Annual Financial Report

GFH Financial Group B.S.C
14 February 2024
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GFH Financial Group BSC

 

CONSOLIDATED

FINANCIAL STATEMENTS

 

31 DECEMBER 2023

 

 

    Commercial registration                     : 44136 (registered with Central Bank of Bahrain

                                                              as an Islamic wholesale Bank)

 

    Registered Office                              : Bahrain Financial Harbour

                                                              Office: 2901, 29th Floor

                                                              Building 1398, East Tower

                                                              Block: 346, Road: 4626                                   

                                                              Manama, Kingdom of Bahrain

                                                              Telephone +973 17538538

 

    Directors                                          : Ghazi Faisal Ebrahim Alhajeri, Chairman

                                                              Edris Mohammed Rafi Alrafi, Vice Chairman

                                                             Hisham Ahmed Alrayes

                                                              Rashid Nasser Al Kaabi

                                                              Ali Murad

                                                              Fawaz Talal Al Tamimi

                                                              Darwish Al Ketbi

                                                              Yusuf Abdulla Taqi

 

    Chief Executive Officer                     : Hisham Ahmed Alrayes

                                                           

    Auditors                                           : KPMG Fakhro


CONSOLIDATED FINANCIAL STATEMENTS

for the year ended 31 December 2023

 

CONTENTS

Page



Chairman's report

1-4

Report of the Shari'a Supervisory Board

5

Independent auditors' report to the shareholders

6-12



Consolidated financial statements


Consolidated statement of financial position

13

Consolidated income statement

14

Consolidated statement of changes in owners' equity

15-16

Consolidated statement of cash flows

17

Consolidated statement of changes in restricted investment accounts

18

Consolidated statement of sources and uses of zakah and charity fund

19

Notes to the consolidated financial statements

20-107





                                                                                                                                     

 

 

 

 

 

 


CHAIRMAN'S REPORT

for the year ended 31 December 2023  

 

Dear Shareholders,

On behalf of the Board of Directors of GFH Financial Group, I am pleased to present the Group's Directors' Report for the fiscal year ended 31 December 2023.  The report demonstrates the strong progress made on transforming GFH into a diversified regional financial group, a journey we began nearly a decade ago. 2023 has been another remarkable year of growth and profitability for the Group despite the unpredictable market conditions and regional geopolitical tensions. This is a testament to the Group's commitment, dedication, and focus.  The Group has been agile and innovative in its approach and has constantly refined its operating model in order to adapt to external market conditions and effectively navigate market disruption.

 

Unwavering Strategic Focus

Our robust strategy has provided us with the stability needed to continue expanding our global footprint in support of top and bottom-line growth, whilst also remaining resilient.

 

We continue to put the interests of our investors and shareholders at the heart of our decision making process and remain committed to sustainable progress across our business including our investment banking, commercial banking, proprietary investments and treasury businesses in order to deliver additional value to all our stakeholders.

 

Continued Business Growth

Aligning with macroeconomic trends, we focused on expanding our portfolio of income generating assets in the GCC, where growth is expected to outperform most other global markets in 2024 due in part to higher oil prices and government spending on national development plans. Markets including Saudi Arabia, UAE, and Bahrain offer significant opportunities.  We consider these as core markets for future growth, where we can continue to capitalize on our on-the-ground presence and deep market knowledge.

As well as focusing on the GCC, we continued to broaden our investment portfolio in key global markets. The Group has made significant portfolio investments, in addition to acquiring strategic stakes in leading asset managers, which will offer additional platforms to access highly promising opportunities. Today our assets span across the GCC, UK, Europe and the US. Throughout the year, our portfolio continued to perform robustly, benefiting from our focus on defensive, recession-proof sectors that have been effective in creating value for investors and shareholders.

The launch of GFH Partners, our specialist dedicated global real estate investment arm, represents a landmark milestone in our overall transformation journey. GFH Partners currently has US$6 billion in assets in its core markets, which include leading specialist asset managers in key sectors such as  logistics, student living, and medical offices in the US and Europe.

 

Strong Financial Performance

Our dedication, focus, and robust business strategy, sustained strong financial performance for 2023. We reported enhanced profits and significantly increased income. The Group's total consolidated revenue was US$369.53 million compared with US$ 297.8 million in 2022, reflecting a year-on-year increase of 24.1%. The Group reported a consolidated net profit of US$105.2 million in 2023 compared to US$97.7 million from the previous year, reflecting an increase of 7.7%, and a net profit attributable to shareholders of US$102.9 million compared with US$90.3 million for the previous year, an increase of 13.9%.

The Group's total assets for the year grew from US$9.76 billion in 2022 to US$11.12 billion in 2023, an increase of 13.9%. The Group's Total Assets and Funds Under Management (AUM) increased from US$17.0 billion in 2022 to US$21.0 billion in 2023, marking a year-on-year increase of 23.5%. The Group also ended the year with a Capital Adequacy Ratio of 21.04% and a Return on Equity (ROE) ratio of 10.1%.

In the twelve months ended December 2023, the Group successfully raised more than US$5.56 billion across its investment banking and treasury business lines.

 

Credit Ratings Reaffirmations

Further positive reflections of our performance were provided by credit rating agencies. Fitch Ratings affirmed our Long- and Short-Term Issuer Default Ratings (IDR) at 'B' and confirmed its outlook on Long-Term IDR as Stable. Capital Intelligence Ratings also affirmed GFH Financial Group's Long-Term Foreign Currency Rating (LT FCR) and Short-Term Foreign Currency Rating (ST FCR) at 'BB-' and 'B', respectively, with Outlook on the LT FCR remaining Stable.

These ratings reaffirmations underscore our resilient business model, future-proof strategy, and strong financial performance. We are proud of the confidence ratings agencies and shareholders have consistently shown in GFH. 

 

Sustainability and Community Commitments

We are proud of the tangible outcomes of our ESG commitments, which drive further sustainable growth and positive social impact. GFH is an integral part of Bahrain's development and community, sponsoring and supporting important projects and high-profile sporting events.

Globally, GFH is also an important voice at internationally significant gatherings focused on impact and change. We recently joined the Future Investment Initiative Institute as a Strategic Partner, and the World Economic Forum as an Associate Partner, contributing to crucial discussions on shaping the future. This global status reflects our position as a major international player as well as a leading regional financial institution.

Dividend Recommendation

As a result of our robust performance, the Board has recommended a total cash dividend of 6.2% on par value for our shareholders.

Future Outlook

As we move ahead, we will continue to prudently grow our portfolio of investments and strategic assets across our key markets of focus in the region and internationally.  Having ended the year with positive momentum, we look forward to delivering greater value for our investors and shareholders in 2024 and beyond.

CHAIRMAN'S REPORT

for the year ended 31 December 2023  

 

Acknowledgments

On behalf of the Board of Directors, we are immensely grateful for the leadership of His Majesty King Hamad bin Isa Al Khalifa and His Royal Highness Prince Salman bin Hamad Al Khalifa, the Crown Prince, Deputy Supreme Commander and Prime Minister, who have provided a stable environment for Bahrain's financial sector to thrive.

I also express our appreciation for the Central Bank of Bahrain and the Government of the Kingdom of Bahrain for facilitating a robust regulatory environment that enables financial institutions such as ours to innovate and grow.

Further, I sincerely thank our investors and shareholders for their continued confidence in our Group and operational model.

Finally, the Board is tremendously proud of the entire GFH team for delivering such strong performance in 2023 and remains confident in their ability to execute our strategy in 2024.

First: Remuneration of the Board of Directors:

Name

Fixed remunerations

Variable remunerations

End-of-service award

Aggregate amount

(Does not include expense allowance)

Expenses Allowance

Remunerations of the chairman and BOD

Total allowance for attending Board and committee meetings

Others

Total

Remunerations of the chairman and BOD

Incentive plans

Others**

Total

First: Independent Directors:

Ghazi Faisal Ebrahim Alhajeri

113,100

100,000

-

213,100






213,100

-

Fawaz Al Tamimi

75,400

50,000

-

125,400

-

-

-

-

-

125,400

-

Ali Murad

75,400

50,000

-

125,400

-

-

-

-

-

125,400

-

Edris Mohd Rafi Mohd Saeed Alrafi

94,250

50,000

-

144,250

-

-

-

-

-

144,250

-

Darwish AlKetbi

75,400

50,000

-

125,400

-

-

-

-

-

125,400

-

Yousif Abdulla Taqi

75,400

50,000

-

125,400

-

-

-

-

-

125,400

-

Second: Non-Executive Directors:

Rashed Alkaabi

75,400

50,000

-

125,400

-

-

-

-

-

125,400

-

Third: Executive Directors (3):

Hisham Alrayes

75,400

50,000

-

125,400

-

-

-

-

-

125,400

-

Total

659,750

450,000

-

1,109,750

-

-

-

-

-

1,109,750

-

 

Notes:

1.     All amounts in Bahraini Dinars.

2.     The Bank does not have any variable remuneration payments, end of service benefits, or expense allowances paid to its directors.

3.     Salaries and other benefits in their capacity as employee is reported in second table below.

 



 

CHAIRMAN'S REPORT

for the year ended 31 December 2023  

Board remuneration represents allocation of proposed remuneration for 2023 subject to approval of the Annual General Meeting.

Second: Executive Management Remuneration Details for Top 6 Executives:

Executive management

Total paid salaries and allowances

Total paid remuneration (Bonus)

Any other cash/ in kind remuneration for 2023

Aggregate Amount

Remunerations of top 6 executives, including CEO* and CFO**

1,222,432

1,074,148

1,611,223

3,907,803

All amounts in Bahraini Dinars.

 

* The highest authority in the executive management of the company, the name may vary: (CEO, President, General Manager (GM), Managing Director...etc.

** The company's highest financial officer (CFO, Finance Director, ...etc)

 

Notes:

1.     A significant portion of executive management remuneration are subject to deferral over a minimum period of 3 years as per regulations of the Central Bank of Bahrain. In addition to the paid benefits reported above, the Bank also operates a long-term share incentive scheme award that allows employees to participate in a share-ownership plan. The Bank allocates shares awards that vest over a period of 6 years under normal terms and are subject to future performance conditions. The non-cash accounting charge recognized for 2023 amounted to BD 377 thousand determined in accordance with the requirements of IFRS 2.  Refer to the Remuneration related and share-based payment disclosures in the Annual Report for a better understanding of the Bank's variable remuneration framework components.

 

2.     Remuneration information above exclude any Board remuneration earned by executive management from their role in the board of investee companies or other subsidiaries.

