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					ALLIANCE HOUSING BANK SAOG
FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2003
ALLIANCE HOUSING BANK SAOG
FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2003




Contents                              Page


Report of the auditors                  1

Balance sheet                           2

Statement of income                     3

Statement of cash flows                 4

Statement of changes in equity          5

Notes to the financial statements     6 - 23
CHAIRMAN’S REPORT
Dear Shareholders

I have pleasure, on behalf of the Board, in presenting your Bank’s Annual Report for 2003, our 6th year of
operation.

Financial Highlights

The Bank has had yet another outstanding year with significant growth in both business and profit. Headline
figures for the year include:

Compared to 31 Dec ’02                                                       End 2003 (In Million)
                                                                                        RO                   US$


Loan Book up 56 % to                                            71.81                       186.77
Total Assets up 52 % to                                         88.66                        230.58
Interest Income up 36% to                                                     5.64              14.66
Operating Expenses down 2 % to                                   1.59                4.13
Profit before tax up 47% to                                                   2.94                7.65

Dividend
Alliance has an established policy of ensuring that dividends are sustainable and progressive. In accordance with
this policy, and in the light of the continuing improvement in the Bank’s earnings, your Board proposes a
dividend of 60 Baizas per share for the year just ended.

Board Changes
At the AGM last March, all bar one of the existing Directors stood, and were duly re-elected to the Board. Mr.
Tariq Jamali decided not to stand for re-election, and Mr. Akbar Ali Habib was elected to replace him. I would
like to record the Board’s thanks to
Mr. Jamali for his contribution as a Director, and to formally welcome Mr. Habib.

During the year various changes were also made to the Chair and Membership of several Board sub-committees.
The Board and I particularly wish to express our appreciation of the contribution made by Mr. Munir Makki and
Mr. Peter Sullivan during their time as Deputy Chairman / Chairman of Executive Committee and Chairman of
Audit Committee respectively.




Management Change
The Board has accepted the resignation of the General Manager with regret. On behalf of the Board of Directors,
I would like to express our thanks for his contribution during his tenor.

Trading Environment
The economy remained stable during 2003 with continuing demand for Alliance’s services notwithstanding
political uncertainty and conflict elsewhere in the region. The comparatively low interest rate environment and
high level of liquidity that we saw in 2002 remained during 2003. Alliance continued with its policy of passing
on the benefit of this benign interest rate environment to its customers, and this in turn again contributed to our
steady growth.

Outlook
2004 has started with a similarly encouraging interest rate and liquidity environment, though most commentators
anticipate a gradual increase in rates from the 2nd Quarter. Unless there is some significant change in the
economy, in regulation, or in interest rates however, Alliance anticipates continuing steady demand for its
services; and at a level consistent with that established in 2003. During 2004 the Bank will continue investing in
its brand, and in both its human and physical resources. For all these reasons we anticipate some margin
reduction and containment of growth as the year progresses. Nonetheless we presently see profit continuing to
grow steadily in absolute terms.
                                                                                                                  2
Thanks
Your Board and I are extremely grateful to His Majestry Sultan Qaboos Bin Said, his Government, Central Bank
of Oman, and the Capital Market Authority for creating the environment and framework essential to the success
of a business such as Alliance. We would especially like to extend our gratitude to the Central Bank of Oman for
their continuing advice and guidance. We are grateful to shareholders for continuing their support of the Bank, to
customers without whom the business could not flourish, and to employees who bring their expertise and
commitment to the provision of our services.




Ahmed Suwaidan Al Balushi
Chairman




REPORT OF THE AUDITORS TO THE
SHAREHOLDERS OF ALLIANCE HOUSING BANK SAOG

We have audited the accompanying balance sheet of Alliance Housing Bank SAOG (the bank) as at
31 December 2003 and the related income and cash flow statements for the year then ended. These financial
statements set out on pages 2 to 23 are the responsibility of the bank’s Board of Directors. Our responsibility is
to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with International Standards on Auditing. Those Standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements present fairly in all material respects the financial position of Alliance
Housing Bank SAOG as at 31 December 2003 and the results of its operations and its cash flows for the year
then ended in accordance with International Financial Reporting Standards.

In our opinion the financial statements comply in all material respects with the disclosure requirements set out in
the Rules for Disclosure and Proformas issued by the Capital Market Authority of the Sultanate of Oman.



PricewaterhouseCoopers

24 January 2004
                                                                                                           3
ALLIANCE HOUSING BANK SAOG
BALANCE SHEET AT 31 DECEMBER 2003



    2002             2003                                                          2003             2002
    US $             US $                                             Note          RO               RO
                                  ASSETS
                                  Cash and balances with the
    357,927           371,631       Central Bank of Oman                3          142,892            137,623
  3,626,705         1,515,063     Due from other banks                  4          582,542          1,394,468
  5,704,252         4,733,420     Assets held-for-trading               5        1,820,000          2,193,285
 20,023,775        35,218,216     Investment securities                 6       13,541,404          7,699,141
119,647,014       186,770,616     Mortgage accounts                     7       71,813,302         46,004,277
    345,061           229,092     Tangible fixed assets                 8           88,086            132,676
          -           106,010     Deferred tax asset                    9           40,761                  -
  1,595,027         1,643,425     Other assets                         10          631,897            613,288
151,299,761       230,587,473                                                   88,660,884         58,174,758

                                  LIABILITIES
  26,444,231       44,081,610     Customers’ deposits                  11       16,949,379         10,167,807
  38,686,606       60,143,043     Certificates of deposit                       23,125,000         14,875,000
  17,165,150       52,015,604     Due to other banks                            20,000,000          6,600,000
     771,230        1,084,065     Taxation                             12          416,823            296,538
   2,603,712        3,243,246     Other liabilities                    13        1,247,028          1,001,127
  85,670,929      160,567,568                                                   61,738,230         32,940,472

                                  EQUITY
  54,616,385       54,616,385     Share capital                        14       21,000,000         21,000,000
   2,228,615        2,913,498     Legal reserve                        15        1,120,240            856,903
           -          342,439     General banking reserve              16          131,668                  -
   6,326,094        8,870,600     Retained earnings                              3,410,746          2,432,383
   2,457,738        3,276,983     Proposed dividends                   17        1,260,000            945,000
  65,628,832       70,019,905                                                   26,922,654         25,234,286

151,299,761       230,587,473                                                   88,660,884         58,174,758




The financial statements on pages 2 to 23 were approved by the Board of Directors on 20 January 2004 and were
signed on their behalf by :




Ahmed Bin Suwaidan Al Balushi                                       Ali Hassan Ali
Chairman                                                            General Manager - Acting


The accounting policies on pages 6 to 8 and notes on pages 9 to 23 form an integral part of these financial
statements.


