Company No: 709506-V Affin Islamic Bank Berhad Affin Islamic Bank Berhad

June 4, 2018 | Author: M. Hasbi Zaenal | Category: N/A
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Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Reports and financial statements for the financial year ended 31 December 2007

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Reports and financial statements for the financial year ended 31 December 2007

Contents Directors' Report

Pages

1-17

Balance Sheet

18

Income Statement

19

Statements of Changes in Equity

20

Cash Flow Statements

21-22

Notes to the Financial Statements

23-79

Statement by Directors

80

Statutory Declaration

80

Report of the Auditors

81

Shariah Committee's Report

82

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

CORPORATE INFORMATION

BOARD OF DIRECTORS Jen (B) Tan Sri Dato' Seri Ismail bin Haji Omar Dato' Sri Abdul Hamidy bin Abdul Hafiz Tan Sri Dato' Lodin bin Wok Kamaruddin Laksamana Madya (B) Dato' Seri Ahmad Ramli bin Mohd Nor Dato' Seri Mohamed Jawhar En. Mohd Suffian bin Haji Haron En. Zulkiflee Abbas bin Abdul Hamid En. Kamarul Ariffin bin Mohd Jamil

SECRETARY Nimma Safira Khalid

REGISTERED OFFICE 17th Floor, Menara Affin 80, Jalan Raja Chulan 50200 Kuala Lumpur Malaysia

AUDITORS PricewaterhouseCoopers

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

DIRECTOR' REPORT for the financial year ended 31 December 2007 The Directors hereby submit their report together with the audited financial statements of the Bank for the financial year ended 31 December 2007.

PRINCIPAL ACTIVITIES The principal activities of the Bank are Islamic banking business and in the provision of related financial services. There were no significant changes in these activities during the financial year.

RESULTS RM'000 Profit before zakat and taxation Zakat Taxation Net profit for the financial year

57,885 (2,240) (16,205) 39,440

DIVIDEND No dividends has been paid by the Bank in respect of the financial period ended 31 December 2007. The Directors do not recommend the payment of any dividend in respect of the current financial year.

RESERVES AND PROVISIONS There were no material transfers to or from reserves or provisions during the financial year other than those disclosed in the financial statements.

BAD AND DOUBTFUL FINANCING Before the financial statements of the Bank were made out, the Directors took reasonable steps to ascertain that actions had been taken in relation to the writing off of bad financing and the making of allowances for doubtful financing, and have satisfied themselves that all known bad financing had been written off and adequate allowances had been made for bad and doubtful financing. At the date of this report, the Directors are not aware of any circumstances which would render the amount written off for bad financing, or the amount of the allowance for doubtful financing in the financial statements of the Bank, inadequate to any substantial extent.

1

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

DIRECTOR' REPORT for the financial year ended 31 December 2007 (continued) CURRENT ASSETS Before the income statement and balance sheet of the Bank were made out, the Directors took reasonable steps to ascertain that any current assets, other than financing, which were unlikely to be realised in the ordinary course of business, their values as shown in the accounting records of the Bank have been written down to their estimated realisable value. At the date of this report, the Directors are not aware of any circumstances which would render the values attributed to the current assets in the financial statements of the Bank misleading.

VALUATION METHODS At the date of this report, the Directors are not aware of any circumstances which have arisen which render adherence to the existing methods of valuation of assets or liabilities in the Bank's accounts misleading or inappropriate.

CONTINGENT AND OTHER LIABILITIES At the date of this report there does not exist: (a) any charge on the assets of the Bank which has arisen since the end of the financial year which secures the liabilities of any other person; or (b) any contingent liability in respect of the Bank that has arisen since the end of the financial year. No contingent or other liability of the Bank has become enforceable, or is likely to become enforceable within the period of twelve months after the end of the financial period which, in the opinion of the Directors, will or may substantially affect the ability of the Bank to meet its obligations as and when they fall due.

CHANGE OF CIRCUMSTANCES At the date of this report, the Directors are not aware of any circumstances, not otherwise dealt with in this report or the financial statements of the Bank, that would render any amount stated in the financial statements misleading.

2

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

DIRECTOR' REPORT for the financial year ended 31 December 2007 (continued) ITEMS OF AN UNUSUAL NATURE The results of the operations of the Bank during the financial year were not, in the opinion of the Directors, substantially affected by any item, transaction or event of a material and unusual nature. There has not arisen in the interval between the end of the financial year and the date of this report any item, transaction or event of a material and unusual nature likely, in the opinion of the Directors, to affect substantially the results of the operations of the Bank for the current financial year in which this report is made.

SUBSEQUENT EVENTS There were no material events subsequent to the balance sheet date that require disclosure or adjustments to the financial statements.

3

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

DIRECTOR' REPORT for the financial year ended 31 December 2007 (continued) DIRECTORS The Directors of the Bank who have held office during the period since the date of the last report are: Jen (B) Tan Sri Dato' Seri Ismail bin Haji Omar Non-Independent Non-Executive Chairman En. Kamarul Ariffin bin Mohd Jamil Chief Executive Officer Non-Independent Executive Director Tan Sri Dato' Lodin bin Wok Kamaruddin Non-Independent Non-Executive Director Laksamana Madya (B) Dato' Seri Ahmad Ramli bin Mohd Nor Non-Independent Non-Executive Director Dato' Seri Mohamed Jawhar Independent Non-Executive Director En. Mohd Suffian bin Haji Haron Independent Non-Executive Director Dato' Sri Abdul Hamidy bin Abdul Hafiz Non-Independent Non-Executive Director En. Zulkiflee Abbas bin Abdul Hamid Non-Independent Non-Executive Director

4

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

DIRECTOR' REPORT for the financial year ended 31 December 2007 (continued) DIRECTORS' INTERESTS According to the register of Directors' shareholdings, the interest of Directors in office at end of the financial year in shares, warrants and options of related corporations are as follows:

As at 1.1.2007 Affin Holdings Berhad Tan Sri Dato' Lodin bin Wok Kamaruddin

Ordinary shares of RM1 each As at Sold 31.12.2007

Bought

8,714 *

-

-

8,714

Boustead Heavy Industries Corporation Berhad Tan Sri Dato' Lodin bin Wok Kamaruddin

-

2,000,000

-

2,000,000

Boustead Petroleum Sdn Bhd Tan Sri Dato' Lodin bin Wok Kamaruddin

-

5,466,465

-

5,466,465

Al-Hadharah Boustead REIT Tan Sri Dato' Lodin bin Wok Kamaruddin

-

200,000

-

200,000

* Shares held in trust by nominee company

As at 1.1.2007 Affin Holdings Berhad Tan Sri Dato' Lodin bin Wok Kamaruddin

1,500

Number of warrants 2000/2010 As at Sold 31.12.2007

Bought -

-

1,500

Each warrant of the holding company ('Affin Warrants 2000/2005') entitles the registered holder to subscribe one new ordinary share of RM1.00 each in Affin Holdings Berhad at any time from the date of issue of 8 July 2000 at the exercise price of RM3.10 per share. The original exercise period of the Affin Warrants 2000/2005 was to expire on 7 July 2005. During the financial year 2005, the Affin Warrants 2000/2005 was extended for another five years and will expire on 7 July 2010 ('Affin Warrants 2000/2010').

5

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

DIRECTOR' REPORT for the financial year ended 31 December 2007 (continued) DIRECTORS' INTERESTS (continued) Options over ordinary shares of RM1 each As at Granted Exercised 31.12.2007

As at 1.1.2007 Affin Holdings Berhad Tan Sri Dato' Lodin bin Wok Kamaruddin Dato' Sri Abdul Hamidy bin Abdul Hafiz En. Kamarul Ariffin bin Mohd Jamil En. Zulkiflee Abbas bin Abdul Hamid Boustead Petroleum Sdn Bhd Tan Sri Dato' Lodin bin Wok Kamaruddin

800,000 **

-

-

800,000

400,000 ** 180,000 ** 180,000 **

-

400,000 180,000 180,000

-

4,137,500

-

-

4,137,500 #

** This option was granted by the holding company, Affin Holdings Berhad under its Employees' Share Option Scheme at the option price of RM 1.41 per share and has expired on 13 February 2008.

#

This is the 2-year option (extended period) granted by Boustead Holdings Berhad ('BHB') to acquire exixting ordinary shares of RM1.00 each up to five percent (5%) of the enlarged issued and paid-up capital of Boustead Petroleum Sdn Bhd from BHB at RM1.149 per share. The option was exercised in full on 26 December 2007.

As at 1.1.2007 ABB Trustee Berhad *** Jen (B) Tan Sri Dato' Seri Ismail bin Haji Omar Laksamana Madya (B) Dato' Seri Ahmad Ramli bin Mohd Nor

Ordinary shares of RM10 each; RM5 uncalled As at Bought Transfer 31.12.2007

20,000

-

-

20,000

20,000

-

-

20,000

*** Shares held in trust for the Bank

6

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

DIRECTOR' REPORT for the financial year ended 31 December 2007 (continued) DIRECTORS' INTERESTS (continued)

As at 1.1.2007 Boustead Holdings Berhad Tan Sri Dato' Lodin bin Wok Kamaruddin 10,492,800

Bought 24,000,000

Ordinary shares of 50 sen each As at Sold 31.12.2007 12,797,800

21,695,000

Other than the above, the Directors in office at the end of the financial year did not have any other interest in shares, warrants and options over shares in the Bank or its related corporations during the financial year.

As at 1.1.2007 Boustead Holdings Berhad Tan Sri Dato' Lodin bin Wok Kamaruddin

*

-

Options over ordinary shares of 50 sen each As at Granted Exercised 31.12.2007 29,912,699 * 24,000,000

5,912,699

This is an option granted by Lembaga Tabung Angkatan Tentera ('LTAT') to acquire 29,912,699 Boustead Holdings Berhad shares from LTAT at RM1.70 per share, expiring on 14 November 2008.

DIRECTORS' BENEFITS Neither at the end of the financial period, nor at any time during the financial year, did there subsist any arrangement to which the Bank is a party with the object or objects of enabling Directors of the Bank to acquire benefits by means of the acquisition of shares in, or debenture of, the Bank or any other body corporate. Since the date of incorporation, no Director of the Bank has received or become entitled to receive a benefit (other than the fees and other emoluments shown in the Note 25 to the financial statements) by reason of a contract made by the Bank or a related corporation with the Director or with a firm of which he is a member or with a company in which he has a substantial financial interest except that certain Directors received remuneration as directors/executives of related corporations, share options granted to Directors of the Bank pursuant to the holding company's Employee Share Option Scheme and share options granted by the ultimate holding corporate body and Boustead Holdings Berhad.

7

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

DIRECTOR' REPORT for the financial year ended 31 December 2007 (continued) RATING BY EXTERNAL RATING AGENCIES The Bank was not rated by any external rating agencies during the financial year.

BUSINESS PLAN AND STRATEGY FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2007 AND FUTURE OUTLOOK Affin Islamic Bank Berhad (AFFIN ISLAMIC) has recorded commendable performance since its started its operations in April 2006. Pretax profit for the financial year ended 2006 was at RM50.1 million, while for financial year ended 2007 the pretax profit stood at RM57.9 million. As at end 2007, total financing grew 41% against the previous year coming from both business and consumer banking. In tandem with the higher financing base, total assets rose by 60% to stand RM6.2 billion as at end Year 2007. In line with the bank’s business strategy, total customer deposits posted a strong growth of 106%, registering at RM5.5 billion as at end 2007. For Year 2008, Affin Islamic plans to implement a range of new strategies that includes developing new innovative products and structures, moving into new territories, developing human capital talents and fostering strategic relationship. The approval from Bank Negara Malaysia to allow Affin Islamic to establish its own International Currencies Business Unit in November 2007 was also timely and augur well with the Bank’s business plan and strategy. As a wholly owned subsidiary of Affin Bank, Affin Islamic will continue to leverage on the parent bank’s infrastructure including the over 80 branches across the country for better cost efficiency purposes. As a full fledged Islamic bank, customers of Affin Islamic are assured that all banking transactions are free from the elements of interests (riba), uncertainty (gharar), gambling (maisir) and other un-Islamic fundamentals as these are monitored by the Bank’s Shariah Department and supervised by the Shariah Committee.

8

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

DIRECTOR' REPORT for the financial year ended 31 December 2007 (continued) CORPORATE GOVERNANCE The Board of Directors is committed to ensure the highest standards of corporate governance throughout the organisation with the objectives of safeguarding the interests of all stakeholders and enhancing the shareholders' value and financial performance of the Bank. The Board considers that it has applied the Best Practices as set out in the Malaysian Code of Corporate Governance throughout the financial year. The Bank is also required to comply with BNM's Guidelines on Directorship in the Islamic Banks ('BNM/GP1-i'). (i) Board of Directors Responsibility and Oversight The Board of Directors The direction and control of the Bank rest firmly with the Board as it effectively assumes the overall responsibility for corporate governance, strategic direction, formulation of policies and overseeing the investments and operations of the Bank. The Board exercises independent oversight on the management and bears the overall accountability for the performance of the Bank and compliance with the principle of good governance. There is a clear division of responsibility between the Chairman and the Chief Executive Officer to ensure that there is a balance of power and authority. The Board is responsible for reviewing and approving the longer-term strategic plans of the Bank as well as the business strategies. It is also responsible for identifying the principal risks and implementation of appropriate systems to manage those risks as well as reviewing the adequacy and integrity of the Bank's internal control systems, management information systems, including systems for compliance with applicable laws, regulations and guidelines. Whilst, the Management Committee, headed by the Chief Executive Officer, is responsible for the implementation of the strategies and internal control as well as monitoring performance. The Committee is also a forum to deliberate issues pertaining to the Bank's business, strategic initiatives, risk management, manpower development, supporting technology platform and business processes.

The Board Meetings Throughout the financial year, 12 Board meetings were held. All Directors have complied with the minimum number of attendances for Board meetings as stipulated by Bank Negara Malaysia. All Directors review Board papers or reports providing updates on operational, financial and corporate developments prior to the Board meetings. These papers and reports are circulated prior to the meeting to enable the Directors to obtain further explanations and having sufficient time to deliberate on the issues and make decisions during the meeting.

9

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

DIRECTOR' REPORT for the financial year ended 31 December 2007 (continued) CORPORATE GOVERNANCE (continued) (i) Board of Directors Responsibility and Oversight (continued) Board Balance Currently the Board has 8 members, comprising 5 Non-Independent Non-Executive Directors (including the Chairman), 2 Independent Non-Executive Directors and 1 Non-Independent Executive Director. The Board of Directors Meeting are presided by Non-Independent Non-Executive Chairman whose role is clearly separated from the role of Chief Executive Officer. The composition of the Board and the number of meetings attended by each Director are as follows: Total Meetings Attended

Name of Directors 1.

Jen (B) Tan Sri Dato' Seri Ismail bin Haji Omar Non-Independent Non-Executive Chairman

12 out of 12

2.

En. Kamarul Ariffin bin Mohd Jamil Chief Executive Officer Non-Independent Executive Director

12 out of 12

3.

Tan Sri Dato' Lodin bin Wok Kamaruddin Non-Independent Non-Executive Director

11 out of 12

4.

Laksamana Madya (B) Dato' Seri Ahmad Ramli bin Mohd Nor Non-Independent Non-Executive Director

12 out of 12

5.

Dato' Seri Mohamed Jawhar Independent Non-Executive Director

10 out of 12

6.

En. Mohd Suffian bin Haji Haron Independent Non-Executive Director

12 out of 12

7.

Dato' Sri Abdul Hamidy bin Abdul Hafiz Non-Independent Non-Executive Director

11 out of 12

8.

En. Zulkiflee Abbas bin Abdul Hamid Non-Independent Non-Executive Director

11 out of 12

10

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

DIRECTOR' REPORT for the financial year ended 31 December 2007 (continued) CORPORATE GOVERNANCE (continued) (i) Board of Directors Responsibility and Oversight (continued) Board Committees The Board is assisted by four committees with specific terms of reference. This enables the committees to focus on areas or issues of critical importance to the operations of Bank. Compositions, functions and terms of reference of these Committees are highlighted below: (i)

Nomination Committee The Nomination Committee was established to provide a formal and transparent procedure for the appointment of Directors and Chief Executive Officer. The Committee also assesses the effectiveness of the Board as a whole, contribution of each director, contribution of the board's various committees and the performance of Chief Executive Officer and key senior management officers. There was 1 meeting held during the financial year ended 31 December 2007. The Nomination Committee comprises the following members: Total Meetings Attended Composition of the Nomination Committee 1. En. Mohd Suffian bin Haji Haron Chairman/Independent Non-Executive Director

1 out of 1

2. Dato' Sri Abdul Hamidy bin Abdul Hafiz Non-Independent Non-Executive Director

Nil

3. Tan Sri Dato' Lodin bin Wok Kamaruddin Non-Independent Non-Executive Director

1 out of 1

4. Laksamana Madya (B) Dato' Seri Ahmad Ramli bin Mohd Nor Non-Independent Non-Executive Director

1 out of 1

5. Dato' Seri Mohamed Jawhar Independent Non-Executive Director

1 out of 1

(ii) Remuneration Committee The Remuneration Committee was established to evaluate and recommend to the Board the framework of remuneration and the remuneration package for Directors, Chief Executive Officer and key senior management officers. The Board is ultimately responsible for the approval of the remuneration package. The Committee is guided by the need to 'attract and retain' and at the same time link the rewards to clearly articulate corporate and individual performance parameters.

11

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

DIRECTOR' REPORT for the financial year ended 31 December 2007 (continued) CORPORATE GOVERNANCE (continued) (i) Board of Directors Responsibility and Oversight (continued) Board Committees (continued) (ii) Remuneration Committee (continued) There were 3 meetings held during the financial year ended 31 December 2007. The Remuneration Committee comprises the following members:

Composition of the Remuneration Committee

Total Meetings Attended

1. Dato' Seri Mohamed Jawhar Chairman/Independent Non-Executive Director

3 out of 3

2. Dato' Sri Abdul Hamidy bin Abdul Hafiz Non-Independent Non-Executive Director

3 out of 3

3. Tan Sri Dato' Lodin bin Wok Kamaruddin Non-Independent Non-Executive Director

3 out of 3

4. Laksamana Madya (B) Dato' Seri Ahmad Ramli bin Mohd Nor Non-Independent Non-Executive Director

3 out of 3

(iii) Board Risk Management Committee ('BRMC') The main function of BRMC is to assist the Board in its supervisory role in the management of risk in the Bank. It has responsibility for approving and reviewing the credit risk strategy, credit risk framework and credit policies of the Bank. The BRMC meetings for the Bank were jointly held with Affin Bank during the financial year ended 31 December 2007 and the meetings were attended by the following Director: Total Meetings Attended 1. En. Mohd Suffian bin Haji Haron Independent Non-Executive Director

11 out of 11

12

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

DIRECTOR' REPORT for the financial year ended 31 December 2007 (continued) CORPORATE GOVERNANCE (continued) (i) Board of Directors Responsibility and Oversight (continued) Board Committees (continued) (iv) Shariah Committee The Bank's business activities are subject to Shariah compliance and conformation by the Shariah Committee. The Shariah Committee is formed as legislated under Section 3(5)(b) of the Islamic Banking Act, 1983 and as per Guidelines on the Governance of Shariah Committee for the Islamic Financial Institutions ('BNM/GPS-i'). The duties and responsibility of the Shariah Committee are as follows: (i) To advise the Board on Shariah matters in order to ensure that the business operations of the Bank comply with the Shariah principles at all times; (ii) To endorse and validate relevant documentations of the Bank's products to ensure that the products comply with Shariah principles; and (iii) To advice the Bank on matters to be referred to the Shariah Advisory Council.

During the financial year ended 31 December 2007, a total of 10 meetings were held. The Shariah Committee comprises the following members and the details of attendance of each member at the Shariah Committee meetings held during the financial year are as follows: Total Meetings Attended

Composition of the Shariah Committee 1. Prof Madya Dr. Hailani bin Muji Tahir Chairman

10 out of 10

2. Prof Madya Dr. Md Khalil bin Ruslan Member

8 out of 10

3. Brig Jen Dato' Haji Jamil Khir bin Baharom Member

8 out of 10

13

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

DIRECTOR' REPORT for the financial year ended 31 December 2007 (continued) CORPORATE GOVERNANCE (continued) (ii) Internal Audit and Internal Control Activities Relationship with the Auditors The Bank has established appropriate relationship with both internal and external auditors in conducting the audit function of the Bank. Internal Controls The Board acknowledges its overall responsibility for maintaining a sound system of internal control to safeguard shareholders' investments, Bank's assets, and need to review the adequacy and integrity of those systems regularly. In accordance with BNM's Guidelines on Minimum Audit Standards for Internal Auditors of Financial Institutions ('BNM/GP10'), the Audit and Compliance Division ('ACD') conducts continuous reviews on auditable areas within the Bank. The continuous reviews by ACD are focused on areas of significant risks and effectiveness of internal control in accordance to the audit plan approved by the Audit and Examination Committee ('AEC'). The risk highlighted on the respective auditable areas as well as recommendation made by the ACD are addressed at AEC and Management meetings on a monthly basis. The AEC also conduct annual reviews on the adequacy of internal audit function, scope of work, resources and budget of ACD. At present, ACD consists of Operational Audit, IS Audit, Credit Review, Investigation and Compliance. Audit activities include these key components:

(a) Conduct audit on all auditable entities (Head Office, branches and subsidiaries) processes, services, products, system, etc and provide an independent assessment to the Board of Directors, AEC and Management that appropriate control environment is maintained with clear authority and responsibility with sufficient staff and resources to carry out control responsibilities. (b) Perform risk assessments to identify control risk and evaluate actions taken to provide reasonable assurance that procedures and controls exist to contain those risks. (c) Maintain strong control activities including documented processes and system incorporating adequate controls to produce accurate financial data and provide for the safeguarding of assets, and a documented review of reported results.

14

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

DIRECTOR' REPORT for the financial year ended 31 December 2007 (continued) CORPORATE GOVERNANCE (continued) (ii) Internal Audit and Internal Control Activities (continued) Internal Controls (continued) (d) Ensure effective information flows and communication, including: (i) Training and the dissemination of standards and requirements; (ii) An information system to produce and convey complete, accurate and timely data including financial data; (iii) The upward communication of trends, developments and emerging issues.

(e) Monitor controls, including procedures to verify that controls are in place and functioning, follow up on corrective action on control findings till its full resolution. Based on ACD's review, identification and assessment of risk, testing and evaluation of controls, ACD will provide an opinion on the effectiveness of internal controls maintained by each entity.

The AEC comprises members of the Bank's Board of Directors whose primary function is to assist the Board in its supervision over: (i) The reliability and integrity of accounting policies and financial reporting and disclosure practise, (ii) The provision of advice to the Board with regards to the financial statements and business risks to enable the Board to fulfill its fiduciary duties and obligations, and (iii) The establishment and maintenance of processes to ensure that they: - are in compliance with all applicable laws, regulations and company policies; and - have adequately addressed the risk relating to internal controls and system, management of inherent and business risks, and ensuring that the assets are properly managed and safeguarded.

The AEC meeting for the Bank were jointly held with Affin Bank Berhad during the financial year ended 31 December 2007 and the following Independent Non-Executive Director of the Bank sits in the meeting: Total Meetings Attended 1.

Dato' Seri Mohamed Jawhar Independent Non-Executive Director

8 out of 11

15

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

DIRECTOR' REPORT for the financial year ended 31 December 2007 (continued) CORPORATE GOVERNANCE (continued) (iii) Risk Management The Risk Management function, operating in an independent capacity, is part of the Bank's senior management structure which works closely as a team in managing risks to enhance stakeholders' value. The Risk Management function provides support to the Asset and Liability Management Committee ('ALCO') and the Board Risk Management Committee ('BRMC'). Its responsibilities extend to cover market, credit and operational risks. The risks underlying the Bank's business, including new activities and product financing programmes, are identified, quantified wherever possible and managed. The risks inherent in the financial business of the Bank are managed under the different headings: (a) Market risk (b) Credit risk (c) Liquidity risk (d) Operational risk management

Board Loan Review and Recovery Committee Board Loan Review Committee critically reviews financing and other credit facilities with higher risk implications, after due process of checking, analysis, review and recommendation by the Credit Risk Management function, and if found necessary, exercise the power to veto financing applications that have been accepted by the Management Loan Committee. The Committee is also responsible to provide review on the non-performing financing report presented by the Management.

Management Loan Committee Management Loan Committee approves complex and larger financing and workout/recovery proposals beyond the delegated authority of the concerned individual senior management personnel of the Bank. Individual Approvers For the delegated authority, a dual sign-off approval system is in place, independent of business imperatives.

16

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

DIRECTOR' REPORT for the financial year ended 31 December 2007 (continued) (iv) Management Reports Before each Board meeting, Directors are provided with a complete set of Board papers itemised in the agenda for Board's review/approval and/or notation. The Board monitors the Bank's performance by reviewing the monthly Management Report, which provides a comprehensive review and analysis of the Bank's operations and financial issues. In addition, the minutes of the Board Committees and Management Committees meetings and other issues are also tabled and considered by the Board. Procedures are in place for Directors to seek both independent professional advice at the Bank's expense and the advice and services of the Company Secretary in order to fulfil their duties and specific responsibilities.

ZAKAT OBLIGATIONS The Bank did not pay zakat on behalf of its depositors or shareholders. The Bank only pays zakat on its business.

AUDITORS The auditors, PricewaterhouseCoopers, have expressed their willingness to continue in office.

Signed on behalf of the Board of Directors in accordance with their resolution dated 29 February 2008.