 

Thank you,

 

 

 

 

 

Ghazi Faisal Ebrahim Alhajeri

Chairman

GFH Financial Group



SHARI'A REPORT

for the year ended 31 December 2023                                                                                                     

 

 

13 February 2024

5 Rajab 1443 AH

 

SHARIA SUPERVISORY BOARD REPORT TO THE SHAREHOLDERS

Report on the activities of GFH Financial Group B.S.C.

for the financial year ending 31 December 2023

 

Prayers and Peace Upon the Last Apostle and Messenger, Our prophet Mohammed, His comrades and Relatives.

 

The Sharia Supervisory Board of GFH Financial Group have reviewed the Bank's investment activates and compared them with the previously issued fatawa and rulings during the financial year 31st December 2023.

 

Respective Responsibility of Sharia Supervisory Board

 

The Sharia Supervisory Board believes that as a general principle and practice, the Bank Management is responsible for ensuring that it conducts its business in accordance with Islamic Sharia rules and principles. The Sharia Supervisory Board responsibility is to express an independent opinion on the basis of its control and review of the Bank's operations and to prepare this report.

 

Basis of opinion

 

Based on Sharia Supervisory Board fatwas and decisions, AAOIFI standards and Sharia Audit plan, the Sharia Supervisory Board through its periodic meetings reviewed the Sharia Audit function reports and examined the compliance of documents and transactions in regards to Islamic Sharia rules and principles, in coordination with Sharia Implementation & Coordination function. Furthermore, the Bank's management explained and clarified the contents of Consolidated Balance Sheet, Consolidated Income Statement, Consolidated statement of Zakah and Charity fund, and attached notes for the financial year ended on 31st December 2023 to our satisfaction.

 

Opinion

 

The Sharia Supervisory Board believes that,

§ The contracts, transactions and dealings entered into by the Bank are in compliance with Islamic Sharia rules and principles

§ The distribution of profit and allocation of losses on investments was in line with the basis and principles approved by the Sharia Supervisory Board and in accordance to the Islamic Sharia rules and principles

§ Any earnings resulted from sources or means prohibited by the Islamic Sharia rules and principles, have been directed to the Charity account.

§ Zakah was calculated according to the Islamic Sharia rules and principles, by the net assets method. And the shareholders should pay their portion of Zakah on their shares as stated in the Zakah guide.

§ The Bank was committed to comply with Islamic Sharia rules and principles, the Sharia Supervisory Board fatawa and guidelines, Sharia related policies and procedures, AAOIFI's Sharia standards, and Sharia directives issued by the CBB.

 

Praise be to Allah, Lord of the worlds.

Prayer on Prophet Mohammed (Peace Be Upon Him), all his family and Companions.

 

 

 









 

Sheikh Nedham Yaqoubi                                               Sheikh Abdulla Al Menai

 

 

 









 

Sheikh Abdulaziz Al Qassar                                           Sheikh Fareed Hadi


Independent auditors' report

 

To the Shareholders of

 

GFH Financial Group B.S.C.    

PO Box 10006

Manama

Kingdom of Bahrain

 

Opinion

 

We have audited the accompanying consolidated financial statements of GFH Financial Group B.S.C. (the "Bank"),  and its subsidiaries (together the "Group") which comprise the consolidated statement of financial position as at 31 December 2023, the consolidated statements of income, changes in owners' equity, cash flows, changes in restricted investment accounts and sources and uses of zakah and charity fund for the year then ended, and notes, comprising significant accounting policies and other explanatory information.

 

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at 31 December 2023, consolidated results of  its operations, changes in owners' equity, its cash flows, changes in restricted investment accounts and its sources and uses of zakah and charity fund for the year then ended in accordance with the Financial Accounting Standards ("FAS")  issued by the Accounting and Auditing Organisation for Islamic Financial Institutions ("AAOIFI").

 

In our opinion, the Group has also complied with the Islamic Shariah Principles and Rules as determined by the Group's Shariah Supervisory Board during the year ended 31 December 2023.

 

Basis for Opinion

 

We conducted our audit in accordance with Auditing Standards for Islamic Financial Institutions ("ASIFIs") issued by AAOIFI.  Our responsibilities under those standards are further described in the Auditors' responsibilities for the audit of the consolidated financial statements section of our report. We are independent of the Group in accordance with AAOIFI's Code of Ethics for Accountants and Auditors of Islamic Financial Institutions  and International Ethics Standards Board for Accountants International Code of Ethics for Professional Accountants (including International Independence Standards) (together "the Code"), together with the ethical requirements that are relevant  to our audit of the consolidated financial statements in the Kingdom of Bahrain, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

 

Key Audit Matters

 

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.


INDEPENDENT AUDITORS REPORT TO THE SHAREHOLDERS (continued)

GFH Financial Group B.S.C.

 

Key Audit Matters (continued)

 

Impairment allowance on Financing contracts

Refer accounting policy in note 4(h) (i) and (q) , use of estimates and judgments in note 5 and management of credit risk in note 35 (a).

 

The key audit matter

How the matter was addressed in our audit

We focused on this area because:

 

Of the significance of financing contracts representing 14% of total assets.

 

The estimation of expected credit losses ("ECL") on Financing contracts involve significant judgment and estimates. The key areas where we identified greater level of management judgment and estimates are:

 

Use of complex models

Use of inherently judgmental complex models to estimate ECL which involves determining Probabilities of default ("PD"), Loss Given Default ("LGD") and Exposure At default ("EAD"). The PD models are considered the drivers of the ECLs.

 

Economic scenarios

The need to measure ECLs on an unbiased forward-looking basis incorporating a range of economic conditions. Significant management judgment is applied in determining the economic scenarios used and the probability weightings applied to them.

 

Management overlays

Adjustments to the ECL model results are made by management to address known impairment model limitations or emerging trends or risks. Such adjustments are inherently uncertain and significant management judgment is involved in estimating these amounts.

 

Our procedures, amongst others, included:

Evaluating the appropriateness of the accounting policies adopted based on the requirements of applicable accounting standards, regulatory guidance, our business understanding and industry practice.

 

Confirming our understanding of management's processes, systems and controls over the ECL calculation process.

 

Control testing

We performed process walkthroughs to identify the key systems, applications and controls associated with the ECL calculation processes.

 

Key aspects of our controls testing involved the following:

 

Testing controls over the transfer of data between underlying source systems and ECL models that the Group operates.

Performing a detailed credit risk assessment for a sample of performing corporate contracts to test controls over the credit rating and monitoring process.

Testing controls over the review and approval of post model adjustments and management overlays and the governance process over such overlays;

Testing controls over the modelling process, including governance over model monitoring, validation and approval.

 

Tests of details

Key aspects of our testing involved:

 

·      Reviewing a sample of credit files for performing accounts and evaluating the financial performance of the borrower, source of repayment and eligible collateral and on this basis assess the appropriateness of credit rating and staging.

 



 

INDEPENDENT AUDITORS REPORT TO THE SHAREHOLDERS (continued)

GFH Financial Group B.S.C.

 

Key Audit Matters (continued)

 

The key audit matter

How the matter was addressed in our audit

 

 

 

·    Sample testing over key data inputs used in estimating the ECL and assessing the completeness, accuracy and relevance of data used.

 

·    Re-performing key elements of the Group's model calculations and assessing performance results for accuracy.

 

·    Sample testing over factors used to determine whether significant increase in credit risk has been appropriately identified.

 

·    Selecting a sample of post model adjustments and management overlays to assess the reasonableness of the adjustments by challenging key assumptions, testing the underlying calculation and tracing a sample back to the source data.

 

Assessing the adequacy of provisions against individually impaired financing contracts (stage 3) in accordance with the applicable FAS.

Use of specialists

For the relevant portfolios examined, we have involved KPMG specialists to assist us in assessing IT system controls and challenging key management assumptions used in estimating expected credit losses. Key aspects of their involvement included the following:

·    We involved our Information Technology Audit  specialists to test the relevant General IT and Applications Controls over key systems used for data extraction as part of the ECL process;

 

·    We involved our Financial Risk Management (FRM) specialists to assist us in:

a.   Evaluating the appropriateness of the Groups' ECL methodologies (including the staging criteria used);

b.   On a test basis, re-performing the calculation of certain components of the ECL model (including the staging criteria);

c.   Evaluating the appropriateness of the Group's methodology for determining the economic scenarios used and the probability weights applied to them; and

d.   Evaluating the overall reasonableness of the management forward- looking estimates by comparing it to external market data and our understanding of the underlying sector and macroeconomic trends.

 

Disclosure

We assessed the adequacy of the Group's disclosures in relation to use of significant estimates and judgement and credit quality of financing assets by reference to the requirements of relevant accounting standards

 

Valuation of unquoted equity investments

Refer accounting policy in note 4g(iv) and fair value of level 3 financial instruments in note 33.

 

The key audit matter

How the matter was addressed in our audit

We considered this as a key audit area we focused on because the valuation of unquoted equity securities held at fair value (level 3) requires the application of valuation techniques which often involve the exercise of significant judgment by the Group and the use of significant unobservable inputs and assumptions.

Our procedures included:

 

·    we involved our own valuation specialists to assist us in:

·    evaluating the appropriateness of the valuation methodologies used by comparing with observed industry practice.

·    evaluating the reasonableness of key input and assumptions used by using our knowledge of the industries in which the investees operate and industry norms



 

INDEPENDENT AUDITORS REPORT TO THE SHAREHOLDERS (continued)

GFH Financial Group B.S.C.

 

Key Audit Matters (continued)

 

The key audit matter

How the matter was addressed in our audit


·    comparing the key underlying financial data and inputs used in the valuation to external sources, investee company financial and management information, as applicable.

 

Disclosures

Evaluating the adequacy of the Group's disclosures related to valuation of unquoted equity instruments by reference to the relevant accounting standards.

 

Other Information

 

The board of directors is responsible for the other information. The other information comprises the annual report but does not include the consolidated financial statements and our auditors' report thereon. Prior to the date of this auditors' report, we obtained the Chairman's report and other sections which forms part of the annual report, and the remaining sections of the annual report are expected to be made available to us after that date.

Our opinion on the consolidated financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon.

In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed on the other information that we have obtained prior to the date of this auditors' report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

 

Responsibilities of Board of Directors for the Consolidated Financial Statements

 

The board of directors is responsible for the Group's undertaking to operate in accordance with Islamic Sharia Rules and Principles as determined by the Group's Shariah Supervisory Board.