Report of Auditors – page 1
                                                                                                            4
ALLIANCE HOUSING BANK SAOG
STATEMENT OF INCOME
FOR THE YEAR ENDED 31 DECEMBER 2003

   2002            2003                                                           2003           2002
   US $            US $                                                 Note      RO             RO

 10,786,453     14,659,797     Interest income                                  5,636,692      4,147,391
 (2,177,524)     (3,555,433)   Interest expense                                (1,367,064)      (837,258)
  8,608,929     11,104,364     Net interest income                              4,269,628      3,310,133

                               Net unrealised gain from assets held-
    131,771          31,844     for-trading and investment securities    18        12,244         50,666
  1,067,126       1,368,536    Other operating income                    19      526,202         410,310
  9,807,826     12,504,744     Net operating income                             4,808,074      3,771,109

 (1,967,108)     (2,299,048)   Staff expenses                            20      (883,984)      (756,353)
   (525,347)       (163,490)   Depreciation                              8        (62,862)      (201,996)
 (1,712,273)     (1,671,480)   Other operating expenses                  21      (642,684)      (658,369)
                               Loan impairment expense, net of
   (300,994)       (479,818)    recoveries                                7      (184,490)      (115,732)

    (90,507)       (239,272)   Board remuneration - proposed             22       (92,000)       (34,800)

 (4,596,229)     (4,853,108)   Net operating expenses                          (1,866,020)    (1,767,250)

  5,211,597       7,651,636    Profit before taxation                           2,942,054      2,003,859

   (616,029)       (802,824)   Income tax expense                        12      (308,686)      (236,863)

  4,595,568       6,848,812    Net profit for the year                          2,633,368      1,766,996

                               Earnings per share
       0.22            0.33    - basic                                   23         0.125          0.084
       0.22            0.32    - diluted                                 23         0.123          0.084




The accounting policies on pages 6 to 8 and notes on pages 9 to 23 form an integral part of these financial
statements.


Report of Auditors – page 1.
                                                                                                             5
ALLIANCE HOUSING BANK SAOG
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 31 DECEMBER 2003



     2002          2003                                                                 2003          2002
     US $          US $                                                      Note        RO            RO

  5,211,597       7,651,636 Profit before taxation                                   2,942,054      2,003,859
                             Adjustments for:
    525,347         163,490 Depreciation                                                62,862        201,996
     90,507         239,272 Board remuneration – proposed                               92,000         34,800
    300,994         479,818 Loan impairment expense, net of recoveries                 184,490        115,732
     20,437          22,752 End of service benefits provision                            8,748          7,858
    (26,268)        (33,355) Profit on sale of tangible fixed assets                   (12,825)       (10,100)
           -         62,944 Tangible fixed assets written off                           24,202              -
                             Net unrealised gain from assets held-for-
   (131,771)        (31,844)   trading and investment securities                        (12,244)       (50,666)
                             Operating profit before changes in
  5,990,843       8,554,713    operating assets and liabilities                      3,289,287      2,303,479
                             Changes in operating assets and
                               liabilities
      (1,842)       (37,891) Payment of end of service benefits                         (14,569)         (708)
                             Increase in deposit with Central Bank of
           -        (21,261)   Oman                                                      (8,175)             -
(39,698,091)    (67,603,420) Increase in mortgage accounts                          (25,993,515)   (15,263,916)
   (616,437)        (48,398) Increase in other assets                                   (18,609)      (237,020)
 16,083,654      17,637,378 Increase in customers’ deposits                           6,781,572      6,184,165
 25,682,705      21,456,437 Increase in certificates of deposit                       8,250,000      9,875,000
           -     24,707,412 Increase in due to other banks                            9,500,000              -
    964,854         521,298 Increase in other liabilities                               200,439        370,986
  8,405,686       5,166,268 Cash generated from operations                            1,986,430      3,231,986
    (56,936)        (90,507) Board remuneration paid                                    (34,800)       (21,892)
   (394,447)       (596,000) Income tax paid                                           (229,162)      (151,665)
                             Net cash generated from operating
  7,954,303       4,479,761    activities                                            1,722,468      3,058,429

                               Investing activities
           -        918,817    Disposal of assets held-for-trading                      353,285              -
(10,557,300)     (7,828,399)   Purchase of securities                                (3,010,019)    (4,059,282)
   (129,202)       (112,235)   Purchase of tangible fixed assets                        (43,154)       (49,678)
     26,268          35,123    Proceeds from sale of tangible fixed assets               13,505         10,100
(10,660,234)     (6,986,694)   Net cash used in investing activities                 (2,686,383)    (4,098,860)

                             Financing activities
 (2,137,823)     (2,473,126) Dividend paid                                            (950,917)      (821,993)

 (4,843,754)     (4,980,059) Net change in cash and cash equivalents                 (1,914,832)    (1,862,424)
  2,443,471      (2,400,283) Cash and cash equivalents at 1 January                    (922,909)       939,515
                               Cash and cash equivalents at
 (2,400,283)     (7,380,342)     31 December                                  24     (2,837,741)     (922,909)

The accounting policies on pages 6 to 8 and notes on pages 9 to 23 form an integral part of these financial
statements.

Report of Auditors – page 1.
                                                                                                         6
ALLIANCE HOUSING BANK SAOG
STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2003


                                                                 General
                                        Share        Legal       banking     Retained     Proposed
                                        capital     reserve      reserve     earnings     dividend        Total
                               Note      RO           RO          RO          RO             RO            RO


Balance at 1 January 2002             21,000,000    680,203            -    1,787,087       840,000    24,307,290
Dividend for 2001                              -          -            -            -      (840,000)     (840,000)
Net profit for the year                        -          -            -    1,766,996             -     1,766,996
Transfer to reserve             15             -    176,700            -     (176,700)            -             -
Proposed dividend               17             -          -            -     (945,000)      945,000              -
At 31 December 2002 (RO)              21,000,000    856,903            -    2,432,383       945,000    25,234,286
At 31 December 2002 (US$)             54,616,385 2,228,615             -    6,326,094     2,457,738    65,628,832


Balance at 1 January 2003            21,000,000   856,903             -     2,432,383       945,000    25,234,286
Dividend for 2002                             -         -             -             -      (945,000)     (945,000)
Net profit for the year                       -         -             -     2,633,368             -     2,633,368
Transfer to reserves           15,16          -   263,337       131,668      (395,005)            -             -
Proposed dividend               17             -        -             -    (1,260,000)    1,260,000              -
At 31 December 2003 (RO)             21,000,000 1,120,240       131,668     3,410,746     1,260,000    26,922,654
At 31 December 2003 (US$)             54,616,385 2,913,498      342,439     8,870,600     3,276,983    70,019,905




The accounting policies on pages 6 to 8 and notes on pages 9 to 23 form an integral part of these financial
statements.


Report of Auditors – page 1
                                                                                                                 7
ALLIANCE HOUSING BANK SAOG
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2003


1   Activities

The financial statements of Alliance Housing Bank SAOG (“the bank”) for the year ended 31 December 2003
were authorised for issue in accordance with a resolution of the Directors on 20 January 2004.

Alliance Housing Bank SAOG is a general joint stock company incorporated in the Sultanate of Oman and is
mainly engaged in providing housing loans in the Sultanate of Oman through a network of seven branches. The
bank operates in Oman under a banking licence issued by the Central Bank of Oman and is covered by its
deposit insurance scheme. The registered address of the bank is P O Box 545, Mina Al Fahal 116, Sultanate of
Oman.