Jen (B) Tan Sri Dato' Seri Ismail bin Haji Omar Chairman

Kamarul Ariffin bin Mohd Jamil Chief Executive Officer

17

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Balance Sheet as at 31 December 2007 2007 RM'000

2006 RM'000

3,532,550

2,143,941

774,250 1,734,155 135,676

381,288 90,600 1,227,293 11,361

9 10 11 12

82,300 273 1,610 6,212 6,267,026

42,000 188 2,093 4,122 3,902,886

13

3,708,613

2,823,420

14

2,078,923 32,674 207,611 3,598 6,031,419

300,450 23,690 68,137 485,036 5,457 3,706,190

160,000 75,607 235,607

160,000 36,696 196,696

6,267,026

3,902,886

3,917,054

4,052,741

Note Assets Cash and short-term funds Securities: Available-for-sale securities Held-to-maturity securities Financing, advances and other loans Other assets Statutory deposits with Bank Negara Malaysia Property, plant and equipment Intangible assets Deferred tax assets (net) Total assets

Liabilities Deposits from customers Deposits and placements of banks and other financial institutions Bills and acceptances payable Other liabilities Amount due to holding company Provision for tax Total liabilities Shareholders' equity Share capital Reserves Total shareholders' equity

4 5

6 8

15 16

17 18

Total liabilities and shareholders' equity COMMITMENTS AND CONTIGENCIES

30

18

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Income Statement for the financial year ended 31 December 2007 Period from 13.09.2005 (date of incorporation) to 31.12.2006 RM'000

Notes

2007 RM'000

19

227,404

115,096

20 21 16

11,240 (9,146) 501 229,999

8,716 (3,832) (501) 119,479

Income attributable to the depositors Total net income

22

(124,618) 105,381

(43,739) 75,740

Personnel expenses Other overheads and expenditures Profit before zakat and taxation Zakat Taxation Net profit after zakat and taxation

23 24

(5,633) (41,863) 57,885 (2,240) (16,205) 39,440

(2,161) (23,488) 50,091 (13,523) 36,568

39,440

36,568

24.7

22.9

Income derived from investment of depositors' funds and others Income derived from investment of shareholders' funds Allowance for losses on financing Transfer to profit equalisation reserve Total distributable income

26

Attributable to: Equity holders of the Bank Earnings per share - basic/fully diluted (sen)

27

19

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Statement of changes in equity for the financial year ended 31 December 2007

Non-Distributable

At 1 January 2007 Net fair value change in available-for-sale securities Deferred tax (Note 12) Income and expenses recognised directly in equity Net profit for the financial year Total recognised income and expense for financial year Transfer to statutory reserves At 31 December 2007

At 13.09.2005 Issuance of shares Net fair value change in available-for-sale securities Deferred tax (Note 12) Income and expenses recognised directly in equity Net profit for the financial year Total recognised income and expense for financial year Balance transferred from Affin Bank Berhad Transfer to statutory reserves At 31 December 2006

Distributable

Share capital RM'000

Statutory reserves RM'000

Investment fluctuation reserves RM'000

Retained profits RM'000

Total RM'000

160,000

18,284

128

18,284

196,696

-

-

(717) 188

-

-

-

(529) -

39,440

160,000

19,720 38,004

(529) (401)

39,440 (19,720) 38,004

38,911 235,607

160,000

-

-

-

160,000

-

-

495 (47)

-

-

-

448 -

36,568

448 36,568

448

36,568

37,016

(320) 128

(18,284) 18,284

(320) 196,696

-

-

160,000

18,284 18,284

20

(717) 188 (529) 39,440

495 (47)

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia) Cash Flow Statement for the financial year ended 31 December 2007

2007 RM'000

Period from 13.09.2005 (date of incorporation) to 31.12.2006 RM'000

CASH FLOWS FROM OPERATING ACTIVITIES Profit before zakat and taxation Adjustments for items not involving the movement of cash and cash equivalents: Income from available-for-sale securities Income from held-to-maturity securities Accretion of discount less amortisation of premium for available-for-sale securities Amortisation of premium less accretion of discount for held-to-maturity securities Gain on unrealised/realised foreign exchange Gain from sale of available-for-sale securities Depreciation of property, plant and equipment Amortisation of intangible asset Net specific allowance for bad and doubtful financing Charge of general allowances OPERATING PROFIT BEFORE CHANGES IN WORKING CAPITAL

(Increase)/decrease in operating assets:Deposits and placements with banks and other financial institutions Net sale on foreign exchange Financing, advances and other loans Other assets Statutory deposits with Bank Negara Malaysia

Increase/(decrease) in operating liabilities:Deposits from customers Deposits and placements of banks and other financial institutions Bills and acceptances payable Amount due to holding company Other liabilities Property, plant and equipment transferred from Affin Bank Berhad Intangible assets transferred from Affin Bank Berhad

57,885

50,091

(5,555) (2,003)

(283) (3,658)

(9,886)

(11,372)

599 (2,574) 57 483 2,399 6,600 48,005

1,085 (2,450) (54) 8 121 3,846 37,334

3,203 (515,862) (124,315) (40,300)

140,000 1,844 (123,358) (334,238) 31,000

885,194

185,790

1,778,473 (23,689) (277,425) (37,704)

278,837 (5,863) 479,247

-

21

(100) (2,213)

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia) Cash Flow Statement for the financial year ended 31 December 2007 (continued)

2007 RM'000 Cash generated from operations Tax paid NET CASH GENERATED FROM OPERATING ACTIVITIES

1,695,580 (19,966) 1,675,614

Period from 13.09.2005 (date of incorporation) to 31.12.2006 RM'000 688,280 688,280

CASH FLOWS FROM INVESTING ACTIVITIES Income received from available-for-sale securities Income received from held-to-maturity securities Purchase of property, plant and equipment Sale of available-for-sale securities net of purchase Redemption of held-to-maturity securities net of purchase NET CASH (USED IN)/GENERATED FROM INVESTING ACTIVITIES

NET INCREASE IN CASH AND CASH EQUIVALENTS NET DECREASE IN FOREIGN EXCHANGE

5,555 2,003 (142) (383,792) 90,000 (286,376)

1,389,238 (629)

CASH AND CASH EQUIVALENTS AT BEGINNING OF THE FINANCIAL YEAR CASH AND CASH EQUIVALENTS VESTED OVER FROM AFFIN BANK BERHAD CASH AND CASH EQUIVALENTS AT END OF THE FINANCIAL YEAR ANALYSIS OF CASH AND CASH EQUIVALENTS Cash and short-term funds (Note 4)

22

2,143,941

283 3,658 (96) 88,305 92,150

780,430 606 -

-

1,362,905

3,532,550

2,143,941

3,532,550

2,143,941

Company No:709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

NOTES TO THE FINANCIAL STATEMENTS for the financial year ended 31 December 2007 1

GENERAL INFORMATION The Bank, a wholly-owned subsidiary of Affin Bank Berhad, was incorporated on 13 September 2005 and commenced operation on 1 April 2006. The net assets of Affin Bank's Islamic Division was transferred to Affin Islamic Bank on 1 April 2006. The Bank is principally engaged in all aspects of Islamic banking and finance business and in the provision of related financial services in accordance with the Shariah principles. The number of employees in the Bank at the end of financial year was 105 (2006: 56) employees. The holding company of the Bank is Affin Bank Berhad. The penultimate holding company is Affin Holdings Berhad and ultimate holding corporate body is Lembaga Tabung Angkatan Tentera, a statutory body incorporated under the Tabung Angkatan Tentera Act, 1973. The Bank is a limited liability company, incorporated and domiciled in Malaysia.

2

BASIS OF PREPARATION The financial statements of the Bank have been prepared with the Malaysian Accounting Standards Board ('MASB') Approved Accounting Standards for Entities Other Than Private Entities, Bank Negara Malaysia ('BNM') Guidelines, Shariah requirements and the provisions of the Companies Act, 1965. The Bank has adopted the revised Guidelines on Financial Reporting for Licensed Islamic Banks ('BNM/GP8-i') issued by BNM in June 2005. The financial statements of the Bank have been prepared under the historical cost convention, unless otherwise indicated in this summary of significant accounting policies. The preparation of financial statements in conformity with the provisions of the Companies Act 1965, Bank Negara Malaysia Guidelines and the MASB Approved Accounting Standards for Entities Other Than Private Entities requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reported period. It also requires Directors to exercise judgement in the process of applying the Bank's accounting policies. Although these estimates are based on the Directors' best knowledge of current events and actions, actual results may differ.

23

Company No:709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

NOTES TO THE FINANCIAL STATEMENTS for the financial year ended 31 December 2007 (continued) 2

BASIS OF PREPARATION (continued) The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 3(Q). (a) Standards and amendments to the published standards that are applicable and effective to the Bank The new accounting standards and amendments to published standards effective for the Bank’s financial periods beginning 1 January 2007 are as follows: - FRS 124 Related Party Disclosures The Bank has also adopted the following Technical Release effective for the Group’s financial period ended 31 December 2007: - TR i – 1 Accounting for Zakat on Business All changes in the accounting policies have been made in accordance with the transitional provision in the respective standards. There was no significant impact arising from the adoption of FRS 124 Related Party Disclosures and TR i-1 Accounting for Zakat on Business on the financial statements of the Bank. (b) Standards, amendments and interpretations to the existing standards that are effective in 2007 but not relevant to the Bank The following standards, amendments and interpretations to published standards are mandatory for accounting periods beginning on or after 1 January 2007 but they are not relevant to the Bank’s operations: - FRS 117 Leases (effective for accounting periods beginning on or after 1 October 2006). This standard requires the classification of leasehold land as prepaid lease payments. FRS 117 is not relevant to the Bank as the Bank do not have any leasehold land and buildings. - FRS 6 Exploration for and Evaluation of Mineral Resources (effective for accounting periods beginning on or after 1 January 2007). This standard is not relevant to the Bank’s operations as the Bank does not carry out exploration for and evaluation of mineral resources. - Amendment to FRS 119 Employee Benefits – Actuarial Gains and Losses, Group Plans and Disclosures (effective for accounting periods beginning on or after 1 January 2007). This amendment introduces the option of an alternative recognition approach for actuarial gains and losses. It may impose additional recognition requirements for multi-employer plans where insufficient information is available to apply defined benefit accounting. It also adds new disclosure requirements. The amendment to FRS 119 has no impact to the financial statements of the Bank as the Bank do not have any defined benefit plans for its employees other than termination benefits. 24

Company No:709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

NOTES TO THE FINANCIAL STATEMENTS for the financial year ended 31 December 2007 (continued) 2

BASIS OF PREPARATION (continued) (c) Standards, amendments to the published standards and interpretations to existing standards that are not yet effective and have not been early adopted The new standards, amendments to published standards and interpretations that are mandatory for the Bank’s financial period beginning on or after 1 January 2008 or later periods, but which the Bank has not early adopted, is as follows: - Amendment to FRS 121 The Effects of Changes in Foreign Exchange Rates – Net Investment in a Foreign Operations (effective for accounting periods beginning on or after 1 July 2007). This amendment requires exchange differences on monetary items that form part of the net investment in a foreign operation to be recognised in equity instead of in profit or loss regardless of the currency in which these items are denominated in. This amendment has no impact to the financial statements of the Bank as the Bank does not have investment in foreign operations. - FRS 112 Income Taxes (effective for accounting period beginning on or after 1 July 2007). This revised standard removes the requirements that prohibit recognition of deferred tax on unutilised reinvestment allowances or other allowances in excess of capital allowances. The Bank will apply this standard from financial periods beginning on 1 January 2008. - FRS 139 Financial Instruments: Recognition and Measurement (effective date yet to be determined by the Malaysian Accounting Standards Board). This new standard establishes principles for recognising and measuring financial assets, financial liabilities and some contracts to buy and sell non-financial items. Hedge accounting is permitted only under strict circumstances. The Bank will apply this standard when effective. The Bank has applied the transitional provision in FRS 139, which exempts entities from disclosing the possible impact arising from the initial application of this standard on the financial statements of the Bank. - Other revised standards (effective for accounting periods beginning on or after 1 July 2007) that have no significant changes compared to the original standards: - FRS 107 Cash Flow Statements - FRS 118 Revenue - FRS 137 Provisions, Contingent Liabilities and Contingent Assets The Bank will apply these standards from financial periods beginning on 1 January 2008. The adoption of these standards and amendmends will not have any significant impact on the results of the Bank.

25

Company No:709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

NOTES TO THE FINANCIAL STATEMENTS for the financial year ended 31 December 2007 (continued) 2

BASIS OF PREPARATION (continued) (d) Standards, amendments to the published standards and interpretations to existing standards that are not yet effective and not relevant to the Bank's operations The following interpretations to existing standards have been published and are mandatory for the Bank’s financial period beginning on or after 1 January 2008 or later periods, but are not relevant for the Bank’s operations: - IC Interpretation 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities (effective for accounting periods beginning on or after 1 July 2007). This interpretation deals with changes in the estimated timing or amount of the outflow of resources required to settle the obligation or a change in the discount rate. - IC Interpretation 2 Members’ Shares in Co-operative Entities and Similar Instruments (effective for accounting periods beginning on or after 1 July 2007). This interpretation deals with liability or equity classification of financial instruments, which give the holder the right to request redemption, but subject to limits on whether it will be redeemed. - IC Interpretation 5 Rights to Interests arising from Decommission, Restoration and Environmental Rehabilitation Funds (effective for accounting periods beginning on or after 1 July 2007). This interpretation deals with accounting by a contributor for its interests arising from decommissioning funds. - IC Interpretation 6 Liabilities arising from Participating in a Specific Market – Waste Electrical and Electronic Equipment (effective for accounting periods beginning on or after 1 July 2007). This interpretation provides guidance on the recognition, in the financial statements of the producers, of liabilities for waste Management under the European Union Directive in respect of sales of historical household equipment. - IC Interpretation 7 Applying the Restatement Approach under FRS 129 Financial Reporting in Hyperinflationary Economies (effective for accounting periods beginning on or after 1 July 2007). This interpretation provides guidance on how to apply the requirements of FRS 129 in a reporting period in which an entity identifies the existence of hyperinflationary in the economy of its functional currency, when that economy was not hyperinflationary in the prior period. - IC Interpretation 8 Scope of FRS 2 (effective for accounting periods beginning on or after 1 July 2007). This interpretation clarifies that FRS 2 Share-based Payment applies even in the absence of specifically identifiable goods and services.

26

Company No:709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

NOTES TO THE FINANCIAL STATEMENTS for the financial year ended 31 December 2007 (continued) 3

SIGNIFICANT ACCOUNTING POLICIES

(A) Intangible assets Computer software Acquired computer software are capitalised on the basis of the cost incurred to acquire and bring to use the specific software. These costs are amortised over their estimated useful lives (five years). Computer software classified as intangible asset are stated at cost less accumulated amortisation and accumulated impairment losses, if any. Costs associated with developing or maintaining computer software programmes are recognised as an expense when incurred. Costs that are directly associated with identifiable and unique software products controlled by the Bank, and that will probably generate economic benefits exceeding costs beyond one year, are recognised as intangible assets.

(B) Impairment of non-financial assets Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non financial assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date. The impairment loss is charged to the income statement unless it reverses a previous revaluation in which case it is charged to the revaluation surplus. Any subsequent increase in recoverable amount is recognized in the income statement unless it reverses an impairment loss on a revalued asset in which case it is taken to revaluation surplus.

27

Company No:709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

NOTES TO THE FINANCIAL STATEMENTS for the financial year ended 31 December 2007 (continued) 3

SIGNIFICANT ACCOUNTING POLICIES (continued)

(C) Securities portfolio The Bank classify securities portfolio into held-for-trading securities, available-for-sale securities and held-to-maturity securities. Classification of the securities is determined at initial recognition. Securities are initially recognised at fair value. Securities are derecognised when the rights to receive cash flows from the securities have expired or where the Bank has transferred substantially all risks and rewards of ownership. Subsequent measurement for each type of securities is as follows: (a) Held-for-trading securities Securities are classified as held-for-trading if it is acquired or incurred principally for the purpose of selling or repurchasing it in the near term or it is part of a portfolio of identified securities that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking. Held-for-trading securities are stated at fair value. Any unrealised gain or loss arising from the change in fair value or arising from sale of such securities are recognised in the income statement. (b) Available-for-sale securities Available-for-sale securities are non-derivative financial assets that are either designated in this category or not classified as held-for-trading or held-to-maturity investments. These securities are initially recognised at fair value. Investments in equity instruments where there is no quoted market price in an active market and whose fair value cannot be reliably measured, will be stated at cost. Any gains or losses arising from the change in fair value adjustments are recognised directly in equity through the statement of changes in equity except for impairment losses and foreign exchange gains or losses. When the financial asset is derecognised, the cumulative gains or loss previously in equity shall be transferred to the income statement. Impairment of available-for-sale securities is assessed when there is an objective evidence of impairment. Cumulative unrealised losses that had been recognised directly in equity shall be removed and recognised in income statement even though the securities has not been derecognised. Impairment loss in addition to the above unrealised losses is also recognised in the income statement. Subsequent reversal of impairment on debt instrument in the income statement is allowed when the decrease in impairment can be related objectively to an event accruing after the impairment was recognised. Impairment losses recognised in income statement for an investment in an equity instrument shall not be reversed. 28

Company No:709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

NOTES TO THE FINANCIAL STATEMENTS for the financial year ended 31 December 2007 (continued) 3

SIGNIFICANT ACCOUNTING POLICIES (continued)

(C) Securities portfolio (continued) (c) Held-to-maturity securities Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity that the Bank has the positive intention and ability to hold to maturity, as well as those instruments allowed by BNM. In accordance with Guidelines on Financial Reporting for Lisensed Islamic Banks ('BNM/GP8-i') issued by the BNM on June 2005, the following instruments may be classified as held-to-maturity investments and measured at cost: (i) equity securities held as investment in organisations which are set up for socio-economic reason; and (ii) equity instruments received as a result of financing restructuring or financing conversion, where there is no quoted market price in an active market and whose fair value cannot be reliably measured. Held-to-maturity securities are measured at amortised cost using the effective profit method. Gains or losses are recognised in income statement when the securities are derecognised or impaired and through the amortisation process. Any sale or reclassification of more than insignificant amount of held-to-maturity securities before maturity during the current financial year or last two preceding financial years will “taint” the entire category and result in the remaining held-to-maturity securities being reclassified to available-for-sale. However, the “tainting” rules will not apply under the conditions stated in the BNM/GP8-i’ and provided that prior approval from the Board of Directors is obtained. Impairment of held-to-maturity securities is assessed when there is an objective evidence of impairment, at the following basis: (i) Securities carried at amortised cost The impairment loss is measured as the difference between the securities' carrying amount and the present value of estimated future cash flows discounted at the Bank's original effective profit rate. Subsequent reversal of impairment is allowed in the event of an objective decrease in impairment. Recognition of impairment losses and its reversal is made through the income statement. (ii) Securities carried at cost The impairment loss is measured as the difference between the securities' carrying amount and the present value of estimated future cash flows discounted at the current market rate of return for similar securities. Such impairment losses shall not be reversed. 29

Company No:709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

NOTES TO THE FINANCIAL STATEMENTS for the financial year ended 31 December 2007 (continued) 3

SIGNIFICANT ACCOUNTING POLICIES (continued)

(D) Bills and Acceptance Payable Bills and acceptances payable represent the Bank's own bills and acceptances rediscounted and outstanding in the market.

(E) Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset's carrying amount or recognised as a separate assets, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Bank and the cost of the item can be measured reliably. The carrying amount of the placed part is derecognised. All the repairs and maintenance are charged to the income statement during the financial period in which they are incurred. Property, plant and equipment are depreciated on the straight line basis to write-off the cost of the assets, to their residual values over their estimated useful lives summarised as follows: Office equipment and furniture Computer equipment and software Motor vehicles

10 years 5 years 5 years

The assets' residual value and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. At each balance sheet date, the Bank assesses whether there is any indication of impairment. If such indications exist, an analysis is performed to assess whether the carrying amount of the asset is fully recoverable. A write down is made if the carrying amount exceeds the recoverable amount. Any subsequent increase in the recoverable amount is recognised in the income statement. Gains and losses on disposal are determined by comparing proceeds with carrying amount and are included in profit/(loss) from operations.

30

Company No:709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

NOTES TO THE FINANCIAL STATEMENTS for the financial year ended 31 December 2007 (continued) 3

SIGNIFICANT ACCOUNTING POLICIES (continued)

(F) Foreign currency translations (i) Functional and presentation currency Items included in the financial statements of the Bank are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The financial statements is presented in Ringgit Malaysia, which is the Bank’s functional and presentation currency.

(ii) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rate prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at yearend exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when deferred in equity as qualifying cash flow hedges and qualifying net investment hedges. Changes in the fair value of monetary securities denominated in foreign currency classified as available-for-sale are analysed between translation differences resulting from changes in the amortised cost of the security and other changes in the carrying amount of the security. Translation differences related to changes in the amortised cost are recognised in income, and other changes in the carrying amount are recognised in equity. Translation differences on non-monetary financial assets and liabilities are reported as part of the fair value gain or loss. Translation differences on non-monetary financial assets are recognised in income as part of fair value gain or loss. Translation differences on nonmonetary financial assets such as equities classified as available-for-sale are included in the fair value reserve in equity.

31

Company No:709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

NOTES TO THE FINANCIAL STATEMENTS for the financial year ended 31 December 2007 (continued) 3

SIGNIFICANT ACCOUNTING POLICIES (continued)

(G) Recognition of financing income and hibah Islamic financing income is recognised on an accrual basis in accordance with the Shariah principles and BNM/GP8-i. Al-Ijarah Thumma Al-Bai ('AITAB') financing income recognised using the "sum-of-digit" method over the lease terms, whilst Al-Bai Bithaman Ajil ('BBA'), AlMurabahah, Al-Istisna' and Bai'-Inah financing income is recognised on a monthly basis over the period of the financing contracts, based on an agreed profit at the inception of such contracts. Income accrued and recognised prior to the date the financing are classified as non-performing shall be reversed out of income by debiting the income account in the income statement and crediting the accrued income receivable account in the balance sheet. Subsequently, income earned on non-performing financing shall be recognised on a cash basis. Customers' accounts are generally classified as non-performing when repayments are in arrears for three months or more from first day of default for financing and cash line, and after three months or more from maturity date for trade bills, trust receipts, bankers' acceptances and other instruments of similar nature. Hibah from securities portfolio is recognised on an accrual basis using the effective profit method. The hibah includes coupons earned and accrued discount and amortisation of premium on these securities.

(H) Recognition of fees and other income Fees and other profit from Islamic Banking business is recognised on an accrual basis in accordance with the principles of Shariah.

(I)

Financing and related expense recognition Profit payable on deposits and borrowings are expensed as incurred. Dealers' handling fees on hire purchase are charged to income statement in the period when they are incurred in accordance with Bank Negara Malaysia circular dated 8 August 2003.

32

Company No:709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

NOTES TO THE FINANCIAL STATEMENTS for the financial year ended 31 December 2007 (continued) 3

SIGNIFICANT ACCOUNTING POLICIES (continued)

(J) Financing, advances and other loans Financing, advances and other loans are recognised when cash is advanced to the borrowers. Specific allowances are made for bad and doubtful financing based on management's evaluation of the collectibility and the status of the financing and their related underlying securities. A general allowance based on a percentage of the financing portfolio is also made to cover possible losses which are not specifically identified. An uncollectible financing or portion of a financing classified as bad is written off after taking into consideration the realisable value of collateral, if any, when in the judgement of the management, there is no prospect of recovery. The policy on allowances for losses on financing is generally more stringent than that laid down in BNM's Guidelines on Classification of Non-Performing Loans and Provision for Substandard, Bad and Doubtful Debts ('BNM/GP3').

(K) Financial Liabilities All non-trading financial liabilities are initially recognised at fair value, being the consideration received at transaction date.

33

Company No:709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

NOTES TO THE FINANCIAL STATEMENTS for the financial year ended 31 December 2007 (continued) 3

SIGNIFICANT ACCOUNTING POLICIES (continued)

(L) Taxation (i) Current tax Current tax expense is determined according to the tax laws of each jurisdiction in which the Bank operates and include all taxes based upon the taxable profits for the financial year. (ii) Deferred tax Deferred tax is recognised in full, using the liability method, on temporary differences arising between the amounts attributed to assets and liabilities for tax purposes and their carrying amounts in the financial statements. However, deferred tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred tax assets are recognised to the extent that it is probable that taxable profit will be available against which the deductible temporary differences or unused tax losses can be utilised. Deferred tax is recognised on temporary differences arising from depreciation of property, plant and equipment, intangible asset, general allowance for financing, unrealised forex revaluation, profit equalisation reserve and unused tax losses carried forward. Deferred tax related to fair value re-measurement of available-for-sale securities, which are charged or credited directly to equity and is subsequently recognised in the income statement together with the deferred gain or loss. Deferred tax is determined using tax rates (and tax laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred tax assets is realised or the deferred tax liability is settled.

34

Company No:709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

NOTES TO THE FINANCIAL STATEMENTS for the financial year ended 31 December 2007 (continued) 3

SIGNIFICANT ACCOUNTING POLICIES (continued)

(M) Zakat The Bank pays zakat based on 2.5% of prior year's net asset method, to comply with the principles of Shariah. The Bank does not pay zakat on behalf of the shareholders or depositors. The Bank made provision for zakat amounting to RM2.24 million for the financial year ended 31 December 2007.

(N) Cash and cash equivalents Cash and cash equivalents consists of cash on hand, bank balances and deposits and placements maturing within one month which are held for the purpose of meeting short term commitments and are readily convertible to cash without significant risk of changes in value.

(O) Profit Equalisation Reserve ('PER') Profit Equalisation Reserve (‘PER’) refers to the amount appropriated out of the total gross income to mitigate the undesirable fluctuation of income and to maintain a certain level of return to depositors. The amount is provided based on BNM’s circular on ‘The Framework of The Rate of Return’. PER is shared by both the depositors and the Bank and hence, can be appropriated from and written back to the total gross income in deriving the distributable income. PER is reflected under ‘Other liabilities’ on the balance sheet.

(P) Contingent liabilities and contingent assets The Bank does not recognise a contingent liability but discloses its existence in the financial statements. A contingent liability is possible obligation that arises from past events whose existence will be confirmed by the occurrence or non-occurrence of one or more uncertain future events beyond the control of the Bank or a present obligation that is not recognised because it is not probable that an outflow of resources will be required to settle the obligation. A contingent liability also arises in the extremely rare case where there is a liability that cannot be recognised because it cannot be measured reliably. A contingent asset is a possible asset that arises from past events whose existence will be confirmed by the occurrence or non-occurrence of one or more uncertain future events beyond the control of the Bank. The Bank does not recognise contingent assets but discloses its existence where inflows of economic benefits are probable, but not virtually certain.

