PT BANK SYARIAH MANDIRI Independent Audi

Independent Auditors’ Report

And The Financial Statements For The Years Ended December 31, 2008 And 2007

CASH 2a 315,746,897 201,359,028 PLACEMENTS WITH BANK INDONESIA

2,120,005,705 1,381,906,403 CURRENT ACCOUNT WITH OTHER BANKS

2a,2d,3

2a,2b,2c,2e,4,40

Third parties 245,682,590 47,937,944 Related party

60,115,912 70,523,068 Total Current Account with Other Banks

305,798,502 118,461,012 Allowance for possible losses

(3,057,985) (4,905) Net

302,740,517 118,456,107 PLACEMENTS WITH OTHER BANKS

2c.2f,5

Third parties 30,000,000 184,045,200 Allowance for possible losses

(300,000) (3,297,194) Net

29,700,000 180,748,006 INVESTMENT IN SECURITIES

2c,2g,6

Third parties Availabele for sale

8,765,497 6,000,000 Held to maturity

1,265,096,512 780,444,070 Total Investment in Securities/Bonds

1,273,862,009 786,444,070 Allowance for possible losses

(12,738,620) (8,034,697) Net

1,261,123,389 778,409,373 RECEIVABLES

2b,2c,2h,7,40

Murabahah Third parties

6,792,039,969 5,178,707,666 Related party

2,898,441 1,625,639 Total Murabahah Receivables

6,794,938,410 5,180,333,305 Istishna

Third parties 141,760,811 117,346,235 Ijarah Receivables

Third parties 2,134,476 2,421,291 Total Receivables

6,938,833,697 5,300,100,831 Allowance for possible losses

(272,317,835) (180,447,059) Net

6,666,515,862 5,119,653,772 FUNDS OF QARDH

2c,2j,8

Third parties 618,845,394 526,169,107 Allowance for possible losses

(6,821,408) (3,804,690) Net

The accompanying notes from an integral part of these financial statements

Mudharabah Third parties

2,963,646,872 2,339,676,256 Allowance for possible losses

(37,575,801) (25,024,012) Net

2,926,071,071 2,314,652,244 Musyarakah

2c,2i,10

Third parties 2,613,729,398 1,997,758,463 Allowance for possible losses

(256,539,526) (124,822,506) Net

2,357,189,872 1,872,935,957 Total Financing

5,577,376,270 4,337,434,719 Allowance for possible losses

(294,115,327) (149,846,518) Net

5,283,260,943 4,187,588,201 ASSETS ACQUIRED FOR IJARAH

2k,11

Fair Value 269,424,722 235,162,360 Accumulated Depreciation

(123,965,948) (72,492,634) Net

145,458,774 162,669,726 ISTISHNA ASSETS IN COMPLETION

2l

PREMISESS AND EQUIPMENT AND

2m,12

ACCUMULATED DEPRECIATION Fair Value

383,675,892 262,933,089 Accumulated Depreciation

(191,659,670) (160,140,176) Book Value

192,016,222 102,792,913 OTHER ASSETS

Deferred tax assets

11,509,812 9,807,914 Take over guarantee

2ac, 19

2c2

Realizable value 26,765,759 28,031,269 Allowance for possible losses

(22,300,000) - Net

4,465,759 28,031,269 Others

121,370,120 86,579,429 Total Other Assets

2c,2n,2o,13

TOTAL ASSETS

The accompanying notes from an integral part of these financial statements

ii

LIABILITIES

CURRENT LIABILITIES

161,990,949 104,432,800 UNDISTRIBUTED REVENUE SHARING

2a,2p,14

71,210,802 52,251,302 WADIAH DEPOSIT

2w,15

2b,2q,16,40

Wadiah demand deposits Third parties

1,812,310,538 1,845,748,441 Related party

14,613 25,849 Wadiah Saving Deposits

Third parties 38,359,066 11,952,957 Total Wadiah Deposits

1,850,684,217 1,857,727,247 DEPOSITS FROM OTHER BANKS

2r,17

Wadiah demand deposits 11,695,606 2,512,370 Interbanks Mudharabah Investment Certificate

15,000,000 Total Deposits from Other Banks

11,695,606 17,512,370 LIABILITIES TO OTHER BANKS

18 5,527,861 5,834,067 TAXES PAYABLE

33,807,860 13,440,456 ESTIMATED LOSSES ON COMMITMENT

2ac,19

2,421,504 1,528,907 AND CONTINGENCIES OTHER LIABILITIES

2c,20

2b,21,40

Third parties 191,139,321 142,510,454 Related party

14,295,146 19,374,573 Total Other Liabilities

205,434,467 161,885,027 ISSUED BONDS

200,000,000 400,000,000 SUBORDINATED LOAN

2s,22

32,000,000 TOTAL LIABILITIES

TEMPORARY SYIRKAH FUNDS

2b,2t,24,40,53

Non Bank Restricted Investment

Third parties Savings

89,760,806 - Total Restricted Investment

89,760,806 - Unrestricted Investment Mudharabah Saving Deposits

Third parties 5,153,102,513 3,857,750,225 Related party

2,777,449 2,674,286 Total Unrestricted Investment Mudharabah Saving Deposits

5,155,879,962 3,860,424,511 Unrestricted Investment Mudharabah Time Deposits

Third parties 7,800,101,803 5,386,703,705 Related party

2,260,163 1,122,960 Total Unrestricted Investment Mudharabah Time Deposits

7,802,361,966 5,387,826,665 Total Temporary Syirkah Funds Non Bank

The accompanying notes from an integral part of these financial statements

iii

Unrestricted Investment Mudharabah Saving Deposits Third parties

48,352,825 40,616,968 Unrestricted Investment Mudharabah Time Deposits Third parties