The bank operates in the Sultanate of Oman and employed 61 employees as of 31 December 2003 (2002: 60
employees).

2   Significant accounting policies

The financial statements have been prepared in accordance with International Financial Reporting Standards,
including International Accounting Standards and Interpretations issued by the International Accounting
Standards Board, applicable requirements of the Commercial Companies Law and applicable regulations issued
by the Capital Market Authority of the Sultanate of Oman and the Central Bank of Oman.

The significant accounting policies adopted are as follows:

Basis of preparation
The financial statements are prepared under the historical cost convention as modified by the revaluation of
available-for-sale investment securities and financial assets held-for-trading.

The accounting policies have been consistently applied by the bank and are consistent with those used in the
previous year.

The accounting records are maintained in Rial Omani which is the measurement and presentation currency for
these financial statements. The United States Dollar amounts shown in the financial statements have been
translated from Rial Omani at an exchange rate of RO 0.3845 to each US Dollar, and are shown for the
convenience of the reader only.

Assets held-for-trading
Held-for-trading assets are assets which were either acquired principally for the purpose of generating a profit
from short-term fluctuations in price or are assets included in a portfolio in which a pattern of short-term profit
taking exists. These are initially recognised at cost (which includes transaction costs) and subsequently re-
measured to fair value based on market prices. All related realised and unrealised gains and losses are included
in the statement of income. Interest earned on trading assets is reported as interest income.

All purchases and sales of trading assets that require delivery within the time frame established by regulation or
market convention (‘regular way’ purchases and sales) are recognised at the trade date, which is the date that the
bank commits to purchase or sell the asset.
                                                                                                                  8
ALLIANCE HOUSING BANK SAOG
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2003 (continued)


2   Significant accounting policies (continued)

Investment securities
The bank classifies its investment securities into two categories: originated and available-for-sale investment
securities. Investment securities that are purchased at original issuance directly from the issuer are classified as
originated investment securities unless the intent is to sell the instrument immediately or in the short term.
Investment securities intended to be held for an indefinite period of time, which may be sold in response to needs
for liquidity or changes in interest rates, exchange rates or equity prices are classified as available-for-sale
investment securities. Management determines the appropriate classification of its investments at the time of the
purchase. All investment securities are initially recognised at cost (which includes transaction costs).

Originated investment securities are subsequently re-measured at amortised cost using the effective yield method
less any provision for impairment. The amount of impairment loss for assets carried at amortised cost is
calculated as the difference between the asset’s carrying amount and the present value of expected future cash
flows discounted at the effective interest rate.

Available-for-sale investment securities are subsequently re-measured to fair value based on market prices or
amounts derived from cash flow models. Unrealised gains and losses arising from changes in the fair value of
securities classified as available-for-sale are recognised in the statement of income, as required by local
regulations.

All purchases and sales of investment securities are recognised at the trade date which is the date that the bank
commits to purchase or sell the asset.

Mortgage accounts
Mortgage accounts originated by providing money directly to the borrower are categorised as originated loans
and are stated at amortised cost less any amounts written off, provisions for loan impairment and reserved
interest.

Provisions for loan impairment losses comprise both specific and general provisions. Specific provisions are
created to reduce all impaired mortgage accounts to their expected realisable value. The amount of provision is
the difference between the carrying amount and recoverable amount, being the present value of expected cash
flows, including amounts recoverable from collateral, discounted based on applicable interest rates.

Potential losses not specifically identified but which experience indicates are present in the portfolio of mortgage
accounts are recognised as an expense and are deducted from the total carrying amount of mortgage accounts as
a general provision for losses on mortgage accounts.

When a loan is uncollectable, it is written off against the related provision for impairments. Subsequent
recoveries are credited to the loan impairment expense in the statement of income.

Tangible fixed assets
Tangible fixed assets are recorded at historical cost less accumulated depreciation. Cost represents the purchase
price, together with any incidental costs of acquisition. Where the carrying amount of an asset is greater than its
estimated recoverable amount, it is written down to its recoverable amount. Gains and losses on disposal of
tangible fixed assets are determined by reference to their carrying amount and are recognised in the statement of
income. Capital work-in-progress is not depreciated until it is taken to fixed assets when the asset is put to use.
                                                                                                                9
ALLIANCE HOUSING BANK SAOG
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2003 (continued)


2   Significant accounting policies (continued)

Depreciation
Depreciation is provided on all tangible fixed assets on the straight line method at rates calculated to write off
the cost less residual value of each asset over its expected useful life.

The rates of depreciation are based upon the following estimated useful lives:

                    Leasehold modifications                                 3 years
                    Computer and other equipment                            5 years
                    Vehicles                                                4 years
                    Furniture                                               5 years

Operating leases
Operating lease payments are recognised as an expense in the statement of income on a straight line basis over
the lease term.

Other liabilities
Liabilities are recognised for amounts to be paid in future for goods or services received, whether billed by the
supplier or not.

End of service benefits and leave entitlements
End of service benefits are accrued in accordance with the terms of employment of the bank’s employees at the
balance sheet date, having regard to the requirements of the labour law in the Sultanate of Oman. Employees’
entitlements to annual leave are recognised when they accrue to employees and an accrual is made for the
estimated liability for annual leave as a result of services rendered by employees up to balance sheet date.

Contributions to a defined contribution retirement plan for Omani employees in accordance with the Omani
Social Insurance Scheme, are recognised as an expense in the income statement.

Deferred income tax
Deferred income tax is provided using the liability method for all temporary differences arising between the tax
bases of assets and liabilities and their carrying values for financial reporting purposes. Currently enacted tax
rates are used to determine deferred tax.

The principal temporary differences arise from depreciation on fixed assets and general provision for loan
impairments. Deferred tax assets are recognised to the extent that it is probable that, where relevant the
temporary differences will reverse, and future tax profits will be available against which the temporary
differences can be utilised.

Revenue recognition
Interest receivable and payable is recognised on an accrual basis using the effective yield method on the
principal outstanding or the actual purchase price as applicable. Interest which is doubtful of recovery is
reserved and excluded from income until it is received in cash. Fees and other income are accounted for in the
period receivable.

Cash and cash equivalents
Cash and cash equivalents comprise balances maturing at three months or less from the date of acquisition
including: cash and balances with the Central Bank of Oman, treasury bills and other eligible government
securities and amounts due from and due to other banks.

Foreign currencies
Foreign currency transactions are recorded at rates of exchange ruling at the value dates of the transactions.
Assets and liabilities in foreign currencies are translated into Rial Omani at the rates of exchange ruling at the
balance sheet date. Any resultant gains or losses are recognised in the statement of income.
                                                                                                             10
ALLIANCE HOUSING BANK SAOG
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2003 (continued)


3     Cash and balances with the Central Bank of Oman
       2002          2003                                                             2003          2002
       US $          US $                                                              RO            RO
      71,287        95,573      Cash on hand                                           36,748       27,410
     143,597       111,753      Clearing account with the Central Bank of Oman         42,969       55,213
     130,039       151,301      Capital deposit with the Central Bank of Oman          58,175       50,000
      13,004        13,004      Insurance deposit with the Central Bank of Oman         5,000        5,000
     357,927       371,631                                                            142,892      137,623

The capital deposit and insurance deposit with the Central Bank of Oman are mandatory deposits and hence are
not available for use in day to day operations.