35

Company No:709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

NOTES TO THE FINANCIAL STATEMENTS for the financial year ended 31 December 2007 (continued) 3

SIGNIFICANT ACCOUNTING POLICIES (continued)

(Q) Critical accounting estimates and judgements Critical accounting estimates and judgements The Bank makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. To enhance the information content of the estimates, certain variables that are anticipated to have material impact to the Bank’s results and financial position are tested for sensitivity to changes in the undying parameters. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year are discussed below.

(i) Allowance for losses on financing, advances and other loans The Bank makes allowance for losses based on assessment of recoverability. Whilst management's judgement is guided by the relevant BNM Guidelines, judgement is made about the future and other key factors in respect of the recovery of financing, advances and other loans. Among the factors considered are the Bank's aggregate exposure to the borrower, the net realisable value of the underlying collateral value, the viability of customer's business model and the capacity to generate sufficient cash flow to service debt obligations and the aggregate amount and ranking of all other creditor claims.

(R) Segment Reporting Segment reporting is presented for enhanced assessment of the Bank's risks and returns. A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. Segment revenue, expense, assets and liabilities are those amounts resulting from the operating activities of a segment that are directly attributable to the segment and the relevant portion that can be allocated on a reasonable basis to the segment.

36

Company No:709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

NOTES TO THE FINANCIAL STATEMENTS for the financial year ended 31 December 2007 (continued) 3

SIGNIFICANT ACCOUNTING POLICIES (continued)

(S) Financial risk management objective and policies (i) Market risk The Bank is mainly exposed to risk on rate of return or profit rate. The rate of return risk arises mainly from differences in timing between the maturities or repricing of assets and liabilities. The Bank is also exposed to basis risk, when the pricing characteristics of two instruments change at different times or by different amounts. Market risk is managed by the Market Risk Management Department, which is part of the parent Bank's Risk Management Division. The main objectives of the Market Risk Management Department are to ensure an effective implementation of market risk management by balancing the level of risk and the rate of return required. For the asset liability mismatch position in the Balance Sheet, the Bank employs a software to measure the risk. The risk is measured monthly using Net Income simulations involving various interest rate scenarios. The market risk management infrastructure in place is adequate for the Bank's present scale of operations, exposures and business range.

(ii) Credit risk Credit risk is the potential financial loss resulting from the failure of the customer or counterparty to settle the financial and contractual obligations to the Bank. Credit risk arises mainly from our financing activities. The management of credit risk in the Bank is governed by a set of credit policies approved by the Board of Directors. Approval authorities are delegated to the parent Bank's Management Loan Committee to approve large and higher risk financing in order to ensure sound credit granting standards. A credit risk grading system is implemented for corporate and business financing. The grading is based on credit worthiness of the customer, i.e. the ability to pay financing obligations based on the customer's current condition, with regard to its management capacity and its market position. The credit risk grading system is being revised to make it more robust and risk sensitive.

37

Company No:709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

NOTES TO THE FINANCIAL STATEMENTS for the financial year ended 31 December 2007 (continued) 3

SIGNIFICANT ACCOUNTING POLICIES (continued)

(S) Financial risk management objective and policies (continued) (iii) Liquidity risk Liquidity risk is the risk of loss due to failure to access funds at reasonable cost to fund the Bank's operations and meet its liabilities as and when they fall due. Liquidity risk arises from the Bank's general on-going funding activities and the management of its assets. The Board is responsible for the Bank's liquidity performance although the strategic management of liquidity has been delegated to the Asset and Liability Management Committee ('ALCO'). The Board is informed regularly of the liquidity situation in the Bank. To measure and manage net funding requirements, the Bank adopts BNM's New Liquidity Framework ('NLF'). The NLF ascertains the liquidity condition based on the contractual and behavioral cash-flow of assets, liabilities and off-balance sheet commitments, taking into consideration the realisable cash value of the eligible liquefiable assets. The Bank has been in compliance with the NLF throughout the current financial year. Liquidity risk indicators have also been instituted as an early alert of any structural change for liquidity risk management.

(iv) Operational risk management Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. Such risks may result in omission, errors and breakdowns that can potentially lead to financial loss or other indirect losses to the Bank. The Bank manages such risk through a control based environment in which policies and procedures are formulated after taking into account individual unit's business activities, the environment and market in which it is operating and any regulatory requirement in force. Risk is identified through the use of assessment tools and measured using threshold/limits mapped against risk matrix. Monitoring and control procedure include the use of key control standards, independent tracking of risk , back-up procedures and contingency plans; including disaster recovery and business continuity plans. This is supported by periodic reviews undertaken by Internal Audit to ensure adequacy and effectiveness of the Operational Risk Management process.

38

Company No:709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

NOTES TO THE FINANCIAL STATEMENTS for the financial year ended 31 December 2007 (continued) 3

SIGNIFICANT ACCOUNTING POLICIES (continued)

(S) Financial risk management objective and policies (continued) (iv) Operational risk management (continued) The Bank gathers and reports operational risk loss data and "near misses" events to the parent Bank's Operational Risk Management Committee and Board Risk Management Committee. Appropriate remedial actions are reviewed and implemented to minimise the recurrence of such risk. The Bank's Operational Risk Management Framework has been automated with the implementation of Basel II Operational Risk Management Solution. Now, all operational risk incidents (loss and near miss) reporting and risk assessments are undertaken 'live'. All manual processes have been discontinued.

39

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 4

Cash and short-term funds

Cash and bank balances with banks and other financial institutions Money at call and interbank placements with remaining maturity not exceeding one month

5

2007 RM'000

2006 RM'000

6,290

7,941

3,526,260 3,532,550

2,136,000 2,143,941

2007 RM'000

2006 RM'000

279,246 24,784 72,514 200,254 576,798

102,956 68,879 123,713 29,263 41,595 14,882 381,288

197,452 774,250

381,288

2007 RM'000

2006 RM'000

Securities (i)

Available-for-sale securities

At fair value Malaysian Government treasury bills Malaysian Government investment certificate Bank Negara Malaysia Notes Negotiable Islamic Debt Certificates Bankers' acceptances and Islamic accepted bills Khazanah bonds Bank Negara Malaysia Monetary Notes

Unquoted securities: Private debt securities in Malaysia

(ii)

Held-to-maturity securities

At amortised cost Unquoted securities: Private debt securities in Malaysia

-

40

90,600 90,600

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 6

Financing, advances and other loans (i)

By type

Cash line Term financing - House financing - Hire purchase receivables - Syndicated financing - Other term financing Bills receivables Trust receipts Claims on customers under acceptance credits Staff financing (of which RM Nil to Directors) Revolving credit

Less: Unearned income Gross financing, advances and other loans Less: Allowance for bad and doubtful financing: - General - Specific Total net financing, advances and other loans

(ii)

2007 RM'000

2006 RM'000

171,901

94,263

1,517,539 599,925 349,942 492,916 8,037 64,895

1,032,244 342,368 360,709 7,070 69,578

54,259 11,452 3,024 3,273,890

49,282 14,074 3,024 1,972,612

(1,506,080) 1,767,810

(720,664) 1,251,948

(26,485) (7,170) 1,734,155

(19,885) (4,770) 1,227,293

2007 RM'000

2006 RM'000

989,881 487,691 1,234 289,004 1,767,810

760,144 278,807 1,461 211,536 1,251,948

By contract

Bai' Bithaman Ajil (deferred payment sale) AITAB Murabahah (cost-plus) Others

41

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 6

Financing, advances and other loans (continued) (iii) By type of customer

Domestic non-bank financial institutions - Others Domestic business enterprises - Small medium enterprises - Others Government and statutory bodies Individuals Other domestic entities Foreign entities

2007 RM'000

2006 RM'000

11,259

60

362,352 193,887 35,568 1,093,088 9,398 62,258 1,767,810

211,023 173,943 51,881 756,622 28,165 30,254 1,251,948

2007 RM'000

2006 RM'000

364,417 487,691 426,416

434,428 278,807 491,366

487,705 1,322 259 1,767,810

47,347 1,251,948

(iv) By profit rate sensitivity

Fixed rate: - House financing - Hire purchase receivables - Other fixed rate financing Variable rate: - BLR - plus - Cost - plus - Other variable rate

42

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 6

Financing, advances and other loans (continued) (v)

By sector

Primary agriculture Mining and quarrying Manufacturing Electricity, gas and water Construction Real estate Wholesale & retail trade and restaurants & hotels Transport, storage and communication Finance, insurance and business services Education, health & others Household Others

43

2007 RM'000

2006 RM'000

54,848 105 148,351 283 154,278 31,599 58,839 45,894 101,210 56,267 1,102,687 13,449 1,767,810

30,568 115 116,520 1,014 28,430 1,019 59,321 41,184 9,649 90,169 768,343 105,616 1,251,948

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 6

Financing, advances and other loans (continued) (vi) By purpose

Purchase of securities Purchase of transport vehicles Purchase of landed property of which: - Residential - Non-residential Personal use Consumer durable Construction Working capital Others

7

2007 RM'000

2006 RM'000

5,405 496,390

5,873 278,087

636,864 56,504 29,380 55 20,222 364,699 158,291 1,767,810

470,279 47,468 7,298 61 10,608 8,019 424,255 1,251,948

Non-performing financing (i)

Movements in the non-performing financing, advances and other loans 2007 RM'000 At beginning of the financial year/period Classified as non-performing during the financial year/period Reclassified as performing during the financial year/period Amount recovered At end of the financial year/period Less: Specific allowance Net non-performing financing, advances and other loans Ratio of net non-performing financing, advances and other loans to gross financing, advances and other loans less specific allowance

44

2006 RM'000

39,150

-

56,440

58,841

(52,642) (5,169) 37,779

(17,979) (1,712) 39,150

(7,170) 30,609

(4,770) 34,380

1.74%

2.76%

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 7

Non-performing financing (continued) (ii)

Movements in the allowance for bad and doubtful financing

General allowance At beginning of the financial year/period Balance vested over from Affin Bank Berhad Allowance made during the financial year/period At end of the financial year/period

2007 RM'000

2006 RM'000

19,885 6,600 26,485

19,885 19,885

As % of gross financing, advances and other loans less specific allowance

1.50%

1.59%

Specific allowance At beginning of the financial year/period Balance vested over from Affin Bank Berhad Allowance made during the financial year/period Amount recovered At end of the financial year/period

4,770 3,248 (848) 7,170

924 4,295 (449) 4,770

(iii) Non-performing financing by sector

Primary agriculture Mining and quarrying Manufacturing Construction Wholesale and retail trade, restaurant and hotels Finance, insurance and business services Education, health & others Household Others

45

2007 RM'000

2006 RM'000

65 40 6,267 307 137 512 1,933 28,518 37,779

6,054 150 208 2,125 29,798 815 39,150

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 7

Non-performing financing (continued) (iv) Non-performing financing by economic purposes

Purchase of securities Purchase of transport vehicles Purchase of landed property of which: - Residential - Non-residential Personal use Construction Working capital Others

8

2006 RM'000

2 7,551

11 6,880

20,423 3,009 58 2,230 3,646 860 37,779

21,963 3,502 93 2,190 4,511 39,150

2007 RM'000

2006 RM'000

9,224 116,761 9,691 135,676

6,684 11 4,666 11,361

Other assets

Other debtors, deposits and prepayments Clearing accounts Accrued income receivable

9

2007 RM'000

Statutory deposits with Bank Negara Malaysia The statutory deposits are maintained with Bank Negara Malaysia in compliance with Section 37(1)(c) of the Central Bank of Malaysia Act, 1958 (revised 1994), the amounts of which are determined at set percentages of total eligible liabilities.

46

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 10 Property, plant and equipment Office equipment, furniture and fittings RM'000 2007 Cost At beginning of the financial year Additions At end of the financial year

17 63 80

Accumulated depreciation At beginning of the financial year Charge for the financial year At end of the financial year

2006 Cost At beginning of the financial period Balance vested over from Affin Bank Berhad Additions At end of the financial period

204 142 346

6 6

16 51 67

16 57 73

74

199

273

107 80 187

108 96 204

-

-

1 16 17

Accumulated depreciation At beginning of the financial period Balance vested over from Affin Bank Berhad Charge for the financial period At end of the financial period

-

Net book value as at end of the financial period

17

47

Total RM'000

187 79 266

-

Net book value as at end of the financial year

Computer equipment and software under lease RM'000

8 8 16

8 8 16

171

188

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 11 Intangible assets Computer software Cost At beginning of the financial year/period Balance vested over from Affin Bank Berhad At end of the financial year/period Accumulated amortisation At beginning of the financial year/period Balance vested over from Affin Bank Berhad Charge for the financial year/period At end of the financial year/period Net book value as at end of the financial year/period

2007 RM'000

2006 RM'000

2,416 2,416

2,416 2,416

323 483 806

202 121 323

1,610

2,093

12 Deferred tax Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when the deferred taxes relate to the same tax authority. The following amounts determined after appropriate offsetting, are shown in the balance sheet:

2007 RM'000

2006 RM'000

Deferred tax assets (after offsetting)

6,212

4,122

At beginning of the financial year/period Balance vested over from Affin Bank Berhad

4,122 -

5,568

Credited/(charged) to income statement (Note 26) - Property, plant and equipment - Intangible assets - General allowances on bad and doubtful debts - Unrealised forex revaluation gain - Others

1,902 (23) (114) 1,517 658 (136)

(1,399) (27) (304) (199) (1,005) 136

Charged to equity At end of the financial year/period

188 6,212

(47) 4,122

48

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 12 Deferred tax (continued) 2007 RM'000 Subject to income tax Deferred tax assets (before offsetting) General allowances for bad and doubtful debts Profit equalisation reserve Investment fluctuation reserve Offsetting Deferred tax assets (after offsetting) Deferred tax liablities (before offsetting) Property, plant and equipment Intangible assets Investment fluctuation reserve Unrealised forex revaluation gain Offsetting Deferred tax liabilities (after offsetting)

2006 RM'000

6,886 141 7,027 (815) 6,212

5,369 136 5,505 (1,383) 4,122

(50) (418) (347) (815) 815 -

(27) (304) (47) (1,005) (1,383) 1,383 -

13 Deposits from customers (i)

By type of deposit

Non-Mudharabah Demand deposits Savings deposits Negotiable instruments of deposit Mudharabah Savings deposits General investment deposits Special investment deposits

49

2007 RM'000

2006 RM'000

1,415,404 183,216 82,215

1,371,377 149,542 770,899

5,792 798,415 1,223,571 3,708,613

5,700 412,515 113,387 2,823,420

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 13 Deposits from customers (continued) (ii)

By type of customer

Government and statutory bodies Business enterprises Individuals Others

2007 RM'000

2006 RM'000

2,098,748 675,484 262,781 671,600 3,708,613

676,936 651,413 204,675 1,290,396 2,823,420

2007 RM'000

2006 RM'000

189,000 4,715 1,885,208 2,078,923

300,450 300,450

14 Deposits and placements of banks and other financial institutions

Mudharabah Licensed banks Bank Negara Malaysia Other financial institutions

Included in the deposits and placements of banks and other financial institutions is the Restricted Profit Sharing Investment Account ('RPSIA') placed by the Affin Bank Berhad amounting to RM13 million for the tenure of 8 months and at profit rate of 4.13% per annum. The RPSIA is a contract based on the Mudharabah concept between two parties to finance a business venture whereby the investor solely provides capital and the business venture is managed solely by the entrepreneur. The profit of the business venture is shared between both parties based on a pre-determined ratio, and in the event of a business loss, the loss will be borne solely by the provider of the capital. Based on BNM's circular dated 12 January 2007, RPSIA placement by the parent institution is recognised as part of the capital base for Single Customer Limit computation purposes.

50

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 15 Other liabilities

Bank Negara Malaysia and Credit Guarantee Corporation Funding programmes Margin and collateral deposits Accrued income payable Sundry creditors Clearing accounts Profit equalisation reserve (a) Defined contribution plan Accrued employee benefits

2007 RM'000

2006 RM'000

40 3,795 17,719 10,962 128 30 32,674

39 4,482 3,809 7,774 51,512 501 20 68,137

2007 RM'000

2006 RM'000

(a) Profit equalisation reserve

At beginning of the financial year/period Provision made during the financial year/period Written back in the financial year/period At end of the financial year/period*

501 (501) -

1,001 (500) 501

* Profit equalisation reserve at the end of the financial period of which the shareholders' portion is RM Nil (2006: RM37,375)

16 Amount due to holding company

Amount due to holding company

2007 RM'000

2006 RM'000

207,611 207,611

485,036 485,036

The amount due to is unsecured and bear interest of 3.58% per annum (2006: 3.67%) with no fixed terms of repayment.

51

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 17 Share capital 2007 Authorised: At beginning/end of the financial year

Number of ordinary shares of RM 1 each '000 1,000,000

Amount RM '000 1,000,000

Issued and fully paid: At beginning/end of the financial year

160,000

160,000

2006 Authorised: At beginning/end of the financial period

Number of ordinary shares of RM 1 each '000 1,000,000

Amount RM '000 1,000,000

Issued and fully paid: At beginning/end of the financial period

160,000

160,000

18 Reserves 2007 RM'000 Investment fluctuation reserves Statutory reserves Retained profits Statutory reserves At beginning of the financial year/period Transfer from retained profits At end of the financial year/period

2006 RM'000

(401) 38,004 38,004 75,607

128 18,284 18,284 36,696

18,284 19,720 38,004

18,284 18,284

2007 RM'000

2006 RM'000

Movement of the unrealised gains/(losses) on 'Available-for-sale'

At beginning of the financial year/period Balance transferred from Affin Bank Berhad Unrealised (losses)/gains on available-for-sale Deferred tax At end of the financial year/period *

128 (717) 188 (401)

(320) 495 (47) 128

* The depositors' portion of net unrealised gains or losses on 'Available-for-sale' at the end of financial year/ period is net unrealised loss of RM382,113 (2006: net unrealised gain of RM118,451).

52

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 19 Income derived from investment of depositors' funds and others

2007 RM'000 Income derived from investment of: - General investment deposits * - Other deposits

Period from 13.09.2005 (date of incorporation) to 31.12.2006 RM'000

126,482 100,922 227,404

22,237 92,859 115,096

* Includes the profit earned from investment of RPSIA in financing, advances and other loans of RM250,394 (2006: RM Nil)

a)

Income derived from investment of general investment deposits

2007 RM'000 Finance income and hibah Financing, advances and other loans Available-for-sale securities Held-to-maturity securities Money at call and deposits with financial institutions

Accretion of discounts less amortisation of premium Total finance income and hibah Other operating income Fee income Commission Service charges and fees Guarantee fees Securities income Gain on sale of securities: - Available-for-sale Other income Foreign exchange (loss)/profit: - Realised - Unrealised Other non-operating income Total income derived from investment of general investment deposits

54,430 2,944 1,062 58,701 117,137

11,915 51 657 6,655 19,278

4,922 122,059

1,848 21,126

1,036 1,400 440 2,876

324 267 37 628

-

10 10

659 705 183 1,547

(228) 668 33 473

126,482 53

Period from 13.09.2005 (date of incorporation) to 31.12.2006 RM'000

22,237

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 19 Income derived from investment of depositors' funds and others (continued) b)

Income derived from investment of other deposits

2007 RM'000 Finance income and hibah Financing, advances and other loans Available-for-sale securities Held-to-maturity securities Money at call and deposits with financial institution

Accretion of discounts less amortisation of premium Total finance income and hibah Other operating income Fee income Commission Service charges and fees Guarantee fees Securities income Gain on sale of securities: - Available-for-sale

43,431 2,349 847 46,838 93,465

49,757 212 2,744 27,792 80,505

3,928 97,393

7,715 88,220

826 1,117 351 2,294

1,353 1,117 153 2,623

-

Other income Foreign exchange (loss)/profit: - Realised - Unrealised Other non-operating income

526 563 146 1,235

Total income derived from investment of other deposits

54

Period from 13.09.2005 (date of incorporation) to 31.12.2006 RM'000

100,922

41 41

(950) 2,788 137 1,975 92,859

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 20 Income derived from investment of shareholders' funds

2007 RM'000 Finance income and hibah Financing, advances and other loans Available-for-sale securities Held-to-maturity securities Money at call and deposits with financial institution

Accretion of discounts less amortisation of premium Total finance income and hibah Other operating income Fee income Commission Service charges and fees Guarantee fees Securities income Gain on sale of securities: - Available-for-sale

4,837 262 94 5,217 10,410

4,670 20 257 2,609 7,556

437 10,847

724 8,280

92 124 39 255

127 105 14 246

-

Other income Foreign exchange (loss)/profit: - Realised - Unrealised Other non-operating income

59 63 16 138

Total income derived from investment of shareholders' funds

55

Period from 13.09.2005 (date of incorporation) to 31.12.2006 RM'000

11,240

4 4

(89) 262 13 186 8,716

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 21 Allowance for losses on financing

2007 RM'000 Allowance for bad and doubtful financing: Specific allowance - provided in the financial year/period - written back

3,248 (848)

General provision - (written back)/provided in the financial year/period

6,600

Bad debts on financing: - recovered - written off

Period from 13.09.2005 (date of incorporation) to 31.12.2006 RM'000

4,295 (449)

-

146 9,146

(20) 6 3,832

2007 RM'000

Period from 13.09.2005 (date of incorporation) to 31.12.2006 RM'000

22 Income attributable to depositors

Deposits from customers - Mudharabah - Non-Mudharabah Deposits and placement of banks and other financial institutions - Mudharabah Others

48,593 24,251

9,952 19,643

44,130 7,644 124,618

4,719 9,425 43,739

23 Personnel expenses

2007 RM'000 Wages, salaries and bonus Defined contribution plan ('EPF') Other personnel costs

4,103 652 878 5,633

56

Period from 13.09.2005 (date of incorporation) to 31.12.2006 RM'000 1,698 267 196 2,161

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 24 Other overheads and expenditures

2007 RM'000 Establishment costs Rental of premises Equipment rental Repair and maintenance Depreciation of property, plant and equipment Amortisation of intangible assets Other establishment costs

Marketing expenses Dealers' handling charges Business promotion and advertisement Entertainment Travelling and accommodation Other marketing expenses

Administration and general expenses Telecommunication expenses Audit expenses Professional fees Management fee paid to Affin Bank Other administration and general expenses

174 120 57 483 414 1,248

17 113 8 121 406 665

3,472 275 69 158 82 4,056

1,276 166 42 59 58 1,601

22 137 2,312 32,672 1,416 36,559

10 110 595 19,707 800 21,222

41,863

23,488

The above expenditure includes the following statutory disclosure: 2007 RM'000 1,151 174 -

Directors' remuneration (Note 25) Rental of premises Equipment rental Auditors remuneration - Statutory audit fees - Non audit fees - Over provision prior year Depreciation of property, plant and equipment Amortisation of intangible assets Dealers' handling charges

84 56 (3) 57 483 3,472 57

Period from 13.09.2005 (date of incorporation) to 31.12.2006 RM'000

Period from 13.09.2005 (date of incorporation) to 31.12.2006 RM'000 476 17 80 30 8 121 1,276

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 25 CEO, Directors and Shariah Committee Members' remuneration The Directors of the Bank who have held office during the period since the date of the last report are: Jen (B) Tan Sri Dato' Seri Ismail bin Haji Omar Non-Independent Non-Executive Chairman En. Kamarul Ariffin bin Mohd Jamil Chief Executive Officer Non-Independent Executive Director Tan Sri Dato' Lodin bin Wok Kamaruddin Non-Independent Non-Executive Director Laksamana Madya (B) Dato' Seri Ahmad Ramli bin Mohd Nor Non-Independent Non-Executive Director Dato' Seri Mohamed Jawhar Independent Non-Executive Director En. Mohd Suffian bin Haji Haron Independent Non-Executive Director Dato' Sri Abdul Hamidy bin Abdul Hafiz Non-Independent Non-Executive Director En. Zulkiflee Abbas bin Abdul Hamid Non-Independent Non-Executive Director

58

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 25 CEO, Directors and Shariah Committee Members' remuneration (continued) The aggregate amount of remuneration for the Directors of the Bank for the financial year are as follows:

2007 RM'000 Executive Directors Salary and other remuneration, including meeting allowance Bonuses Defined contribution plan ('EPF') Other employee benefits Non-executive Directors Fees Directors' remuneration (Note 24) Shariah Committee

Period from 13.09.2005 (date of incorporation) to 31.12.2006 RM'000

322 249 101 60

234 21 41 20

419 1,151

160 476

24 1,175

15 491

The remuneration attributable to the Chief Executive Officer of the Bank during the financial period amounted to RM 732,000 (2006: RM 315,800).

The number of Directors of the Bank whose total remuneration (including benefits-in-kind) received from the Bank falls within the Directors' remuneration band as follows:

Remuneration band: RM 0 - RM50,000 RM50,001 - RM100,000 RM300,000 - RM350,000 RM700,000 - RM750,000

Number of directors NonExecutive Executive Director Director 2007 2007

Executive Director 2006

NonExecutive Director 2006

2 5 -

1 -

5 2 -

1

59

Number of directors

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 26 Taxation

2007 RM'000 Malaysian income tax: - Current tax - Deferred tax (Note 12)

Period from 13.09.2005 (date of incorporation) to 31.12.2006 RM'000

17,348 (1,902) 15,446 759 16,205

12,124 1,399 13,523 13,523

Malaysian tax rate

% 27.00

% 28.00

Tax effect of: - change in tax rate - expenses not deductible for tax purposes - zakat - under provision in prior years - others Average effective tax rate

0.40 0.05 (0.77) 1.31 27.99

0.31 0.05 (1.24) (0.12) 27.00

Under provision in prior years

Numerical reconciliation between the average effective tax rate and the Malaysian tax rate:

27 Earnings per share The basic and fully diluted earnings per ordinary share for the Bank has been calculated based on the net profit attributable to ordinary equity holders of the Bank of RM39,440,000 (2006:RM36,568,000). The weighted average number of shares in issue during the financial year of 160,000,000 (2006:160,000,000) is used for the computation.