218,380,535 138,534,050 Total Temporary Syirkah Funds Bank

266,733,360 179,151,018 Total Temporary Syirkah Funds

STOCKHOLDERS' EQUITY

Capital Stock-par value of Rp 5.000 per share Authorized - 200.000.000 shares Issued and fully paid 111.648.713 shares in 2008 and 71.674.513 shares in 2007

558,243,565 358,372,565 Unrealize Profit (loss) - bonds

765,497 - Retained Earning

Appropriated 206,993,156 206,993,156 Unappropriated

442,426,408 246,010,467 Total Stockholders' Equity

TOTAL LIABILITIES, TEMPORARY SYIRKAH FUNDS AND STOCKHOLDERS' EQUITY

The accompanying notes from an integral part of these financial statements

iv

Income From Sales and Purcahse Murabahah Margin Income

824,274,869 552,679,012 Istishna Paralel - Net Income

2u,29,53

12,226,444 8,241,105 Total Income From Sales and Purcahse

836,501,313 560,920,117 Income from rent Ijarah Income - Net

15,240,458 24,713,676 Revenue sharing Revenue sharing - Mudharabah

443,355,992 264,813,301 Revenue sharing - Musyarakah

260,521,406 200,090,296 Total Revenue sharing

OTHER OPERATING REVENUE

2v,30,53

TOTAL REVENUE FROM FUND MANAGEMENT AS MUDHARIB

THIRD PARTIES' ON RETURN OF TEMPORY SYIRKAH FUNDS

2w,31,53

OTHER OPERATING REVENUE

Revenue from Banking services 32.53 285,181,366 193,375,976 Revenue from restricted investment

15,805,055 16,544,134 Total other operating revenue

OPERATING EXPENSES

Salaries and employee benefit 33.53 (294,251,847) (207,798,478) General and administrative

34.53 (241,669,986) (195,391,229) Depreciation and amortization:

Depreciation of premises and equipment (31,999,963) (34,236,284) Provision for possible losses on earnings assets

(309,296,455) (253,812,932) Provision for possible losses on non earnings assets

(24,300,000) - Reversal (expense) losses estimated on commitments and contingencies

(796,521) 701,724 Other operating expenses: Bonus

(19,560,249) (17,514,528) Others

2x,36

36.53 (42,512,354) (20,200,553) Total other operating expenses:

INCOME FROM OPERATIONS

NON OPERATING INCOME AND EXPENSE

Non operating income 8,651,995 1,147,548 Non operating expense

(4,506,497) (31,930) Total non operating income and expense

INCOME BEFORE INCOME TAX

INCOME TAX BENEFIT (EXPENSE)

2ac,19,53

Current (89,370,886) (53,421,644) Deferred

1,701,898 693,691 Total tax expense

NET INCOME 196,415,940 115,455,198 BASIC EARNINGS PER SHARE

2ad

The accompanying notes from an integral part of these financial statements v

206,993,156 131,865,270 697,230,991 Net income for 2007

Balance as of December 31, 2006

115,455,198 115,455,198 Tantiem payment

206,993,156 246,010,468 811,376,189 Stock Issued

Balance as of December 31, 2007

- 199,871,000 Unrealized profit (loss) - Securities

765,497 765,497 Net income for 2008

Balance as of December 31, 2008

The accompanying notes from an integral part of these financial statements

vi

Receipt from financing and receivable already written-off 34,328,629 14,930,341 Payment to employee

(290,788,191) (204,383,674) Payment of tantiem

(3,463,656) - Payment for operating expenses

(297,505,538) (442,560,064) Payment of tax

(87,668,988) (49,877,182) Receipt from non operating income

3,866,190 395,768 Decrease (Increase) in operating assets: Receipt (Placement) with Bank Indonesia

(635,000,000) 110,000,000 Receipt (Placement) with Other Banks

154,101,086 14,979,232 Receivable

(1,881,608,887) (1,005,796,201) Qardh loan

(89,659,570) (275,873,276) Mudharabah financing

(611,418,826) (1,220,563,913) Musyarakah financing

(484,253,915) (443,562,062) Assets ecquired for ijarah

17,210,953 37,643,516 Other assets

(7,903,078) (27,207,960) Increase (Decrease) in operating liabilities: Current liabilities

49,489,565 12,443,123 Wadiah deposit

(7,043,030) (201,266,658) Deposit from other Banks

(5,816,764) 12,136,937 Liabilities to other Banks

1,129,363 - Tax payable

20,367,403 (361,463) Other liabilities

(62,769,879) (45,469,868) Net Cash used in Operating Activities

CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of available or sale and held to maturity