4     Due from other banks

      2002          2003                                                              2003         2002
      US $          US $                                                               RO           RO
    3,626,705    1,515,063      Bank balances                                         582,542    1,394,468

5     Assets held-for-trading

31 December 2003
                                                                                    Carrying     Carrying
                                                                       Cost          value        value
                                                                       RO             RO          US $
Unquoted debt instruments:
- Certificates of deposit                                           1,000,000      1,020,000     2,652,796
- Bank deposit                                                        800,000        800,000     2,080,624
                                                                    1,800,000      1,820,000     4,733,420

31 December 2002
Unquoted debt instruments:
- Certificates of deposit                                           1,353,285      1,393,285     3,623,628
- Bank deposit                                                        800,000        800,000     2,080,624
                                                                    2,153,285      2,193,285     5,704,252

6     Investment securities

31 December 2003
                                                                                   Carrying      Carrying
                                                                      Cost          value         value
                                                                      RO             RO            US$
Securities originated (at amortised cost)
- Government development bonds                                     7,013,281       7,013,281    18,240,003
- Government certificate of deposit                                3,500,000       3,500,000     9,102,731
- Listed debt security                                               130,700         130,700       339,921
- Unlisted debt security                                             100,000         100,000       260,078
                                                                  10,743,981      10,743,981    27,942,733
31 December 2002
- Government development bonds                                     4,590,967       4,590,967    11,940,097
- Government certificate of deposit                                  700,000         700,000     1,820,546
- Other unlisted debt security                                       100,000         100,000       260,078
                                                                   5,390,967       5,390,967    14,020,721
                                                                                                                 11
ALLIANCE HOUSING BANK SAOG
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2003 (continued)


6   Investment securities (continued)

31 December 2003
                                                                                     Carrying        Carrying
                                                                      Cost            value           value
                                                                      RO               RO             US $

Securities available-for-sale (at fair value)
- Government development bonds                                        524,880        511,200         1,329,519
- Listed debt securities                                            2,165,646      2,260,435         5,878,895
- Listed funds (capital guaranteed)                                    17,335         25,788            67,069
                                                                    2,707,861      2,797,423         7,275,483

31 December 2002
- Listed debt securities                                            1,661,778      1,714,624         4,459,361
- Unlisted debt securities                                            555,045        555,045         1,443,550
- Listed funds (capital guaranteed)                                    36,595         38,505           100,143
                                                                    2,253,418      2,308,174         6,003,054

Total investment securities: at 31 December 2003                   13,451,842   13,541,404          35,218,216
                           : at 31 December 2002                    7,644,385      7,699,141        20,023,775

7   Mortgage accounts

    2002            2003                                                                2003            2002
    US $            US $                                                                 RO              RO

120,460,861 188,179,482         Originated mortgage accounts                         72,355,011     46,317,201
   (725,974) (1,205,792)        Provision for loan impairment                          (463,627)      (279,137)
     (87,873)  (203,074)        Reserved interest                                       (78,082)       (33,787)
119,647,014 186,770,616                                                              71,813,302     46,004,277

The movement in the provision for loan impairment and reserved interest is analysed below:

                                                          Specific        General                     Reserved
                                                         provision       provision        Total        interest
                                                            RO              RO             RO            RO

At 1 January 2003                                        186,137          93,000         279,137        33,787
Provided during the year                                 135,861          51,000         186,861             -
Released during the year                                  (2,371)              -          (2,371)            -
Interest reserved during the year                              -               -               -        44,803
Reserved interest recovered                                    -               -               -          (508)
At 31 December 2003 (RO)                                 319,627         144,000         463,627        78,082
At 31 December 2003 (US $)                               831,280         374,512        1,205,792      203,074

At 1 January 2002                                        123,405          40,000         163,405        14,824
Provided during the year                                 120,840          53,000         173,840             -
Released during the year                                 (58,108)              -         (58,108)            -
Interest reserved during the year                              -               -               -        21,722
Reserved interest recovered                                    -               -               -        (2,759)
At 31 December 2002 (RO)                                 186,137          93,000         279,137        33,787
At 31 December 2002 (US $)                               484,101         241,873         725,974        87,873
                                                                                                       12
ALLIANCE HOUSING BANK SAOG
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2003 (continued)


7   Mortgage accounts (continued)

Interest is reserved for all non-performing mortgage accounts where recovery is considered doubtful. At
31 December 2003, the total balance of mortgage accounts on which interest is not being accrued, or where
interest is suspended, amounted to RO 802,674 equivalent to US $ 2,087,579 (31 December 2002: RO 524,576
equivalent to US $ 1,364,307).

Specific provisions for loan impairment represent 39.8% of gross non-performing mortgage accounts as of 31
December 2003 (2002 – 35.5%).

8   Tangible fixed assets
                                 Leasehold   Computer                               Capital
                                  modifi-    and other                              work in
                                  cations    equipment      Vehicles   Furniture    progress       Total
                                    RO           RO           RO         RO           RO            RO
Balance at 1 January 2003, net
  of accumulated depreciation      16,948       47,983       21,967     21,576        24,202      132,676
Additions                           3,720       31,086            -      3,950         4,398       43,154
Disposal/write-off                      -            -         (680)         -       (24,202)     (24,882)
Depreciation for the year          (7,107)     (31,474)      (8,825)   (15,456)            -      (62,862)
Balance at 31 December 2003,
  net of accumulated
  depreciation (RO)                13,561       47,595       12,462     10,070         4,398        88,086

Tangible fixed assets
At cost                           383,062      764,259       46,500   177,036          4,398     1,375,255
Accumulated depreciation         (369,501)    (716,664)     (34,038) (166,966)             -    (1,287,169)
Net carrying amount at
  31 December 2003 (RO)            13,561       47,595       12,462     10,070         4,398        88,086

Net carrying amount at
 31 December 2003 (US $)           35,269      123,784       32,411     26,190        11,438      229,092
Cost of fully depreciated
 assets in use at
  31 December 2003 (RO)           360,811      657,691       58,100     140,132            -     1,216,734

Tangible fixed assets
At cost                           379,342      733,163       90,100     173,096       24,202     1,399,903
Accumulated depreciation         (362,394)    (685,180)     (68,133)   (151,520)           -    (1,267,227)
Net carrying amount at
   31 December 2002 (RO)           16,948       47,983       21,967      21,576       24,202      132,676

Net carrying amount at
   31 December 2002 (US $)         44,078      124,793       57,131      56,115       62,944      345,061
                                                                                                                13
ALLIANCE HOUSING BANK SAOG
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2003 (continued)