The board of directors is also responsible for the preparation and fair presentation of the consolidated financial statements in accordance with FAS, and for such internal control as the board of directors determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

 

In preparing the consolidated financial statements, the board of directors is responsible for assessing the Group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the board of directors either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.



 

INDEPENDENT AUDITORS REPORT TO THE SHAREHOLDERS (continued)

GFH Financial Group B.S.C.

 

Auditors' Responsibilities for the Audit of the Consolidated Financial Statements

 

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors' report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ASIFIs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

 

As part of an audit in accordance with ASIFIs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also:

 

-   Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

-   Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group's internal control.

-   Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the board of directors.

-   Conclude on the appropriateness of the board of directors' use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors' report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors' report. However, future events or conditions may cause the Bank to cease to continue as a going concern.

-   Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

-   Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements.  We are responsible for the direction, supervision and performance of the Group audit.  We remain solely responsible for our audit opinion.

 

We communicate with the board of directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

 

We also provide the board of directors with a statement that we have complied with relevant ethical requirements regarding independence and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguards applied.  

 

From the matters communicated with the board of directors, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditors' report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.



 

INDEPENDENT AUDITORS REPORT TO THE SHAREHOLDERS (continued)

GFH Financial Group B.S.C.

 

Report on Other Regulatory Requirements

 

As required by the Commercial Companies Law 2001 (as amended) and Volume 2 of the Rulebook issued by the Central Bank of Bahrain, we report that:

 

a)     the Bank has maintained proper accounting records and the consolidated financial statements are in agreement therewith;

b)    the financial information contained in the chairman's report is consistent with the consolidated financial statements;

c)     we are not aware of any violations during the year of the Commercial Companies Law 2001 (as amended) , the CBB and Financial Institutions Law No. 64 of 2006 (as amended), the CBB Rule Book (Volume 2, applicable provisions of Volume 6 and CBB directives), the CBB Capital Markets Regulations and associated resolutions, the Bahrain Bourse rules and procedures or the terms of the Bank's memorandum and articles of association that would have had a material adverse effect on the business of the Bank or on its financial position; and

d)    satisfactory explanations and information have been provided to us by management in response to all our requests.

 

The engagement partner on the audit resulting in this independent auditors' report is Mahesh Balasubramanian.

 

 

 

 

 

 

KPMG Fakhro

Partner Registration Number 137

13 February 2024


CONSOLIDATED STATEMENT OF FINANCIAL POSITION

as at 31 December 2023                                                                                                                                   US$ 000's

 


Note

31 December

2023 


31 December 2022

 

 


 



ASSETS





Cash and bank balances

6

376,884


858,239

Treasury portfolio

7

5,135,032


4,210,020

Financing contracts

8

1,537,314


1,435,238

Investment in real estate

9

1,371,932


1,287,085

Proprietary investments

10

1,044,727  


1,005,053

Co-investments

11

254,610  


142,051

Receivables and other assets

12

787,640  


589,869

Property and equipment

13

274,721   


232,736

Assets held for sale

37

338,619


-

 

Total assets

 

11,121,479  


9,760,291

 





LIABILITIES





Clients' funds


206,222


123,300

Placements from financial institutions


2,323,217


3,790,870

Placements from non-financial institutions and individuals

14

960,050


1,064,258

Customer current accounts


203,697


131,234

Term financing

15

2,124,307


1,942,198

Other liabilities

16

548,056


423,363

Liabilities held for sale

37

230,562


-

 

 




Total liabilities


6,596,111


7,475,223

 

 




Equity of investment account holders

17

3,451,006


1,213,674

 


 



OWNERS' EQUITY





Share capital

18

1,015,637


1,015,637

Treasury shares


(125,525)


(105,598)

Statutory reserve


47,518


36,995

Investment fair value reserve


(46,103)


(53,195)

Cash flow hedge reserve


(2,135)


-

Other reserve


(13,612)


-

Retained earnings

38

105,831


95,831

Share grant reserve

19

7,930


6,930

Total equity attributable to shareholders of Bank

 

989,541


996,600

Non-controlling interests


84,821


74,794

 

Total owners' equity

 

1,074,362


1,071,394

Total liabilities, equity of investment account holders and owners' equity

 

11,121,479


9,760,291

The consolidated financial statements were approved by the Board of Directors on 13 February 2024 and signed on its behalf by:                 

 

 

Ghazi Faisal Ebrahim Alhajeri                                                                          Hisham Alrayes

Chairman                                                                                                              Chief Executive Officer & Board member

 

                                 

                                                                                                               

 The accompanying notes 1 to 38 form an integral part of these consolidated financial statements.

CONSOLIDATED INCOME STATEMENT

for the year ended 31 December 2023                                                                                                         US$ 000's

 


Note

2023

 


2022

 



 








Investment banking income





Deal related income


182,719


86,967

Asset management


18,652


33,536



201,371

 

120,503

Commercial banking income





Income from financing


106,691


94,751

Treasury and investment income


94,254


61,021

Fee and other income


27,210


9,211

Less: Return to investment account holders

17

(57,183)


(38,051)

Less: Finance expense


(91,973)


(47,960)



78,999

 

78,972

Treasury and Proprietary Investments





Finance and treasury portfolio income, net

Direct investment income, net


209,372

37,142


94,665

53,559

Income from co-investments, net


10,993


24,626

Share of profit from equity-accounted investees


34,536


27,694

Income from sale of assets


7,959


13,388

Leasing and operating income


15,793


7,753

Other income, net


15,089


19,910

Finance expenses - Repo and FI


(241,727)


(143,308)



89,157


98,287

Total income


369,527


297,762






Other operating expenses

21 & 22

181,373


147,947

Finance expense - Term financing and others


62,468


48,798

Impairment allowances

 23

20,459


3,310

Total expenses


264,300


200,055

 





Profit for the year


105,227


 

             97,707

 

Attributable to:




Shareholders of the Bank

102,863


90,253

Non-controlling interests

2,364


7,454

 

105,227


97,707

 

Earnings per share


 



Basic and diluted earnings per share (US cents)


2.95


2.65



 



 

 

 

 

 

 

Ghazi Faisal Ebrahim Alhajeri                                                                          Hisham Alrayes

Chairman                                                                                                              Chief Executive Officer & Board member

 

  The accompanying notes 1 to 38 form an integral part of these consolidated financial statements.


CONSOLIDATED STATEMENT OF CHANGES IN OWNERS' EQUITY                                                              

for the year ended 31 December 2023                                                                                                                                                US$ 000's

 

 

 

 

Attributable to shareholders of the Bank

 

 

Total owners' equity

31 December 2023

Share capital

 Treasury shares

 Statutory reserve

 

 

Cashflow hedge reserve

 

 

Other reserve *

Investment fair value reserve

Retained earnings

Share grant reserve

Total

Non-Controlling Interests (NCI) **





 

 

 






Balance at 1 January 2023               (as previously reported)

1,015,637

(105,598)

36,995

 

-

 

-

(53,195)

95,831

6,930

996,600

74,794

1,071,394

Prior year adjustment (note 38)

-

-

-

-

-

-

(22,753)

-

(22,753)

-

(22,753)

Balance as at 1 January 2023             (re-stated)  

1,015,637

(105,598)

36,995

 

-

 

-

(53,195)

73,078

6,930

973,847

74,794

1,048,641

Profit for the year

-

-

-

-

 

-

-

102,863

-

102,863

2,364

105,227

Fair value changes during the year

-

-

-

 

(2,135)

 

(13,612)

7,092

-

-

(8,655)

(542)

(9,197)

Total recognised income and expense

-

-

-

 

(2,135)

 

(13,612)

7,092

102,863

-

94,208

1,822

96,030


 

 

 









Issue of shares under incentive scheme

-

-

-

-

-

-

-

1,000

1,000

-

1,000

Transfer to zakah and charity fund

-

-

-

-

-

-

(1,000)

-

(1,000)

-

(1,000)

Dividends declared for 2022

-

-

-

-

-

-

(56,261)

-

(56,261)

-

(56,261)

Transfer to statutory reserve

-

-

10,523

-

-

-

(10,523)

-

-

-

-

Purchase of treasury shares

-

(48,178)

-

-

-

-

-

-

(48,178)

-

(48,178)

Sale of treasury shares

-

28,251

-

-

-

-

(2,326)

-

25,925

-

25,925

Additional NCI without a change in control

-

-

-

-

-

-

-

-

-

12,165

12,165

Reduction in NCI due to loss of control

-

-

-

-

-

-

-

-

-

(3,960)

(3,960)

 

Balance at 31 December 2023

1,015,637

(125,525)

47,518

 

(2,135)

 

(13,612)

(46,103)

 105,831

7,930

989,541

84,821

1,074,362















 

* Represents share of changes in reserves of equity accounted investee

** Includes non-controlling interest of US $ 16,470 (2022: US Nil) classified under held for sale (note 37).         

 

The accompanying notes 1 to 38 form an integral part of these consolidated financial statements.                                                                   


CONSOLIDATED STATEMENT OF CHANGES IN OWNERS' EQUITY

for the year ended 31 December 2023 (continued)                                                                                                                              US$ 000's

 

 


Attributable to shareholders of the Bank

Non-Controlling Interests (NCI)

Total owners' equity

31 December 2022

Share capital

 Treasury shares

 Statutory reserve

Investment fair value reserve

Foreign currency translation reserve

Retained earnings

Share grant reserve

Total












Balance at 1 January 2022

1,000,637

(48,497)

27,970

(28,561)

(70,266)

81,811

-

963,094

205,027

1,168,121

Profit for the year

-

-

-

-

-

90,253

-

90,253

7,454

97,707

Transfer on reclassification from FVTE to amortised cost

-

-

-

41,320

-

-

-

41,320

-

41,320

Fair value changes during the year

-

-

-

(63,312)

-

-

-

(63,312)

(2,462)

(65,774)

Transfer to income statement on disposal of sukuk

-

-

-

(2,642)

-

-

-

(2,642)

-

(2,642)

Total recognised income and expense

-

-

-

(24,634)

-

90,253

-

65,619  

4,992

70,611












Bonus shares issued

15,000

-

-

-

-

(15,000)

-

-

-

-

Dividend declared

-

-

-

-

-

(45,000)

-

(45,000)

-

(45,000)

Purchase of treasury shares

-

(79,141)

-

-

-

-

-

(79,141)

-

(79,141)

Sale of treasury shares

-

22,040

-

-

-

(5,725)

-

16,315

-

16,315

Transfer to zakah and charity fund

-

-

-

-

-

(1,483)

-

(1,483)

-

(1,483)

Transferred to income statement on deconsolidation of subsidiaries

-

-

-

-

70,266

-

-

70,266

-

70,266

Transfer to statutory reserve



9,025



(9,025)


-


-

Increased in NCI

-

-

-

-

-

-

-

-

6,492

6,492

Adjusted on deconsolidation of subsidiaries

-

-

-

-

-

-

             -

-

(141,717)

(141,717)

Issue of shares under incentive scheme

-

-

-

-

-

-

6,930

6,930

-

6,930

 

Balance at 31 December 2022

1,015,637

(105,598)

36,995

(53,195)

-

95,831

6,930

996,600   

74,794

1,071,394    

 

 

 

 

The accompanying notes 1 to 38 form an integral part of these consolidated financial statements.                        