(481,948,518) (284,213,059) Acquisition of premises and equipment

12 (21,424,766) (21,355,892) Proceeds from sale of premises and equipment

12 279,309 645,971 Net Cash used in Investing Activities

CASH FLOWS FROM FINANCING ACTIVITIES

Issued bonds (200,000,000) - Increase in Unrestricted Investment

3,797,573,094 3,227,259,917 Increase in Restricted Investment

89,760,806 - Additional Paid in Capital

100,000,000 - Payment of Tamtiem

- (1,310,000) Net Cash provided by Financing Activities

NET INCREASE IN CASH AND CASH EQUIVALENT

CASH AND CASH EQUIVALENT AT BEGINNING OF YEAR

CASH AND CASH EQUIVALENT AT END OF YEAR 1,436,551,104 1,031,726,443

Cash and cash equivalent at and of year consist of: Cash

315,746,897 201,359,028 Current account with Bank Indonesia

3 815,005,705 711,906,403 Current account with Other Banks

Total 1,436,551,104 1,031,726,443

The accompanying notes from an integral part of these financial statements

vii

2a 291,710,424 255,213,860 Receipt fund

Balance at beginning of year

109,336,340 146,569,682 Profit from Investment

26,356,800 29,599,392 Bank's share as invesment agent fees

32 (15,805,055) (16,544,134) Fund withdrawal

Investment at end of period

The accompanying notes from an integral part of these financial statements

viii

Sources of Zakah Fund

2y, 43

Zakah from Bank 34 2,886,380 1,640,000 Zakah from Non Bank

1,372,224 888,089 Total Sources of Zakah Fund

4,258,604 2,528,089 Uses of Zakah Fund

Distributed through LAZ BSM Ummat 2a 7,657 1,898,727 Total Uses of Zakah Fund

7,657 1,898,727 Increase (Decrease) Zakah Fund

4,250,947 629,362 Beginning balance of Zakah Fund

Ending balance of Zakah Fund

The accompanying notes from an integral part of these financial statements

ix

Sources of Qardh Funds Penalties

44 2,151,357 1,237,510 Prohibited earnings

2e 223,252 379,274 Total Sources of Qardh Funds

2,374,609 1,616,784 Uses of Qardh Funds

Distributed through LAZ BSM Ummat 2a 1,459,231 967,248 Total Uses of Qardh Funds

1,459,231 967,248 Foreign exchange

55,193 46,236 Increase (Decrease) of Qardh Funds

970,571 695,772 Beginning Balance of Qardh Funds

Ending Balance of Qardh Funds

The accompanying notes from an integral part of these financial statements

Main Operating Income (Accrual)

2a,2u,29,30

Unearned Revenue: Income from murabahah margin

7 27,632,169 18,467,066 Income from istishna

- - Profit sharing: Mudharabah financing

- - Musyarakah financing

- - Rent income

Total Less

Add:

Revenue previous period which received cash on current period Receipt from Receivable Settlement: Murabahah margin 7

18,467,067 11,659,290 Istishna

- - Rent income

7 2,421,291 2,418,104 Receipt from sharing receivable:

Mudharabah financing - - Musyarakah financing

Total Add

Available profit Sharing 2a 1,727,511,293

Profit sharing of bank syariah's right

Profit sharing of owner fund

31 793,049,197 511,873,694 Consist of: Owner fund's right on distributed profit sharing

723,505,844 461,192,198 Owner fund's right on undistributed profit sharing

The accompanying notes from an integral part of these financial statements

xi

1. GENERAL

a. Background

PT Bank Syariah Mandiri (Bank) was initially established under the name of PT Bank Industri Nasional, abbreviated as PT BINA or also known as PT National Industrial Banking Corporation Ltd., having its head office in Jakarta, based on notarial deed No. 115 dated June 15, 1955 of Meester Raden Soedja, S.H., in Jakarta. the notarial deed was approved by the Minister of Justice and Human Rights of the Republic of Indonesia (formerly known as the Minister of Justice of the Republic of Indonesia) in his decision letter No. J.A.5/69/23 dated July 16, 1955, and it was registered in the State Court Office of South Jakarta No. 1810 dated October 6, 1955. The articles of association were published in the State Gazette No. 37 dated May 8, 1956 as Supplement No. 390.

In accordance with the Articles of Association Amendment concerning Bank's Capital Stock No. 12 dated April 6,1967 which was amended with Article of Association Amendment concerning Bank's Capital Stock No. 37 dated October 4, 1967, both of Adlan Yulizar, S.H., in Jakarta, and which have been published in the State Gazette No. 34 dated April 29, 1969 as Supplement No. 55, the Bank's name was changed from PT Bank Industri Nasional, abbreviated as PT BINA or also known as PT National Industrial Banking Corporation Ltd., into PT Bank Maritim Indonesia.

In accordance with the Minutes of Meeting No. 146 dated August 10, 1973, which was notarized under notarial deed No. 146 of Raden Soeratman, S.H. in Jakarta, which has been published in the State Gazette No. 79 dated October 1, 1974, as Supplement No. 554, the Bank's name was changed from PT Bank Maritim Indonesia into PT Bank Susila Bakti.

In accordance with Notary Deed of Decision of Meeting No. 29 dated May 19, 1999 of Machrani Moertolo Soenarto, SH., in Jakarta, which was approved by the Minister of Justice of the Republic of Indonesia in his decision letter No. C2-1210.HT.01.04.TH 99 dated July 1, 1999 and was published in the State Gazette No. 87 dated October 31, 2000 as Supplement No. 6587, Bank changed its name from PT Bank Susila Bakti into PT Bank Syariah Sakinah Mandiri.

In accordance with Notary Deed of Decision of Meeting No. 7 dated July 7, 1999 of Machrani Moertolo Soenarto, S.H., in Jakarta, which was revised respectively with notary deed of minutes of meeting No. 6 dated July 22, 1999 and notary deed of minutes of meeting No. 9 dated July 23, 1999, both of Hasanal Yani Ali Ami, S.H., in Jakarta, and Notary Deed of Decision of Meeting No. 23 dated September 8, 1999 of Sutjipto, S.H., in Jakarta concerning the Change of the Bank's Capital Stock, which was approved by the Minister of Justice of the Republic of Indonesia in his decision letter No. 16495.HT.01.04.TH 99 dated September 16, 1999 and was published in the State Gazette No. 87 dated October 31, 2000 as Supplement No. 6588, Bank changed its name from PT Bank Syariah Sakinah Mandiri into PT Bank Syariah Mandiri.

Based on the Governor of Bank Indonesia's decision letter No. 1/24/KEP.GBI/1999 dated October 25, 1999 the Bank changed its activities from conventional bank to a commercial bank under Islamic Sharia principles and it has been operating effectively since November 1, 1999.

In accordance with Notary Deed of Decision of Meeting No. 38 dated March 10, 2000 of Lia Muliani, S.H., in Jakarta, substituting for Sutjipto, S.H., concerning the Change of the Bank's Capital Stock, Bank changed the amount of its capital stock, of which change was approved by the Minister of Justice and Human Rights of the Republic of Indonesia in his decision letter No. C-11545.HT.01.04.TH.2000 dated June 6, 2000 and was published in the State Gazette No. 87 dated October 31, 2000 as Supplement No. 6589.