60

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 28 Significant related party transactions and balances The related parties that have transactions and their relationship with the Bank are as follows: Related parties Relationships Lembaga Tabung Angkatan Tentera ('LTAT') Ultimate holding corporate body Affin Holdings Berhad ('AHB')

Penultimate holding company

Affin Bank Berhad

Holding company

Boustead REIT Managers Sdn Bhd Perbadanan Hal Ehwal Bekas Angkatan Tentera Perbadanan Perwira Harta Malaysia Perwira Niaga Malaysia

Subsidiaries of LTAT

ABB Trustee Berhad Affin MoneyBrokers Sdn Bhd Affin Fund Management Bhd Affin Nominees (Tempatan) Sdn Bhd

Subsidiaries of AHB

Boustead Properties Berhad Boustead Credit Sdn Berhad Boustead Plantations Berhad Boustead Emastulin Sdn Berhad Boustead Eldred Sdn Berhad Boustead Estates Agency Sdn Berhad Boustead Weld Court Sdn Berhad Segamaha Development Sdn Bhd Syarikat Hing Lee Plantations Sdn Bhd Yaw Lim Plantations Sdn Bhd Boustead Pelita Kanowit Sdn Bhd Boustead Sutera Sdn Bhd Boustead Advisory and Consultancy Services Sdn Bhd Boustead Curve Sdn Bhd Boustead Oil Bulking Sdn Bhd Boustead Sungai Manar Sdn Bhd Boustead Pelita Tinjar Sdn Bhd Boustead Gradient Sdn Bhd Boustead Segaria Sdn Bhd Boustead Solandra Sdn Bhd Boustead Rimba Nilai Sdn Bhd Mutiara Rini Sdn Bhd

Subsidiaries of related company

61

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 28 Significant related party transactions and balances (continued) (a)

Related party transactions

2007 Sales Treasury bills securities Private debt securities NIDs

2006 Sales Treasury bills securities Private debt securities NIDs

Ultimate holding corporate body RM'000 82,215 82,215

Ultimate holding corporate body RM'000 61,478 61,478

62

Penultimate holding company RM'000 -

Penultimate holding company RM'000 -

Holding company RM'000 77,244 25,965 103,209

Holding company RM'000 19,432 117,832 137,264

Other related company RM'000 -

Other related company RM'000 -

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 28 Significant related party transactions and balances (continued) (b)

Related party balances

2007 Income Income on short-term advances Income received on placement

Expenditure Hibah / profit paid on advances and deposits Hibah / profit paid on repo Others

Amount due to Demand and fixed deposits Negotiable instrument deposits Special investment account Interbank placement Short-term advances

Amount due from Short-term advances Brokerage fee

Ultimate holding corporate body RM'000

Penultimate holding company RM'000

Holding company RM'000

-

-

6,208 7 6,215

-

6,190 32,672 38,862

88 14 102

321 82,215 -

-

189,000 207,611 396,611

63,359 9,199 72,558

82,536

-

-

63

-

Other related company RM'000

-

1 1

8 2 10

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 28 Significant related party transactions and balances (continued) (b)

Related party balances (continued)

Period from 13.09.2005 (date of incorporation) to 31.12.2006 Income Income on short-term advances Income received on placement Expenditure Hibah / profit paid on advances and deposits Hibah / profit paid on repo Others Amount due to Demand and fixed deposits Negotiable instrument deposits Special investment account Interbank placement Short-term advances Amount due from Demand deposits Short-term advances Brokerage fee

(c)

Ultimate holding corporate body RM'000

Penultimate holding company RM'000

-

-

2,137 8 2,145 419 61,800 6,633 68,852 -

Holding company RM'000

Other related company RM'000

356 356

-

2

4 4

19,706 19,706

-

-

485,036 485,036

-

-

1 1

2

18 18

Key management personnel compensation 2007 RM'000 Short-term employment benefits: - Salaries - Bonuses - Defined contribution plan ('EPF') - Other employee benefits - Benefit-in-kind

597 433 187 140 77 1,434

Included in the above table are Directors' remuneration as disclosed in Note 25.

64

2006 RM'000 485 390 161 130 58 1,224

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 28 Related party transactions (continued) (c)

Key management personnel compensation (continued) The key management personnel were granted options under Affin Holding Berhad's ('AHB') Employee Share Option Scheme ('ESOS'), which has expired on 13 February 2008. The ESOS was offered to eligible employees in Affin Group on 14 February 2003 and 5 December 2005 at the subscription rate per share of RM1.00 and RM1.41 respectively. The main features of the ESOS are as follows: - Only staff, executive directors and non-executive directors of Affin Group who on the date of allocation have been so appointed are eligible to participate in the ESOS. - Options granted under the ESOS carry no dividend or voting rights. Upon exercise of the options, shares issued rank pari passu in all respects with existing ordinary shares of AHB. - The persons to whom the options have been granted have no right to participate by virtue of the options in any share issue of any other company. A total of 380,000 ESOS options, comprising 100,000 share options at RM1.00 per share and 280,000 share options at RM1.41 per share were granted to the key management personnel of the Bank. As at 31 December 2007, Nil share options at RM1.00 per share (2006: 70,000 share options) and Nil share options at RM1.41 per share (2006: 280,000 share options) remained unexercised.

29 Staff retirement benefits Short term employee benefits Wages, salaries, paid annual leave and sick leave, bonuses and non-monetary benefits are accrued in the period in which the associated services are rendered by employees of the Bank. Defined contribution plan The defined contribution plan is a pension plan under which the Bank pays fixed contributions to the National Pension Scheme, the Employees' Provident Fund ('EPF') and will have no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits relating to employee service in the current and prior periods. The Bank's contribution to defined contribution plans are charged to the income statement in the period to which they relate. Once the contributions have been paid, the Bank has no further payment obligations. Termination benefits Termination benefits are payable whenever an employee's employment is terminated before the normal retirement date or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Bank recognises termination benefits when it is demonstrably committed to either terminate the employment of current employees according to a detailed formal plan without any possibility of withdrawal or to provide termination benefits as a result of an offer made to encourage voluntary redundancy.

65

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 30 Commitments and contingencies In the normal course of business, the Bank make various commitments and incurs certain contingent liabilities with legal recourse to their customers. No material losses are anticipated as a result of these transactions. The commitments and contingencies consist of:

2007 Direct credit substitutes Transaction-related contingent items Short-term self-liquidating trade related contingencies Irrevocable commitments to extend credit: - maturity less than one year - maturity more than one year

Principal amount RM'000

Credit equivalent amount * RM'000

Riskweighted amount * RM'000

112,605 111,299

112,605 55,650

112,605 55,650

3,028,870

605,774

14,076

474,728 189,552

94,776

82,907

3,917,054

868,805

265,238

Credit equivalent amount * RM'000

Riskweighted amount * RM'000

Principal amount RM'000

2006 Direct credit substitutes Transaction-related contingent items Short-term self-liquidating trade related contingencies Irrevocable commitments to extend credit: - maturity less than one year - maturity more than one year

49,100 72,297

49,100 36,149

49,100 36,149

3,607,445

721,489

165,796

282,078 41,821

20,911

18,694

4,052,741

827,649

269,739

* The credit equivalent amount is arrived at using the credit conversion factors as per BNM Guidelines.

66

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 31 Rate of return risk The Bank is exposed to the risk associated with the effects of fluctuations in the prevailing levels of profit rate on the financial position and cash flows of its portfolio. The fluctuations in the profit rate can be influenced by changes in interest rates that effect the value of financial instruments under its portfolio.

Non-trading book

2007

Up to 1 month RM'000

> 1-3 months RM'000

>3-12 months RM'000

>1-5 years RM'000

Over 5 years RM'000

Nonprofit sensitive RM'000

Trading book RM'000

Effective profit Total rate RM'000 %

Assets Cash and short-term funds Available-for-sale securities Financing, advances and other loans - performing - non-performing Others (1)

3,526,260 100,155

54,400

467,353

152,342

-

6,290 -

-

3,532,550 774,250

3.5 3.8

810,566 -

80,558 -

126,579 -

426,201 -

286,126 -

(26,485) * 30,610 # 226,071

-

1,703,545 30,610 226,071

6.9 -

Total assets

4,436,981

134,958

593,932

578,543

286,126

236,486

-

6,267,026

* The negative balance represents specific allowances and general allowance for loans, advances and financing in accordance with the Bank's accounting policy on allowance for bad and doubtful financing. # Net of specific allowance for bad and doubtful financing. 1. Others include property, plant and equipment, intangible assets, deferred tax, statutory deposits with Bank Negara Malaysia and other assets.

67

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 31 Rate of return risk (continued) Non-trading book

2007

Up to 1 month RM'000

Over 5 years RM'000

Nonprofit sensitive RM'000

Trading book RM'000

Effective profit Total rate RM'000 %

> 1-3 months RM'000

>3-12 months RM'000

>1-5 years RM'000

2,781,730

381,699

538,498

6,686

-

-

-

3,708,613

2.2

1,324,162 207,611 4,313,503 4,313,503

741,143 1,122,842 1,122,842

13,618 552,116 552,116

6,686 6,686

-

-

-

2,078,923 207,611 36,272 6,031,419 235,607 6,267,026

3.5 3.6 -

41,816 41,816

571,857 571,857

286,126 286,126

Liabilities Deposits from customers Deposits and placements of banks and other financial institutions Amount due to holding company Other liabilities Total liabilities Shareholders' equity Total liabilities and shareholders' equity On-balance sheet profit sensitivity gap Total profit sensitivity gap

123,478 123,478

(987,884) (987,884)

68

36,272 36,272 235,607 271,879 (35,393) (35,393)

-

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 31 Rate of return risk (continued) Non-trading book

2006

Up to 1 month RM'000

> 1-3 months RM'000

>3-12 months RM'000

>1-5 years RM'000

Over 5 years RM'000

Nonprofit sensitive RM'000

Trading book RM'000

Effective profit Total rate RM'000 %

Assets Cash and short-term funds Available-for-sale securities Held-to-maturity securities Financing, advances and other loans - performing - non-performing Others (1)

2,136,000 32,750 -

78,241 -

270,297 90,600

-

-

138,540 -

72,627 -

101,184 -

396,164 -

504,283 -

Total assets

2,307,290

150,868

462,081

396,164

504,283

7,941 -

-

2,143,941 381,288 90,600

3.6 3.6 3.8

(19,885) * 34,380 # 59,764

-

1,192,913 34,380 59,764

7.1 -

-

3,902,886

82,200

* The negative balance represents specific allowances and general allowance for loans, advances and financing in accordance with the Bank's accounting policy on allowance for bad and doubtful financing. # Net of specific allowance for bad and doubtful financing. 1. Others include property, plant and equipment, intangible assets, deferred tax, statutory deposits with Bank Negara Malaysia and other assets.

69

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 31 Rate of return risk (continued) Non-trading book

2006

Up to 1 month RM'000

> 1-3 months RM'000

>3-12 months RM'000

>1-5 years RM'000

Over 5 years RM'000

Nonprofit sensitive RM'000

Trading book RM'000

Effective profit Total rate RM'000 %

Liabilities Deposits from customers Deposits and placements of banks and other financial institutions Bills and acceptances payable Amount due to holding company Other liabilities Total liabilities Shareholders' equity Total liabilities and shareholders' fund On-balance sheet profit sensitivity gap Total profit sensitivity gap

2,250,487

213,374

354,228

5,331

-

-

-

2,823,420

1.9

185,450 10,892 485,036 2,931,865 2,931,865

100,000 11,938

15,000 860

-

-

-

325,312 325,312

370,088 370,088

5,331 5,331

-

73,594 73,594 196,696 270,290

300,450 23,690 485,036 73,594 3,706,190 196,696 3,902,886

3.5 3.6 3.7 -

(174,444) (174,444)

91,993 91,993

390,833 390,833

504,283 504,283

(624,575) (624,575)

70

(188,090) (188,090)

-

-

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 32 Credit Risk Credit risk is the risk of financial loss from the failure of customers to meet their obligations. Exposure to credit risk is managed through portfolio management. The credit portfolio's risk profiles and exposures are reviewed and monitored regularly to ensure that an acceptable level of risk diversification is maintained. Exposure to credit risk is also managed in part by obtaining collateral security and corporate and personal guarantees. The credit risk concentrations of the Bank, by industry concentration, are set out in the following tables:

2007

Cash and short-term funds RM'000

Agriculture Mining and quarrying Manufacturing Electricity, gas and water Construction Real estate Transport, storage and communication Finance, insurance and business services Government and government agencies Wholesale and retail trade, restaurant and hote Others Total assets

121,443 3,411,107 3,532,550

Deposits and placements with banks and other Available- Held-toFinancing, financial for-sale maturity advances and institutions securities securities other loans RM'000 RM'000 RM'000 RM'000 -

34,847 72,160 157,961 504,284 4,998 774,250

71

-

54,848 105 145,142 283 154,254 31,599 45,894 101,210 35,568 58,838 1,132,899 1,760,640

Other assets RM'000 351 665 1,453 7,195 125,977 135,641

On balance sheet total RM'000 54,848 456 179,989 283 227,079 31,599 45,894 382,067 3,958,154 63,836 1,258,876 6,203,081

Commitments and contingencies RM'000 3,187 50 22,468 52,500 28,796 1,243 50,937 590,771 10,299 108,554 868,805

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 32 Credit Risk (continued)

2006

Cash and short-term funds RM'000

Agriculture Mining and quarrying Manufacturing Electricity, gas and water Construction Real estate Transport, storage and communication Finance, insurance and business services Government and government agencies Wholesale and retail trade, restaurant and hote Others Total assets

47,208 2,096,733 2,143,941

Deposits and placements with banks and other Availablefinancial for-sale institutions securities RM'000 RM'000 -

70,858 310,430 381,288

72

Held-toFinancing, maturity advances and securities other loans RM'000 RM'000 90,600 90,600

30,568 115 113,558 1,014 28,406 1,019 41,184 9,649 51,881 59,321 910,463 1,247,178

Other assets RM'000 427 190 4,136 6,589 11,342

On balance sheet total RM'000 30,568 115 113,558 1,014 119,433 1,019 41,184 127,905 2,463,180 59,321 917,052 3,874,349

Commitments and contingencies RM'000 1,134 75 6,893 28 31,837 16,587 267,396 604 15,362 487,733 827,649

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 33 Capital adequacy (a)

The capital adequacy ratios of the Bank are as follows:

Tier I capital Paid-up share capital Retained profits Statutory reserves

Less: Deferred tax assets Total Tier I capital

2007 RM'000

2006 RM'000

160,000 38,004 38,004 236,008

160,000 18,284 18,284 196,568

(6,071) 229,937

196,568

26,485 26,485

19,885 19,885

256,422

216,453

Tier II capital General allowance for bad and doubtful financing Total Tier II capital Capital Base Core capital ratio Risk-weighted capital ratio

(b)

11.82% 13.18%

14.00% 15.41%

Breakdown of gross risk-weighted assets in the various categories of risk-weights:

0% 10% 20% 50% 100% Total risk-weighted assets for credit risk

73

2007 Principal RM'000

2006 Principal RM'000

4,597,606 318,514 595,854 1,529,153 7,041,127

3,008,824 165,975 463,199 1,137,881 4,775,879

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 33 Capital adequacy (continued) 2007 Risk-weighted RM'000 63,703 297,927 1,529,153 1,890,783 53,380 1,944,163

0% 10% 20% 50% 100% Total risk-weighted assets for credit risk Risk-weighted assets for market risk * Total risk-weighted assets

2006 Risk-weighted RM'000 33,195 231,600 1,137,881 1,402,676 1,571 1,404,247

Pursuant to Bank Negara Malaysia’s circular, ‘Recognition of Deferred Tax Asset (‘DTA’) and Treatment of DTA for RWCR Purposes’ dated 8 August 2003, deferred tax income/(expenses) is excluded from the calculation of Tier I capital and DTA is excluded from the calculation of risk-weighted assets. * Effective 1 April 2005, the Bank have incorporated market risk in its capital adequacy ratios, in accordance to BNM's Market Risk Capital Adequacy Framework.

74

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 34 Segment analysis Segment analysis is presented in respect of the Bank's business segment. The Bank's activities are principally conducted in Malaysia and accordingly, no analysis on the Bank's operations by geographical segments have been provided. The format of the segment analysis is based on the internal financial reporting system which reflect the Bank's management reporting structure. The Bank comprises the following main segments: Enterprise banking Corporate and commercial banking provide/obtain funding to/from corporate customers including public listed corporations and its related entities, multinational corporation, financial institutions, government and state owned entities, small and medium enterprises. Consumer banking Retail banking focuses on providing products and services to individual customers. The products and services offered to customers include credit facilities (house and personal financing), remittance services, deposit collection and investment products. Treasury Treasury and money market operations is involved in proprietary trading in fixed income and foreign exchange, derivatives trading and structuring, managing customer-based foreign exchange and money market transactions, funding and investment in ringgit and foreign currencies. Hire purchase Hire purchase focuses on the products and services offered to customers under the hire purchase financing facilities.

75

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 34 Segment analysis (continued)

2007 External revenue/income Result Segment result Unallocated corporate expenses Profit from operation

Consumer Banking RM'000

Enterprise Banking RM'000

Treasury RM'000

Hire Purchase RM'000

41,938

39,063

130,844

26,749

238,594

17,707

13,209

16,682

10,287

57,885 57,885

Zakat and taxation Net profit for the financial period Other information Segment assets Deferred tax assets Unallocated assets Total assets Segment laibilities Provision for tax Amount due to holding company Unallocated liabilities Total liabilities Other segment items Capital expenditure Depreciation of property, plant and equipment Amortisation of intangible assets Specific allowances General provision Other non-cash (income)/expenses

Total RM'000

(18,445) 39,440

644,304

631,142

4,374,435

484,984

6,134,865 6,212 125,949 6,267,026

525,794

523,771

4,374,435

392,072

5,816,072 3,598 207,611 4,138 6,031,419

15 17 148 692 -

15 14 110 205 6,600 -

76

101 16 139 (19,419)

11 10 86 1,502 -

142 57 483 2,399 6,600 (19,419)

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 34 Segment analysis (continued)

Period from 13.09.2005 (date of incorporation) to 31.12.2006 External revenue/income Result Segment result Unallocated corporate expenses Profit from operation

Consumer Banking RM'000

Enterprise Banking RM'000

Treasury RM'000

32,314

23,974

54,150

13,375

123,813

18,686

9,298

16,292

5,815

50,091 50,091

Hire Purchase RM'000

Zakat and taxation Net profit for the financial period Other information Segment assets Deferred tax assets Unallocated assets Total assets Segment laibilities Provision for tax Unallocated liabilities Total liabilities Other segment items Capital expenditure Depreciation of property, plant and equipment Amortisation of intangible assets Specific allowances Other non-cash (income)/expenses

Total RM'000

(13,523) 36,568

499,924

467,157

2,647,990

277,048

3,892,119 4,122 6,645 3,902,886

203,928

197,823

2,647,990

111,292

3,161,033 5,457 539,700 3,706,190

12 2 32 (190) -

12 2 24 2,962 -

77

65 3 52 (16,732)

7 1 13 1,074 -

96 8 121 3,846 (16,732)

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 35 Fair value financial assets and liabilities The fair value of the financial assets and financial liabilities of the Bank approximated to their carrying value as at balance sheet date, except for the following: 2007

RM'000 Carrying value

RM'000 Fair value

Financial Assets Financing, advances and other loans

1,734,155

1,655,010

Financial Liabilities Deposits from customers

3,708,613

3,710,398

RM'000 Carrying value

RM'000 Fair value

90,600 1,227,293 1,317,893

90,513 1,351,709 1,442,222

2,823,420

2,711,591

2006 Financial Assets Held-to-maturity securities Financing, advances and other loans

Financial Liabilities Deposits from customers

Financial instruments comprise financial assets, financial liabilities and also off balance sheet financial instruments. The fair value of a financial instrument is the amount at which the instruments could be exchanged or settled between knowledgeable and willing parties in an arm’s length transaction. The information presented herein represents estimates of fair values as at balance sheet date. Quoted market prices, when available, are used as the measure of fair values. For financial instruments, without quoted market prices, fair values are estimated using net present value or other valuation techniques. These techniques involve a certain degree of uncertainty depending on the assumptions used and judgements made regarding risk characteristics of various financial instruments, discounts rates, estimates of future cash flows, future expected loss experience and other factors. Changes in these assumptions could materially affect these estimates and the resulting fair value.

Fair value information for non financial assets and liabilities are excluded as they do not fall within the scope of FRS 132 which requires fair values to be disclosed. This includes property, plant and equipment, statutory deposits with Bank Negara Malaysia, deferred tax and intangible assets. The derivative financial instruments become favourable (assets) or unfavourable (liabilities) as a result of fluctuation in market interest rates or foreign exchange rates relative to their terms. The extent to which instruments are favourable or unfavourable and the aggregate fair values of derivative financial assets and liabilities can fluctuate significantly from time to time.

78

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 35 Fair value financial assets and liabilities (continued) The fair value estimates were determined by application of the methodologies and assumptions described below. Short-term-funds and placements with banks and other financial institutions For short-term-funds and placements with banks and other financial institutions with maturity of less than six months, the carrying amount is a reasonable estimate of fair value. For amounts with maturities of six months or more, fair values have been estimated by reference to current rates at which similar deposits and placements would be made with similar credit ratings and maturities. Available-for-sale and held-to-maturity securities The fair value of available-for-sale and held-to-maturity securities are reasonable estimates based on quoted market prices. In the absence of such quoted prices, the fair values are based on indicative market yields or the asset book value of the invested company. Financing, advances and other loans For performing fixed rate financing, fair values have been estimated by discounting the estimated cash flows using the prevailing market rates of financing and advances with similar credit ratings and maturities. For floating-rate financing, the carrying amount is generally a reasonable estimate of fair value. The fair value of impaired financing, fixed or floating are based on the carrying value less specific allowance and general allowance for bad and doubtful financing which cover unidentified losses inherent to the loan portfolio, being the expected recoverable amount. Deposits from customers, banks and other financial institutions and bills and acceptances payable. The fair value of demand deposits is the amounts payable on demand at the reporting date. For other liabilities with maturities of less than 6 months, the carrying amount is a reasonable estimate of fair value. For liabilities with maturities of 6 months or longer, fair values have been based on quoted market prices, where such prices exist. Otherwise, fair values are estimated using discounted cash flows based on rates currently offered for similar liabilities of similar remaining maturities. The estimated fair value of deposits with no stated maturity, which include non-hibah/profit bearing deposits, approximates carrying amount which represents the amount repayable on demand.

36 Approval of financial statements The financial statements have been approved for issue in accordance with a resolution of the Board of Directors on 29 February 2008.

79

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Statement by Directors Pursuant to Section 169(15) of the Companies Act, 1965 We, JEN (B) TAN SRI DATO' SERI ISMAIL BIN HAJI OMAR and KAMARUL ARIFFIN BIN MOHD JAMIL, two of the Directors of AFFIN ISLAMIC BANK BERHAD, state that, in the opinion of the Directors, the accompanying financial statements set out on pages 18 to 79 are drawn up so as to give a true and fair view of the state of affairs of the Bank as at 31 December 2007 and of the results and cash flows of the Bank in accordance with the provisions of the Companies Act, 1965, the MASB Approved Accounting Standards for Entities Other Than Private Entities and Bank Negara Malaysia Guidelines. Signed on behalf of the Board of Directors in accordance with their resolution dated 29 February 2008.

JEN (B) TAN SRI DATO' SERI ISMAIL BIN HAJI OMAR Chairman

KAMARUL ARIFFIN BIN MOHD JAMIL Chief Executive Officer

Statutory Declaration Pursuant to Section 169(16) of the Companies Act, 1965 I, EE KOK SIN, the officer of AFFIN ISLAMIC BANK BERHAD primarily responsible for the financial management of the Bank, do solemnly and sincerely declare that in my opinion, the accompanying financial statements set out on pages 18 to 79 are correct and I make this solemn declaration conscientiously believing the same to be true and by virtue of the provisions of the Statutory Declarations Act, 1960.

EE KOK SIN Subscribed and solemnly declared by the abovenamed EE KOK SIN at Kuala Lumpur in Malaysia on 29 February 2008, before me.

AHMAD BIN LAYA No. W259 Commissioner for Oaths

80

Company No: 709506-V

REPORT OF THE AUDITORS TO THE MEMBERS OF AFFIN ISLAMIC BANK BERHAD (Incorporated in Malaysia) We have audited the financial statements set out on pages 18 to 79. These financial statements are the responsibility of the Bank's Directors. It is our responsibility to form an independent opinion, based on our audit, on these financial statements and to report our opinion to you, as a body, in accordance with Section 174 of the Companies Act, 1965 and for no other purpose. We do not assume responsibility to any other person for the content of this report. We conducted our audit in accordance with approved auditing standards in Malaysia. 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 the Directors, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. In our opinion: (a) the financial statements have been prepared in accordance with the provisions of the Companies Act, 1965, MASB Approved Accounting Standards for Entities Other Than Private Entities and Bank Negara Malaysia Guidelines so as to give a true and fair view of: (i) the matters required by Section 169 of the Companies Act, 1965 to be dealt with in the financial statements; and (ii) the state of affairs of the Bank as at 31 December 2007 and of the results and cash flows of the Bank for the financial year ended on that date; and (b) the accounting and other records and the registers required by the Act to be kept by the Bank have been properly kept in accordance with the provisions of the Act.

PRICEWATERHOUSECOOPERS (No. AF : 1146) Chartered Accountants

MOHAMMAD FAIZ BIN MOHAMMAD AZMI (No. 2025/03/08 (J)) Partner of the firm

Kuala Lumpur, Malaysia 29 February 2008

81

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Shariah Committee's Report

We, Dr. Hailani Muji Tahir and Dr. Md. Khalil Ruslan, two of the members of the Shariah Committee of Affin Islamic Bank Berhad, do hereby confirm on behalf of the Shariah Committee, that in our opinion, the operation of the Bank for the financial year ended 31 December 2007 have been conducted in conformity with the Shariah principles.