CONSOLIDATED STATEMENT OF CASH FLOWS

for the year ended 31 December 2023                                                                                       US$ 000's

 

 

31 December

2023

 

 

31 December

2022

 

OPERATING ACTIVITIES

 

 


Profit for the year

105,227


97,707

Adjustments for:




Treasury and proprietary investments

(89,156)


(98,287)

Foreign exchange gain

(1,199)


(4,853)

Finance expense

62,468


48,798

Impairment allowances

20,459


3,310

Depreciation and amortisation

11,244


5,841


109,043


52,516

Changes in:




Placements with financial institutions (original maturities of more       than 3 months)

404,308


(475,696)

Financing contracts

(37,473)


(169,271)

Receivables and other assets

(174,768)


(177,000)

CBB Reserve and restricted bank balance

(6,758)


(12,676)

Clients' funds

82,922


(93,462)

Customer Current accounts

72,463


(1,812)

Placements from financial institutions

(1,467,653)


1,520,053

Placements from non-financial institutions and individuals

(104,208)


290,646

Equity of investment account holders

2,237,332


(144,670)

Other liabilities

(148,170)


(113,660)

Net cash generated used operating activities

967,038


674,968


 



INVESTING ACTIVITIES

 

 


Payments for purchase of equipment, net

(5,546)


(1,818)

(Purchase) / sale of proprietary and co-investments, net

(84,638)


30,441

Cash paid on acquisition of subsidiary, net

(5,654)


(7,112)

Cash transferred on deconsolidation of a subsidiary

(5,997)


(80,119)

Purchase of treasury portfolio, net

(196,717)


(467,860)

Profit received on treasury portfolio and other income

200,877


111,054

Proceeds from sale of investment in real estate

37,182


19,209

Dividends received from proprietary and co-investments

80,886


55,235

Payment for development of real estate asset

(12,026)


(65,809)

Net cash from / (used) in investing activities

8,367


(406,779)

 

 



FINANCING ACTIVITIES

 

 


Term financing, net

198,820


215,998

Finance expense paid

(449,236)


(204,649)

Dividends paid

(58,400)


(44,818)

Purchase of treasury shares, net

(19,926)


(38,000)

Net cash used financing activities

(328,742)


(71,469)

 

 



Net increase in cash and cash equivalents during the year

646,663


196,720

Cash and cash equivalents at 1 January*

1,041,064


844,344


 



Cash and cash equivalents at 31 December

1,687,727


1,041,064


 



Cash and cash equivalents comprise:*

 



Cash and balances with banks (excluding CBB Reserve balance and restricted cash)

300,736


787,479

Placements with financial institutions (original maturities of 3 months or less)

1,386,991


253,585


1,687,727


1,041,064

 

 

* net of expected credit loss of US$ 27 thousand (31 December 2022: US$ 11 thousand)

The accompanying notes 1 to 38 form an integral part of these consolidated financial statements.


CONSOLIDATED STATEMENT OF CHANGES IN RESTRICTED INVESTMENT ACCOUNTS

for the year ended 31 December 2023                                                                                                                                                                                                                                                                                                  

 

31 December 2023

Balance at 1 January 2023

Movements during the year

Balance at 31 December 2023

Company

No. of units (000)

Average value per share US$

Total            US$ 000's

Investment/ (withdrawal) US$ 000's

Revaluation 

US$ 000's

Gross income US$ 000's

Dividends paid

US$ 000's

Group's fees as an agent          US$ 000's

Administration expenses US$ 000's

No. of units (000)

Average value per share US$

Total            US$ 000's

 














 

Mena Real Estate Company KSCC

150

0.33

50

-

-

-

-

-

-

150

0.33

50

 

Al Basha'er Fund

12

7.87

94

-

-

-

-

-

-

12

7.87

94

 

Safana Investment (RIA 1)

1,247

2.65

3,305

-

(75)

-

-

-

-

1,219

2.65

3,230

 

Shaden Real Estate Investment

WLL (RIA 5)

269

2.65

713

-

119

-

-

-

-

314

2.65

832

 




4,162

-

44

-

-

-

-



4,206

 

 

31 December 2022

Balance at 1 January 2022

Movements during the year

Balance at 31 December 2022

Company

No. of units (000)

Average value per share US$

Total            US$ 000's

Investment/ (withdrawal) US$ 000's

Revaluation 

US$ 000's

Gross income US$ 000's

Dividends paid

US$ 000's

Group's fees as an agent          US$ 000's

Administration expenses US$ 000's

No. of units (000)

Average value per share US$

Total            US$ 000's

 














 

Mena Real Estate Company KSCC

150

0.33

50

-

-

-

-

-

-

150

0.33

50

 

Al Basha'er Fund

12

7.87

94

-

-

-

-

-

-

12

7.87

94

 

Safana Investment (RIA 1)

1,247

2.65

3,305

-

-

-

-

-

-

1,247

2.65

3,305

 

Shaden Real Estate Investment

WLL (RIA 5)

269

2.65

713

-

-

-

-

-

-

269

2.65

713

 




4,162

-

-

-

-

-

-



4,162

 

 

 

 

 

The accompanying notes 1 to 38 form an integral part of these consolidated financial statements.


CONSOLIDATED STATEMENT OF SOURCES AND USES OF ZAKAH AND CHARITY FUND

for the year ended 31 December 2023                                                                                 US$ 000's

 


2023


2022


 



Sources of zakah and charity fund

 

 


Contributions by the Group

2,471

 

2,531

Non-Sharia income (note 28)

278


88

 




Total sources

2,749


2,619





Uses of zakah and charity fund

 



Contributions to charitable organisations

(2,120)


(1,903)





Total uses

(2,120)


(1,903)

 




Surplus of sources over uses

629


716

Undistributed zakah and charity fund at beginning of the year

5,924


5,208





Undistributed zakah and charity fund at 31 December (note 16)

6,553


5,924

 

Represented by:

 

 


Zakah payable

1,647


753

Charity fund

4,906


5,171

 




 

6,553


5,924

           

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes 1 to 38 form an integral part of these consolidated financial statements.


 

1    REPORTING ENTITY

GFH Financial Group BSC ("the Bank") was incorporated as Gulf Finance House BSC in 1999 in the Kingdom of Bahrain under Commercial Registration No. 44136 and operates under an Islamic Wholesale Investment Banking license issued by the Central Bank of Bahrain ("CBB"). The Bank's shares are listed on the Bahrain, Kuwait, Dubai and Abu Dhabi Financial Market Stock Exchanges. The Bank's sukuk certificates are listed on London Stock Exchange.

 

The Bank's activities are regulated by the CBB and supervised by a Shari'a Supervisory Board. The principal activities of the Bank include investment advisory services and investment transactions which comply with Islamic rules and principles determined by the Bank's Shari'a Supervisory Board.

 

The consolidated financial statements for the year comprise the results of the Bank and its material subsidiaries (together referred to as "the Group"). The significant subsidiaries of the Bank which consolidated in these financial statements are:

 

Investee name

Country of incorporation

Effective ownership interests as at

31 December 2023

Activities

GFH Partners Ltd

(formally known as GFH Capital Limited)

United Arab Emirates

100%

Investment management

GFH Capital S.A.

Saudi Arabia

100%

Investment management

Khaleeji Bank BSC ('KHB')

Kingdom of Bahrain

 

85.14%

Islamic retail bank

GBCORP B.S.C (c)

62.91%

Investment firs (Islamic principles)

Al Areen Hotels W.L.L.

100%

Hospitality management services

 

 The Bank has other SPE holding companies and subsidiaries, which are set up to supplement the activities of the Bank and its principal subsidiaries and hold assets and non-core operations which are not material to the group.



 

 

2    STATEMENT OF COMPLIANCE

The consolidated financial statements have been prepared in accordance with the Financial Accounting Standards ('FAS') issued by the Accounting and Auditing Organisation for Islamic Financial Institutions ("AAOIFI") and in conformity with Commercial Companies Law. In line with the requirement of AAOIFI and the Rulebook issued by CBB, for matters that are not covered by FAS, the Group uses guidance from the relevant IFRS Accounting Standards as issued by the International Accounting Standards Board (IFRS Accounting Standards).

 

3    BASIS OF MEASUREMENT

The consolidated financial statements are prepared on the historical cost basis except for the measurement at fair value of investment securities.

 

The Group classifies its expenses in the consolidated income statement by the nature of expense method. The consolidated financial statements are presented in United States Dollars (US$), which is also the functional currency of the Group's operations. All financial information presented in US$ has been rounded to the nearest thousands, except when otherwise indicated.

 

The preparation of consolidated financial statements requires the use of certain critical accounting estimates. It also requires management to exercise judgement in the process of applying the Group's accounting policies. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. Management believes that the underlying assumptions are appropriate and the Group's consolidated financial statements therefore present the financial position and results fairly. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in note 5.

The below paragraphs and tables describe the Group's significant lines of business and sources of revenue they are associated with.

 

Activities:

The Group's primary activities include:

a) to provide investment opportunities and manage assets on behalf of its clients as an agent,

b) to provide commercial banking services,

c) to undertake targeted development and sale of infrastructure and real estate projects for enhanced returns, and

d) to co-invest with clients and hold strategic proprietary assets as a principal. In addition, the Group also manages its treasury portfolio with the objective of earning higher returns from capital and money market opportunities.



 

3    BASIS OF MEASUREMENT (continued)

 

Segments:

To undertake the above activities, the Group has organised itself in the following operating segments units:

 

Investment banking

Investment banking segment focuses on private equity and asset management activities. Private equity activities include acquisition of interests in unlisted businesses at average prices with potential for growth. The Group acts as both a principal and an intermediary by acquiring, managing and realizing investments in investment assets for institutional and high net worth clients. The asset management unit is responsible for identifying and managing investments in income yielding real estate and leased assets in the target markets.