The latest change of the capital stock is as stated in the Notary Deed of Decision of Meeting of PT Bank Syariah Mandiri No. 59 dated May 17, 2006 of Imas Fatimah, S.H., in Jakarta, which has been published in the State Gazette No. 74 dated September 15, 2006 as Supplement No. 960. The Bank's head office is located at Jalan M.H. Thamrin No. 5 Jakarta 10340. As of December

31, 2008, the Bank has 57 branches, 79 sub branches, 76 cash offices, 43 payment points, 47 sharia service offices and 13 mobile cash offices.

Based on the Minutes of the Extraordinary General Meeting of Stockholders of PT Bank Syariah Mandiri No. 10 dated June 19, 2008 of Badarusyamsi, S.H., M.Kn., in Jakarta the composition of the Sharia Supervisory Board on June 19, 2008 up to the General Meeting of Stockholder after the promotion is as follows:

The Sharia Supervisory Board

Chairman:

Professor K.H. M. Ali Yafie

Member:

Drs. H. Muhamad Hidayat, M.B.A, M.H.

Member:

Dr. M. Syafii Antonio, M.Ec.

According to the Bank Indonesia regulation No.6/24/PBI/2004 concerning The Commercial Bank whose scope of activities are based on sharia principles, the duties, authorities and responsibilities of Sharia Supervisory Board include: -

Ascertaining and supervising the conduct of the Bank's operation with fatwa issued by the National Sharia Board;

- Evaluating sharia aspect on operation manual and products issued by Bank; -

Giving an opinion in sharia aspect to overall operation in Bank's publication report; -

Analyzing new products and services that are not included in fatwa to be proposed to the National Sharia Board;

- Submitting sharia observation report at least every 6 (six) months to Directors, Commissioners, National Sharia Board and Bank Indonesia.

The Annual General Meeting of Stockholders and the Extraordinary General Meeting of Stockholders dated June 19, 2008, of which minutes of meeting were notarized under the Notary Deed of Minutes of Annual General Meeting of Stockholders of PT Bank Syariah Mandiri No. 09 and of Minute of Meeting of the Extraordinary General Meeting of Stockholders of PT Bank Syariah Mandiri No. 10, change the entire article of association in order to comply with Regulation No. 40 of 2007 regarding Limited Companies and the Company’s needs, of which deed was published in the State Gazette of the Republic of Indonesia dated September 5,2008 No. 72 as Supplement No. 17106.

Meanwhile, the minutes of the Extraordinary General Meeting of Stockholders on June 19, 2007 was notarized under the Notary Deed of Minutes of Meeting of the Extraordinary General Meeting of Stockholders of Bank Syariah Mandiri No. 119. Referring to the above and the letter of Bank Indonesia No. 9/11/DpG/DPbs dated July 13, 2007, the composition of the Board of Commissioners and the Board of Directors of the Bank as of December 31, 2008 and 2007, are as follows:

2007 Board of Com m issioners

President Commissioner:

A. Noor Ilham Commissioners:

Achmad Marzuki

Drs. H. Zainul Arifin, MBA Commissioners:

Abdillah

Djakfarudin Junus Commissioners:

Lilis Kurniasih

Tardi

Board of Directors

President Director:

Yuslam Fauzi, SE Director:

Yuslam Fauzi, SE

Ir. Muhammad Haryoko Director:

Sugiharto

Hanawijaya Hanawijaya Director:

Amran P. Nasution Director:

Amran P. Nasution

Zainal Fanani Director:

Zainal Fanani

Srie Sulistyowati Based on Notary Deed of Decision of Meeting of PT Bank Syariah Mandiri No. 59 dated May 17,

Srie Sulistyowati

2006 of Imas Fatimah, S.H., in Jakarta, which was published in the State Gazette No. 74 dated September 15, 2006 as Supplement No. 960, the terms of President Commissioner and President Director were changed into Head Commissioner and Head Director, and there were also changes in the job description, authority and responsibility of Sharia Supervisory Board, which was revised in accordance with the prevailing rules and regulations.

The composition of the audit committee as of December 31, 2008 and 2007 are as follow:

2007 Audit Comm ittee

Drs. H. Zainul Arifin, M.B.A Member: Tjeppy Kustiwa

Kasmadi Andrianto Salary and benefit expenses incurred for the members of the board of directors, commissioners

Kasmadi Andrianto

and the Sharia Supervisory Board amounted to Rp 10,101,164 and Rp 7,006,306 as of December 31, 2008 and 2007, respectively.

As of December 31, 2008 and 2007, the Bank has 2.547 and 2.228 employees, respectively.

b. Public Offering of Mudharabah Sharia Bond

On October 22, 2003 the Bank obtained the notice of effectivity from the Chairman of Capital Market Supervisory Agency (Bapepam) in his letter No. S-2545/PM/2003 for public offering of its Mudharabah Sharia Bonds amounting Rp 200,000,000, bonds with 5 (five) years maturity date, due on October 31, 2008. The entire Sharia bond fund amounting to Rp 200,000.000 has been repaid on October 31, 2008.

