The South African economy continued to recover well from the after-effects of the global slowdown in 2008-09, recording an estimated 2.8% growth in GDP compared with an overall 2.2% drop in 2009. The current account deficit was slightly reduced from the previous year's -5.0% of GDP to -4.6%. Inflation, moreover, continued to moderate, closing the year at an estimated 4.4% compared with 2009's 6.3%.

Both tourism revenues and retail sales benefited from the successful staging of the FIFA World Cup in the middle of the year. In addition, gold prices reached record levels, while at the same time crude oil prices tended to remain fairly stable. Partly on account of the improved economic performance, the Rand strengthened substantially over the course of the year, resulting in lower import costs and reduced inflation, in turn permitting the Reserve Bank to start to reduce interest rates.

Pursuant to Basel II implementation, effective 1st January 2010 the Reserve Bank increased the minimum Capital Adequacy Ratio (Pillar 1 and Pillar 2) required of South African banks to 14%. Al Baraka South Africa is in the process of enhancing its capital to meet the minimum CAR requirements. Another development significantly affecting the banking industry was the promulgation of the National Credit Act, which seeks to regulate the manner in which financial institutions operate in order to curtail unhealthy and excessive consumer borrowing.

Al Baraka South Africa's total assets grew by 32% to $426 million, due in part to the effect of an 11.3% appreciation of the Rand in US dollar terms on the total asset base, supported by 30% growth in its financings and investments portfolios, which reached $363 million. The expansion was funded largely by a 34% increase in the bank's unrestricted investment accounts and customer current and other accounts, which rose in aggregate to $387 million. This business growth resulted in 16% higher income from jointly financed contracts and investments to $30 million. After accounting for the investors’ share, the bank's income from this source, including its share as Mudarib, was likewise 16% higher, at $13 million.

Including income from self financing and investment, revenue from banking services and other operating income, its total operating income rose by 21% to $15 million. After operating expenses – which rose by 25% to $13 million, reflecting the higher staff costs and investment in infrastructure over the past year, the net operating income was unchanged at $2 million and, following provisions and a taxation charge, the bank returned a net profit of $1.5 million compared with $2.0 million in 2009. Rand appreciation accounted for a 14% enhancement of the bank's net income in US dollar terms. Full implementation of the new Misys Islamic Equation banking system was achieved during the year, Equation going live in August 2010. As a consequence, Al Baraka South Africa was able, after completing the process of converting savings accounts to electronic banking via debit cards, to commence offering e-banking products to its customers.

The first to benefit were its small business customers, but the bank is working towards extending these products to its corporate customers early in 2011. It will also now be able to conduct a reevaluation exercise to leverage up on its new state-of-the-art core banking system and reduce its operating expenses, aiming for a cost to income ratio of less than 60% within 4 years. It has meanwhile submitted an application to the authorities for a full foreign exchange licence, which it hopes will be granted by the end of the year. Among a number of new products to be introduced shortly are a Hajj investment account and a property diminishing musharaka financing facility, both of which it expects will be well received by clients.

Mr. Shabir Chohan
Board Member
& Chief Executive Officer
Kingsmead Office Park,
Stalwart Simelane (Stanger) Street
Durban 4001, South Africa
Tel: +2731 364 9000
Fax: +2731 364 9001
www.albaraka.co.za