Investment banking activities focuses on acquiring, managing and realizing investments to achieve and exceed benchmark returns.

Investment banking activities produce fee-based, activity-based and asset-based income for the Group.  Assets under this segment include investment banking receivables.

Commercial banking

This includes all sharia compliant corporate banking and retail banking activities of the Group provided through the Group's subsidiary, Khaleeji Bank BSC. The subsidiary also manages its own treasury and proprietary investment book within this operating segment.

Proprietary and treasury

All common costs and activities that are undertaken at the Group level, including treasury and residual proprietary and co-investment assets, is considered as part of the Proprietary and treasury activities of the Group.

 

Each of the above operating segments, except commercial banking which is a separate subsidiary, has its own dedicated team of professionals and are supported by a common placement team and support units.

 

The strategic business units offer different products and services and are managed separately because they require different strategies for management and resource allocation within the Group. For each of the strategic business units, the Group's Board of Directors (chief operating decision makers) review internal management reports on a quarterly basis.

 

The performance of each operating segment is measured based on segment results and are reviewed by the management committee and the Board of Directors on a quarterly basis. Segment results is used to measure performance as management believes that such information is most relevant in evaluating the results of certain segments relative to other entities that operate within these industries. Inter-segment pricing, if any is determined on an arm's length basis.

 

The Group classifies directly attributable revenue and cost relating to transactions originating from respective segments as segment revenue and segment expenses respectively. Indirect costs is allocated based on cost drivers/factors that can be identified with the segment and/ or the related activities. The internal management reports are designed to reflect revenue and cost for respective segments which are measured against the budgeted figures. The unallocated revenues, expenses, assets and liabilities related to entity-wide corporate activities and treasury activities at the Group level. Expenses are not allocated to the business segment.



 

3    BASIS OF MEASUREMENT (continued)

Sources of revenue:

The Group primarily earns its revenue from the following sources and presents its statement of income accordingly:

 

Activity/ Source

Products

Types of revenue

 

Investment banking

Deal-by-deal offerings of private equity, income yielding asset opportunities

Deal related income, earned by the Group from structuring and sale of assets.

 

Fee based income, in the nature of management fees, performance fee, acquisition fee and exit fee which are contractual in nature

Commercial banking

Islamic Shari'ah compliant corporate, institutional and retail banking financing and cash management products and services

 

Financing income, fees and investment income (net of direct funding costs)

 

Proprietary investments

Proprietary investments comprise the Group's strategic investment exposure. This also includes equity -accounted investees where the Bank has significant influence

Includes dividends, gain / (loss) on sale and remeasurement of proprietary investments and share of profit / (loss) of equity accounted investees

 

Income from restructuring of liabilities and funding arrangements are also considered as income from proprietary investments

Co-investment

Represent the Group's co-investment along with its clients in the products promoted by the Group

 

Dividends and gain / (loss) on co-investments of the Bank

Sale of assets

Proprietary holdings of real estate for direct sale, development and sale, and/ or rental yields.  This also includes the group's holding or participation in leisure and hospitality assets.

Development and sale income arises from development and real estate projects of the Group based on percentage of completion (POC) method.

 

Leasing and operating income, from rental and other ancillary income from investment in real estate and other assets.

 

Treasury operations

Represents the Bank's liquidity management operations, including its fund raising and deployment activities to earn a commercial profit margin.

Income arising from the deployment of the Bank's excess liquidity, through but not limited to short term placements with bank and financial institutions, money market instruments, capital market and other related treasury investments.

 



 

 

4    SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies applied in the preparation of these consolidated financial statements are set out below. These accounting policies have been applied consistently to all periods presented in the consolidated financial statements and have been consistently applied by the Group.

 

(a)  New standards, amendments, and interpretations effective for annual periods beginning on or after 1 January 2023

 

The following new standards and amendments to standards are effective for financial years beginning on or after 1 January 2023 with an option to early adopt. However, the Group has not early adopted any of these standards.

 

(i)   FAS 39 Financial Reporting for Zakah

 

AAOIFI has issued FAS 39 Financial Reporting for Zakah in 2021. The objective of this standard is to establish principles of financial reporting related to Zakah attributable to different stakeholders of an Islamic financial Institution. This standard supersedes FAS 9 Zakah and is effective for the financial reporting periods beginning on or after 1 January 2023.

 

This standard shall apply to institution with regard to the recognition, presentation and disclosure of Zakah attributable to relevant stakeholders. While computation of Zakah shall be applicable individually to each institution within the Group, this standard shall be applicable on all consolidated and separate / standalone financial statements of an institution.

 

This standard does not prescribe the method for determining the Zakah base and measuring Zakah due for a period. An institution shall refer to relevant authoritative guidance for determination of Zakah base and to measure Zakah due for the period. (for example: AAOIFI Shari'a standard 35 Zakah, regulatory requirements or guidance from Shari'a supervisory board, as applicable).

 

An institution obliged to pay Zakah by law or by virtue of its constitution documents shall recognise current Zakah due for the period as an expense in its financial statements. Where Zakah is not required to be paid by law or by virtue of its constitution documents, and where the institution is considered as an agent to pay Zakah on behalf of certain stakeholders, any amount paid in respect of Zakah shall be adjusted with the equity of the relevant stakeholders.

 

The Group does not have any obligation to pay Zakah as per its constitutional documents but only pays Zakah on undistributed profits as an agent on behalf of its shareholders. The Group has adopted this standard and has provided the necessary additional disclosures in its annual financial statements (refer notes 27).

 

(ii) FAS 41 Interim financial reporting

This standard prescribes the principles for the preparation of condensed interim financial information and the relevant presentation and disclosure requirements, emphasizing the minimum disclosures specific to Islamic financial institutions in line with various financial accounting standards issued by AAOIFI. This standard is also applicable to the institutions which prepare a complete set of financial statements at interim reporting dates in line with the respective FAS's.

 

This standard is effective for financial statements for the period beginning on or after 1 January 2023. The Group has adopted this standard for the basis of preparation of its condensed consolidated interim financial information. The adoption of this standard did not have any significant impact on the Group's interim financial information.

 

(iii) FAS 44 Determining Control of Assets and Business

AAOIFI has issued FAS 44 "Determining Control of Assets and Business" on 31 December 2023, applicable with immediate effect. The objective of this standard is to establish clear and consistent principles for assessing whether and when an institution controls an asset or a business, both in the context of participatory structures and for consolidation purposes. 

 

 

4    SIGNIFICANT ACCOUNTING POLICIES (continued)

 

This standard is applicable to all Islamic financial institutions ("IFIs") and entities who are party to the Sharia compliant transactions and structures (as allowed by the respective regulatory and reporting framework). This standard covers both on-balance sheet and off-balance sheet arrangements, including participatory structures like mudaraba, musharaka, and sukuk. The assessment of control is relevant across various accounting policies of the Group, including but not limited to consolidation of subsidiaries, recognition and de-recognition of various financial assets and participatory investment structures.

 

The Group has assessed the revised framework for control assessment provided by FAS 44 and does not expect any significant impact on its previously assessed control conclusions on the adoption of this standard.  However, the Groups accounting policies and disclosures have been revised to be consistent with the revised definitions and principles clarified under FAS 44

 

(b)  New standards, amendments, and interpretations issued but not yet effective

 

(i) FAS 1 General Presentation and Disclosures in the Financial Statements

 

AAOIFI has issued the revised FAS 1 General Presentation and Disclosures in the Financial Statements in 2021. This standard describes and improves the overall presentation and disclosure requirements prescribed in line with the global best practices and supersedes the earlier FAS 1. It is applicable to all the Islamic Financial Institutions and other institutions following AAOIFI FAS's. This standard is effective for the financial reporting periods beginning on or after 1 January 2024 with an option to early adopt.

 

The revision of FAS 1 is in line with the modifications made to the AAOIFI conceptual framework for financial reporting.

 

Some of the significant revisions to the standard are as follows:

a)   Revised conceptual framework is now integral part of the AAOIFI FAS's;

b)   Definition of Quassi equity is introduced;

c)   Definitions have been modified and improved;

d)   Concept of comprehensive income has been introduced;

e)   Institutions other than Banking institutions are allowed to classify assets and liabilities as current and non-current;

f)    Disclosure of Zakah and Charity have been relocated to the notes;

g)   True and fair override has been introduced;

h)   Treatment for change in accounting policies, change in estimates and correction of errors has been introduced;

i)    Disclosures of related parties, subsequent events and going concern have been improved;

j)    Improvement in reporting for foreign currency, segment reporting;

k)   Presentation and disclosure requirements have been divided into three parts. First part is applicable to all institutions, second part is applicable only to banks and similar IFI's and third part prescribes the authoritative status, effective date an amendments to other AAOIFI FAS's; and

l)    The illustrative financial statements are not part of this standard and will be issued separately.   

 

The Group is assessing the impact of adoption of this standard and expects changes in certain presentation and disclosures in its consolidated financial statement in line with the wider market practice.

 

(ii) FAS 45: Quasi-Equity (Including Investment Accounts)

AAOIFI has issued Financial Accounting Standard (FAS) 45 "Quasi-Equity (Including Investment Accounts)" during 2023. The objective of this standard is to establish the principles for identifying, measuring, and presenting "quasi-equity" instruments in the financial statements of Islamic Financial Institutions "IFIs".



 

4    SIGNIFICANT ACCOUNTING POLICIES (continued)

 

The standard prescribes the principles of financial reporting to participatory investment instruments (including investment accounts) in which an IFI controls underlying assets (mostly, as working partner), on behalf of the stakeholders other than owner's equity. This standard provides the overall criteria for on-balance sheet accounting for participatory investment instruments and quasi-equity, as well as, pooling, recognition, derecognition, measurement, presentation and disclosure for quasi-equity.

 

This standard shall be effective for the financial reporting periods beginning on or after 1 January 2026 with an option to early adopt.

 

The Group does not expect any significant impact on the adoption of this standard.

 

(iii) FAS 46: Off-Balance-Sheet Assets Under Management

AAOIFI has issued Financial Accounting Standard ("FAS") 46 "Off-Balance-Sheet Assets Under Management" during 2023. The objective of this standard is to establish principles and rules for recognition, measurement, disclosure, and derecognition of off-balance-sheet assets under management, based on Shari'a and international best practices. The standard aims to improve transparency, comparability, accountability, and governance of financial reporting related to off-balance-sheet assets under management.

 

This standard is applicable to all IFIs with fiduciary responsibilities over asset(s) without control, except for the following:

• The participants' Takaful fund and / or participants' investment fund of a Takaful institution; and

• An investment fund managed by an institution, being a separate legal entity, which is subject to financial reporting in line with the requirements of the respective AAOIFI FAS.