As of November 3, 2003 all of the outstanding bonds issued by the Bank have been listed in the Indonesia Stock Exchanges (formerly Surabaya Stock Exchanges).

c. Mudharabah Sharia Subordinated Notes

On January 31, 2007 the Bank made a limited offering and sale of Subordinated Notes of Mudharabah Sharia 2007 (Bank's subnotes) amounting Rp 200,000,000. The duration of these subnotes is 10 (ten) years with call option in the 5th (fifth) year since the issuance date. The issuance of the Bank's Subnotes is conducted in 3 (three) phases, they are: -

Phase I was on January 31, 2007 with nominal amount of Rp 105,000,000; -

Phase II was on February 27, 2007 with nominal amount of Rp 65,000,000; -

Phase III was on April 5, 2007 with nominal amount of Rp 30,000,000.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a. Basis of Preparation of Financial Statem ents

The financial statements have been prepared in conformity with Statement of Financial Accounting Standards ("PSAK") No. 101 regarding “Presentation of Sharia Financial Statements” and PSAK No. 59 regarding "Accounting for Sharia Banks", the Accounting Guidelines for Indonesian Sharia Banks (PAPSI), and other generally accepted accounting principles issued by Indonesian Institute of Accountant (IAI), and where applicable, prevailing banking industry accounting and practices prescribed by the banking authority in Indonesia and the Capital Market Supervisory Agency (Bapepam) under regulation No. VIII.G.7 of decision letter No.KEP-06/PM/2000 dated March 13, 2000 of the Chairman of BAPEPAM concerning "Guidelines for Financial Statements Presentation".

The financial statements were prepared on the accrual basis using the historical cost concept except for certain securities which are stated at fair values, foreclosed assets which are stated at net realizable values, and certain land and building which are stated at revalued amounts.

The statements of cash flows present receipts and payments of cash and cash equivalents classified into operating, investing and financing activities, using the direct method. For cash flows presentation purposes, cash and cash equivalents consist of cash, current accounts with Bank Indonesia, and current accounts with other banks, which are not pledged as collateral or restricted for use.

Cash is composed of cash on hand, petty cash, deposit cash and cash of automatic teller machine (ATM).

Based on PSAK No. 101, sharia bank financial statements should include the following: (i)

Balance sheet; (ii)

Statements of income; (iii) Statements of cash flow; (iv) Statements of changes in stockholders' equity; (v)

Statements of changes in restricted investments; (vi) Statements of Income Reconciliation of Income and profit sharing (vii) Statements of sources and uses of zakah, infaq and shadaqah funds; (viii) Statements of sources and uses of qardhul hasan funds; (ix) Notes to financial statements.

Balance sheet, statements of income, cash flow and changes in stockholders' equity are financial reports that reflect Bank's activities as an investor with its right and liabilities.

Statements of changes in restricted investments are the financial statements that reflect changes in restricted investments managed by Bank to other parties benefit based on mudharabah contract or investment agent.

Statement of Reconciliation of income and Profit Sharing are reconciliation between income of Sharia Bank on accrual basis and income distributed as profit sharing to fund owners on a cash basis.

Statements of sources and uses of zakah, infaq and shadaqah funds and sources and uses of qardhul hasan funds are financial statements that reflect Bank's role as amanah holder in charity activities in separate operation.

Statements of sources and used of zakah, infaq and shadaqah funds are statement that show the sources of zakah, infaq and Shadaqah funds, its uses and the period. They also show the sources of zakah, infaq and shadaqah fund that have not been distributed on certain dates.

Restricted investments represent investments from restricted investment owners, which are managed by the Bank as the investment agent based on the principles of mudharabah muqayyadah. Restricted investments are neither assets nor liabilities of the Bank, since the Bank is not entitled to use or withdraw the investments and Bank has no obligation of returning the investments and does not share the risk involved in the investment. The Bank receives a profit based on the investment gain ratio. Undistributed funds would be recognized in current liabilities account. The Bank started to manage restricted investments in 2003.

Zakah is some of the wealth that must be taken out by Muzak (the zakah payer) to give to mustahiq (the zakah receiver). The sources of zakah, infaq, shadaqah funds are from Bank and other parties received by Bank to be distributed to the people who have the right. The uses of zakah, infaq and shadaqah funds are in the form of the distribution to the people who have the right based on the sharia principles.

Statements of sources and uses of qardhul hasan funds are the statements showing the sources and the using of qardh on specific dates.

The Bank does not directly operate the function of management of zakah, infaq and shadaqah funds, and also the Qardhul Hasan funds.

Since 2002 the Bank has distributed zakah, through zakah management Bank (Lembaga Amil Zakat (LAZ) BSM Ummat.

Effectively on January 1, 2005, Bank has made statements of sources and uses of zakah, infaq and shadaqah funds and sources and uses of qardhul hasan funds.

b. Transactions with Related Parties

In its normal course of business, the Bank entered into transactions with related parties as defined under PSAK No. 7, "Related Party Disclosures".

All significant transactions with related parties, whether or not made at terms and conditions similar to those granted to third parties, are disclosed in the notes herein. Transactions with state-and region-owned entities are not disclosed as transactions with related parties.

c. Allowance for Possible Losses on Earning Assets non Earning Assets and Estim ated Losses on Com m itment and Contingencies.

1) Productive Assets its placements of Bank funds in rupiah and foreign currency to get income in financing, Sharia Bonds, Placements capital investment, temporary capital investment, commitment and contingency in transaction of administrative accounts and Bank Indonesia Wadiah Certificate and capitals funds that could be equaled.

Financing is Placements Fund or bill which equaled with: a)

Sharing transaction in Mudharabah and Musyarakah;

b) Leasing transaction in Ijarah or buy Rent in Ijarah muntahiyah bittamlik; c)

Trading transaction in Murabahah receivable, Salaam, Istishna; d)

Land transaction in Qardh receivable; and

e) Leasing services transaction in Ijarah for multi service transaction based on agreement between Bank Sharia and/or UUS and other party who appoint the lessor to return fund after period determined in condition with or without ujroh financial return and profit sharing.

Allowance for possible losses on earning assets and estimated losses on commitments and contingencies are provided based on management's review and evaluation of the collectibility of each earning asset and commitments and contingencies at the end of the year. In determining the required allowance for possible losses, the Bank uses the guidelines prescribed by Bank Indonesia as a minimum requirement.