9     Deferred tax

Deferred income taxes are calculated on all temporary differences under the liability method using a principal
tax rate of 12%. The deferred tax assets and liabilities in the balance sheet and the deferred tax credit in the
profit and loss account are attributable to the following items:
                                                                                   Credited/
                                                                                 (charged) to
                                                                 31 December     profit & loss     31 December
                                                                     2002           account            2003
                                                                      RO               RO               RO
Provisions                                                              -            16,916           16,916
Accelerated book depreciation                                           -            36,685           36,685
Fair value gain on investments                                          -          (12,840)          (12,840)
                                                                        -            40,761           40,761
At 31 December (US$)                                                    -          106,010           106,010

10 Other assets

      2002             2003                                                          2003             2002
      US $             US $                                                          RO                RO

    1,336,710        1,339,885    Interest receivable                                515,186           513,965
      196,359          187,925    Prepayments                                         72,257            75,500
       61,958          115,615    Other receivables                                   44,454            23,823
    1,595,027        1,643,425                                                       631,897           613,288

11 Customers’ deposits

      2002            2003                                                            2003             2002
      US $            US $                                                             RO               RO

17,852,312        29,047,711       Term deposits                                   11,168,845        6,864,214
 8,591,919        15,033,899       Other accounts                                   5,780,534        3,303,593
26,444,231        44,081,610                                                       16,949,379       10,167,807

12 Taxation

(a) The taxation (charge)/credit for the year is as follows:
      2002             2003                                                          2003              2002
      US $             US $                                                           RO                RO
    616,029           908,834      Current tax - current year                      349,447           236,863
           -           (5,974)     Deferred tax - current year                      (2,300)                 -
           -         (100,036)     - cumulative effect of prior years              (38,464)                 -
    616,029           802,824                                                      308,686           236,863

(b) The reconciliation of the accounting profits at the applicable rate of 12% (2002 – 12%) after basic
exemption of RO 30,000 with the taxation charge in the financial statements is as follows:
      2002             2003                                                           2003             2002
      US $             US $                                                            RO               RO
                                   Tax charge on the accounting profit of
     616,029          908,834      RO 2,942,054 (2002 – RO 2,003,859)              349,447          236,863
                                   Add/(less) tax effect of:
                                   Cumulative deferred tax credit during the
          -          (106,010)     year                                            (40,761)               -
    616,029           802,824      Tax provision for the current year              308,686          236,863
                                                                                                                14
ALLIANCE HOUSING BANK SAOG
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2003 (continued)

12 Taxation (continued)

(c) The movements in current taxation for the year comprise:

     2002              2003                                                          2003              2002
     US $              US $                                                           RO                RO
   549,648           771,230        At 1 January                                   296,538           211,340
   616,029           908,834        Charge for the year                            349,447           236,863
  (394,447)         (595,999)       Paid during the year                          (229,162)         (151,665)
   771,230         1,084,065        At 31 December                                 416,823           296,538

(d) The bank’s income tax assessments for the years 1997 (year of incorporation) to 2003 are subject to
agreement with the taxation authorities.

13 Other liabilities

     2002              2003                                                           2003             2002
     US $              US $                                                            RO               RO

   987,649         1,436,965        Interest payable                                  552,513          379,751
   379,787           346,707        Staff related liabilities                         133,309          146,028
   331,176           363,295        Sundry creditors                                  139,687          127,337
   657,878           715,680        Provision for expenses                            275,179          252,954
    90,507           239,272        Board remuneration - proposed                      92,000           34,800
   156,715           141,327        Unclaimed dividend                                 54,340           60,257
 2,603,712         3,243,246                                                        1,247,028        1,001,127

Staff related liabilities include the following:
      2002               2003                                                         2003             2002
      US $               US $                                                          RO               RO
    42,551              27,412       Statutory end of service benefits                10,540           16,361
   103,441              44,900       Contractual liabilities                          17,264           39,773
   233,795             274,395       Other liabilities                               105,505           89,894
   379,787             346,707                                                       133,309          146,028

     2002              2003                                                           2003             2002
     US $              US $                                                            RO               RO
                                   Movements in the end of service benefits
                                    liability are as follows:
    23,956            42,551         Liability as at 1 January                       16,361            9,211
    20,437            22,752         Expense recognised                               8,748            7,858
    (1,842)          (37,891)        End of service benefits paid                   (14,569)            (708)
    42,551            27,412         Liability as at 31 December                     10,540           16,361

14 Share capital

The authorised share capital of the bank is 30,000,000 (2002 - 30,000,000) shares of RO 1 each. 21,000,000
(2002 - 21,000,000) shares of RO 1 each have been issued and fully paid.

In accordance with the terms set out in the bank’s Articles of Association (AOA), the three principal founding
members have been granted a share option to subscribe and purchase up to 12.5% of the issued share capital at a
price of RO 1 per share. The option is subject to approval at an Extraordinary General Meeting of the
shareholders as required by the AOA, and to be in compliance with the Commercial Companies Law, as
amended and subject to regulatory approval. The three founders (one of whom is the current Chairman of the
Board) have advised the bank of their desire to exercise these options and the bank is accordingly in discussion
with the concerned authorities.

As of 31 December 2003, no shareholder personally held 10% or more of the bank’s capital.
                                                                                                             15


ALLIANCE HOUSING BANK SAOG
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2003 (continued)


15 Legal reserve

As required by the Omani Commercial Companies Law of 1974, 10% of the net profit for the year has been
transferred to legal reserve. The bank may resolve to discontinue such annual transfers when the reserve totals
one third of the paid up share capital. The reserve is non distributable.

16 General banking reserve

The bank has established a policy during the year to set aside 5% of the net profit for the year to a ‘General
banking reserve’. The bank will review this policy and may resolve to discontinue such annual transfers when the
reserve totals 25% of the paid-up share capital.

17 Proposed dividends

A dividend of RO 0.060 per share (2002 – RO 0.045 per share) has been proposed by the bank’s Board of
Directors and will be submitted for formal approval at the Annual General Meeting in March 2004. The financial
statements reflect this resolution and the proposed dividend is accounted for in equity as an appropriation of
retained earnings.

18 Net unrealised gain from assets held-for-trading and investment securities

   2002            2003                                                                2003           2002
   US $            US $                                                                 RO             RO
   13,004         (52,016)    Unrealised (loss)/gain on assets held-for-trading        (20,000)         5,000
  118,767          83,860     Net unrealised gain on investment securities              32,244         45,666
  131,771          31,844                                                               12,244         50,666

19 Other operating income
   2002           2003                                                                2003             2002
   US $           US $                                                                 RO               RO
  537,602        912,819      Fee income                                              350,979         206,708
  529,524        455,717      Other income                                            175,223         203,602
1,067,126      1,368,536                                                              526,202         410,310

20 Staff expenses
Staff expenses include RO 331,265 equivalent to US $ 861,547 (2002 – RO 254,528 equivalent to US $
661,971) being salary and related benefits to the top five officers of the bank. Employment contracts with these
officers are in accordance with the labour law of the Sultanate of Oman.