 

This standard shall be effective for the financial reporting periods beginning on or after 1 January 2026 with an option to early adopt.

 

This standard shall be effective for the financial periods beginning on or after 1 January 2026 with an option to early adopt. This standard shall be adopted at the same time as adoption of FAS 45 "Quasi-Equity (Including Investment Accounts)".

 

The Group does not expect any significant impact on the adoption of this standard.

 

(iv) FAS 47: Transfer of Assets Between Investment Pools

AAOIFI has issued Financial Accounting Standard ("FAS") 47 "Transfer of Assets Between Investment Pools" during 2023.  The objective of this standard is to establish guidance on the accounting treatment and disclosures for transfers of assets between investment pools that are managed by the same institution or its related parties. The standard applies to transfers of assets that are not part of a business combination, a disposal of a business, or a restructuring of an institution.

 

The standard defines an investment pool as a group of assets that are managed together to achieve a common investment objective, such as a fund, a portfolio, or a trust. The standard also defines a transfer of assets as a transaction or event that results in a change in the legal ownership or economic substance of the assets, such as a sale, a contribution, a distribution, or a reclassification.

 

The transfer of assets between investment pools should be accounted for based on the substance of the transaction and the terms and conditions of the transfer agreement. The standard classifies transfers of assets into three categories: transfers at fair value, transfers at carrying amount, and transfers at other than fair value or carrying amount. The standard also specifies the disclosure requirements for transfers of assets between investment pools.

 

This standard shall be effective for the financial periods beginning on or after 1 January 2026 with an option to early adopt.

 

The Group does not expect any significant impact on the adoption of this standard.



 

4    SIGNIFICANT ACCOUNTING POLICIES (continued)

 

(c)  Basis of consolidation

(i)   Business combinations

Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Group. Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, the Group takes into consideration potential voting rights that are currently exercisable.

 

The Group measures goodwill at the acquisition date as:

·              the fair value of the consideration transferred; plus  

·              the recognised amount of any non-controlling interest in the acquiree; plus

·            if the business combination achieved in stages, the fair value of the pre-existing equity interest in the     acquiree; less

·              the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities  assumed.

 

When the excess is negative, a bargain purchase gain is recognised immediately in the consolidated income statement.

 

The consideration transferred does not include amounts related to settlement of pre-existing relationships. Such amounts are generally recognised in the consolidated income statement.  Transaction costs, other than those associated with the issue of debt or equity securities, that the Group incurs in connection with a business combination are expensed as incurred.

 

Any contingent consideration payable is measured at fair value at the acquisition date.  If the contingent consideration is classified as equity, then it is not re-measured and settlement is accounted within equity. Otherwise subsequent changes in the fair value of the contingent consideration are recognised in the consolidated income statement.

 

(ii)  Subsidiaries

   Subsidiaries are those enterprises (including special purpose entities) controlled by the Bank. The Group controls a business if, and only if, it has a) power over the business b) exposure, or rights, to variable returns from its involvement with the business; and c) the ability to use its power over the business to affect the amount of the institution's returns.

 

Power is presumed when an entity directly, or indirectly through its subsidiaries, holds more than 50% of the voting rights.  Where the Group has less than majority voting rights, control may exist through a) agreement with other shareholders or the business itself; b) rights arising from other contractual arrangements; c) the institution's voting rights (de facto power); d) potential voting rights; or e) a combination thereof.

 

The Group considers only substantive voting rights in its assessment of whether it has power over a business. In order to be substantive, rights need to be exercisable when relevant decisions are required to be made and the holder of such rights must have the practical ability to exercise those rights.  When making an assessment of whether the Group controls a business, it considers the voting and other rights emanating from the investment in the business duly funded by the Group itself and its equity of investment accountholders. 

 

 

 



 

4    SIGNIFICANT ACCOUNTING POLICIES (continued)

(c)  Basis of consolidation (continued)

 

(iii) Non-controlling interests (NCI)

NCI are measured at their proportionate share of the acquiree's identifiable net assets at the date of acquisition.

If less than 100% of a subsidiary is acquired, then the Group elects on a transaction-by-transaction basis to measure non-controlling interests either at:

 

·      Fair value at the date of acquisition, which means that goodwill, or the gain on a bargain purchase, includes a portion attributable to ordinary non-controlling interests; or

·      the holders' proportionate interest in the recognised amount of the identifiable net assets of the acquire, which means that goodwill recognised, or the gain on a bargain purchase, relates only to the controlling interest acquired.

 

Changes in the Group's interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions.

 

(iv)   Special purpose entities

 

Special purpose entities (SPEs) are entities that are created to accomplish a narrow and well-defined objective such as the securitisation of particular assets, or the execution of a specific borrowing or investment transaction and usually voting rights are relevant for the operating of such entities. An investor that has decision-making power over an investee and exposure to variability of returns determines whether it acts as a principal or as an agent to determine whether there is a linkage between power and returns. The Group in its ordinary course of business may manage an asset or a business for the benefit of stakeholders other than its equity holders through an agency (usually investment agency) or similar arrangement. Control does not include situations whereby the institution has the power, but such power is exercisable in a fiduciary capacity, and not for the variable returns to the institution itself. Performance incentives receivable by an agent are in a fiduciary capacity, and hence not considered to be variable returns for the purpose of control assessment

 

The Group in its fiduciary capacity manages and administers assets held in trust and other investment vehicles on behalf of investors. The financial statements of these entities are usually not included in these consolidated financial statements. Information about the Group's fiduciary assets under management is set out in note 25. For the purpose of reporting assets under management, the gross value of assets managed are considered.

 

(v)    Loss of control

When the Group losses control over a subsidiary, it derecognises the assets and liabilities of the subsidiary, any non-controlling interests and the other components of equity. Any surplus or deficit arising on the loss of control is recognised in consolidated income statement. Any interest retained in the former subsidiary, is measured at fair value when control is lost. Subsequently it is accounted for as an equity-accounted investee or in accordance with the Group's accounting policy for investment securities depending on the level of influence retained.

 

 

 

 

 

 

 

 

 



 

4    SIGNIFICANT ACCOUNTING POLICIES (continued)

(c)  Basis of consolidation (continued)

 

(vi)   Equity accounted investees

This comprise investment in associates and joint ventures. Associates are those entities in which the Group has significant influence, but not control or joint control, over the financial and operating policies. Significant influence is presumed to exits when the Group holds between 20% and 50% of the voting power of another entity.  A joint venture is an arrangement in which the Group has joint control, where the Group has rights to the net assets of the arrangement, rather than rights to its assets and obligations for its liabilities.

 

Associates and Joint venters are accounted for under equity method. These are initially recognised at cost and the carrying amount is increased or decreased to recognise the investor's share of the profit or loss of the investees after the date of acquisition. Distributions received from an investees reduce the carrying amount of the investment. Adjustments to the carrying amount may also be necessary for changes in the investor's proportionate interest in the investees arising from changes in the investee's equity. When the

 

Group's share of losses exceeds its interest in an equity-accounted investees, the Group's carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the equity-accounted investees. Equity accounting is discontinued when an associate is classified as held-for-sale.

 

(vii)      Transactions eliminated on consolidation and equity accounting

Intra-group balances and transactions, and any unrealised income and expenses (except for foreign currency translation gains or losses) from intra-group transactions with subsidiaries are eliminated in preparing the consolidated financial statements. Intra-group gains on transactions between the Group and its equity-accounted investees are eliminated to the extent of the Group's interest in the investees. Unrealised losses are also eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.  Accounting policies of the subsidiaries and equity- accounted investees have been changed where necessary to ensure consistency with the policies adopted by the Group.

 

(d)  Assets held-for-sale

Classification

Non-current assets, or disposal groups comprising assets and liabilities, are classified as held-for-sale if it is highly probable that they will be recovered primarily through sale rather than through continuing use within twelve months.  A subsidiary acquired exclusively with a view to resale is classified as disposal group held-for-sale and income and expense from its operations are presented as part of discontinued operation.

 

Measurement

Such assets, or disposal groups, are generally measured at the lower of their carrying amount and fair value less costs to sell. Any impairment loss on a disposal group is allocated first to goodwill, and then to the remaining assets and liabilities on a pro-rata basis, except that no loss is allocated to inventories, financial assets, deferred tax assets, employee benefit assets, investment property or biological assets, which continue to be measured in accordance with the Group's other accounting policies. Impairment losses on initial classification as held-for-sale or held-for-distribution and subsequent gains and losses on re-measurement are recognised in profit or loss. Once classified as held-for-sale, intangible assets and property, plant and equipment are no longer amortised or depreciated, and any equity-accounted investee is no longer equity accounted.

 

If the criteria for classification as held for sale are no longer met, the entity shall cease to classify the asset (or disposal group) as held for sale and shall measure the asset at the lower of its carrying amount before the asset (or disposal group) was classified as held-for-sale, adjusted for any depreciation, amortisation or revaluations that would have been recognised had the asset (or disposal group) not been classified as held-for-sale and its recoverable amount at the date of the subsequent decision not to sell.



 

4          SIGNIFICANT ACCOUNTING POLICIES (continued)

(e)  Foreign currency transactions

(i)      Functional and presentation currency

Items included in the consolidated financial statements are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The consolidated financial statements are presented in US dollars, which is the Group's functional and presentation currency.

 

(ii)         Transactions and balances

Transactions in foreign currencies are translated into the functional currency using the spot exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated into the functional currency at the spot exchange rate at the reporting date.

 

Non-monetary items that are measured based on historical cost in a foreign currency are translated using the spot exchange rate at the date of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. Translation differences on non-monetary items carried at their fair value, such as certain equity securities measured at fair value through equity, are included in investments fair value reserve.

 

(iii)         Foreign operations

The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition are translated into US$ at exchange rates at the reporting date. The income and expenses of foreign operations are translated into US$ at the exchange rates at the date of the transactions. Foreign currency differences are accumulated into foreign currency translation reserve in owners' equity, except to the extent the translation difference is allocated to NCI.

 

When foreign operation is disposed of in its entirety such that control is lost, cumulative amount in the translation reserve is reclassified to consolidated income statement as part of the gain or loss on disposal.

 

(f)   Offsetting of financing instruments

Financial assets and liabilities are offset and the net amount presented in the consolidated statement of financial position when, and only when, the Group has a legal right to set off the recognised amounts and it intends either to settle on a net basis or to realise the asset and settle the liability simultaneously.  Income and expense are presented on a net basis only when permitted under AAOIFI, or for gains and losses arising from a group of similar transactions.