The guidelines in determining the allowance for possible losses on earning assets are as follows:

a) General reserve of at least 1% of earning assets classified as current, excluding Bank Indonesia W adiah Certificates and Government Bonds based on the principles of sharia, and also on the portion of earning assets guaranteed by government guarantee and cash collateral in the form of current accounts, saving accounts, deposits, guarantee deposits, and/or gold and all accompanied with letter stating the power of attorney for to cash the collateral.

b)

Special reserve, at a minimum of: (1) 5% of earning assets classified as Special Mention less collateral value; and (2) 15% of earning assets classified as Substandard less collateral value; and (3) 50% of earning assets classified as Doubtful less collateral value; and (4) 100% of earning assets classified as Loss less collateral value.

c) The obligation to reserve allowance for possible losses does not apply for earning assets for lease transactions which include transfer of title, such as the contracts of ijarah or ijarah muthahiyah bittamlik. Bank must provide depreciation/amortization of the assets of ijarah muntahiyah bittamlik (Note 2.k.).

The outstanding balance of earning assets is written off against the respective allowance for possible losses when the management believes that the assets are determined to be definitely uncollectible. Recovery of earning assets for previously written off is credited to allowance for possible losses in the period they were recovered.

Based on Bank Indonesia Regulation No. 9/9/PBI/2007 concerning the revision on Bank Indonesia Regulation No. 8/21/PBI/2006 concerning the Assets Quality Evaluation of Commercial Bank that Conducts its Business Based on the Principles of Sharia, the administrative account transaction quality and financing are classified into 5 (five) categories, namely current, special mention, substandard, doubtful and loss. Meanwhile, the quality of securities and placements with banks are classified into 3 (three) categories, they are current, substandard and loss; and the quality of equity deposit is classified into

4 (four) categories, namely current, substandard, doubtful and loss.

2) Non earning assets represent Bank assets excluding earning assets which have potential loss such as foreclosed assets, unused property, inter-branches account, suspense account and inventories.

a) Foreclosed asset is asset acquired through auction or non auction based on voluntary submission by owner or authority to sell the assets guaranteed through non auction in term of debtors default in repaying debt to Bank.

The Bank is required to conduct completion on foreclosed asset and prepare documentation for the completion.

The Bank is required to reevaluate the foreclosed asset to determine net realizable value of the asset acquired in the acquisition. Bank appointed independent appraisal to reevaluate the foreclosed asset in the amount of Rp 5,000,000,000 (five billion) or more. While foreclosed asset below Rp 5,000,000,000 (five billion) is reevaluated by internal appraisal.

The Bank is required to use the lowest price if there are several values proposed the by independent or internal appraisal.

The quality of completed foreclosed asset is determined as: -

Current, if acquired in 1 (one) year;

Substandard, if acquired more than 1 (one) year to 3 (three) years;

Doubtful, if acquired more than 3 (three) years to 5 (five) years;

Loss, if acquired more than 5 (five) years. The quality of un-completed foreclosed asset is determined to be one level below

the regulation. Foreclosed asset related to completion of financing (presented as other asset) is

recognized based on net realizable value. Net realizable value is fair value net of estimated disposal expense. Difference net realizable value and balance of uncollectible receivables or financing is recognized as addition or deduction of allowance for possible losses on between receivables or financing.

b)

Unused Property The Bank required to identify and determine unused property and receive the

directors approval and document it. The Bank is required to conduct completion on unused property and prepare

documentation for the completion. The quality of completed unused property is determined as:

Current, acquired in 1(one) year;

Substandard, acquired in 1 (one) year to 3 (three) years;

Doubtful, acquired in 3 (three) years to 5 (five) years;

Losses, acquired in more than 5 (five) years. Quality of uncompleted unused inventories is determined to be one level below the

regulation.

c) Inter branch account is claim arising from an inter branch transaction that is uncompleted in determined period.

The Bank is required to conduct completion of inter branch account.

The quality of inter branch account is determined as: -

Current, recorded in period of 180 days.

Loss, recorded in more than 180 days.

d) Suspense Account represents unidentified transaction or transaction that are not recorded with proper documentation and are not reclassified in the required account. Bank is required to complete suspense accounts.

The quality of Suspense Account is determined as: -

Current, recorded in period of 180 days.

Loss, recorded in more than 180 days.

e) Inventory is a temporary account for non cash asset before submitted to debtors in transaction based on Murabahah, Salam and Istishna.

The Bank is required to identify and determined inventories as receive to the directors approval and document it.

The Bank is required to complete and docum ent the inventories. The quality of completed inventories is determined as:

Current, acquired in 1(one) year;

Substandard, acquired in 1 (one) year to 3 (three) years;

Doubtful, acquired in 3 (three) years to 5 (five) years;

Losses, acquired in more than 5 (five) years. Quality of uncompleted inventories is determined to be one level below the

regulation.

3) Administrative account is commitment and contingencies (off balance sheet) based on sharia principle including current bank guarantee, acceptance/endorsement, irrevocable letter of credit, import based on timely LC, standby LC and other guarantees in accordance with sharia principle.

Commitment and contingencies bearing credit risks consist of outstanding irrevocable letters of credit and bank guarantees. Provision for possible losses on commitments and contingencies is recorded under “Estimated Losses on Commitment and Contingencies”.

d. Placem ents with Bank Indonesia

Placements with Bank Indonesia consist of Wadiah current accounts and Wadiah certificates issued by Bank Indonesia as proof of short-term fund deposits based on wadiah principles.

e. Current Accounts with Other Banks

Current accounts with other banks are stated at their outstanding balance net of allowance for possible losses. Bonuses received from Sharia banks are recognized as other operating income. Interest on current accounts placed with conventional banks are not recognized as the Bank's income but are recorded as part of the charity fund (Qardhul Hasan).

f. Placem ents with Other Banks

Placements with other banks represent placements in the form of mudharabah time deposits and mudharabah investments and other placements based on sharia principles in other sharia banks. Placements with other banks are stated at their outstanding balance net of allowance for possible losses.

g. Securities

Sharia securities is the proof of investment under the sharia principles commonly traded in money market, such as sharia bonds, sharia mutual funds certificates and other securities based on sharia principles.