21 Other operating expenses
     2002          2003                                                                2003            2002
     US $          US $                                                                 RO              RO
    683,300       684,101     Infrastructure costs                                    263,037         262,729
     81,043        80,693     Regulatory fees and expenses                             31,026          31,161
    118,421       113,443     Board and related expenses                               43,619          45,533
    829,509       793,243     Other expenses                                          305,002         318,946
  1,712,273     1,671,480                                                             642,684         658,369

Board and related expenses include the following:
    2002           2003                                                                 2003           2002
    US $           US $                                                                  RO             RO
     62,678        70,481     Sitting fees                                              27,100         24,100
     55,743        42,962     Travel and other expenses                                 16,519         21,433
    118,421       113,443                                                               43,619         45,533
                                                                                                              16
ALLIANCE HOUSING BANK SAOG
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2003 (continued)


22 Board remuneration - proposed

Individual directors will receive RO 8,000 (2002: RO 3,200) and the Chairman and Deputy Chairman will
receive RO 16,000 (2002: RO 5,500) and RO 12,000 (2002: RO 3,700) respectively. Board remuneration will
be submitted for formal approval at the Annual General Meeting in March 2004.

23 Earnings per share

Earnings per share figures are calculated by dividing the net profit for the year by the weighted average number
of shares outstanding during the year as follows:
   2002           2003                                                                  2003          2002
   US $           US $                                                                   RO            RO
  4,595,568     6,848,812     Net profit for the year                                 2,633,368     1,766,996
21,000,000     21,000,000     Weighted average number of shares in issue             21,000,000    21,000,000
          -       489,407     Adjustment for share options                              489,407             -
                              Weighted average number of shares for diluted
21,000,000     21,489,407     earnings                                               21,489,407    21,000,000
      0.22            0.33    Earnings per share - basic                                  0.125          0.084

      0.22            0.32    Earnings per share - diluted                                0.123          0.084

For the diluted earnings per share, the number of shares in issue have been adjusted assuming full allotment of
shares in respect of the application made by the three principal founding members to exercise options set out in
the bank’s Articles of Association.

24 Cash and cash equivalents

Cash and cash equivalents included in the statement of cash flows comprise the following balance sheet amounts:

    2002           2003                                                                  2003          2002
    US $           US $                                                                   RO            RO

   214,884      207,326       Cash and balances with the Central Bank of Oman            79,717        82,623
 3,626,705    1,515,063       Due from other banks                                      582,542     1,394,468
 1,820,547    9,102,731       Government certificates of deposit                      3,500,000       700,000
(8,062,419) (18,205,462)      Due to other banks                                     (7,000,000)   (3,100,000)
(2,400,283) (7,380,342)                                                              (2,837,741)     (922,909)

25 Contingent liabilities and commitments

(a) Mortgage loans approved but not drawn down as of 31 December 2003 amount to RO 6,992,940 equivalent
to US $ 18,005,046 (31 December 2002 - 5,340,636 equivalent to US $ 13,889,821).

(b) The bank has entered into certain long term operating leases. Under the terms of the leases the future
minimum rental payments are as follows:

    2002            2003                                                                2003           2002
    US$             US$                                                                  RO             RO

                              Future minimum lease payments :
   160,182        158,757      - not later than one year                                61,042         61,590
   816,531        561,365      - later than one year and not later than five years     215,845        313,956
                              Aggregate operating lease expenditure contracted
   976,713        720,122        for at the balance sheet date                         276,887        375,546
                                                                                                                     17
ALLIANCE HOUSING BANK SAOG
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2003 (continued)


25 Contingent liabilities and commitments (continued)

(c) The bank has issued guarantees for RO 2,837,500 equivalent to US $ 7,379,714 (2002 – RO
250,000 equivalent to US$ 650,195) against the security of customer deposits of RO 2,837,500
equivalent to US $ 7,379,714 (2002 – RO 250,000 equivalent to US $ 650,195).

26 Related party transactions

The bank enters into transactions with directors and their related concerns in the ordinary course of business at
the bank’s normal commercial terms. All loans and advances to related parties are performing advances and are
free of any provision for loan impairment. Pricing policies and terms of other transactions are approved by the
bank’s management and Board of Directors.

The year end balances in respect of related parties included in the financial statements are as follows:
    2002           2003                                                                    2003             2002
    US $           US $                                                                     RO               RO

    67,501         449,969     Mortgage accounts                                         173,013            25,954
   325,334         494,395     Customers’ deposits                                       190,095           125,091


The income and expenses in respect of related parties included in the financial statements are as follows:

    2002            2003                                                                   2003             2002
    US $            US $                                                                    RO              RO

     6,700          21,612     Interest income                                              8,310            2,576
    10,117          15,862     Interest expense                                             6,099            3,890
                                                                                                              18
ALLIANCE HOUSING BANK SAOG
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2003 (continued)

27 Maturity profile of assets and liabilities

The maturity profile of the assets and liabilities at the year end are based on contractual repayment arrangements.
The following reflects the contractual maturities of assets and liabilities which have been determined on the basis
of the remaining period at the balance sheet date to the contractual maturity date.

The asset and liability maturity profile is as follows:
                                On demand
                                  or within        4 to 12      1 to 5      5 to 10     More than
                                  3 months         months       years        years       10 years          Total
                                     RO              RO          RO           RO           RO               RO

As of 31 December 2003

Cash and balances with the
  Central Bank of Oman               79,717             -             -            -     63,175           142,892
Due from other banks                582,542             -             -            -          -           582,542
Assets held-for-trading                   -     1,020,000       800,000            -          -         1,820,000
Investment securities             3,500,000             -     7,482,869    2,558,535          -        13,541,404
Mortgage accounts                   268,973     2,479,924    15,592,818   23,452,701 30,018,886        71,813,302
Tangible fixed assets                26,367        20,573        41,146            -          -            88,086
Deferred tax asset                        -             -        40,761            -          -            40,761
Other assets                        238,894       219,967       173,036            -          -           631,897
Total assets (RO)                 4,696,493     3,740,464    24,130,630   26,011,236 30,082,061        88,660,884

Total assets (US $)             12,214,546      9,728,125    62,758,465   67,649,508 78,236,829       230,587,473

Customers’ deposits              6,235,318      7,679,829     3,034,232               -          -     16,949,379
Certificates of deposit                  -      5,000,000    18,125,000               -          -     23,125,000
Due to other banks              11,500,000      8,500,000             -               -          -     20,000,000
Taxation                           349,447         67,376             -               -          -        416,823
Other liabilities                  852,350        394,678             -               -          -      1,247,028
Equity                                   -              -             -               - 26,922,654     26,922,654
Total liabilities and equity
(RO)                            18,937,115 21,641,883        21,159,232               - 26,922,654     88,660,884

Total liabilities and equity
(US $)                          49,251,274 56,285,782        55,030,512               - 70,019,905    230,587,473

Net liquidity gap (RO)         (14,240,622) (17,901,419)      2,971,398   26,011,236     3,159,407

Net liquidity gap (US$)        (37,036,728) (46,557,657)      7,727,953   67,649,508     8,216,924
                                                                                                         19
ALLIANCE HOUSING BANK SAOG

NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2003 (continued)


27 Maturity profile of assets and liabilities (continued)
                            On demand
                              or within         4 to 12        1 to 5     5 to 10       More than
                              3 months         months          years       years         10 years       Total
                                 RO               RO            RO          RO             RO            RO

