more than 10 years from the date of grant. Options are also forfeited if the Optionholder ceases to hold office with the Company before the options vest, with certain exceptions ("good leaver" provisions). All options are non-transferable and there are no cash settlement alternatives.

The following options were granted during the prior year under the CSOP scheme and represent all outstanding options issued by the Company:

 

Number of options outstanding at

1 January 2009

Exercise

Price

Date

of grant

Date of first exercise

Date of last exercise

Cancelled during year

Number of options outstanding at

31 December 2009








1,491,020

9.5p

5 Nov 2007

5 Nov 2010

4 Nov 2017

119,197

1,371,823

109,210

9.5p

11 Dec 2007

11 Dec 2010

10 Dec 2017

-

109,210








During the year, 119,197 of the options granted in 2007 were cancelled due to the employee to whom the options were granted leaving the employment of the Company. No options were granted during the year and no options were exercised during the current or prior years.

The fair value of the equity-settled share options granted under the CSOP are estimated at the date of grant using a Black-Scholes model, taking into account the terms and conditions upon which the options were granted. There are no market conditions which need to be taken into account in measuring the fair value of the share options.

The assumptions used in the model are as follows:

 

Input

 

Assumption

Share price

Price at date of grant

Expected share price volatility

70% (Expected volatility is based on the Company's historic share price volatility over the previous 260 days)

Option life

Per scheme rules

Expected dividends

Nil

Risk free rate

4.9%



The expense recognised in the income statement for share based payments and the corresponding movement within reserves during the year was £29,144 (2008: £28,927).

 

23           Related parties

At 31 December 2009, directors of the Company and their immediate relatives controlled 0.03% of the voting shares of the Company (2008: 0.04%).

Transactions with key management personnel

Key management of the Company are the Board of Directors and senior management.  The compensation of key management personnel including the directors is as follows:

 

 

 

 

2009   

 

2008

 

 

 

£

 

£

 

 

 

 

 

 

Key management emoluments including social security costs

 

 

1,568,407

 

1,376,291

Company contributions to pension plans

 

 

58,684

 

49,251

 

 

 

 

 

 

Total

 

 

1,627,091

 

1,425,542

 

 

 

 

 

 

 

Deposit balances, operated under standard customer terms and conditions, held by key management personnel, including directors, totalled £303,194 as at 31 December 2009 (2008: £242,923). The highest balance during the year was £441,718 (2008: £322,988).  Total returns paid on these accounts during the year totalled £2,355 (2008: £2,895).

Outstanding consumer finance and home purchase plan balances relating to key management personnel totalled £209,753 as at 31 December 2009 (2008: £54,302).  Returns recognised during the year for these accounts were £7,544 (2008: £3,553).  All consumer finance account facilities taken by key management personnel and staff were offered in line with standard customer terms and conditions.

24           Loss per ordinary share

Basic and diluted loss per ordinary share are calculated by dividing the loss for the financial period attributable to equity holders by the weighted average number of ordinary shares in issue for the year ended 31 December 2009 of 538,437,644 (31 December 2008: 419,000,000).

The Company has established a HMRC approved Company Share Option Plan, "CSOP", under which options to subscribe for the Company's ordinary shares of 1p each have been awarded to certain employees.  At 31 December 2009, 1,481,033 options remain outstanding (31 December 2008: 1,600,230).  Diluted loss per share is the same as basic loss per share since the outstanding share options have not been taken into account due to their anti-dilutive effect.  This arises since the Company is loss making.

 

25           Capital commitments

The Company had no outstanding capital commitments at 31 December 2009 (2008: £nil).

 

26        Segmental reporting

The Company measures and reports on the financial performance of the business to the chief operating decision maker as a whole and so has only one operating segment.  All business is conducted from the United Kingdom. 

A split of the Company's revenue by the geographic location in which the revenue was generated is provided below:

 

 

 

 

2009   

 

2008

 

 

 

£

 

£

 

 

 

 

 

 

United Kingdom

 

 

1,923,190

 

1,446,656

Europe

 

 

232,800

 

1,697,273

Middle East

 

 

861,022

 

4,957,331

Asia

 

 

-

 

206,037

 

 

 

 

 

 

Total

 

 

3,017,012

 

8,307,297

 

 

 

 

 

 

 

The Company does not have any non-current assets located outside the United Kingdom and no single external customer accounts for more than 10% of total income.

 

27           Assets and liabilities denominated in foreign currency

As at 31 December 2009, assets equivalent to £1,097,371 were denominated in US Dollars and are included within Commodity Murabaha and Wakala receivables and other advances to banks (2008: £1,131,054).  At 31 December 2009 assets equivalent to £359,529 were denominated in Euro and are included within Commodity Murabaha and Wakala receivables and other advances to banks (2008: £186,586).

Customer liabilities of £1,078,281 were denominated in US Dollars (2008: £339,796) and £356,184 were denominated in Euro (2008: £184,042).

 

 

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
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