On behalf of the Shariah Committee,

Dr. Hailani Muji Tahir

Dr. Md. Khalil Ruslan

Kuala Lumpur, Malaysia 29 February 2008

82



Deskripsi

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Reports and financial statements for the financial year ended 31 December 2007

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Reports and financial statements for the financial year ended 31 December 2007

Contents Directors' Report

Pages

1-17

Balance Sheet

18

Income Statement

19

Statements of Changes in Equity

20

Cash Flow Statements

21-22

Notes to the Financial Statements

23-79

Statement by Directors

80

Statutory Declaration

80

Report of the Auditors

81

Shariah Committee's Report

82

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

CORPORATE INFORMATION

BOARD OF DIRECTORS Jen (B) Tan Sri Dato' Seri Ismail bin Haji Omar Dato' Sri Abdul Hamidy bin Abdul Hafiz Tan Sri Dato' Lodin bin Wok Kamaruddin Laksamana Madya (B) Dato' Seri Ahmad Ramli bin Mohd Nor Dato' Seri Mohamed Jawhar En. Mohd Suffian bin Haji Haron En. Zulkiflee Abbas bin Abdul Hamid En. Kamarul Ariffin bin Mohd Jamil

SECRETARY Nimma Safira Khalid

REGISTERED OFFICE 17th Floor, Menara Affin 80, Jalan Raja Chulan 50200 Kuala Lumpur Malaysia

AUDITORS PricewaterhouseCoopers

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

DIRECTOR' REPORT for the financial year ended 31 December 2007 The Directors hereby submit their report together with the audited financial statements of the Bank for the financial year ended 31 December 2007.

PRINCIPAL ACTIVITIES The principal activities of the Bank are Islamic banking business and in the provision of related financial services. There were no significant changes in these activities during the financial year.

RESULTS RM'000 Profit before zakat and taxation Zakat Taxation Net profit for the financial year

57,885 (2,240) (16,205) 39,440

DIVIDEND No dividends has been paid by the Bank in respect of the financial period ended 31 December 2007. The Directors do not recommend the payment of any dividend in respect of the current financial year.

RESERVES AND PROVISIONS There were no material transfers to or from reserves or provisions during the financial year other than those disclosed in the financial statements.

BAD AND DOUBTFUL FINANCING Before the financial statements of the Bank were made out, the Directors took reasonable steps to ascertain that actions had been taken in relation to the writing off of bad financing and the making of allowances for doubtful financing, and have satisfied themselves that all known bad financing had been written off and adequate allowances had been made for bad and doubtful financing. At the date of this report, the Directors are not aware of any circumstances which would render the amount written off for bad financing, or the amount of the allowance for doubtful financing in the financial statements of the Bank, inadequate to any substantial extent.

1

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

DIRECTOR' REPORT for the financial year ended 31 December 2007 (continued) CURRENT ASSETS Before the income statement and balance sheet of the Bank were made out, the Directors took reasonable steps to ascertain that any current assets, other than financing, which were unlikely to be realised in the ordinary course of business, their values as shown in the accounting records of the Bank have been written down to their estimated realisable value. At the date of this report, the Directors are not aware of any circumstances which would render the values attributed to the current assets in the financial statements of the Bank misleading.

VALUATION METHODS At the date of this report, the Directors are not aware of any circumstances which have arisen which render adherence to the existing methods of valuation of assets or liabilities in the Bank's accounts misleading or inappropriate.

CONTINGENT AND OTHER LIABILITIES At the date of this report there does not exist: (a) any charge on the assets of the Bank which has arisen since the end of the financial year which secures the liabilities of any other person; or (b) any contingent liability in respect of the Bank that has arisen since the end of the financial year. No contingent or other liability of the Bank has become enforceable, or is likely to become enforceable within the period of twelve months after the end of the financial period which, in the opinion of the Directors, will or may substantially affect the ability of the Bank to meet its obligations as and when they fall due.

CHANGE OF CIRCUMSTANCES At the date of this report, the Directors are not aware of any circumstances, not otherwise dealt with in this report or the financial statements of the Bank, that would render any amount stated in the financial statements misleading.

2

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

DIRECTOR' REPORT for the financial year ended 31 December 2007 (continued) ITEMS OF AN UNUSUAL NATURE The results of the operations of the Bank during the financial year were not, in the opinion of the Directors, substantially affected by any item, transaction or event of a material and unusual nature. There has not arisen in the interval between the end of the financial year and the date of this report any item, transaction or event of a material and unusual nature likely, in the opinion of the Directors, to affect substantially the results of the operations of the Bank for the current financial year in which this report is made.

SUBSEQUENT EVENTS There were no material events subsequent to the balance sheet date that require disclosure or adjustments to the financial statements.

3

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

DIRECTOR' REPORT for the financial year ended 31 December 2007 (continued) DIRECTORS The Directors of the Bank who have held office during the period since the date of the last report are: Jen (B) Tan Sri Dato' Seri Ismail bin Haji Omar Non-Independent Non-Executive Chairman En. Kamarul Ariffin bin Mohd Jamil Chief Executive Officer Non-Independent Executive Director Tan Sri Dato' Lodin bin Wok Kamaruddin Non-Independent Non-Executive Director Laksamana Madya (B) Dato' Seri Ahmad Ramli bin Mohd Nor Non-Independent Non-Executive Director Dato' Seri Mohamed Jawhar Independent Non-Executive Director En. Mohd Suffian bin Haji Haron Independent Non-Executive Director Dato' Sri Abdul Hamidy bin Abdul Hafiz Non-Independent Non-Executive Director En. Zulkiflee Abbas bin Abdul Hamid Non-Independent Non-Executive Director

4

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

DIRECTOR' REPORT for the financial year ended 31 December 2007 (continued) DIRECTORS' INTERESTS According to the register of Directors' shareholdings, the interest of Directors in office at end of the financial year in shares, warrants and options of related corporations are as follows:

As at 1.1.2007 Affin Holdings Berhad Tan Sri Dato' Lodin bin Wok Kamaruddin

Ordinary shares of RM1 each As at Sold 31.12.2007

Bought

8,714 *

-

-

8,714

Boustead Heavy Industries Corporation Berhad Tan Sri Dato' Lodin bin Wok Kamaruddin

-

2,000,000

-

2,000,000

Boustead Petroleum Sdn Bhd Tan Sri Dato' Lodin bin Wok Kamaruddin

-

5,466,465

-

5,466,465

Al-Hadharah Boustead REIT Tan Sri Dato' Lodin bin Wok Kamaruddin

-

200,000

-

200,000

* Shares held in trust by nominee company

As at 1.1.2007 Affin Holdings Berhad Tan Sri Dato' Lodin bin Wok Kamaruddin

1,500

Number of warrants 2000/2010 As at Sold 31.12.2007

Bought -

-

1,500

Each warrant of the holding company ('Affin Warrants 2000/2005') entitles the registered holder to subscribe one new ordinary share of RM1.00 each in Affin Holdings Berhad at any time from the date of issue of 8 July 2000 at the exercise price of RM3.10 per share. The original exercise period of the Affin Warrants 2000/2005 was to expire on 7 July 2005. During the financial year 2005, the Affin Warrants 2000/2005 was extended for another five years and will expire on 7 July 2010 ('Affin Warrants 2000/2010').

5

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

DIRECTOR' REPORT for the financial year ended 31 December 2007 (continued) DIRECTORS' INTERESTS (continued) Options over ordinary shares of RM1 each As at Granted Exercised 31.12.2007

As at 1.1.2007 Affin Holdings Berhad Tan Sri Dato' Lodin bin Wok Kamaruddin Dato' Sri Abdul Hamidy bin Abdul Hafiz En. Kamarul Ariffin bin Mohd Jamil En. Zulkiflee Abbas bin Abdul Hamid Boustead Petroleum Sdn Bhd Tan Sri Dato' Lodin bin Wok Kamaruddin

800,000 **

-

-

800,000

400,000 ** 180,000 ** 180,000 **

-

400,000 180,000 180,000

-

4,137,500

-

-

4,137,500 #

** This option was granted by the holding company, Affin Holdings Berhad under its Employees' Share Option Scheme at the option price of RM 1.41 per share and has expired on 13 February 2008.

#

This is the 2-year option (extended period) granted by Boustead Holdings Berhad ('BHB') to acquire exixting ordinary shares of RM1.00 each up to five percent (5%) of the enlarged issued and paid-up capital of Boustead Petroleum Sdn Bhd from BHB at RM1.149 per share. The option was exercised in full on 26 December 2007.

As at 1.1.2007 ABB Trustee Berhad *** Jen (B) Tan Sri Dato' Seri Ismail bin Haji Omar Laksamana Madya (B) Dato' Seri Ahmad Ramli bin Mohd Nor

Ordinary shares of RM10 each; RM5 uncalled As at Bought Transfer 31.12.2007

20,000

-

-

20,000

20,000

-

-

20,000

*** Shares held in trust for the Bank

6

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

DIRECTOR' REPORT for the financial year ended 31 December 2007 (continued) DIRECTORS' INTERESTS (continued)

As at 1.1.2007 Boustead Holdings Berhad Tan Sri Dato' Lodin bin Wok Kamaruddin 10,492,800

Bought 24,000,000

Ordinary shares of 50 sen each As at Sold 31.12.2007 12,797,800

21,695,000

Other than the above, the Directors in office at the end of the financial year did not have any other interest in shares, warrants and options over shares in the Bank or its related corporations during the financial year.

As at 1.1.2007 Boustead Holdings Berhad Tan Sri Dato' Lodin bin Wok Kamaruddin

*

-

Options over ordinary shares of 50 sen each As at Granted Exercised 31.12.2007 29,912,699 * 24,000,000

5,912,699

This is an option granted by Lembaga Tabung Angkatan Tentera ('LTAT') to acquire 29,912,699 Boustead Holdings Berhad shares from LTAT at RM1.70 per share, expiring on 14 November 2008.

DIRECTORS' BENEFITS Neither at the end of the financial period, nor at any time during the financial year, did there subsist any arrangement to which the Bank is a party with the object or objects of enabling Directors of the Bank to acquire benefits by means of the acquisition of shares in, or debenture of, the Bank or any other body corporate. Since the date of incorporation, no Director of the Bank has received or become entitled to receive a benefit (other than the fees and other emoluments shown in the Note 25 to the financial statements) by reason of a contract made by the Bank or a related corporation with the Director or with a firm of which he is a member or with a company in which he has a substantial financial interest except that certain Directors received remuneration as directors/executives of related corporations, share options granted to Directors of the Bank pursuant to the holding company's Employee Share Option Scheme and share options granted by the ultimate holding corporate body and Boustead Holdings Berhad.

7

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

DIRECTOR' REPORT for the financial year ended 31 December 2007 (continued) RATING BY EXTERNAL RATING AGENCIES The Bank was not rated by any external rating agencies during the financial year.

BUSINESS PLAN AND STRATEGY FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2007 AND FUTURE OUTLOOK Affin Islamic Bank Berhad (AFFIN ISLAMIC) has recorded commendable performance since its started its operations in April 2006. Pretax profit for the financial year ended 2006 was at RM50.1 million, while for financial year ended 2007 the pretax profit stood at RM57.9 million. As at end 2007, total financing grew 41% against the previous year coming from both business and consumer banking. In tandem with the higher financing base, total assets rose by 60% to stand RM6.2 billion as at end Year 2007. In line with the bank’s business strategy, total customer deposits posted a strong growth of 106%, registering at RM5.5 billion as at end 2007. For Year 2008, Affin Islamic plans to implement a range of new strategies that includes developing new innovative products and structures, moving into new territories, developing human capital talents and fostering strategic relationship. The approval from Bank Negara Malaysia to allow Affin Islamic to establish its own International Currencies Business Unit in November 2007 was also timely and augur well with the Bank’s business plan and strategy. As a wholly owned subsidiary of Affin Bank, Affin Islamic will continue to leverage on the parent bank’s infrastructure including the over 80 branches across the country for better cost efficiency purposes. As a full fledged Islamic bank, customers of Affin Islamic are assured that all banking transactions are free from the elements of interests (riba), uncertainty (gharar), gambling (maisir) and other un-Islamic fundamentals as these are monitored by the Bank’s Shariah Department and supervised by the Shariah Committee.

8

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

DIRECTOR' REPORT for the financial year ended 31 December 2007 (continued) CORPORATE GOVERNANCE The Board of Directors is committed to ensure the highest standards of corporate governance throughout the organisation with the objectives of safeguarding the interests of all stakeholders and enhancing the shareholders' value and financial performance of the Bank. The Board considers that it has applied the Best Practices as set out in the Malaysian Code of Corporate Governance throughout the financial year. The Bank is also required to comply with BNM's Guidelines on Directorship in the Islamic Banks ('BNM/GP1-i'). (i) Board of Directors Responsibility and Oversight The Board of Directors The direction and control of the Bank rest firmly with the Board as it effectively assumes the overall responsibility for corporate governance, strategic direction, formulation of policies and overseeing the investments and operations of the Bank. The Board exercises independent oversight on the management and bears the overall accountability for the performance of the Bank and compliance with the principle of good governance. There is a clear division of responsibility between the Chairman and the Chief Executive Officer to ensure that there is a balance of power and authority. The Board is responsible for reviewing and approving the longer-term strategic plans of the Bank as well as the business strategies. It is also responsible for identifying the principal risks and implementation of appropriate systems to manage those risks as well as reviewing the adequacy and integrity of the Bank's internal control systems, management information systems, including systems for compliance with applicable laws, regulations and guidelines. Whilst, the Management Committee, headed by the Chief Executive Officer, is responsible for the implementation of the strategies and internal control as well as monitoring performance. The Committee is also a forum to deliberate issues pertaining to the Bank's business, strategic initiatives, risk management, manpower development, supporting technology platform and business processes.

The Board Meetings Throughout the financial year, 12 Board meetings were held. All Directors have complied with the minimum number of attendances for Board meetings as stipulated by Bank Negara Malaysia. All Directors review Board papers or reports providing updates on operational, financial and corporate developments prior to the Board meetings. These papers and reports are circulated prior to the meeting to enable the Directors to obtain further explanations and having sufficient time to deliberate on the issues and make decisions during the meeting.

9

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

DIRECTOR' REPORT for the financial year ended 31 December 2007 (continued) CORPORATE GOVERNANCE (continued) (i) Board of Directors Responsibility and Oversight (continued) Board Balance Currently the Board has 8 members, comprising 5 Non-Independent Non-Executive Directors (including the Chairman), 2 Independent Non-Executive Directors and 1 Non-Independent Executive Director. The Board of Directors Meeting are presided by Non-Independent Non-Executive Chairman whose role is clearly separated from the role of Chief Executive Officer. The composition of the Board and the number of meetings attended by each Director are as follows: Total Meetings Attended

Name of Directors 1.

Jen (B) Tan Sri Dato' Seri Ismail bin Haji Omar Non-Independent Non-Executive Chairman

12 out of 12

2.

En. Kamarul Ariffin bin Mohd Jamil Chief Executive Officer Non-Independent Executive Director

12 out of 12

3.

Tan Sri Dato' Lodin bin Wok Kamaruddin Non-Independent Non-Executive Director

11 out of 12

4.

Laksamana Madya (B) Dato' Seri Ahmad Ramli bin Mohd Nor Non-Independent Non-Executive Director

12 out of 12

5.

Dato' Seri Mohamed Jawhar Independent Non-Executive Director

10 out of 12

6.

En. Mohd Suffian bin Haji Haron Independent Non-Executive Director

12 out of 12

7.

Dato' Sri Abdul Hamidy bin Abdul Hafiz Non-Independent Non-Executive Director

11 out of 12

8.

En. Zulkiflee Abbas bin Abdul Hamid Non-Independent Non-Executive Director

11 out of 12

10

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

DIRECTOR' REPORT for the financial year ended 31 December 2007 (continued) CORPORATE GOVERNANCE (continued) (i) Board of Directors Responsibility and Oversight (continued) Board Committees The Board is assisted by four committees with specific terms of reference. This enables the committees to focus on areas or issues of critical importance to the operations of Bank. Compositions, functions and terms of reference of these Committees are highlighted below: (i)

Nomination Committee The Nomination Committee was established to provide a formal and transparent procedure for the appointment of Directors and Chief Executive Officer. The Committee also assesses the effectiveness of the Board as a whole, contribution of each director, contribution of the board's various committees and the performance of Chief Executive Officer and key senior management officers. There was 1 meeting held during the financial year ended 31 December 2007. The Nomination Committee comprises the following members: Total Meetings Attended Composition of the Nomination Committee 1. En. Mohd Suffian bin Haji Haron Chairman/Independent Non-Executive Director

1 out of 1

2. Dato' Sri Abdul Hamidy bin Abdul Hafiz Non-Independent Non-Executive Director

Nil

3. Tan Sri Dato' Lodin bin Wok Kamaruddin Non-Independent Non-Executive Director

1 out of 1

4. Laksamana Madya (B) Dato' Seri Ahmad Ramli bin Mohd Nor Non-Independent Non-Executive Director

1 out of 1

5. Dato' Seri Mohamed Jawhar Independent Non-Executive Director

1 out of 1

(ii) Remuneration Committee The Remuneration Committee was established to evaluate and recommend to the Board the framework of remuneration and the remuneration package for Directors, Chief Executive Officer and key senior management officers. The Board is ultimately responsible for the approval of the remuneration package. The Committee is guided by the need to 'attract and retain' and at the same time link the rewards to clearly articulate corporate and individual performance parameters.

11

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

DIRECTOR' REPORT for the financial year ended 31 December 2007 (continued) CORPORATE GOVERNANCE (continued) (i) Board of Directors Responsibility and Oversight (continued) Board Committees (continued) (ii) Remuneration Committee (continued) There were 3 meetings held during the financial year ended 31 December 2007. The Remuneration Committee comprises the following members:

Composition of the Remuneration Committee

Total Meetings Attended

1. Dato' Seri Mohamed Jawhar Chairman/Independent Non-Executive Director

3 out of 3

2. Dato' Sri Abdul Hamidy bin Abdul Hafiz Non-Independent Non-Executive Director

3 out of 3

3. Tan Sri Dato' Lodin bin Wok Kamaruddin Non-Independent Non-Executive Director

3 out of 3

4. Laksamana Madya (B) Dato' Seri Ahmad Ramli bin Mohd Nor Non-Independent Non-Executive Director

3 out of 3

(iii) Board Risk Management Committee ('BRMC') The main function of BRMC is to assist the Board in its supervisory role in the management of risk in the Bank. It has responsibility for approving and reviewing the credit risk strategy, credit risk framework and credit policies of the Bank. The BRMC meetings for the Bank were jointly held with Affin Bank during the financial year ended 31 December 2007 and the meetings were attended by the following Director: Total Meetings Attended 1. En. Mohd Suffian bin Haji Haron Independent Non-Executive Director

11 out of 11

12

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

DIRECTOR' REPORT for the financial year ended 31 December 2007 (continued) CORPORATE GOVERNANCE (continued) (i) Board of Directors Responsibility and Oversight (continued) Board Committees (continued) (iv) Shariah Committee The Bank's business activities are subject to Shariah compliance and conformation by the Shariah Committee. The Shariah Committee is formed as legislated under Section 3(5)(b) of the Islamic Banking Act, 1983 and as per Guidelines on the Governance of Shariah Committee for the Islamic Financial Institutions ('BNM/GPS-i'). The duties and responsibility of the Shariah Committee are as follows: (i) To advise the Board on Shariah matters in order to ensure that the business operations of the Bank comply with the Shariah principles at all times; (ii) To endorse and validate relevant documentations of the Bank's products to ensure that the products comply with Shariah principles; and (iii) To advice the Bank on matters to be referred to the Shariah Advisory Council.

During the financial year ended 31 December 2007, a total of 10 meetings were held. The Shariah Committee comprises the following members and the details of attendance of each member at the Shariah Committee meetings held during the financial year are as follows: Total Meetings Attended

Composition of the Shariah Committee 1. Prof Madya Dr. Hailani bin Muji Tahir Chairman

10 out of 10

2. Prof Madya Dr. Md Khalil bin Ruslan Member

8 out of 10

3. Brig Jen Dato' Haji Jamil Khir bin Baharom Member

8 out of 10

13

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

DIRECTOR' REPORT for the financial year ended 31 December 2007 (continued) CORPORATE GOVERNANCE (continued) (ii) Internal Audit and Internal Control Activities Relationship with the Auditors The Bank has established appropriate relationship with both internal and external auditors in conducting the audit function of the Bank. Internal Controls The Board acknowledges its overall responsibility for maintaining a sound system of internal control to safeguard shareholders' investments, Bank's assets, and need to review the adequacy and integrity of those systems regularly. In accordance with BNM's Guidelines on Minimum Audit Standards for Internal Auditors of Financial Institutions ('BNM/GP10'), the Audit and Compliance Division ('ACD') conducts continuous reviews on auditable areas within the Bank. The continuous reviews by ACD are focused on areas of significant risks and effectiveness of internal control in accordance to the audit plan approved by the Audit and Examination Committee ('AEC'). The risk highlighted on the respective auditable areas as well as recommendation made by the ACD are addressed at AEC and Management meetings on a monthly basis. The AEC also conduct annual reviews on the adequacy of internal audit function, scope of work, resources and budget of ACD. At present, ACD consists of Operational Audit, IS Audit, Credit Review, Investigation and Compliance. Audit activities include these key components:

(a) Conduct audit on all auditable entities (Head Office, branches and subsidiaries) processes, services, products, system, etc and provide an independent assessment to the Board of Directors, AEC and Management that appropriate control environment is maintained with clear authority and responsibility with sufficient staff and resources to carry out control responsibilities. (b) Perform risk assessments to identify control risk and evaluate actions taken to provide reasonable assurance that procedures and controls exist to contain those risks. (c) Maintain strong control activities including documented processes and system incorporating adequate controls to produce accurate financial data and provide for the safeguarding of assets, and a documented review of reported results.

14

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

DIRECTOR' REPORT for the financial year ended 31 December 2007 (continued) CORPORATE GOVERNANCE (continued) (ii) Internal Audit and Internal Control Activities (continued) Internal Controls (continued) (d) Ensure effective information flows and communication, including: (i) Training and the dissemination of standards and requirements; (ii) An information system to produce and convey complete, accurate and timely data including financial data; (iii) The upward communication of trends, developments and emerging issues.

(e) Monitor controls, including procedures to verify that controls are in place and functioning, follow up on corrective action on control findings till its full resolution. Based on ACD's review, identification and assessment of risk, testing and evaluation of controls, ACD will provide an opinion on the effectiveness of internal controls maintained by each entity.

The AEC comprises members of the Bank's Board of Directors whose primary function is to assist the Board in its supervision over: (i) The reliability and integrity of accounting policies and financial reporting and disclosure practise, (ii) The provision of advice to the Board with regards to the financial statements and business risks to enable the Board to fulfill its fiduciary duties and obligations, and (iii) The establishment and maintenance of processes to ensure that they: - are in compliance with all applicable laws, regulations and company policies; and - have adequately addressed the risk relating to internal controls and system, management of inherent and business risks, and ensuring that the assets are properly managed and safeguarded.

The AEC meeting for the Bank were jointly held with Affin Bank Berhad during the financial year ended 31 December 2007 and the following Independent Non-Executive Director of the Bank sits in the meeting: Total Meetings Attended 1.

Dato' Seri Mohamed Jawhar Independent Non-Executive Director

8 out of 11

15

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

DIRECTOR' REPORT for the financial year ended 31 December 2007 (continued) CORPORATE GOVERNANCE (continued) (iii) Risk Management The Risk Management function, operating in an independent capacity, is part of the Bank's senior management structure which works closely as a team in managing risks to enhance stakeholders' value. The Risk Management function provides support to the Asset and Liability Management Committee ('ALCO') and the Board Risk Management Committee ('BRMC'). Its responsibilities extend to cover market, credit and operational risks. The risks underlying the Bank's business, including new activities and product financing programmes, are identified, quantified wherever possible and managed. The risks inherent in the financial business of the Bank are managed under the different headings: (a) Market risk (b) Credit risk (c) Liquidity risk (d) Operational risk management

Board Loan Review and Recovery Committee Board Loan Review Committee critically reviews financing and other credit facilities with higher risk implications, after due process of checking, analysis, review and recommendation by the Credit Risk Management function, and if found necessary, exercise the power to veto financing applications that have been accepted by the Management Loan Committee. The Committee is also responsible to provide review on the non-performing financing report presented by the Management.

Management Loan Committee Management Loan Committee approves complex and larger financing and workout/recovery proposals beyond the delegated authority of the concerned individual senior management personnel of the Bank. Individual Approvers For the delegated authority, a dual sign-off approval system is in place, independent of business imperatives.

16

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

DIRECTOR' REPORT for the financial year ended 31 December 2007 (continued) (iv) Management Reports Before each Board meeting, Directors are provided with a complete set of Board papers itemised in the agenda for Board's review/approval and/or notation. The Board monitors the Bank's performance by reviewing the monthly Management Report, which provides a comprehensive review and analysis of the Bank's operations and financial issues. In addition, the minutes of the Board Committees and Management Committees meetings and other issues are also tabled and considered by the Board. Procedures are in place for Directors to seek both independent professional advice at the Bank's expense and the advice and services of the Company Secretary in order to fulfil their duties and specific responsibilities.

ZAKAT OBLIGATIONS The Bank did not pay zakat on behalf of its depositors or shareholders. The Bank only pays zakat on its business.

AUDITORS The auditors, PricewaterhouseCoopers, have expressed their willingness to continue in office.

Signed on behalf of the Board of Directors in accordance with their resolution dated 29 February 2008.