As of 31 December 2002

Cash and balances with the
  Central Bank of Oman           82,623              -               -            -         55,000       137,623
Due from other banks          1,394,468              -               -            -              -     1,394,468
Assets held-for-trading         353,285              -       1,840,000            -              -     2,193,285
Investment securities         1,255,045              -       5,605,470      818,369         20,257     7,699,141
Mortgage accounts               155,301      1,167,981       7,272,131   10,069,743     27,339,121    46,004,277
Tangible fixed assets                 -         88,035          44,641            -              -       132,676
Other assets                    495,697          5,587         112,004            -              -       613,288
Total assets (RO)             3,736,419      1,261,603      14,874,246   10,888,112     27,414,378    58,174,758

Total assets (US $)           9,717,605      3,281,152      38,684,646   28,317,586     71,298,772   151,299,761

Customers’ deposits           5,679,254      1,723,993       2,466,384              -      298,176    10,167,807
Certificates of deposit               -              -      14,875,000              -            -    14,875,000
Due to other banks            3,100,000      3,500,000               -              -            -     6,600,000
Taxation                              -        296,538               -              -            -       296,538
Other liabilities               825,112        176,015               -              -            -     1,001,127
Equity                                -              -               -              -   25,234,286    25,234,286
Total liabilities and
equity (RO)                   9,604,366      5,696,546      17,341,384              -   25,532,462    58,174,758

Total liabilities and
equity (US $)                24,978,845     14,815,464      45,101,129              -   66,404,323   151,299,761

Net liquidity gap (RO)        (5,867,947)    (4,434,943)    (2,467,138) 10,888,112       1,881,916

Net liquidity gap (US$)      (15,261,240)   (11,534,312)    (6,416,483) 28,317,586       4,894,449
ALLIANCE HOUSING BANK SAOG
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2003 (continued)


28 Interest rate risk

Interest rate sensitivity position

The bank’s interest rate sensitivity position, based on the contractual repricing or maturity dates, whichever dates are earlier, is as follows:

                                                                        Floating
                                                      Effective          rate or
                                                      interest          within 3          Months            Year             Year             Over       Non interest
                                                       rate %           months            4 to 12           1 to 5          5 to 10          10 years     sensitive      Total
As of 31 December 2003                                                    RO                RO               RO               RO               RO           RO            RO

Cash and balances with Central Bank of Oman               2.5              63,175                 -                -               -                -       79,717         142,892
Due from other banks                                      0.5             582,542                 -                -               -                -            -         582,542
Assets held-for-trading                              6.75 to 7.65               -         1,020,000          800,000               -                -            -       1,820,000
Investment securities                                 0.6 to 7.00       3,500,000                 -        7,482,869       2,558,535                -            -      13,541,404
Mortgage accounts                                   4.66 to 12.00      65,513,785           438,710        5,860,807               -                -            -      71,813,302
Tangible fixed assets                                                           -                 -                -               -                -       88,086          88,086
Deferred tax assets                                                             -                 -                -               -                -       40,761          40,761
Other assets                                                                    -                 -                -               -                -      631,897         631,897
Total assets                                                           69,659,502         1,458,710       14,143,676       2,558,535                -      840,461      88,660,884

Customers’ deposits                                    0 to 7.5         6,629,431        7,285,716         3,034,232                  -             -            -      16,949,379
Certificates of deposit                              3.45 to 6.25               -        5,000,000        18,125,000                  -             -            -      23,125,000
Due to other banks                                    0.6 to 1.5       11,500,000        8,500,000                 -                  -             -            -      20,000,000
Taxation                                                                        -                -                 -                  -             -      416,823         416,823
Other liabilities                                                               -                -                 -                  -             -    1,247,028       1,247,028
Equity                                                                          -                -                 -                  -             -   26,922,654      26,922,654
Total liabilities and equity                                           18,129,431       20,785,716        21,159,232                  -             -   28,586,505      88,660,884

Total interest rate sensitivity gap                                    51,530,071       (19,327,006)      (7,015,556)      2,558,535                -   (27,746,044)

Cumulative interest rate sensitivity gap (RO)                          51,530,071       32,203,065        25,187,509      27,746,044       27,746,044
Cumulative interest rate sensitivity gap (US $)                       134,018,390       83,753,095        65,507,176      72,161,363       72,161,363




                                                                                                                                                                             19
ALLIANCE HOUSING BANK SAOG
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2003 (continued)


28 Interest rate risk (continued)

                                                                       Floating
                                                     Effective          rate or
                                                     interest          within 3          Months           Year              Year            Over          Non interest
                                                      rate %           months            4 to 12          1 to 5           5 to 10         10 years        sensitive          Total
As of 31 December 2002                                                   RO                RO              RO                RO              RO              RO                RO

Cash and balances with Central Bank of Oman            2 to 3.50               -                -                -               -           55,000             82,623         137,623
Due from other banks                                     0.50          1,332,795                -                -               -                -             61,673       1,394,468
Assets held-for-trading                              1.07 to 7.65        353,285                -        1,840,000               -                -                  -       2,193,285
Investment securities                                0.85 to 6.69      1,255,045                -        5,587,222         818,369                -             38,505       7,699,141
Mortgage accounts                                   6.20 to 12.00     41,429,030        2,679,687        1,895,560               -                -                  -      46,004,277
Tangible fixed assets                                                          -                -                -               -                -            132,676         132,676
Other assets                                                                   -                -                -               -                -            613,288         613,288
Total assets                                                          44,370,155        2,679,687        9,322,782         818,369           55,000            928,765      58,174,758

Customers’ deposits                                   0 to 8.25        6,527,906        1,723,993        1,912,568                   -              -            3,340      10,167,807
Certificates of deposit                              3.9 to 6.25               -                -       14,875,000                   -              -                -      14,875,000
Due to other banks                                   0.4 to 2.20       3,100,000        3,500,000                -                   -              -                -       6,600,000
Taxation                                                                       -                -                -                   -              -          296,538         296,538
Other liabilities                                                              -                -                -                   -              -        1,001,127       1,001,127
Equity                                                                         -                -                -                                          25,234,286      25,234,286
Total liabilities and equity                                           9,627,906        5,223,993       16,787,568                   -              -       26,535,291      58,174,758

Total interest rate sensitivity gap                                   34,742,249        (2,544,306)      (7,464,786)       818,369           55,000        (25,606,526)

Cumulative interest rate sensitivity gap (RO)                         34,742,249       32,197,943       24,733,157      25,551,526       25,606,526
Cumulative interest rate sensitivity gap (US $)                       90,356,954       83,739,774       64,325,506      66,453,904       66,596,947




An asset (or positive) gap position exists when assets reprice more quickly or in greater proportion than liabilities during a given period and tends to benefit net interest income
in a rising interest rate environment. A liability (or negative) gap position exists when liabilities reprice more quickly or in greater proportion than assets during a given period
and tends to benefit net interest income in a declining interest rate environment.