Securities are classified based on management intention at the purchasing date in accordance with PSAK No. 50 (Revision of 2001) on "Accounting for Certain Investments in Securities", on the following classifications: 1)

Held to maturity securities are stated at cost. Any permanent decline in the value of the security is charged to current operations.

2) Available for sale securities are stated at fair values. Unrealized gains (losses) from the increase or decrease in fair values are not recognized in the current year's profit and loss but are presented as a separated component of stockholder's equity. Gains or losses are recognized in profit and loss upon realization.

Sharia mutual fund units are stated at their fair values, which represent the net asset value of the mutual fund units as of balance sheet date.

Export bills represent prepayments made to other parties in connection with the export and import transactions of customers. Export bills are stated at their outstanding balance.

Allowance for possible losses is deducted from the related securities account.

h. Receivables

Receivables represent claims arising from the sale and purchase and/or leasing transactions conducted on the basis of Murabahah, Istishna, and/or Ijarah contracts.

Murabahah is a sales contract for goods in which the purchase price and the profit margin are agreed by both the buyer and the seller and are made explicit. A murabahah may or may not

be based on an order for goods. W here an order is in place, the Bank purchases the goods once the customer has placed the order. Payment of Murabahah maybe in cash or in deferred (installment). Upon entering into a murabahah contract, a murabahah receivable is recognized equivalent to the acquisition cost of the murabahah assets plus the agreed margin. Murabahah receivables are stated at net realized value, that is, the balance of the receivable less allowance for possible losses. Deferred murabahah margin is presented as a contra account of murabahah receivables. In a murabahah transaction, the Bank acts as the fund provider.

Istishna is a purchase agreement between an al-mustashni (buyer) and an as-shani (manufacturer acting as the seller). Based on the contract, the buyer orders the manufacturer to make or to supply al-mashnu (goods ordered) to the specifications required by the buyer at an agreed price. Istishna receivables are presented based on the outstanding billings less allowance for possible losses. In a istishna transaction, the Bank acts as the fund provider.

Ijarah is a lease contract between muajjir (lessor) and musta'jir (lessee) on ma'jur (object of lease) to earn a return on the object. An ijarah muntahiyah bit tamlik is a leasing agreement between a lessor and a lessee in order to earn a gain on the object, which includes an option to transfer the ownership title of the object after a specified period of time in accordance with the lease contract.

The transfer of title of the lease object to the lessee in an ijarah muntahiyah bit tamlik may be made by: (i)

a grant; (ii)

sale prior to the end of the contract for an amount equivalent to the remaining lease installments;

(iii) sale prior to the end of the contract at a specified amount as agreed at the inception of the contract, and (iv) gradual sale at a specific price as agreed in the contract.

Ijarah income receivable is recognized when the ijarah installment becomes due. Ijarah income receivable is stated at its net realizable value, which is the outstanding balance of the receivable less allowance for possible losses.

The Bank provides allowance for possible losses based on the quality of each receivable balance.

i. Financing

Mudharabah financing is a commercial cooperation contract between the Bank as the owner of funds (shahibul maal) and the customer as a fund manager (m udharib) to conduct certain project, by implying profit sharing and net revenue sharing method. The profit arising from the project is distributed based on a predetermined ratio.

Mudharabah financing is stated at the outstanding balance of financing less allowance for possible losses. Allowance for possible losses is provided based on the quality of the financing based on the review on each individual account.

In the event that a portion of financing is lost prior to the start up of operations owing to damage or any other reason, without course to negligence or error on the part of the fund manager, the said loss shall reduce the mudharabah financing balance and shall be recognized as a loss by the Bank. In the event that a portion of financing is lost after the commencement of operations for reasons unrelated to negligence or error on the part of the fund manager, the loss shall be distributed between parties upon the determination of profit sharing between the Bank and the fund manager.

Musyarakah financing is a partnership contract between the fund-owners (musyarakah partners) in contributing funds and conducting business through partnership. All parties share profits based on a predetermined ratio, while the loss will be distributed proportionally based on capital contribution.

Permanent musyarakah financing refer to a condition in which the fund portion of each partner is made explicit in the contract and shall stay the same until the contract expires.

Declining musyarakah financing (musyarakah mutanaqisha) refers to condition in which the fund portion of one partner will the transferred in several stage to the other partner, resulting the declining of fund portion and, when the contract expires, making the other partner the full owner of the business.

Musyarakah financing is stated at the outstanding balance of the financing less allowance for possible losses. The Bank provides allowance for possible losses based on the quality of the financing based on the review on each individual balance.

j. Qardh

Qardh represents provision of funds or similar claims based on an agreement or contract between the borrower and the lender, wherein the borrower should pay the loan after a specified period of time. The lender may receive some fee, however, this may not be stated in the agreement. The fee is recognized upon receipt.

Qardh includes hiwalah and rahn. Hiwalah is the assignment of customer's debts and/or receivables to the Bank. The Bank will

obtain a fee (ujroh) from this transaction, which is recognized upon receipt. Rahn represents the exchange of goods or assets owned by the customer for an equivalent

amount of money. Assets or goods pawned are appraised based on market value, reduced by

a certain percentage. The Bank will obtain a fee (ujroh) from this transaction, which is recognized upon receipt.

Qardh is recognized in the amount lent at the transaction date. Any excess amount paid by the borrower in repaying a qardh is recognized as revenue upon receipt.