Jen (B) Tan Sri Dato' Seri Ismail bin Haji Omar Chairman

Kamarul Ariffin bin Mohd Jamil Chief Executive Officer

17

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Balance Sheet as at 31 December 2007 2007 RM'000

2006 RM'000

3,532,550

2,143,941

774,250 1,734,155 135,676

381,288 90,600 1,227,293 11,361

9 10 11 12

82,300 273 1,610 6,212 6,267,026

42,000 188 2,093 4,122 3,902,886

13

3,708,613

2,823,420

14

2,078,923 32,674 207,611 3,598 6,031,419

300,450 23,690 68,137 485,036 5,457 3,706,190

160,000 75,607 235,607

160,000 36,696 196,696

6,267,026

3,902,886

3,917,054

4,052,741

Note Assets Cash and short-term funds Securities: Available-for-sale securities Held-to-maturity securities Financing, advances and other loans Other assets Statutory deposits with Bank Negara Malaysia Property, plant and equipment Intangible assets Deferred tax assets (net) Total assets

Liabilities Deposits from customers Deposits and placements of banks and other financial institutions Bills and acceptances payable Other liabilities Amount due to holding company Provision for tax Total liabilities Shareholders' equity Share capital Reserves Total shareholders' equity

4 5

6 8

15 16

17 18

Total liabilities and shareholders' equity COMMITMENTS AND CONTIGENCIES

30

18

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Income Statement for the financial year ended 31 December 2007 Period from 13.09.2005 (date of incorporation) to 31.12.2006 RM'000

Notes

2007 RM'000

19

227,404

115,096

20 21 16

11,240 (9,146) 501 229,999

8,716 (3,832) (501) 119,479

Income attributable to the depositors Total net income

22

(124,618) 105,381

(43,739) 75,740

Personnel expenses Other overheads and expenditures Profit before zakat and taxation Zakat Taxation Net profit after zakat and taxation

23 24

(5,633) (41,863) 57,885 (2,240) (16,205) 39,440

(2,161) (23,488) 50,091 (13,523) 36,568

39,440

36,568

24.7

22.9

Income derived from investment of depositors' funds and others Income derived from investment of shareholders' funds Allowance for losses on financing Transfer to profit equalisation reserve Total distributable income

26

Attributable to: Equity holders of the Bank Earnings per share - basic/fully diluted (sen)

27

19

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Statement of changes in equity for the financial year ended 31 December 2007

Non-Distributable

At 1 January 2007 Net fair value change in available-for-sale securities Deferred tax (Note 12) Income and expenses recognised directly in equity Net profit for the financial year Total recognised income and expense for financial year Transfer to statutory reserves At 31 December 2007

At 13.09.2005 Issuance of shares Net fair value change in available-for-sale securities Deferred tax (Note 12) Income and expenses recognised directly in equity Net profit for the financial year Total recognised income and expense for financial year Balance transferred from Affin Bank Berhad Transfer to statutory reserves At 31 December 2006

Distributable

Share capital RM'000

Statutory reserves RM'000

Investment fluctuation reserves RM'000

Retained profits RM'000

Total RM'000

160,000

18,284

128

18,284

196,696

-

-

(717) 188

-

-

-

(529) -

39,440

160,000

19,720 38,004

(529) (401)

39,440 (19,720) 38,004

38,911 235,607

160,000

-

-

-

160,000

-

-

495 (47)

-

-

-

448 -

36,568

448 36,568

448

36,568

37,016

(320) 128

(18,284) 18,284

(320) 196,696

-

-

160,000

18,284 18,284

20

(717) 188 (529) 39,440

495 (47)

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia) Cash Flow Statement for the financial year ended 31 December 2007

2007 RM'000

Period from 13.09.2005 (date of incorporation) to 31.12.2006 RM'000

CASH FLOWS FROM OPERATING ACTIVITIES Profit before zakat and taxation Adjustments for items not involving the movement of cash and cash equivalents: Income from available-for-sale securities Income from held-to-maturity securities Accretion of discount less amortisation of premium for available-for-sale securities Amortisation of premium less accretion of discount for held-to-maturity securities Gain on unrealised/realised foreign exchange Gain from sale of available-for-sale securities Depreciation of property, plant and equipment Amortisation of intangible asset Net specific allowance for bad and doubtful financing Charge of general allowances OPERATING PROFIT BEFORE CHANGES IN WORKING CAPITAL

(Increase)/decrease in operating assets:Deposits and placements with banks and other financial institutions Net sale on foreign exchange Financing, advances and other loans Other assets Statutory deposits with Bank Negara Malaysia

Increase/(decrease) in operating liabilities:Deposits from customers Deposits and placements of banks and other financial institutions Bills and acceptances payable Amount due to holding company Other liabilities Property, plant and equipment transferred from Affin Bank Berhad Intangible assets transferred from Affin Bank Berhad

57,885

50,091

(5,555) (2,003)

(283) (3,658)

(9,886)

(11,372)

599 (2,574) 57 483 2,399 6,600 48,005

1,085 (2,450) (54) 8 121 3,846 37,334

3,203 (515,862) (124,315) (40,300)

140,000 1,844 (123,358) (334,238) 31,000

885,194

185,790

1,778,473 (23,689) (277,425) (37,704)

278,837 (5,863) 479,247

-

21

(100) (2,213)

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia) Cash Flow Statement for the financial year ended 31 December 2007 (continued)

2007 RM'000 Cash generated from operations Tax paid NET CASH GENERATED FROM OPERATING ACTIVITIES

1,695,580 (19,966) 1,675,614

Period from 13.09.2005 (date of incorporation) to 31.12.2006 RM'000 688,280 688,280

CASH FLOWS FROM INVESTING ACTIVITIES Income received from available-for-sale securities Income received from held-to-maturity securities Purchase of property, plant and equipment Sale of available-for-sale securities net of purchase Redemption of held-to-maturity securities net of purchase NET CASH (USED IN)/GENERATED FROM INVESTING ACTIVITIES

NET INCREASE IN CASH AND CASH EQUIVALENTS NET DECREASE IN FOREIGN EXCHANGE

5,555 2,003 (142) (383,792) 90,000 (286,376)

1,389,238 (629)

CASH AND CASH EQUIVALENTS AT BEGINNING OF THE FINANCIAL YEAR CASH AND CASH EQUIVALENTS VESTED OVER FROM AFFIN BANK BERHAD CASH AND CASH EQUIVALENTS AT END OF THE FINANCIAL YEAR ANALYSIS OF CASH AND CASH EQUIVALENTS Cash and short-term funds (Note 4)

22

2,143,941

283 3,658 (96) 88,305 92,150

780,430 606 -

-

1,362,905

3,532,550

2,143,941

3,532,550

2,143,941

Company No:709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

NOTES TO THE FINANCIAL STATEMENTS for the financial year ended 31 December 2007 1

GENERAL INFORMATION The Bank, a wholly-owned subsidiary of Affin Bank Berhad, was incorporated on 13 September 2005 and commenced operation on 1 April 2006. The net assets of Affin Bank's Islamic Division was transferred to Affin Islamic Bank on 1 April 2006. The Bank is principally engaged in all aspects of Islamic banking and finance business and in the provision of related financial services in accordance with the Shariah principles. The number of employees in the Bank at the end of financial year was 105 (2006: 56) employees. The holding company of the Bank is Affin Bank Berhad. The penultimate holding company is Affin Holdings Berhad and ultimate holding corporate body is Lembaga Tabung Angkatan Tentera, a statutory body incorporated under the Tabung Angkatan Tentera Act, 1973. The Bank is a limited liability company, incorporated and domiciled in Malaysia.

2

BASIS OF PREPARATION The financial statements of the Bank have been prepared with the Malaysian Accounting Standards Board ('MASB') Approved Accounting Standards for Entities Other Than Private Entities, Bank Negara Malaysia ('BNM') Guidelines, Shariah requirements and the provisions of the Companies Act, 1965. The Bank has adopted the revised Guidelines on Financial Reporting for Licensed Islamic Banks ('BNM/GP8-i') issued by BNM in June 2005. The financial statements of the Bank have been prepared under the historical cost convention, unless otherwise indicated in this summary of significant accounting policies. The preparation of financial statements in conformity with the provisions of the Companies Act 1965, Bank Negara Malaysia Guidelines and the MASB Approved Accounting Standards for Entities Other Than Private Entities requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reported period. It also requires Directors to exercise judgement in the process of applying the Bank's accounting policies. Although these estimates are based on the Directors' best knowledge of current events and actions, actual results may differ.

23

Company No:709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

NOTES TO THE FINANCIAL STATEMENTS for the financial year ended 31 December 2007 (continued) 2

BASIS OF PREPARATION (continued) The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 3(Q). (a) Standards and amendments to the published standards that are applicable and effective to the Bank The new accounting standards and amendments to published standards effective for the Bank’s financial periods beginning 1 January 2007 are as follows: - FRS 124 Related Party Disclosures The Bank has also adopted the following Technical Release effective for the Group’s financial period ended 31 December 2007: - TR i – 1 Accounting for Zakat on Business All changes in the accounting policies have been made in accordance with the transitional provision in the respective standards. There was no significant impact arising from the adoption of FRS 124 Related Party Disclosures and TR i-1 Accounting for Zakat on Business on the financial statements of the Bank. (b) Standards, amendments and interpretations to the existing standards that are effective in 2007 but not relevant to the Bank The following standards, amendments and interpretations to published standards are mandatory for accounting periods beginning on or after 1 January 2007 but they are not relevant to the Bank’s operations: - FRS 117 Leases (effective for accounting periods beginning on or after 1 October 2006). This standard requires the classification of leasehold land as prepaid lease payments. FRS 117 is not relevant to the Bank as the Bank do not have any leasehold land and buildings. - FRS 6 Exploration for and Evaluation of Mineral Resources (effective for accounting periods beginning on or after 1 January 2007). This standard is not relevant to the Bank’s operations as the Bank does not carry out exploration for and evaluation of mineral resources. - Amendment to FRS 119 Employee Benefits – Actuarial Gains and Losses, Group Plans and Disclosures (effective for accounting periods beginning on or after 1 January 2007). This amendment introduces the option of an alternative recognition approach for actuarial gains and losses. It may impose additional recognition requirements for multi-employer plans where insufficient information is available to apply defined benefit accounting. It also adds new disclosure requirements. The amendment to FRS 119 has no impact to the financial statements of the Bank as the Bank do not have any defined benefit plans for its employees other than termination benefits. 24

Company No:709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

NOTES TO THE FINANCIAL STATEMENTS for the financial year ended 31 December 2007 (continued) 2

BASIS OF PREPARATION (continued) (c) Standards, amendments to the published standards and interpretations to existing standards that are not yet effective and have not been early adopted The new standards, amendments to published standards and interpretations that are mandatory for the Bank’s financial period beginning on or after 1 January 2008 or later periods, but which the Bank has not early adopted, is as follows: - Amendment to FRS 121 The Effects of Changes in Foreign Exchange Rates – Net Investment in a Foreign Operations (effective for accounting periods beginning on or after 1 July 2007). This amendment requires exchange differences on monetary items that form part of the net investment in a foreign operation to be recognised in equity instead of in profit or loss regardless of the currency in which these items are denominated in. This amendment has no impact to the financial statements of the Bank as the Bank does not have investment in foreign operations. - FRS 112 Income Taxes (effective for accounting period beginning on or after 1 July 2007). This revised standard removes the requirements that prohibit recognition of deferred tax on unutilised reinvestment allowances or other allowances in excess of capital allowances. The Bank will apply this standard from financial periods beginning on 1 January 2008. - FRS 139 Financial Instruments: Recognition and Measurement (effective date yet to be determined by the Malaysian Accounting Standards Board). This new standard establishes principles for recognising and measuring financial assets, financial liabilities and some contracts to buy and sell non-financial items. Hedge accounting is permitted only under strict circumstances. The Bank will apply this standard when effective. The Bank has applied the transitional provision in FRS 139, which exempts entities from disclosing the possible impact arising from the initial application of this standard on the financial statements of the Bank. - Other revised standards (effective for accounting periods beginning on or after 1 July 2007) that have no significant changes compared to the original standards: - FRS 107 Cash Flow Statements - FRS 118 Revenue - FRS 137 Provisions, Contingent Liabilities and Contingent Assets The Bank will apply these standards from financial periods beginning on 1 January 2008. The adoption of these standards and amendmends will not have any significant impact on the results of the Bank.

25

Company No:709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

NOTES TO THE FINANCIAL STATEMENTS for the financial year ended 31 December 2007 (continued) 2

BASIS OF PREPARATION (continued) (d) Standards, amendments to the published standards and interpretations to existing standards that are not yet effective and not relevant to the Bank's operations The following interpretations to existing standards have been published and are mandatory for the Bank’s financial period beginning on or after 1 January 2008 or later periods, but are not relevant for the Bank’s operations: - IC Interpretation 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities (effective for accounting periods beginning on or after 1 July 2007). This interpretation deals with changes in the estimated timing or amount of the outflow of resources required to settle the obligation or a change in the discount rate. - IC Interpretation 2 Members’ Shares in Co-operative Entities and Similar Instruments (effective for accounting periods beginning on or after 1 July 2007). This interpretation deals with liability or equity classification of financial instruments, which give the holder the right to request redemption, but subject to limits on whether it will be redeemed. - IC Interpretation 5 Rights to Interests arising from Decommission, Restoration and Environmental Rehabilitation Funds (effective for accounting periods beginning on or after 1 July 2007). This interpretation deals with accounting by a contributor for its interests arising from decommissioning funds. - IC Interpretation 6 Liabilities arising from Participating in a Specific Market – Waste Electrical and Electronic Equipment (effective for accounting periods beginning on or after 1 July 2007). This interpretation provides guidance on the recognition, in the financial statements of the producers, of liabilities for waste Management under the European Union Directive in respect of sales of historical household equipment. - IC Interpretation 7 Applying the Restatement Approach under FRS 129 Financial Reporting in Hyperinflationary Economies (effective for accounting periods beginning on or after 1 July 2007). This interpretation provides guidance on how to apply the requirements of FRS 129 in a reporting period in which an entity identifies the existence of hyperinflationary in the economy of its functional currency, when that economy was not hyperinflationary in the prior period. - IC Interpretation 8 Scope of FRS 2 (effective for accounting periods beginning on or after 1 July 2007). This interpretation clarifies that FRS 2 Share-based Payment applies even in the absence of specifically identifiable goods and services.

26

Company No:709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

NOTES TO THE FINANCIAL STATEMENTS for the financial year ended 31 December 2007 (continued) 3

SIGNIFICANT ACCOUNTING POLICIES

(A) Intangible assets Computer software Acquired computer software are capitalised on the basis of the cost incurred to acquire and bring to use the specific software. These costs are amortised over their estimated useful lives (five years). Computer software classified as intangible asset are stated at cost less accumulated amortisation and accumulated impairment losses, if any. Costs associated with developing or maintaining computer software programmes are recognised as an expense when incurred. Costs that are directly associated with identifiable and unique software products controlled by the Bank, and that will probably generate economic benefits exceeding costs beyond one year, are recognised as intangible assets.

(B) Impairment of non-financial assets Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non financial assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date. The impairment loss is charged to the income statement unless it reverses a previous revaluation in which case it is charged to the revaluation surplus. Any subsequent increase in recoverable amount is recognized in the income statement unless it reverses an impairment loss on a revalued asset in which case it is taken to revaluation surplus.

27

Company No:709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

NOTES TO THE FINANCIAL STATEMENTS for the financial year ended 31 December 2007 (continued) 3

SIGNIFICANT ACCOUNTING POLICIES (continued)

(C) Securities portfolio The Bank classify securities portfolio into held-for-trading securities, available-for-sale securities and held-to-maturity securities. Classification of the securities is determined at initial recognition. Securities are initially recognised at fair value. Securities are derecognised when the rights to receive cash flows from the securities have expired or where the Bank has transferred substantially all risks and rewards of ownership. Subsequent measurement for each type of securities is as follows: (a) Held-for-trading securities Securities are classified as held-for-trading if it is acquired or incurred principally for the purpose of selling or repurchasing it in the near term or it is part of a portfolio of identified securities that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking. Held-for-trading securities are stated at fair value. Any unrealised gain or loss arising from the change in fair value or arising from sale of such securities are recognised in the income statement. (b) Available-for-sale securities Available-for-sale securities are non-derivative financial assets that are either designated in this category or not classified as held-for-trading or held-to-maturity investments. These securities are initially recognised at fair value. Investments in equity instruments where there is no quoted market price in an active market and whose fair value cannot be reliably measured, will be stated at cost. Any gains or losses arising from the change in fair value adjustments are recognised directly in equity through the statement of changes in equity except for impairment losses and foreign exchange gains or losses. When the financial asset is derecognised, the cumulative gains or loss previously in equity shall be transferred to the income statement. Impairment of available-for-sale securities is assessed when there is an objective evidence of impairment. Cumulative unrealised losses that had been recognised directly in equity shall be removed and recognised in income statement even though the securities has not been derecognised. Impairment loss in addition to the above unrealised losses is also recognised in the income statement. Subsequent reversal of impairment on debt instrument in the income statement is allowed when the decrease in impairment can be related objectively to an event accruing after the impairment was recognised. Impairment losses recognised in income statement for an investment in an equity instrument shall not be reversed. 28

Company No:709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

NOTES TO THE FINANCIAL STATEMENTS for the financial year ended 31 December 2007 (continued) 3

SIGNIFICANT ACCOUNTING POLICIES (continued)

(C) Securities portfolio (continued) (c) Held-to-maturity securities Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity that the Bank has the positive intention and ability to hold to maturity, as well as those instruments allowed by BNM. In accordance with Guidelines on Financial Reporting for Lisensed Islamic Banks ('BNM/GP8-i') issued by the BNM on June 2005, the following instruments may be classified as held-to-maturity investments and measured at cost: (i) equity securities held as investment in organisations which are set up for socio-economic reason; and (ii) equity instruments received as a result of financing restructuring or financing conversion, where there is no quoted market price in an active market and whose fair value cannot be reliably measured. Held-to-maturity securities are measured at amortised cost using the effective profit method. Gains or losses are recognised in income statement when the securities are derecognised or impaired and through the amortisation process. Any sale or reclassification of more than insignificant amount of held-to-maturity securities before maturity during the current financial year or last two preceding financial years will “taint” the entire category and result in the remaining held-to-maturity securities being reclassified to available-for-sale. However, the “tainting” rules will not apply under the conditions stated in the BNM/GP8-i’ and provided that prior approval from the Board of Directors is obtained. Impairment of held-to-maturity securities is assessed when there is an objective evidence of impairment, at the following basis: (i) Securities carried at amortised cost The impairment loss is measured as the difference between the securities' carrying amount and the present value of estimated future cash flows discounted at the Bank's original effective profit rate. Subsequent reversal of impairment is allowed in the event of an objective decrease in impairment. Recognition of impairment losses and its reversal is made through the income statement. (ii) Securities carried at cost The impairment loss is measured as the difference between the securities' carrying amount and the present value of estimated future cash flows discounted at the current market rate of return for similar securities. Such impairment losses shall not be reversed. 29

Company No:709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

NOTES TO THE FINANCIAL STATEMENTS for the financial year ended 31 December 2007 (continued) 3

SIGNIFICANT ACCOUNTING POLICIES (continued)

(D) Bills and Acceptance Payable Bills and acceptances payable represent the Bank's own bills and acceptances rediscounted and outstanding in the market.

(E) Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset's carrying amount or recognised as a separate assets, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Bank and the cost of the item can be measured reliably. The carrying amount of the placed part is derecognised. All the repairs and maintenance are charged to the income statement during the financial period in which they are incurred. Property, plant and equipment are depreciated on the straight line basis to write-off the cost of the assets, to their residual values over their estimated useful lives summarised as follows: Office equipment and furniture Computer equipment and software Motor vehicles

10 years 5 years 5 years

The assets' residual value and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. At each balance sheet date, the Bank assesses whether there is any indication of impairment. If such indications exist, an analysis is performed to assess whether the carrying amount of the asset is fully recoverable. A write down is made if the carrying amount exceeds the recoverable amount. Any subsequent increase in the recoverable amount is recognised in the income statement. Gains and losses on disposal are determined by comparing proceeds with carrying amount and are included in profit/(loss) from operations.

30

Company No:709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

NOTES TO THE FINANCIAL STATEMENTS for the financial year ended 31 December 2007 (continued) 3

SIGNIFICANT ACCOUNTING POLICIES (continued)

(F) Foreign currency translations (i) Functional and presentation currency Items included in the financial statements of the Bank are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The financial statements is presented in Ringgit Malaysia, which is the Bank’s functional and presentation currency.

(ii) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rate prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at yearend exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when deferred in equity as qualifying cash flow hedges and qualifying net investment hedges. Changes in the fair value of monetary securities denominated in foreign currency classified as available-for-sale are analysed between translation differences resulting from changes in the amortised cost of the security and other changes in the carrying amount of the security. Translation differences related to changes in the amortised cost are recognised in income, and other changes in the carrying amount are recognised in equity. Translation differences on non-monetary financial assets and liabilities are reported as part of the fair value gain or loss. Translation differences on non-monetary financial assets are recognised in income as part of fair value gain or loss. Translation differences on nonmonetary financial assets such as equities classified as available-for-sale are included in the fair value reserve in equity.

31

Company No:709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

NOTES TO THE FINANCIAL STATEMENTS for the financial year ended 31 December 2007 (continued) 3

SIGNIFICANT ACCOUNTING POLICIES (continued)

(G) Recognition of financing income and hibah Islamic financing income is recognised on an accrual basis in accordance with the Shariah principles and BNM/GP8-i. Al-Ijarah Thumma Al-Bai ('AITAB') financing income recognised using the "sum-of-digit" method over the lease terms, whilst Al-Bai Bithaman Ajil ('BBA'), AlMurabahah, Al-Istisna' and Bai'-Inah financing income is recognised on a monthly basis over the period of the financing contracts, based on an agreed profit at the inception of such contracts. Income accrued and recognised prior to the date the financing are classified as non-performing shall be reversed out of income by debiting the income account in the income statement and crediting the accrued income receivable account in the balance sheet. Subsequently, income earned on non-performing financing shall be recognised on a cash basis. Customers' accounts are generally classified as non-performing when repayments are in arrears for three months or more from first day of default for financing and cash line, and after three months or more from maturity date for trade bills, trust receipts, bankers' acceptances and other instruments of similar nature. Hibah from securities portfolio is recognised on an accrual basis using the effective profit method. The hibah includes coupons earned and accrued discount and amortisation of premium on these securities.

(H) Recognition of fees and other income Fees and other profit from Islamic Banking business is recognised on an accrual basis in accordance with the principles of Shariah.

(I)

Financing and related expense recognition Profit payable on deposits and borrowings are expensed as incurred. Dealers' handling fees on hire purchase are charged to income statement in the period when they are incurred in accordance with Bank Negara Malaysia circular dated 8 August 2003.

32

Company No:709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

NOTES TO THE FINANCIAL STATEMENTS for the financial year ended 31 December 2007 (continued) 3

SIGNIFICANT ACCOUNTING POLICIES (continued)

(J) Financing, advances and other loans Financing, advances and other loans are recognised when cash is advanced to the borrowers. Specific allowances are made for bad and doubtful financing based on management's evaluation of the collectibility and the status of the financing and their related underlying securities. A general allowance based on a percentage of the financing portfolio is also made to cover possible losses which are not specifically identified. An uncollectible financing or portion of a financing classified as bad is written off after taking into consideration the realisable value of collateral, if any, when in the judgement of the management, there is no prospect of recovery. The policy on allowances for losses on financing is generally more stringent than that laid down in BNM's Guidelines on Classification of Non-Performing Loans and Provision for Substandard, Bad and Doubtful Debts ('BNM/GP3').

(K) Financial Liabilities All non-trading financial liabilities are initially recognised at fair value, being the consideration received at transaction date.

33

Company No:709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

NOTES TO THE FINANCIAL STATEMENTS for the financial year ended 31 December 2007 (continued) 3

SIGNIFICANT ACCOUNTING POLICIES (continued)

(L) Taxation (i) Current tax Current tax expense is determined according to the tax laws of each jurisdiction in which the Bank operates and include all taxes based upon the taxable profits for the financial year. (ii) Deferred tax Deferred tax is recognised in full, using the liability method, on temporary differences arising between the amounts attributed to assets and liabilities for tax purposes and their carrying amounts in the financial statements. However, deferred tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred tax assets are recognised to the extent that it is probable that taxable profit will be available against which the deductible temporary differences or unused tax losses can be utilised. Deferred tax is recognised on temporary differences arising from depreciation of property, plant and equipment, intangible asset, general allowance for financing, unrealised forex revaluation, profit equalisation reserve and unused tax losses carried forward. Deferred tax related to fair value re-measurement of available-for-sale securities, which are charged or credited directly to equity and is subsequently recognised in the income statement together with the deferred gain or loss. Deferred tax is determined using tax rates (and tax laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred tax assets is realised or the deferred tax liability is settled.

34

Company No:709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

NOTES TO THE FINANCIAL STATEMENTS for the financial year ended 31 December 2007 (continued) 3

SIGNIFICANT ACCOUNTING POLICIES (continued)

(M) Zakat The Bank pays zakat based on 2.5% of prior year's net asset method, to comply with the principles of Shariah. The Bank does not pay zakat on behalf of the shareholders or depositors. The Bank made provision for zakat amounting to RM2.24 million for the financial year ended 31 December 2007.

(N) Cash and cash equivalents Cash and cash equivalents consists of cash on hand, bank balances and deposits and placements maturing within one month which are held for the purpose of meeting short term commitments and are readily convertible to cash without significant risk of changes in value.

(O) Profit Equalisation Reserve ('PER') Profit Equalisation Reserve (‘PER’) refers to the amount appropriated out of the total gross income to mitigate the undesirable fluctuation of income and to maintain a certain level of return to depositors. The amount is provided based on BNM’s circular on ‘The Framework of The Rate of Return’. PER is shared by both the depositors and the Bank and hence, can be appropriated from and written back to the total gross income in deriving the distributable income. PER is reflected under ‘Other liabilities’ on the balance sheet.

(P) Contingent liabilities and contingent assets The Bank does not recognise a contingent liability but discloses its existence in the financial statements. A contingent liability is possible obligation that arises from past events whose existence will be confirmed by the occurrence or non-occurrence of one or more uncertain future events beyond the control of the Bank or a present obligation that is not recognised because it is not probable that an outflow of resources will be required to settle the obligation. A contingent liability also arises in the extremely rare case where there is a liability that cannot be recognised because it cannot be measured reliably. A contingent asset is a possible asset that arises from past events whose existence will be confirmed by the occurrence or non-occurrence of one or more uncertain future events beyond the control of the Bank. The Bank does not recognise contingent assets but discloses its existence where inflows of economic benefits are probable, but not virtually certain.