                                                                                                                                                                                  20
                                                                                                                    21

ALLIANCE HOUSING BANK SAOG
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2003 (continued)


29 Geographical distribution of assets and liabilities

Investment securities include RO 761,217 equivalent to US $ 1,979,758 (2002 – RO 756,874 equivalent to US $
1,968,463) mainly denominated in US dollars and issued by institutions located outside the Sultanate of Oman.
Apart from these, all other assets, liabilities and shareholder funds are located in the Sultanate of Oman.

Total assets include RO 783,302 equivalent to US $ 2,037,196 (2002 – RO 756,874 equivalent to US $
1,968,463) mainly denominated in US Dollars. Total liabilities include RO 1,156,589 equivalent to US $
3,008,034 (2002 – nil) denominated in US Dollars. Apart from these, all other assets, liabilities and shareholder
funds are denominated in Rial Omani.

30 Fair value of financial instruments

On balance sheet items

The following table summarises carrying amounts and fair values of financial assets and liabilities.

The estimate of fair values of financial instruments is based on relevant information available to management as
at 31 December 2003. Whilst management has used its best judgement in estimating the fair value of financial
instruments, there are inherent weaknesses in any estimation technique. The estimates involve matters of
judgement and cannot be determined with precision. A description of the basis adopted in deriving the fair
values is given in the commentary that follows the assessment.

                                               2003               2003               2002                2002
                                            Book Value         Fair Value          Book Value          Fair Value
                                                RO                 RO                 RO                  RO
Assets

Cash and balances with the
  Central Bank of Oman                         142,892          142,892              137,623              137,623
Due from other banks                           582,542          582,542            1,394,468            1,394,468
Assets held-for-trading                      1,820,000        1,820,000            2,193,285            2,193,285
Investment securities                       13,541,404       13,604,100            7,699,141            7,801,729
Mortgage accounts                           71,813,302       71,813,302           46,004,277           46,004,277

Liabilities

Customers’ deposits                         16,949,379       17,025,888           10,167,807           10,171,675
Certificates of deposit                     23,125,000       23,661,597           14,875,000           15,274,207
Due to other banks                          20,000,000       19,980,482            6,600,000            6,608,670

Due from other banks
Due from other banks comprise inter-bank placements, call account balances and items in the course of
collection. Since these balances are short-term in nature, their fair values are considered equal to their carrying
amounts.

Mortgage accounts
Mortgage accounts are net of specific and general provisions for impairment. For variable rate mortgage
accounts their fair value is taken as their carrying value. For the remainder, the fair value has been taken at book
value as the prevailing interest rates on similar loans are not materially different from actual loan rates.

Assets held-for-trading and investment securities
Fair value for held-for-trading assets is based on market prices or broker/dealer price quotations. Investments
originated are carried at amortised cost using effective interest rate. Available-for-sale assets are carried at fair
value based on market prices or amounts derived from cash flow models.
                                                                                                                   22

ALLIANCE HOUSING BANK SAOG
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2003 (continued)


30 Fair value of financial instruments (continued)

Customers’ deposits, certificates of deposit and amounts due to other banks
The estimated fair value of deposits with no stated maturity, is assumed to be equal to carrying value.

The estimated fair value of fixed interest bearing deposits and other borrowings without quoted market price is
based on discounted cash flows using interest rates for new debts with similar remaining maturity.

Other on balance sheet financial instruments
The fair value of all other on-balance sheet instruments are considered to approximate their book value as they
are short term in nature.

Off balance sheet items
No fair value adjustment is made with respect to commitments to extend credit as the related future income
streams materially reflect contractual fees actually charged at the balance sheet date for agreements of similar
credit standing and maturity.

31 Risk management statement

Overview
The bank manages risk through various committees of the Board and Management, each with defined authority
and responsibility. The internal audit department makes an independent assessment of risk management process
as do the external auditors and regulators.

The nature and extent of our activities carry a variety of risks. The main risks together with an outline of the way
they are mitigated, are covered below:

Credit risk
Credit risk is the risk that a counter-party to a financial instrument will fail to perform according to the terms and
conditions of the contract thus causing the bank to incur a financial loss.

On loans, the bank controls this through an analysis of borrowers’ ability to meet repayment obligations, and by
limiting total exposure to any single borrower. To ensure consistency, the bank appraises and if appropriate
approves loans centrally, and follows documented policies and procedures as set out in its Credit Manual.

Investments and other placements are made in accordance with Board’s approved policies. Investments are
primarily in debt instruments issued by the Government and reputed local banks. Placements are with reputed
local and international banks. All are regularly reviewed to prevent undue exposure.

Liquidity risk
Liquidity risk is the risk that the bank will have insufficient funds to meet its obligations at any given time.

The bank’s policies are designed to ensure that even under severely adverse conditions, the bank will be in a
position to meet its obligations. The bank’s Asset Liability Committee (ALCO) meets weekly to review and
monitor various relevant measures against target positions. The Board’s Audit Committee also receives similar
regular reports based on independent review by the internal audit department.

The bank also maintains significant investments in highly liquid instruments issued by the Government and other
local banks principally for liquidity reasons.
                                                                                                                  23

ALLIANCE HOUSING BANK SAOG
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2003 (continued)


31 Risk management statement (continued)

Interest rate risk
Interest rate risk is the sensitivity of the bank’s net earnings to movements in interest rates. Mismatches in the
amount of assets and liabilities held at different rates and maturities can generate interest rate risk. In order to
minimise this risk, the bank generally seeks to minimise such mismatches.

Additionally mortgage loans are written mostly on variable rates of interest, i.e. interest on these can be varied at
short notice, typically one month. Funding is, where possible, taken on a similar variable rate basis. However,
mortgage loans written on fixed rates and tenors are matched by fixed rate and tenor liabilities.

Investments in fixed rate instruments are funded by a combination of short and medium term liabilities. Interest
rate gaps are periodically monitored, sensitivity analysis done and risk limits measured.

Operations risk
Operations risk arises due to lack of accuracy in executing various operations.

Operations risk is managed in several ways, including having documented procedures for the principal
operational areas in the bank, having in-built controls in the work processes, carrying out independent reviews of
and adherence to controls by internal and external auditors and reviewing management information reports. The
bank has recently developed a “Business Continuity Plan” revolving around its IT systems which is currently
being implemented. This will now be expanded to the key operational areas of the bank.

32 Capital Adequacy

The international standard for measuring capital adequacy is the risk asset ratio, which relates capital to balance
sheet assets and off balance sheet exposures weighted according to broad categories of risk.

The risk asset ratio, calculated in accordance with the capital adequacy guidelines of the BIS, is as follows:

     2002            2003                                                                 2003             2002
     US $            US $                                                                  RO               RO
                                 Capital
65,628,832       70,019,905      Tier 1                                                26,622,654      25,234,286
   241,873          374,512      Tier 2                                                   144,000          93,000
                                 Risk weighted assets
72,552,819      104,667,826      Balance sheet items                                   40,244,779      27,896,559

     90.79             67.25     Risk asset ratio (%)                                       67.25            90.79

Tier 1 capital comprises mainly shareholders’ funds.

33 Segmental information

The bank operates only in the banking industry and its operating revenues arise mainly from providing loans for
housing and related purposes in the Sultanate of Oman.

				
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