Qardh is stated at its outstanding balance less allowance for possible losses.

k. Ijarah Assets

Ijarah assets represent assets which are objects of lease (ijarah) transactions and are recognized in the balance sheet at the acquisition cost less accumulated depreciation. The assets in an ijarah transaction are depreciated based on the depreciation policy for similar assets, while in an ijarah muntahiyah bit tamlik transactions, the asset for lease is depreciated over the lease period.

Ijarah Assets are represented in book value less allowance for possible losses.

l. Istishna Assets in Completion

Istishna assets in completion are istishna assets which are still in process. If the completion of payment is done simultaneously with the process of making istishna asset, then: 1)

Deferred expense that is paid prior to the contract is recognized as istishna asset in progress when the contract is signed.

2) Istishna expense is recognized as istishna asset in progress when it is done. 3)

Parallel istishna expense is recognized as istishna asset in progress when the bill is received from sub contractor as much the amount of bill.

m. Prem ises and Equipment

Premises and equipment are stated at cost less accumulated depreciation, except for landrights and buildings, which were revalued in accordance with government regulation in 1998. Depreciation is computed using the straight -line method based on the estimated useful lives of the assets as follows:

Installations, office equipment and vehicles 4 - 5 The cost of repairs and maintenance is charged to operations as incurred; significant renewals

and betterments are capitalized. W hen assets are retired or otherwise disposed of, their cost and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is credited or charged to current operations.

In accordance with PSAK No. 47, "Accounting for Land", acquisition of land after January 1, 1999 is stated at cost and is not depreciated. Significant expenses incurred in the acquisition or renewal of the land rights are deferred and amortized over the terms of the landrights or their useful lives, whichever is shorter.

The Bank conducts a review at the end of the year to determine whether there are indications of asset impairment in accordance with PSAK No. 48 on "Accounting for Impairment of Asset Value". If there are any indications of impairment, the Bank should compute the estimated recoverable amount of all of it assets and determine if there is a decrease in the value of the asset and recognize an impairment loss to current year operations.

n. Prepaid Expenses

Prepaid expenses (recorded under "Other Assets" account) are amortized over their expected beneficial periods using the straight-line method.

o. Deferred Income and Expenses

Deferred income consists of Rahn fees, which are amortized over the contract period and recorded under "Other Liabilities" account. Deferred expenses consist of expenses incurred in connection with the opening of new branches and will be charged to operations upon the start of branch operations.

p. Current Liabilities

Current liabilities represent obligations to third parties, based on a contract or an order by those having authority that have to be settled immediately. Current liabilities are stated at the amount of the Bank's liability.

q. W adiah Deposits

W adiah deposits represent other parties' funds in the form of demand deposits and savings deposits. Demand deposits can be used as payment instrum ents, and are available for withdrawal at any time through check, automatic teller machines and other methods available. Demand deposits and savings deposits may earn bonus based on Bank's policy. W adiah deposits in that forms are stated at the amount entrusted by depositors.

r. Deposits from Other Banks

Deposits from other banks represent liabilities to other banks in the form of wadiah demand deposits, wadiah saving deposits and Interbank Mudharabah Investment Certificate. Deposits from other banks are stated at the amounts payable to other banks.

s. Securities Issued

Securities issued are stated at their nominal value. Costs incurred in the issuance of these securities were charged to expense in the period they were incurred.

t. Tem porary Syirkah Funds

Temporary Syirkah Funds represent investment that received by sharia entity which have right to manage and invested funds, accordance to sharia entity policy or bearing regulation from owners of the funds, with profit sharing based on agreement; but less in temporary syirkah funds is caused by normal losses which not from fraud, careless or dispute agreement, sharia entity doesn’t have any liability to redeem this fund. The example of temporary syirkah fund are receive fund from mudharabah muthlaqah, mudharabah muqayyadah, mudharabah musyarakah investment and other similar account.

1) Mudharabah mutlaqah represents mudharabah financing in which the fund owner (Shahibul maal) grants freedom to fund manager (m udharib Bank) in managing its investment.

2) Mudharabah muqayyadah represents mudharabah financing in which the fund owner sets restrictions against fund manager regarding, among other, the place, the means and the object of investment.

3) Mudharabah musyarakah represents mudharabah financing in which fund manager submits its capital or fund in the investment.

Temporary syirkah fund cannot classified as liability. Because it does not have any liability to redeem beginning fund from the owners when there’s loss, expect management’s fault. On the other hand, temporary syirkah fund cannot be classified as equity, because some of these matter: time period, each owners doesn’t have the same right whether in voting and realized gain from current assets and other non-investment accounts.

The relation between sharia entity and the owner of temporary syirkah fund represent partnership based on mudharabah muthlaqah, mudharabah muqayyadah or musyarakah.

agreement. Sharia entity have right to manage and investing received fund with or without bearing such as place, way or object of investment.

Temporary syirkah fund is one of the balance sheet part which accordance with sharia principle that give right to sharia entity to manage and invest fund, including to mixing this fund with the other fund.

The owner of temporary syirkah funds receive a part of profit accordance to agreement and receive loss based on total funds of each party. Profit sharing of temporary syirkah fund could

be revenue sharing or gain sharing concept.

u. Bank’s Revenue from Fund Managem ent as Mudharib

Bank’s revenue from fund management as Mudharib consist of income from Murabahah and Istishna transaction, income from profit sharing of Mudharabah and Musyarakah financing, income from Ijarah Muntahiyah Bittamlik (leasing) and other.

Revenue from Murabahah is recognized upon delivery of goods if payment is in cash or deferred, so the recognition of principle and revenue has done proportionally based on generally bank accounting practice (vide: Bank Indonesia Letter No. 10/1260/DPbS dated October 15, 2008 and Bank Indonesia Letter No.9/634/DPbS dated April 20, 2007).

In relation with the rate of mudharabah receivable risk, the Bank established policy on murabahah revenue recognition as follow: 1)