35

Company No:709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

NOTES TO THE FINANCIAL STATEMENTS for the financial year ended 31 December 2007 (continued) 3

SIGNIFICANT ACCOUNTING POLICIES (continued)

(Q) Critical accounting estimates and judgements Critical accounting estimates and judgements The Bank makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. To enhance the information content of the estimates, certain variables that are anticipated to have material impact to the Bank’s results and financial position are tested for sensitivity to changes in the undying parameters. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year are discussed below.

(i) Allowance for losses on financing, advances and other loans The Bank makes allowance for losses based on assessment of recoverability. Whilst management's judgement is guided by the relevant BNM Guidelines, judgement is made about the future and other key factors in respect of the recovery of financing, advances and other loans. Among the factors considered are the Bank's aggregate exposure to the borrower, the net realisable value of the underlying collateral value, the viability of customer's business model and the capacity to generate sufficient cash flow to service debt obligations and the aggregate amount and ranking of all other creditor claims.

(R) Segment Reporting Segment reporting is presented for enhanced assessment of the Bank's risks and returns. A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. Segment revenue, expense, assets and liabilities are those amounts resulting from the operating activities of a segment that are directly attributable to the segment and the relevant portion that can be allocated on a reasonable basis to the segment.

36

Company No:709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

NOTES TO THE FINANCIAL STATEMENTS for the financial year ended 31 December 2007 (continued) 3

SIGNIFICANT ACCOUNTING POLICIES (continued)

(S) Financial risk management objective and policies (i) Market risk The Bank is mainly exposed to risk on rate of return or profit rate. The rate of return risk arises mainly from differences in timing between the maturities or repricing of assets and liabilities. The Bank is also exposed to basis risk, when the pricing characteristics of two instruments change at different times or by different amounts. Market risk is managed by the Market Risk Management Department, which is part of the parent Bank's Risk Management Division. The main objectives of the Market Risk Management Department are to ensure an effective implementation of market risk management by balancing the level of risk and the rate of return required. For the asset liability mismatch position in the Balance Sheet, the Bank employs a software to measure the risk. The risk is measured monthly using Net Income simulations involving various interest rate scenarios. The market risk management infrastructure in place is adequate for the Bank's present scale of operations, exposures and business range.

(ii) Credit risk Credit risk is the potential financial loss resulting from the failure of the customer or counterparty to settle the financial and contractual obligations to the Bank. Credit risk arises mainly from our financing activities. The management of credit risk in the Bank is governed by a set of credit policies approved by the Board of Directors. Approval authorities are delegated to the parent Bank's Management Loan Committee to approve large and higher risk financing in order to ensure sound credit granting standards. A credit risk grading system is implemented for corporate and business financing. The grading is based on credit worthiness of the customer, i.e. the ability to pay financing obligations based on the customer's current condition, with regard to its management capacity and its market position. The credit risk grading system is being revised to make it more robust and risk sensitive.

37

Company No:709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

NOTES TO THE FINANCIAL STATEMENTS for the financial year ended 31 December 2007 (continued) 3

SIGNIFICANT ACCOUNTING POLICIES (continued)

(S) Financial risk management objective and policies (continued) (iii) Liquidity risk Liquidity risk is the risk of loss due to failure to access funds at reasonable cost to fund the Bank's operations and meet its liabilities as and when they fall due. Liquidity risk arises from the Bank's general on-going funding activities and the management of its assets. The Board is responsible for the Bank's liquidity performance although the strategic management of liquidity has been delegated to the Asset and Liability Management Committee ('ALCO'). The Board is informed regularly of the liquidity situation in the Bank. To measure and manage net funding requirements, the Bank adopts BNM's New Liquidity Framework ('NLF'). The NLF ascertains the liquidity condition based on the contractual and behavioral cash-flow of assets, liabilities and off-balance sheet commitments, taking into consideration the realisable cash value of the eligible liquefiable assets. The Bank has been in compliance with the NLF throughout the current financial year. Liquidity risk indicators have also been instituted as an early alert of any structural change for liquidity risk management.

(iv) Operational risk management Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. Such risks may result in omission, errors and breakdowns that can potentially lead to financial loss or other indirect losses to the Bank. The Bank manages such risk through a control based environment in which policies and procedures are formulated after taking into account individual unit's business activities, the environment and market in which it is operating and any regulatory requirement in force. Risk is identified through the use of assessment tools and measured using threshold/limits mapped against risk matrix. Monitoring and control procedure include the use of key control standards, independent tracking of risk , back-up procedures and contingency plans; including disaster recovery and business continuity plans. This is supported by periodic reviews undertaken by Internal Audit to ensure adequacy and effectiveness of the Operational Risk Management process.

38

Company No:709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

NOTES TO THE FINANCIAL STATEMENTS for the financial year ended 31 December 2007 (continued) 3

SIGNIFICANT ACCOUNTING POLICIES (continued)

(S) Financial risk management objective and policies (continued) (iv) Operational risk management (continued) The Bank gathers and reports operational risk loss data and "near misses" events to the parent Bank's Operational Risk Management Committee and Board Risk Management Committee. Appropriate remedial actions are reviewed and implemented to minimise the recurrence of such risk. The Bank's Operational Risk Management Framework has been automated with the implementation of Basel II Operational Risk Management Solution. Now, all operational risk incidents (loss and near miss) reporting and risk assessments are undertaken 'live'. All manual processes have been discontinued.

39

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 4

Cash and short-term funds

Cash and bank balances with banks and other financial institutions Money at call and interbank placements with remaining maturity not exceeding one month

5

2007 RM'000

2006 RM'000

6,290

7,941

3,526,260 3,532,550

2,136,000 2,143,941

2007 RM'000

2006 RM'000

279,246 24,784 72,514 200,254 576,798

102,956 68,879 123,713 29,263 41,595 14,882 381,288

197,452 774,250

381,288

2007 RM'000

2006 RM'000

Securities (i)

Available-for-sale securities

At fair value Malaysian Government treasury bills Malaysian Government investment certificate Bank Negara Malaysia Notes Negotiable Islamic Debt Certificates Bankers' acceptances and Islamic accepted bills Khazanah bonds Bank Negara Malaysia Monetary Notes

Unquoted securities: Private debt securities in Malaysia

(ii)

Held-to-maturity securities

At amortised cost Unquoted securities: Private debt securities in Malaysia

-

40

90,600 90,600

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 6

Financing, advances and other loans (i)

By type

Cash line Term financing - House financing - Hire purchase receivables - Syndicated financing - Other term financing Bills receivables Trust receipts Claims on customers under acceptance credits Staff financing (of which RM Nil to Directors) Revolving credit

Less: Unearned income Gross financing, advances and other loans Less: Allowance for bad and doubtful financing: - General - Specific Total net financing, advances and other loans

(ii)

2007 RM'000

2006 RM'000

171,901

94,263

1,517,539 599,925 349,942 492,916 8,037 64,895

1,032,244 342,368 360,709 7,070 69,578

54,259 11,452 3,024 3,273,890

49,282 14,074 3,024 1,972,612

(1,506,080) 1,767,810

(720,664) 1,251,948

(26,485) (7,170) 1,734,155

(19,885) (4,770) 1,227,293

2007 RM'000

2006 RM'000

989,881 487,691 1,234 289,004 1,767,810

760,144 278,807 1,461 211,536 1,251,948

By contract

Bai' Bithaman Ajil (deferred payment sale) AITAB Murabahah (cost-plus) Others

41

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 6

Financing, advances and other loans (continued) (iii) By type of customer

Domestic non-bank financial institutions - Others Domestic business enterprises - Small medium enterprises - Others Government and statutory bodies Individuals Other domestic entities Foreign entities

2007 RM'000

2006 RM'000

11,259

60

362,352 193,887 35,568 1,093,088 9,398 62,258 1,767,810

211,023 173,943 51,881 756,622 28,165 30,254 1,251,948

2007 RM'000

2006 RM'000

364,417 487,691 426,416

434,428 278,807 491,366

487,705 1,322 259 1,767,810

47,347 1,251,948

(iv) By profit rate sensitivity

Fixed rate: - House financing - Hire purchase receivables - Other fixed rate financing Variable rate: - BLR - plus - Cost - plus - Other variable rate

42

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 6

Financing, advances and other loans (continued) (v)

By sector

Primary agriculture Mining and quarrying Manufacturing Electricity, gas and water Construction Real estate Wholesale & retail trade and restaurants & hotels Transport, storage and communication Finance, insurance and business services Education, health & others Household Others

43

2007 RM'000

2006 RM'000

54,848 105 148,351 283 154,278 31,599 58,839 45,894 101,210 56,267 1,102,687 13,449 1,767,810

30,568 115 116,520 1,014 28,430 1,019 59,321 41,184 9,649 90,169 768,343 105,616 1,251,948

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 6

Financing, advances and other loans (continued) (vi) By purpose

Purchase of securities Purchase of transport vehicles Purchase of landed property of which: - Residential - Non-residential Personal use Consumer durable Construction Working capital Others

7

2007 RM'000

2006 RM'000

5,405 496,390

5,873 278,087

636,864 56,504 29,380 55 20,222 364,699 158,291 1,767,810

470,279 47,468 7,298 61 10,608 8,019 424,255 1,251,948

Non-performing financing (i)

Movements in the non-performing financing, advances and other loans 2007 RM'000 At beginning of the financial year/period Classified as non-performing during the financial year/period Reclassified as performing during the financial year/period Amount recovered At end of the financial year/period Less: Specific allowance Net non-performing financing, advances and other loans Ratio of net non-performing financing, advances and other loans to gross financing, advances and other loans less specific allowance

44

2006 RM'000

39,150

-

56,440

58,841

(52,642) (5,169) 37,779

(17,979) (1,712) 39,150

(7,170) 30,609

(4,770) 34,380

1.74%

2.76%

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 7

Non-performing financing (continued) (ii)

Movements in the allowance for bad and doubtful financing

General allowance At beginning of the financial year/period Balance vested over from Affin Bank Berhad Allowance made during the financial year/period At end of the financial year/period

2007 RM'000

2006 RM'000

19,885 6,600 26,485

19,885 19,885

As % of gross financing, advances and other loans less specific allowance

1.50%

1.59%

Specific allowance At beginning of the financial year/period Balance vested over from Affin Bank Berhad Allowance made during the financial year/period Amount recovered At end of the financial year/period

4,770 3,248 (848) 7,170

924 4,295 (449) 4,770

(iii) Non-performing financing by sector

Primary agriculture Mining and quarrying Manufacturing Construction Wholesale and retail trade, restaurant and hotels Finance, insurance and business services Education, health & others Household Others

45

2007 RM'000

2006 RM'000

65 40 6,267 307 137 512 1,933 28,518 37,779

6,054 150 208 2,125 29,798 815 39,150

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 7

Non-performing financing (continued) (iv) Non-performing financing by economic purposes

Purchase of securities Purchase of transport vehicles Purchase of landed property of which: - Residential - Non-residential Personal use Construction Working capital Others

8

2006 RM'000

2 7,551

11 6,880

20,423 3,009 58 2,230 3,646 860 37,779

21,963 3,502 93 2,190 4,511 39,150

2007 RM'000

2006 RM'000

9,224 116,761 9,691 135,676

6,684 11 4,666 11,361

Other assets

Other debtors, deposits and prepayments Clearing accounts Accrued income receivable

9

2007 RM'000

Statutory deposits with Bank Negara Malaysia The statutory deposits are maintained with Bank Negara Malaysia in compliance with Section 37(1)(c) of the Central Bank of Malaysia Act, 1958 (revised 1994), the amounts of which are determined at set percentages of total eligible liabilities.

46

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 10 Property, plant and equipment Office equipment, furniture and fittings RM'000 2007 Cost At beginning of the financial year Additions At end of the financial year

17 63 80

Accumulated depreciation At beginning of the financial year Charge for the financial year At end of the financial year

2006 Cost At beginning of the financial period Balance vested over from Affin Bank Berhad Additions At end of the financial period

204 142 346

6 6

16 51 67

16 57 73

74

199

273

107 80 187

108 96 204

-

-

1 16 17

Accumulated depreciation At beginning of the financial period Balance vested over from Affin Bank Berhad Charge for the financial period At end of the financial period

-

Net book value as at end of the financial period

17

47

Total RM'000

187 79 266

-

Net book value as at end of the financial year

Computer equipment and software under lease RM'000

8 8 16

8 8 16

171

188

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 11 Intangible assets Computer software Cost At beginning of the financial year/period Balance vested over from Affin Bank Berhad At end of the financial year/period Accumulated amortisation At beginning of the financial year/period Balance vested over from Affin Bank Berhad Charge for the financial year/period At end of the financial year/period Net book value as at end of the financial year/period

2007 RM'000

2006 RM'000

2,416 2,416

2,416 2,416

323 483 806

202 121 323

1,610

2,093

12 Deferred tax Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when the deferred taxes relate to the same tax authority. The following amounts determined after appropriate offsetting, are shown in the balance sheet:

2007 RM'000

2006 RM'000

Deferred tax assets (after offsetting)

6,212

4,122

At beginning of the financial year/period Balance vested over from Affin Bank Berhad

4,122 -

5,568

Credited/(charged) to income statement (Note 26) - Property, plant and equipment - Intangible assets - General allowances on bad and doubtful debts - Unrealised forex revaluation gain - Others

1,902 (23) (114) 1,517 658 (136)

(1,399) (27) (304) (199) (1,005) 136

Charged to equity At end of the financial year/period

188 6,212

(47) 4,122

48

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 12 Deferred tax (continued) 2007 RM'000 Subject to income tax Deferred tax assets (before offsetting) General allowances for bad and doubtful debts Profit equalisation reserve Investment fluctuation reserve Offsetting Deferred tax assets (after offsetting) Deferred tax liablities (before offsetting) Property, plant and equipment Intangible assets Investment fluctuation reserve Unrealised forex revaluation gain Offsetting Deferred tax liabilities (after offsetting)

2006 RM'000

6,886 141 7,027 (815) 6,212

5,369 136 5,505 (1,383) 4,122

(50) (418) (347) (815) 815 -

(27) (304) (47) (1,005) (1,383) 1,383 -

13 Deposits from customers (i)

By type of deposit

Non-Mudharabah Demand deposits Savings deposits Negotiable instruments of deposit Mudharabah Savings deposits General investment deposits Special investment deposits

49

2007 RM'000

2006 RM'000

1,415,404 183,216 82,215

1,371,377 149,542 770,899

5,792 798,415 1,223,571 3,708,613

5,700 412,515 113,387 2,823,420

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 13 Deposits from customers (continued) (ii)

By type of customer

Government and statutory bodies Business enterprises Individuals Others

2007 RM'000

2006 RM'000

2,098,748 675,484 262,781 671,600 3,708,613

676,936 651,413 204,675 1,290,396 2,823,420

2007 RM'000

2006 RM'000

189,000 4,715 1,885,208 2,078,923

300,450 300,450

14 Deposits and placements of banks and other financial institutions

Mudharabah Licensed banks Bank Negara Malaysia Other financial institutions

Included in the deposits and placements of banks and other financial institutions is the Restricted Profit Sharing Investment Account ('RPSIA') placed by the Affin Bank Berhad amounting to RM13 million for the tenure of 8 months and at profit rate of 4.13% per annum. The RPSIA is a contract based on the Mudharabah concept between two parties to finance a business venture whereby the investor solely provides capital and the business venture is managed solely by the entrepreneur. The profit of the business venture is shared between both parties based on a pre-determined ratio, and in the event of a business loss, the loss will be borne solely by the provider of the capital. Based on BNM's circular dated 12 January 2007, RPSIA placement by the parent institution is recognised as part of the capital base for Single Customer Limit computation purposes.

50

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 15 Other liabilities

Bank Negara Malaysia and Credit Guarantee Corporation Funding programmes Margin and collateral deposits Accrued income payable Sundry creditors Clearing accounts Profit equalisation reserve (a) Defined contribution plan Accrued employee benefits

2007 RM'000

2006 RM'000

40 3,795 17,719 10,962 128 30 32,674

39 4,482 3,809 7,774 51,512 501 20 68,137

2007 RM'000

2006 RM'000

(a) Profit equalisation reserve

At beginning of the financial year/period Provision made during the financial year/period Written back in the financial year/period At end of the financial year/period*

501 (501) -

1,001 (500) 501

* Profit equalisation reserve at the end of the financial period of which the shareholders' portion is RM Nil (2006: RM37,375)

16 Amount due to holding company

Amount due to holding company

2007 RM'000

2006 RM'000

207,611 207,611

485,036 485,036

The amount due to is unsecured and bear interest of 3.58% per annum (2006: 3.67%) with no fixed terms of repayment.

51

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 17 Share capital 2007 Authorised: At beginning/end of the financial year

Number of ordinary shares of RM 1 each '000 1,000,000

Amount RM '000 1,000,000

Issued and fully paid: At beginning/end of the financial year

160,000

160,000

2006 Authorised: At beginning/end of the financial period

Number of ordinary shares of RM 1 each '000 1,000,000

Amount RM '000 1,000,000

Issued and fully paid: At beginning/end of the financial period

160,000

160,000

18 Reserves 2007 RM'000 Investment fluctuation reserves Statutory reserves Retained profits Statutory reserves At beginning of the financial year/period Transfer from retained profits At end of the financial year/period

2006 RM'000

(401) 38,004 38,004 75,607

128 18,284 18,284 36,696

18,284 19,720 38,004

18,284 18,284

2007 RM'000

2006 RM'000

Movement of the unrealised gains/(losses) on 'Available-for-sale'

At beginning of the financial year/period Balance transferred from Affin Bank Berhad Unrealised (losses)/gains on available-for-sale Deferred tax At end of the financial year/period *

128 (717) 188 (401)

(320) 495 (47) 128

* The depositors' portion of net unrealised gains or losses on 'Available-for-sale' at the end of financial year/ period is net unrealised loss of RM382,113 (2006: net unrealised gain of RM118,451).

52

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 19 Income derived from investment of depositors' funds and others

2007 RM'000 Income derived from investment of: - General investment deposits * - Other deposits

Period from 13.09.2005 (date of incorporation) to 31.12.2006 RM'000

126,482 100,922 227,404

22,237 92,859 115,096

* Includes the profit earned from investment of RPSIA in financing, advances and other loans of RM250,394 (2006: RM Nil)

a)

Income derived from investment of general investment deposits

2007 RM'000 Finance income and hibah Financing, advances and other loans Available-for-sale securities Held-to-maturity securities Money at call and deposits with financial institutions

Accretion of discounts less amortisation of premium Total finance income and hibah Other operating income Fee income Commission Service charges and fees Guarantee fees Securities income Gain on sale of securities: - Available-for-sale Other income Foreign exchange (loss)/profit: - Realised - Unrealised Other non-operating income Total income derived from investment of general investment deposits

54,430 2,944 1,062 58,701 117,137

11,915 51 657 6,655 19,278

4,922 122,059

1,848 21,126

1,036 1,400 440 2,876

324 267 37 628

-

10 10

659 705 183 1,547

(228) 668 33 473

126,482 53

Period from 13.09.2005 (date of incorporation) to 31.12.2006 RM'000

22,237

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 19 Income derived from investment of depositors' funds and others (continued) b)

Income derived from investment of other deposits

2007 RM'000 Finance income and hibah Financing, advances and other loans Available-for-sale securities Held-to-maturity securities Money at call and deposits with financial institution

Accretion of discounts less amortisation of premium Total finance income and hibah Other operating income Fee income Commission Service charges and fees Guarantee fees Securities income Gain on sale of securities: - Available-for-sale

43,431 2,349 847 46,838 93,465

49,757 212 2,744 27,792 80,505

3,928 97,393

7,715 88,220

826 1,117 351 2,294

1,353 1,117 153 2,623

-

Other income Foreign exchange (loss)/profit: - Realised - Unrealised Other non-operating income

526 563 146 1,235

Total income derived from investment of other deposits

54

Period from 13.09.2005 (date of incorporation) to 31.12.2006 RM'000

100,922

41 41

(950) 2,788 137 1,975 92,859

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 20 Income derived from investment of shareholders' funds

2007 RM'000 Finance income and hibah Financing, advances and other loans Available-for-sale securities Held-to-maturity securities Money at call and deposits with financial institution

Accretion of discounts less amortisation of premium Total finance income and hibah Other operating income Fee income Commission Service charges and fees Guarantee fees Securities income Gain on sale of securities: - Available-for-sale

4,837 262 94 5,217 10,410

4,670 20 257 2,609 7,556

437 10,847

724 8,280

92 124 39 255

127 105 14 246

-

Other income Foreign exchange (loss)/profit: - Realised - Unrealised Other non-operating income

59 63 16 138

Total income derived from investment of shareholders' funds

55

Period from 13.09.2005 (date of incorporation) to 31.12.2006 RM'000

11,240

4 4

(89) 262 13 186 8,716

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 21 Allowance for losses on financing

2007 RM'000 Allowance for bad and doubtful financing: Specific allowance - provided in the financial year/period - written back

3,248 (848)

General provision - (written back)/provided in the financial year/period

6,600

Bad debts on financing: - recovered - written off

Period from 13.09.2005 (date of incorporation) to 31.12.2006 RM'000

4,295 (449)

-

146 9,146

(20) 6 3,832

2007 RM'000

Period from 13.09.2005 (date of incorporation) to 31.12.2006 RM'000

22 Income attributable to depositors

Deposits from customers - Mudharabah - Non-Mudharabah Deposits and placement of banks and other financial institutions - Mudharabah Others

48,593 24,251

9,952 19,643

44,130 7,644 124,618

4,719 9,425 43,739

23 Personnel expenses

2007 RM'000 Wages, salaries and bonus Defined contribution plan ('EPF') Other personnel costs

4,103 652 878 5,633

56

Period from 13.09.2005 (date of incorporation) to 31.12.2006 RM'000 1,698 267 196 2,161

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 24 Other overheads and expenditures

2007 RM'000 Establishment costs Rental of premises Equipment rental Repair and maintenance Depreciation of property, plant and equipment Amortisation of intangible assets Other establishment costs

Marketing expenses Dealers' handling charges Business promotion and advertisement Entertainment Travelling and accommodation Other marketing expenses

Administration and general expenses Telecommunication expenses Audit expenses Professional fees Management fee paid to Affin Bank Other administration and general expenses

174 120 57 483 414 1,248

17 113 8 121 406 665

3,472 275 69 158 82 4,056

1,276 166 42 59 58 1,601

22 137 2,312 32,672 1,416 36,559

10 110 595 19,707 800 21,222

41,863

23,488

The above expenditure includes the following statutory disclosure: 2007 RM'000 1,151 174 -

Directors' remuneration (Note 25) Rental of premises Equipment rental Auditors remuneration - Statutory audit fees - Non audit fees - Over provision prior year Depreciation of property, plant and equipment Amortisation of intangible assets Dealers' handling charges

84 56 (3) 57 483 3,472 57

Period from 13.09.2005 (date of incorporation) to 31.12.2006 RM'000

Period from 13.09.2005 (date of incorporation) to 31.12.2006 RM'000 476 17 80 30 8 121 1,276

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 25 CEO, Directors and Shariah Committee Members' remuneration The Directors of the Bank who have held office during the period since the date of the last report are: Jen (B) Tan Sri Dato' Seri Ismail bin Haji Omar Non-Independent Non-Executive Chairman En. Kamarul Ariffin bin Mohd Jamil Chief Executive Officer Non-Independent Executive Director Tan Sri Dato' Lodin bin Wok Kamaruddin Non-Independent Non-Executive Director Laksamana Madya (B) Dato' Seri Ahmad Ramli bin Mohd Nor Non-Independent Non-Executive Director Dato' Seri Mohamed Jawhar Independent Non-Executive Director En. Mohd Suffian bin Haji Haron Independent Non-Executive Director Dato' Sri Abdul Hamidy bin Abdul Hafiz Non-Independent Non-Executive Director En. Zulkiflee Abbas bin Abdul Hamid Non-Independent Non-Executive Director

58

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 25 CEO, Directors and Shariah Committee Members' remuneration (continued) The aggregate amount of remuneration for the Directors of the Bank for the financial year are as follows:

2007 RM'000 Executive Directors Salary and other remuneration, including meeting allowance Bonuses Defined contribution plan ('EPF') Other employee benefits Non-executive Directors Fees Directors' remuneration (Note 24) Shariah Committee

Period from 13.09.2005 (date of incorporation) to 31.12.2006 RM'000

322 249 101 60

234 21 41 20

419 1,151

160 476

24 1,175

15 491

The remuneration attributable to the Chief Executive Officer of the Bank during the financial period amounted to RM 732,000 (2006: RM 315,800).

The number of Directors of the Bank whose total remuneration (including benefits-in-kind) received from the Bank falls within the Directors' remuneration band as follows:

Remuneration band: RM 0 - RM50,000 RM50,001 - RM100,000 RM300,000 - RM350,000 RM700,000 - RM750,000

Number of directors NonExecutive Executive Director Director 2007 2007

Executive Director 2006

NonExecutive Director 2006

2 5 -

1 -

5 2 -

1

59

Number of directors

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 26 Taxation

2007 RM'000 Malaysian income tax: - Current tax - Deferred tax (Note 12)

Period from 13.09.2005 (date of incorporation) to 31.12.2006 RM'000

17,348 (1,902) 15,446 759 16,205

12,124 1,399 13,523 13,523

Malaysian tax rate

% 27.00

% 28.00

Tax effect of: - change in tax rate - expenses not deductible for tax purposes - zakat - under provision in prior years - others Average effective tax rate

0.40 0.05 (0.77) 1.31 27.99

0.31 0.05 (1.24) (0.12) 27.00

Under provision in prior years

Numerical reconciliation between the average effective tax rate and the Malaysian tax rate:

27 Earnings per share The basic and fully diluted earnings per ordinary share for the Bank has been calculated based on the net profit attributable to ordinary equity holders of the Bank of RM39,440,000 (2006:RM36,568,000). The weighted average number of shares in issue during the financial year of 160,000,000 (2006:160,000,000) is used for the computation.