 

(g)  Investment securities

Investment securities are categorised as proprietary investments, co-investments and treasury portfolio.

(refer note 3 for categorisation).

 

Investment securities comprise debt type and equity type instruments but exclude investment in subsidiaries and equity-accounted investees (note 4 (c) (ii) and (vi)).

 

(i)   Categorization and classification

The classification and measurement approach for investments in sukuk, shares and similar instruments that reflects the business model in which such investments are managed and the underlying cash flow characteristics. Under the standard, each investment is to be categorized as either investment in:        

i)         equity-type instruments

ii)        debt-type instruments, including:

·      monetary debt-type instruments; and

·      non-monetary debt-type instruments.

iii)       other investment instruments

Unless irrevocable initial recognition choices as per the standard are exercised, an institution shall classify investments as subsequently measured at either of: 

·    amortised cost;

·    fair value through equity (FVTE) or

·    fair value through income statement (FVTIS), on the basis of both:

Ø  the Group's business model for managing the investments; and

Ø  the expected cash flow characteristics of the investment in line with the nature of the underlying Islamic finance contracts.

4          SIGNIFICANT ACCOUNTING POLICIES (continued)

(g)        Investment securities (continued)

 

(ii)  Recognition and de-recognition

Investment securities are recognised at the trade date i.e. the date that the Group commits to purchase or sell the asset, at which date the Group becomes party to the contractual provisions of the instrument. Investment securities are derecognised when the rights to receive cash flows from the financial assets have expired or where the Group has transferred substantially all risk and rewards of ownership. 

 

(iii) Measurement

Investment securities are measured initially at fair value plus, except for investment securities carried at FVTIS, transaction costs that are directly attributable to its acquisition or issue.

 

Subsequent to initial recognition, investments carried at FVTIS and FVTE are re-measured to fair value. Gains and losses arising from a change in the fair value of investments carried at FVTIS are recognised in the consolidated income statement in the period in which they arise. Gains and losses arising from a change in the fair value of investments carried at FVTE are recognised in the consolidated statement of changes in owners equity and presented in a separate investment fair value reserve in equity.

 

The fair value gains / (losses) are recognised taking into consideration the split between portions related to owners' equity and equity of investment account holders. When the investments carried at FVTE are sold, impaired, collected or otherwise disposed of, the cumulative gain or loss previously recognised in the statement of changes in owners' equity is transferred to the income statement.

 

Investments at FVTE where the entity is unable to determine a reliable measure of fair value on a continuing basis, such as investments that do not have a quoted market price or there are no other appropriate methods from which to derive reliable fair values, are stated at cost less impairment allowances.

 

(iv) Measurement principles

Amortised cost measurement

The amortised cost of a financial asset or liability is the amount at which the financial asset or liability is measured at initial recognition, minus capital repayments, plus or minus the cumulative amortisation using the effective profit method of any difference between the initial amount recognised and the maturity amount, minus any reduction (directly or through use of an allowance account) for impairment or uncollectibility. The calculation of the effective profit rate includes all fees and points paid or received that are an integral part of the effective profit rate.

 

Fair value measurement

Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction on the measurement date.  When available, the Group measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions on an arm's length basis.

 

The best evidence of the fair value of a financial instrument on initial recognition is normally the transaction price - i.e. the fair value of the consideration given or received.

 

If a market for a financial instrument is not active, the Group establishes fair value using a valuation technique. Valuation techniques include using recent arm's length transactions between knowledgeable, willing parties (if available), discounted cash flow analyses, price / earnings multiples and other valuation models with accepted economic methodologies for pricing financial instruments.

 

Some or all of the inputs into these models may not be market observable, but are estimated based on assumptions. Inputs to valuation techniques reasonably represent market expectations and measures of the risk-return factors inherent in the financial instrument.



 

4          SIGNIFICANT ACCOUNTING POLICIES (continued)

(g)        Investment securities (continued)

(iv)        Measurement principles (continued)

 

Fair value estimates involve uncertainties and matters of significant judgement and therefore, cannot be determined with precision. There is no certainty about future events (such as continued operating profits and financial strengths). It is reasonably possible, based on existing knowledge, that outcomes within the next financial year that are different from assumptions could require a material adjustment to the carrying amount of the investments.

 

The fair value of a financial liability with a demand feature (e.g. a demand deposit) is not less than the amount payable on demand, discounted from the first date on which the amount could be required to be paid.

 

The Group recognises transfers between levels of the fair value hierarchy as of the end of the reporting period during which the change has occurred.

 

(h)  Financing contracts

Financing contracts comprise Shari'a compliant financing contracts with fixed or determinable payments. These include financing provided through Murabaha, Musharaka, Istisna and Wakala contracts. Financing contracts are recognised on the date at which they are originated and are carried at their amortised cost less impairment allowances, if any.

 

(i)   Assets acquired for leasing

Assets acquired for leasing (Ijarah Muntahia Bittamleek) comprise finance lease assets which are stated at cost less accumulated depreciation and any impairment in value. Under the terms of lease, the legal title of the asset passes to the lessee at the end of the lease term, provided that all lease instalments are settled. Depreciation is calculated on a straight-line basis at rates that systematically reduce the cost of the leased assets over the period of the lease. The Group assesses at each reporting date whether there is objective evidence that the assets acquired for leasing are impaired. Impairment losses are measured as the difference between the carrying amount of the asset (including lease rental receivables) and the estimated recoverable amount. Impairment losses, if any, are recognised in the consolidated income statement.

 

(j)   Placements with and from financial and other institutions

These comprise placements made with/ from financial and other institutions under shari'a compliant contracts.  Placements are usually short term in nature and are stated at their amortised cost. 

 

(k)  Cash and cash equivalents

For the purpose of consolidated statement of cash flows, cash and cash equivalents comprise cash on hand, bank balances and placements with financial institutions) with original maturities of three months or less when acquired that are subject to insignificant risk of changes in their fair value, and are used by the Group in the management of its short-term commitments. Bank balances that are restricted and not available for day-to-day operations of the Group are not included in cash and cash equivalents.

 

(l)   Derivatives held for risk management purposes and hedge accounting.

Derivatives held for risk management purposes include all derivative assets and liabilities that are not classified as trading assets or liabilities. All derivatives are measured at fair value in the statement of financial position.

 

The Group designates certain derivatives held for risk management as hedging instruments in qualifying hedging relationships.

 



 

4          SIGNIFICANT ACCOUNTING POLICIES (continued)

(l)         Derivatives held for risk management purposes and hedge accounting (continued)

 

Policy applicable generally to hedging relationships

On initial designation of the hedge, the Group formally documents the relationship between the hedging instruments and hedged items, including the risk management objective and strategy in undertaking the hedge, together with the method that will be used to assess the effectiveness of the hedging relationship. The Group makes an assessment, both on inception of the hedging relationship and on an ongoing basis, of whether the hedging instruments are expected to be highly effective in offsetting the changes in the fair value or cash flows of the respective hedged items during the period for which the hedge is designated, and whether the actual results of each hedge are within a identified. For a cash flow hedge of a forecast transaction, the Group makes an assessment of whether the forecast transaction is highly probable to occur and presents an exposure to variations in cash flows that could ultimately affect profit or loss.

 

The Group normally designates a portion of the cash flows of a financial instrument for cash flow or fair value changes attributable to a benchmark profit rate risk, if the portion is separately identifiable and reliably measurable.

 

i. Fair value hedges

When a derivative is designated as the hedging instrument in a hedge of the change in fair value of a recognised asset or liability or a firm commitment that could affect profit or loss, changes in the fair value of the derivative are recognised immediately in profit or loss. The change in fair value of the hedged item attributable to the hedged risk is recognised in profit or loss. If the hedged item would otherwise be measured at cost or amortised cost, then its carrying amount is adjusted accordingly.

 

If the hedging derivative expires or is sold, terminated or exercised, or the hedge no longer meets the criteria for fair value hedge accounting, or the hedge designation is revoked, then hedge accounting is discontinued prospectively.

 

Any adjustment up to the point of discontinuation to a hedged item for which the effective profit method is used is amortised to profit or loss as an adjustment to the recalculated effective profit rate of the item over its remaining life. On hedge discontinuation, any hedging adjustment made previously to a hedged financial instrument for which the effective profit method is used is amortised to profit or loss by adjusting the effective profit rate of the hedged item from the date on which amortisation begins. If the hedged item is derecognised, then the adjustment is recognised immediately in profit or loss when the item is derecognised.

 

ii. Cash flow hedges

When a derivative is designated as the hedging instrument in a hedge of the variability in cash flows attributable to a particular risk associated with a recognised asset or liability or highly probable forecast transaction that could affect profit or loss, the effective portion of changes in the fair value of the derivative is recognised in equity and presented in the hedging reserve within equity. Any ineffective portion of changes in the fair value of the derivative is recognised immediately in profit or loss. The amount recognised in the hedging reserve is reclassified from equity to profit or loss as a reclassification adjustment in the same period as the hedged cash flows affect profit or loss, and in the same line item in the statement of profit or loss and equity.

 

If the hedging derivative expires or is sold, terminated or exercised, or the hedge no longer meets the criteria for cash flow hedge accounting, or the hedge designation is revoked, then hedge accounting is discontinued prospectively. If the hedged cash flows are no longer expected to occur, then the Group immediately reclassifies the amount in the hedging reserve from equity to profit or loss. For terminated hedging relationships, if the hedged cash flows are still expected to occur, then the amount accumulated in the hedging reserve is not reclassified until the hedged cash flows affect profit or loss; if the hedged cash flows are expected to affect profit or loss in multiple reporting periods, then the Group reclassifies the amount in the hedging reserve from equity to profit or loss on a straight-line basis.

 

4          SIGNIFICANT ACCOUNTING POLICIES (continued)

(l)         Derivatives held for risk management purposes and hedge accounting (continued)

 

Other non-trading derivatives

Other non-trading derivatives are recognised on balance sheet at fair value. If a derivative is not held for trading, and is not designated in a qualifying hedging relationship, then all changes in its fair value are recognised immediately in profit or loss as a component of net income from other financial instruments at FVTIS.

 

(m) Investment property

Investment property comprise land plots and buildings. Investment property is property held to earn rental income or for capital appreciation or both but not for sale in the ordinary course of business, use in the supply of services or for administrative purposes. Investment property is measured initially at cost, including directly attributable expenses. Subsequent to initial recognition, investment property is carried at cost less accumulated depreciation and accumulated impairment allowances (if any). Land is not depreciated, and building is depreciated over the period of 30 to 45 years.