60

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 28 Significant related party transactions and balances The related parties that have transactions and their relationship with the Bank are as follows: Related parties Relationships Lembaga Tabung Angkatan Tentera ('LTAT') Ultimate holding corporate body Affin Holdings Berhad ('AHB')

Penultimate holding company

Affin Bank Berhad

Holding company

Boustead REIT Managers Sdn Bhd Perbadanan Hal Ehwal Bekas Angkatan Tentera Perbadanan Perwira Harta Malaysia Perwira Niaga Malaysia

Subsidiaries of LTAT

ABB Trustee Berhad Affin MoneyBrokers Sdn Bhd Affin Fund Management Bhd Affin Nominees (Tempatan) Sdn Bhd

Subsidiaries of AHB

Boustead Properties Berhad Boustead Credit Sdn Berhad Boustead Plantations Berhad Boustead Emastulin Sdn Berhad Boustead Eldred Sdn Berhad Boustead Estates Agency Sdn Berhad Boustead Weld Court Sdn Berhad Segamaha Development Sdn Bhd Syarikat Hing Lee Plantations Sdn Bhd Yaw Lim Plantations Sdn Bhd Boustead Pelita Kanowit Sdn Bhd Boustead Sutera Sdn Bhd Boustead Advisory and Consultancy Services Sdn Bhd Boustead Curve Sdn Bhd Boustead Oil Bulking Sdn Bhd Boustead Sungai Manar Sdn Bhd Boustead Pelita Tinjar Sdn Bhd Boustead Gradient Sdn Bhd Boustead Segaria Sdn Bhd Boustead Solandra Sdn Bhd Boustead Rimba Nilai Sdn Bhd Mutiara Rini Sdn Bhd

Subsidiaries of related company

61

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 28 Significant related party transactions and balances (continued) (a)

Related party transactions

2007 Sales Treasury bills securities Private debt securities NIDs

2006 Sales Treasury bills securities Private debt securities NIDs

Ultimate holding corporate body RM'000 82,215 82,215

Ultimate holding corporate body RM'000 61,478 61,478

62

Penultimate holding company RM'000 -

Penultimate holding company RM'000 -

Holding company RM'000 77,244 25,965 103,209

Holding company RM'000 19,432 117,832 137,264

Other related company RM'000 -

Other related company RM'000 -

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 28 Significant related party transactions and balances (continued) (b)

Related party balances

2007 Income Income on short-term advances Income received on placement

Expenditure Hibah / profit paid on advances and deposits Hibah / profit paid on repo Others

Amount due to Demand and fixed deposits Negotiable instrument deposits Special investment account Interbank placement Short-term advances

Amount due from Short-term advances Brokerage fee

Ultimate holding corporate body RM'000

Penultimate holding company RM'000

Holding company RM'000

-

-

6,208 7 6,215

-

6,190 32,672 38,862

88 14 102

321 82,215 -

-

189,000 207,611 396,611

63,359 9,199 72,558

82,536

-

-

63

-

Other related company RM'000

-

1 1

8 2 10

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 28 Significant related party transactions and balances (continued) (b)

Related party balances (continued)

Period from 13.09.2005 (date of incorporation) to 31.12.2006 Income Income on short-term advances Income received on placement Expenditure Hibah / profit paid on advances and deposits Hibah / profit paid on repo Others Amount due to Demand and fixed deposits Negotiable instrument deposits Special investment account Interbank placement Short-term advances Amount due from Demand deposits Short-term advances Brokerage fee

(c)

Ultimate holding corporate body RM'000

Penultimate holding company RM'000

-

-

2,137 8 2,145 419 61,800 6,633 68,852 -

Holding company RM'000

Other related company RM'000

356 356

-

2

4 4

19,706 19,706

-

-

485,036 485,036

-

-

1 1

2

18 18

Key management personnel compensation 2007 RM'000 Short-term employment benefits: - Salaries - Bonuses - Defined contribution plan ('EPF') - Other employee benefits - Benefit-in-kind

597 433 187 140 77 1,434

Included in the above table are Directors' remuneration as disclosed in Note 25.

64

2006 RM'000 485 390 161 130 58 1,224

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 28 Related party transactions (continued) (c)

Key management personnel compensation (continued) The key management personnel were granted options under Affin Holding Berhad's ('AHB') Employee Share Option Scheme ('ESOS'), which has expired on 13 February 2008. The ESOS was offered to eligible employees in Affin Group on 14 February 2003 and 5 December 2005 at the subscription rate per share of RM1.00 and RM1.41 respectively. The main features of the ESOS are as follows: - Only staff, executive directors and non-executive directors of Affin Group who on the date of allocation have been so appointed are eligible to participate in the ESOS. - Options granted under the ESOS carry no dividend or voting rights. Upon exercise of the options, shares issued rank pari passu in all respects with existing ordinary shares of AHB. - The persons to whom the options have been granted have no right to participate by virtue of the options in any share issue of any other company. A total of 380,000 ESOS options, comprising 100,000 share options at RM1.00 per share and 280,000 share options at RM1.41 per share were granted to the key management personnel of the Bank. As at 31 December 2007, Nil share options at RM1.00 per share (2006: 70,000 share options) and Nil share options at RM1.41 per share (2006: 280,000 share options) remained unexercised.

29 Staff retirement benefits Short term employee benefits Wages, salaries, paid annual leave and sick leave, bonuses and non-monetary benefits are accrued in the period in which the associated services are rendered by employees of the Bank. Defined contribution plan The defined contribution plan is a pension plan under which the Bank pays fixed contributions to the National Pension Scheme, the Employees' Provident Fund ('EPF') and will have no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits relating to employee service in the current and prior periods. The Bank's contribution to defined contribution plans are charged to the income statement in the period to which they relate. Once the contributions have been paid, the Bank has no further payment obligations. Termination benefits Termination benefits are payable whenever an employee's employment is terminated before the normal retirement date or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Bank recognises termination benefits when it is demonstrably committed to either terminate the employment of current employees according to a detailed formal plan without any possibility of withdrawal or to provide termination benefits as a result of an offer made to encourage voluntary redundancy.

65

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 30 Commitments and contingencies In the normal course of business, the Bank make various commitments and incurs certain contingent liabilities with legal recourse to their customers. No material losses are anticipated as a result of these transactions. The commitments and contingencies consist of:

2007 Direct credit substitutes Transaction-related contingent items Short-term self-liquidating trade related contingencies Irrevocable commitments to extend credit: - maturity less than one year - maturity more than one year

Principal amount RM'000

Credit equivalent amount * RM'000

Riskweighted amount * RM'000

112,605 111,299

112,605 55,650

112,605 55,650

3,028,870

605,774

14,076

474,728 189,552

94,776

82,907

3,917,054

868,805

265,238

Credit equivalent amount * RM'000

Riskweighted amount * RM'000

Principal amount RM'000

2006 Direct credit substitutes Transaction-related contingent items Short-term self-liquidating trade related contingencies Irrevocable commitments to extend credit: - maturity less than one year - maturity more than one year

49,100 72,297

49,100 36,149

49,100 36,149

3,607,445

721,489

165,796

282,078 41,821

20,911

18,694

4,052,741

827,649

269,739

* The credit equivalent amount is arrived at using the credit conversion factors as per BNM Guidelines.

66

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 31 Rate of return risk The Bank is exposed to the risk associated with the effects of fluctuations in the prevailing levels of profit rate on the financial position and cash flows of its portfolio. The fluctuations in the profit rate can be influenced by changes in interest rates that effect the value of financial instruments under its portfolio.

Non-trading book

2007

Up to 1 month RM'000

> 1-3 months RM'000

>3-12 months RM'000

>1-5 years RM'000

Over 5 years RM'000

Nonprofit sensitive RM'000

Trading book RM'000

Effective profit Total rate RM'000 %

Assets Cash and short-term funds Available-for-sale securities Financing, advances and other loans - performing - non-performing Others (1)

3,526,260 100,155

54,400

467,353

152,342

-

6,290 -

-

3,532,550 774,250

3.5 3.8

810,566 -

80,558 -

126,579 -

426,201 -

286,126 -

(26,485) * 30,610 # 226,071

-

1,703,545 30,610 226,071

6.9 -

Total assets

4,436,981

134,958

593,932

578,543

286,126

236,486

-

6,267,026

* The negative balance represents specific allowances and general allowance for loans, advances and financing in accordance with the Bank's accounting policy on allowance for bad and doubtful financing. # Net of specific allowance for bad and doubtful financing. 1. Others include property, plant and equipment, intangible assets, deferred tax, statutory deposits with Bank Negara Malaysia and other assets.

67

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 31 Rate of return risk (continued) Non-trading book

2007

Up to 1 month RM'000

Over 5 years RM'000

Nonprofit sensitive RM'000

Trading book RM'000

Effective profit Total rate RM'000 %

> 1-3 months RM'000

>3-12 months RM'000

>1-5 years RM'000

2,781,730

381,699

538,498

6,686

-

-

-

3,708,613

2.2

1,324,162 207,611 4,313,503 4,313,503

741,143 1,122,842 1,122,842

13,618 552,116 552,116

6,686 6,686

-

-

-

2,078,923 207,611 36,272 6,031,419 235,607 6,267,026

3.5 3.6 -

41,816 41,816

571,857 571,857

286,126 286,126

Liabilities Deposits from customers Deposits and placements of banks and other financial institutions Amount due to holding company Other liabilities Total liabilities Shareholders' equity Total liabilities and shareholders' equity On-balance sheet profit sensitivity gap Total profit sensitivity gap

123,478 123,478

(987,884) (987,884)

68

36,272 36,272 235,607 271,879 (35,393) (35,393)

-

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 31 Rate of return risk (continued) Non-trading book

2006

Up to 1 month RM'000

> 1-3 months RM'000

>3-12 months RM'000

>1-5 years RM'000

Over 5 years RM'000

Nonprofit sensitive RM'000

Trading book RM'000

Effective profit Total rate RM'000 %

Assets Cash and short-term funds Available-for-sale securities Held-to-maturity securities Financing, advances and other loans - performing - non-performing Others (1)

2,136,000 32,750 -

78,241 -

270,297 90,600

-

-

138,540 -

72,627 -

101,184 -

396,164 -

504,283 -

Total assets

2,307,290

150,868

462,081

396,164

504,283

7,941 -

-

2,143,941 381,288 90,600

3.6 3.6 3.8

(19,885) * 34,380 # 59,764

-

1,192,913 34,380 59,764

7.1 -

-

3,902,886

82,200

* The negative balance represents specific allowances and general allowance for loans, advances and financing in accordance with the Bank's accounting policy on allowance for bad and doubtful financing. # Net of specific allowance for bad and doubtful financing. 1. Others include property, plant and equipment, intangible assets, deferred tax, statutory deposits with Bank Negara Malaysia and other assets.

69

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 31 Rate of return risk (continued) Non-trading book

2006

Up to 1 month RM'000

> 1-3 months RM'000

>3-12 months RM'000

>1-5 years RM'000

Over 5 years RM'000

Nonprofit sensitive RM'000

Trading book RM'000

Effective profit Total rate RM'000 %

Liabilities Deposits from customers Deposits and placements of banks and other financial institutions Bills and acceptances payable Amount due to holding company Other liabilities Total liabilities Shareholders' equity Total liabilities and shareholders' fund On-balance sheet profit sensitivity gap Total profit sensitivity gap

2,250,487

213,374

354,228

5,331

-

-

-

2,823,420

1.9

185,450 10,892 485,036 2,931,865 2,931,865

100,000 11,938

15,000 860

-

-

-

325,312 325,312

370,088 370,088

5,331 5,331

-

73,594 73,594 196,696 270,290

300,450 23,690 485,036 73,594 3,706,190 196,696 3,902,886

3.5 3.6 3.7 -

(174,444) (174,444)

91,993 91,993

390,833 390,833

504,283 504,283

(624,575) (624,575)

70

(188,090) (188,090)

-

-

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 32 Credit Risk Credit risk is the risk of financial loss from the failure of customers to meet their obligations. Exposure to credit risk is managed through portfolio management. The credit portfolio's risk profiles and exposures are reviewed and monitored regularly to ensure that an acceptable level of risk diversification is maintained. Exposure to credit risk is also managed in part by obtaining collateral security and corporate and personal guarantees. The credit risk concentrations of the Bank, by industry concentration, are set out in the following tables:

2007

Cash and short-term funds RM'000

Agriculture Mining and quarrying Manufacturing Electricity, gas and water Construction Real estate Transport, storage and communication Finance, insurance and business services Government and government agencies Wholesale and retail trade, restaurant and hote Others Total assets

121,443 3,411,107 3,532,550

Deposits and placements with banks and other Available- Held-toFinancing, financial for-sale maturity advances and institutions securities securities other loans RM'000 RM'000 RM'000 RM'000 -

34,847 72,160 157,961 504,284 4,998 774,250

71

-

54,848 105 145,142 283 154,254 31,599 45,894 101,210 35,568 58,838 1,132,899 1,760,640

Other assets RM'000 351 665 1,453 7,195 125,977 135,641

On balance sheet total RM'000 54,848 456 179,989 283 227,079 31,599 45,894 382,067 3,958,154 63,836 1,258,876 6,203,081

Commitments and contingencies RM'000 3,187 50 22,468 52,500 28,796 1,243 50,937 590,771 10,299 108,554 868,805

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 32 Credit Risk (continued)

2006

Cash and short-term funds RM'000

Agriculture Mining and quarrying Manufacturing Electricity, gas and water Construction Real estate Transport, storage and communication Finance, insurance and business services Government and government agencies Wholesale and retail trade, restaurant and hote Others Total assets

47,208 2,096,733 2,143,941

Deposits and placements with banks and other Availablefinancial for-sale institutions securities RM'000 RM'000 -

70,858 310,430 381,288

72

Held-toFinancing, maturity advances and securities other loans RM'000 RM'000 90,600 90,600

30,568 115 113,558 1,014 28,406 1,019 41,184 9,649 51,881 59,321 910,463 1,247,178

Other assets RM'000 427 190 4,136 6,589 11,342

On balance sheet total RM'000 30,568 115 113,558 1,014 119,433 1,019 41,184 127,905 2,463,180 59,321 917,052 3,874,349

Commitments and contingencies RM'000 1,134 75 6,893 28 31,837 16,587 267,396 604 15,362 487,733 827,649

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 33 Capital adequacy (a)

The capital adequacy ratios of the Bank are as follows:

Tier I capital Paid-up share capital Retained profits Statutory reserves

Less: Deferred tax assets Total Tier I capital

2007 RM'000

2006 RM'000

160,000 38,004 38,004 236,008

160,000 18,284 18,284 196,568

(6,071) 229,937

196,568

26,485 26,485

19,885 19,885

256,422

216,453

Tier II capital General allowance for bad and doubtful financing Total Tier II capital Capital Base Core capital ratio Risk-weighted capital ratio

(b)

11.82% 13.18%

14.00% 15.41%

Breakdown of gross risk-weighted assets in the various categories of risk-weights:

0% 10% 20% 50% 100% Total risk-weighted assets for credit risk

73

2007 Principal RM'000

2006 Principal RM'000

4,597,606 318,514 595,854 1,529,153 7,041,127

3,008,824 165,975 463,199 1,137,881 4,775,879

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 33 Capital adequacy (continued) 2007 Risk-weighted RM'000 63,703 297,927 1,529,153 1,890,783 53,380 1,944,163

0% 10% 20% 50% 100% Total risk-weighted assets for credit risk Risk-weighted assets for market risk * Total risk-weighted assets

2006 Risk-weighted RM'000 33,195 231,600 1,137,881 1,402,676 1,571 1,404,247

Pursuant to Bank Negara Malaysia’s circular, ‘Recognition of Deferred Tax Asset (‘DTA’) and Treatment of DTA for RWCR Purposes’ dated 8 August 2003, deferred tax income/(expenses) is excluded from the calculation of Tier I capital and DTA is excluded from the calculation of risk-weighted assets. * Effective 1 April 2005, the Bank have incorporated market risk in its capital adequacy ratios, in accordance to BNM's Market Risk Capital Adequacy Framework.

74

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 34 Segment analysis Segment analysis is presented in respect of the Bank's business segment. The Bank's activities are principally conducted in Malaysia and accordingly, no analysis on the Bank's operations by geographical segments have been provided. The format of the segment analysis is based on the internal financial reporting system which reflect the Bank's management reporting structure. The Bank comprises the following main segments: Enterprise banking Corporate and commercial banking provide/obtain funding to/from corporate customers including public listed corporations and its related entities, multinational corporation, financial institutions, government and state owned entities, small and medium enterprises. Consumer banking Retail banking focuses on providing products and services to individual customers. The products and services offered to customers include credit facilities (house and personal financing), remittance services, deposit collection and investment products. Treasury Treasury and money market operations is involved in proprietary trading in fixed income and foreign exchange, derivatives trading and structuring, managing customer-based foreign exchange and money market transactions, funding and investment in ringgit and foreign currencies. Hire purchase Hire purchase focuses on the products and services offered to customers under the hire purchase financing facilities.

75

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 34 Segment analysis (continued)

2007 External revenue/income Result Segment result Unallocated corporate expenses Profit from operation

Consumer Banking RM'000

Enterprise Banking RM'000

Treasury RM'000

Hire Purchase RM'000

41,938

39,063

130,844

26,749

238,594

17,707

13,209

16,682

10,287

57,885 57,885

Zakat and taxation Net profit for the financial period Other information Segment assets Deferred tax assets Unallocated assets Total assets Segment laibilities Provision for tax Amount due to holding company Unallocated liabilities Total liabilities Other segment items Capital expenditure Depreciation of property, plant and equipment Amortisation of intangible assets Specific allowances General provision Other non-cash (income)/expenses

Total RM'000

(18,445) 39,440

644,304

631,142

4,374,435

484,984

6,134,865 6,212 125,949 6,267,026

525,794

523,771

4,374,435

392,072

5,816,072 3,598 207,611 4,138 6,031,419

15 17 148 692 -

15 14 110 205 6,600 -

76

101 16 139 (19,419)

11 10 86 1,502 -

142 57 483 2,399 6,600 (19,419)

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 34 Segment analysis (continued)

Period from 13.09.2005 (date of incorporation) to 31.12.2006 External revenue/income Result Segment result Unallocated corporate expenses Profit from operation

Consumer Banking RM'000

Enterprise Banking RM'000

Treasury RM'000

32,314

23,974

54,150

13,375

123,813

18,686

9,298

16,292

5,815

50,091 50,091

Hire Purchase RM'000

Zakat and taxation Net profit for the financial period Other information Segment assets Deferred tax assets Unallocated assets Total assets Segment laibilities Provision for tax Unallocated liabilities Total liabilities Other segment items Capital expenditure Depreciation of property, plant and equipment Amortisation of intangible assets Specific allowances Other non-cash (income)/expenses

Total RM'000

(13,523) 36,568

499,924

467,157

2,647,990

277,048

3,892,119 4,122 6,645 3,902,886

203,928

197,823

2,647,990

111,292

3,161,033 5,457 539,700 3,706,190

12 2 32 (190) -

12 2 24 2,962 -

77

65 3 52 (16,732)

7 1 13 1,074 -

96 8 121 3,846 (16,732)

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 35 Fair value financial assets and liabilities The fair value of the financial assets and financial liabilities of the Bank approximated to their carrying value as at balance sheet date, except for the following: 2007

RM'000 Carrying value

RM'000 Fair value

Financial Assets Financing, advances and other loans

1,734,155

1,655,010

Financial Liabilities Deposits from customers

3,708,613

3,710,398

RM'000 Carrying value

RM'000 Fair value

90,600 1,227,293 1,317,893

90,513 1,351,709 1,442,222

2,823,420

2,711,591

2006 Financial Assets Held-to-maturity securities Financing, advances and other loans

Financial Liabilities Deposits from customers

Financial instruments comprise financial assets, financial liabilities and also off balance sheet financial instruments. The fair value of a financial instrument is the amount at which the instruments could be exchanged or settled between knowledgeable and willing parties in an arm’s length transaction. The information presented herein represents estimates of fair values as at balance sheet date. Quoted market prices, when available, are used as the measure of fair values. For financial instruments, without quoted market prices, fair values are estimated using net present value or other valuation techniques. These techniques involve a certain degree of uncertainty depending on the assumptions used and judgements made regarding risk characteristics of various financial instruments, discounts rates, estimates of future cash flows, future expected loss experience and other factors. Changes in these assumptions could materially affect these estimates and the resulting fair value.

Fair value information for non financial assets and liabilities are excluded as they do not fall within the scope of FRS 132 which requires fair values to be disclosed. This includes property, plant and equipment, statutory deposits with Bank Negara Malaysia, deferred tax and intangible assets. The derivative financial instruments become favourable (assets) or unfavourable (liabilities) as a result of fluctuation in market interest rates or foreign exchange rates relative to their terms. The extent to which instruments are favourable or unfavourable and the aggregate fair values of derivative financial assets and liabilities can fluctuate significantly from time to time.

78

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Notes to the financial statements for the financial year ended 31 December 2007 (continued) 35 Fair value financial assets and liabilities (continued) The fair value estimates were determined by application of the methodologies and assumptions described below. Short-term-funds and placements with banks and other financial institutions For short-term-funds and placements with banks and other financial institutions with maturity of less than six months, the carrying amount is a reasonable estimate of fair value. For amounts with maturities of six months or more, fair values have been estimated by reference to current rates at which similar deposits and placements would be made with similar credit ratings and maturities. Available-for-sale and held-to-maturity securities The fair value of available-for-sale and held-to-maturity securities are reasonable estimates based on quoted market prices. In the absence of such quoted prices, the fair values are based on indicative market yields or the asset book value of the invested company. Financing, advances and other loans For performing fixed rate financing, fair values have been estimated by discounting the estimated cash flows using the prevailing market rates of financing and advances with similar credit ratings and maturities. For floating-rate financing, the carrying amount is generally a reasonable estimate of fair value. The fair value of impaired financing, fixed or floating are based on the carrying value less specific allowance and general allowance for bad and doubtful financing which cover unidentified losses inherent to the loan portfolio, being the expected recoverable amount. Deposits from customers, banks and other financial institutions and bills and acceptances payable. The fair value of demand deposits is the amounts payable on demand at the reporting date. For other liabilities with maturities of less than 6 months, the carrying amount is a reasonable estimate of fair value. For liabilities with maturities of 6 months or longer, fair values have been based on quoted market prices, where such prices exist. Otherwise, fair values are estimated using discounted cash flows based on rates currently offered for similar liabilities of similar remaining maturities. The estimated fair value of deposits with no stated maturity, which include non-hibah/profit bearing deposits, approximates carrying amount which represents the amount repayable on demand.

36 Approval of financial statements The financial statements have been approved for issue in accordance with a resolution of the Board of Directors on 29 February 2008.

79

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Statement by Directors Pursuant to Section 169(15) of the Companies Act, 1965 We, JEN (B) TAN SRI DATO' SERI ISMAIL BIN HAJI OMAR and KAMARUL ARIFFIN BIN MOHD JAMIL, two of the Directors of AFFIN ISLAMIC BANK BERHAD, state that, in the opinion of the Directors, the accompanying financial statements set out on pages 18 to 79 are drawn up so as to give a true and fair view of the state of affairs of the Bank as at 31 December 2007 and of the results and cash flows of the Bank in accordance with the provisions of the Companies Act, 1965, the MASB Approved Accounting Standards for Entities Other Than Private Entities and Bank Negara Malaysia Guidelines. Signed on behalf of the Board of Directors in accordance with their resolution dated 29 February 2008.

JEN (B) TAN SRI DATO' SERI ISMAIL BIN HAJI OMAR Chairman

KAMARUL ARIFFIN BIN MOHD JAMIL Chief Executive Officer

Statutory Declaration Pursuant to Section 169(16) of the Companies Act, 1965 I, EE KOK SIN, the officer of AFFIN ISLAMIC BANK BERHAD primarily responsible for the financial management of the Bank, do solemnly and sincerely declare that in my opinion, the accompanying financial statements set out on pages 18 to 79 are correct and I make this solemn declaration conscientiously believing the same to be true and by virtue of the provisions of the Statutory Declarations Act, 1960.

EE KOK SIN Subscribed and solemnly declared by the abovenamed EE KOK SIN at Kuala Lumpur in Malaysia on 29 February 2008, before me.

AHMAD BIN LAYA No. W259 Commissioner for Oaths

80

Company No: 709506-V

REPORT OF THE AUDITORS TO THE MEMBERS OF AFFIN ISLAMIC BANK BERHAD (Incorporated in Malaysia) We have audited the financial statements set out on pages 18 to 79. These financial statements are the responsibility of the Bank's Directors. It is our responsibility to form an independent opinion, based on our audit, on these financial statements and to report our opinion to you, as a body, in accordance with Section 174 of the Companies Act, 1965 and for no other purpose. We do not assume responsibility to any other person for the content of this report. We conducted our audit in accordance with approved auditing standards in Malaysia. 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 the Directors, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. In our opinion: (a) the financial statements have been prepared in accordance with the provisions of the Companies Act, 1965, MASB Approved Accounting Standards for Entities Other Than Private Entities and Bank Negara Malaysia Guidelines so as to give a true and fair view of: (i) the matters required by Section 169 of the Companies Act, 1965 to be dealt with in the financial statements; and (ii) the state of affairs of the Bank as at 31 December 2007 and of the results and cash flows of the Bank for the financial year ended on that date; and (b) the accounting and other records and the registers required by the Act to be kept by the Bank have been properly kept in accordance with the provisions of the Act.

PRICEWATERHOUSECOOPERS (No. AF : 1146) Chartered Accountants

MOHAMMAD FAIZ BIN MOHAMMAD AZMI (No. 2025/03/08 (J)) Partner of the firm

Kuala Lumpur, Malaysia 29 February 2008

81

Company No: 709506-V

Affin Islamic Bank Berhad (Incorporated in Malaysia)

Shariah Committee's Report

We, Dr. Hailani Muji Tahir and Dr. Md. Khalil Ruslan, two of the members of the Shariah Committee of Affin Islamic Bank Berhad, do hereby confirm on behalf of the Shariah Committee, that in our opinion, the operation of the Bank for the financial year ended 31 December 2007 have been conducted in conformity with the Shariah principles.

On behalf of the Shariah Committee,

Dr. Hailani Muji Tahir

Dr. Md. Khalil Ruslan

Kuala Lumpur, Malaysia 29 February 2008

82

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