 

A property is transferred to investment property when, there is change in use, evidenced by:

end of owner-occupation, for a transfer from owner-occupied property to investment property; or

commencement of an operating ijara to another party, for a transfer from a development property to investment property.

 

Further, an investment property is transferred to development property when, there is a change in use, evidenced by:

commencement of own use, for a transfer from investment property to owner-occupied property;

commencement of development with a view to sale, for a transfer from investment in real estate to development property.

 

An investment property is derecognised upon disposal or when the investment property is permanently withdrawn from use and no future economic benefits are expected from the disposal. Any gain or loss arising on derecognition of the property (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the consolidated income statement in the period in which the property is derecognised.

 

(n)  Development properties

Development properties are properties held for sale or development and sale in the ordinary course of business. Development properties are measured at the lower of cost and net realisable value.

 

(o)  Property and equipment

Property and equipment is stated at cost less accumulated depreciation and accumulated impairment losses, if any. Cost includes the cost of replacing part of the property, plant and equipment and borrowing costs for long-term construction projection if the recognition criteria are met.  All other repair and maintenance costs are recognised in the consolidated income statement as incurred.

 

Depreciation is calculated to write off the cost of items of property, plant and equipment less their estimated residual values using the straight line method over their estimated useful lives, and is generally recognised in the consolidated income statement.

 

The estimated useful lives of property and equipment of the industrial business assets are as follows:

 

Buildings and infrastructure on lease hold           30 - 50 years

Computers                                                        3 - 5 years

Furniture and fixtures                                         5 - 8 years

Motor vehicles                                                  4 - 5 years

 

The carrying values of property and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying values may not be recoverable. If any such indication exists and where

 

4          SIGNIFICANT ACCOUNTING POLICIES (continued)

(o)        Property and equipment (continued)

 

the carrying values exceed the estimated recoverable amounts, the assets are written down to their recoverable amounts, being the higher of the fair value less costs to sell and their value in use.

 

An item of property and equipment is derecognised on disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset is recognised in the consolidated statement of income in the year of derecognition.

 

The assets' residual values, useful lives and methods of depreciation are reviewed annually and adjusted prospectively if appropriate.

 

(p)  Intangible assets

Goodwill

Goodwill that arises on the acquisition of subsidiaries is measured at cost less accumulated impairment losses.

 

Other Intangible assets

Intangible assets acquired separately are initially measured at cost. The cost of intangible assets acquired in a business combination are their fair values as at the date of acquisition.  Subsequently, intangible assets are recognised at cost less any accumulated amortisation and accumulated impairment losses. Internally generated intangible assets, excluding capitalised development costs, are not capitalised and expenditure is recognised in the consolidated income statement in the period in which the expenditure is incurred. The useful lives of intangible assets are assessed to be either finite or indefinite.

 

Intangible assets with finite lives are amortised over the useful economic life of ten years and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life is reviewed at each reporting date. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortisation period or method, as appropriate, and are treated as changes in accounting estimates.

 

The amortisation expense on intangible assets with finite lives is recognised in the consolidated statement of income in the expenses category consistent with the function if intangible assets.

 

Intangible assets with indefinite useful lives are not amortised, but are tested for impairment annually, either individually or at the cash generating unit level. The assessment of indefinite life is reviewed annually to determine whether the indefinite life continues to be supportable. If not, the change in useful life from indefinite to finite is made on a prospective basis. Intangible assets with indefinite useful life consists of a license to construct and operate a cement plant in the Kingdom of Bahrain.

 

Gains or losses arising from de-recognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in the consolidated statement of income when the asset is derecognised.

 

(q)  Impairment of exposures subject to credit risk

 

The Group recognises loss allowances for the expected credit losses "ECLs" on:

 

·    Bank balances.

·    Placements with financial institutions.

·    Financing contracts;

·    Lease rental receivables;

·    Investments in Sukuk (debt-type instruments carried at amortised cost);

·    Other receivables; and

·    Undrawn financing commitments and financial guarantee contracts issued.

4      SIGNIFICANT ACCOUNTING POLICIES (continued)

(q)    Impairment of exposures subject to credit risk (continued)

 

The Group measures loss allowances at an amount equal to lifetime ECLs, except for the following, which are measured at 12-month ECLs:

·    Debt-type securities that are determined to have low credit risk at the reporting date; and

·    Other debt-type securities and bank balances for which credit risk (i.e. the risk of default occurring over the expected life of the financial instrument) has not increased significantly since initial recognition.

 

When determining whether the credit risk of an exposure subject to credit risk has increased significantly since initial recognition when estimating ECLs, the Group considers reasonable and supportable information that is relevant and available without undue cost or effort. This includes both quantitative and qualitative information and analysis, based on the Group's historical experience and informed credit assessment including forward-looking information.

 

The Group assumes that the credit risk on exposure subject to credit risk increased significantly if it is more than 30 days past due. The Group considers an exposure subject to credit risk to be in default when:

·    the borrower is unlikely to pay its credit obligations to the Group in full, without recourse by the Group to actions such as realising security, if any is held; or

·    the exposure is more than 90 days past due.

 

The Group considers a debt security to have low credit risk when its credit risk rating is equivalent to the globally understood definition of 'investment grade'. The Group considers this to be BBB- or higher per S&P.

 

The Group applies a three-stage approach to measuring ECL. Assets migrate through the following three stages based on the change in credit quality since initial recognition.

 

Stage 1: 12-months ECL

Stage 1 includes exposures that are subject to credit risk on initial recognition and that do not have a significant increase in credit risk since initial recognition or that have low credit risk. 12-month ECL is the expected credit losses that result from default events that are possible within 12 months after the reporting date. It is not the expected cash shortfalls over the 12-month period but the entire credit loss on an asset weighted by the probability that the loss will occur in the next 12-months.

 

Stage 2: Lifetime ECL - not credit impaired

Stage 2 includes exposures that are subject to credit risk that have had a significant increase in credit risk since initial recognition but that do not have objective evidence of impairment. For these assets, lifetime ECL are recognised. Lifetime ECL are the expected credit losses that result from all possible default events over the expected life of the financial instrument. Expected credit losses are the weighted average credit losses with the life-time probability of default ('PD').



 

4      SIGNIFICANT ACCOUNTING POLICIES (continued)

(q)    Impairment of exposures subject to credit risk (continued)

 

Stage 3: Lifetime ECL - credit impaired

Stage 3 includes exposures that are subject to credit risk that have objective evidence of impairment at the reporting date in accordance with the indicators specified in the CBB's rule book. For these assets, lifetime ECL is recognised.

 

Measurement of ECLs

ECLs are a probability-weighted estimate of credit losses. They are measured as follows:

·    Exposures subject to credit risk that are not credit-impaired at the reporting date: as the present value of all cash shortfalls (i.e. the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Group expects to receive);

·    Exposures subject to credit risk that are credit-impaired at the reporting date: as the difference between the gross carrying amount and the present value of estimated future cash flows;

·    Undrawn financing commitment: as the present value of the difference between the contractual cash flows that are due to the Group if the commitment is drawn and the cash flows that the Group expects to receive; 

·    Financial guarantee contracts: the expected payments to reimburse the holder less any amounts that the Group expects to recover; and

·    ECLs are discounted at the effective profit rate of the exposure subject to credit risk.

 

Credit-impaired exposures

At each reporting date, the Group assesses whether exposures subject to credit risk are credit impaired. An exposure subject to credit risk is 'credit-impaired' when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred. Evidence that an exposure is credit-impaired includes the following observable data:

·      significant financial difficulty of the borrower or issuer;

·      a breach of contract such as a default or being more than 90 days past due;

·      the restructuring of a financing facility or advance by the Bank on terms that the Bank would not consider otherwise;

·      it is probable that the borrower will enter bankruptcy or other financial reorganisation; or

·      the disappearance of an active market for a security because of financial difficulties.

 

Presentation of allowance for ECL in the statement of financial position

Loss allowances for exposures subject to credit risk are deducted from the gross carrying amount of the assets.

 

(r)   Impairment of equity investments classified at fair value through equity (FVTE)

In the case of investments in equity securities classified as FVTE. A significant or prolonged decline in the fair value of the security below its cost is an objective evidence of impairment. The Group considers a decline of 30% to be significant and a period of nine months to be prolonged. If any such evidence exists, the cumulative loss - measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that investment previously recognised in income statement - is removed from equity and recognised in the income statement. Impairment losses recognised in the income statement on equity instruments are subsequently reversed through equity.

 

(s)  Impairment of non-financial assets

The carrying amount of the Group's non-financial assets (other than those subject to credit risk covered above) are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, the asset's recoverable amount is estimated. The recoverable amount of an asset is the greater of its value in use or fair value less costs to sell. An impairment loss is recognised whenever the carrying amount of an asset exceeds its estimated recoverable amount. Impairment losses are recognised in the income statement. Impairment losses are reversed only if there is an indication that the impairment loss may no longer exist and there has been a change in the estimates used to determine the recoverable amount.

4      SIGNIFICANT ACCOUNTING POLICIES (continued)

(s)    Impairment of non-financial assets (continued)

 

In assessing value in use, the estimated future cash flows are discounted to their present value using a discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or cash generating unit. An impairment loss is recognised whenever the carrying amount of an asset or its cash generating unit exceeds its estimated recoverable amount. Impairment losses are recognised in the income statement. Impairment losses are reversed only if there is an indication that the impairment loss may no longer exist and there has been a change in the estimates used to determine the recoverable amount. Separately recognised goodwill is not amortised and is tested annually for impairment and carried at cost less accumulated impairment losses. Impairment losses on separately recognised goodwill are not reversed. 

 

(t)   Clients' funds

These represents amounts received from customers for investments in SPEs or project companies formed as part of its investment management activities pending transfer to these entities. These funds are usually disbursed on capital calls from these entities based on its activities and requirements and are payable on demand. Such funds held by the Group are carried at amortised cost.

 

(u)  Current accounts

Balances in current (non-investment) accounts are recognised when received by the Group. The transactions are measured at the cash equivalent amount received by the Group at the time of contracting. At the end of the accounting period, the accounts are measured at their book value.

 

(v)  Term financing

Term financing represents facilities from financial institutions, and financing raised through Sukuk. Term financing are initially measured at fair value plus transaction costs, and subsequently measured at their amortised cost using the effective profit rate method. Financing cost, dividends and losses relating to the term financing are recognised in the consolidated income statement as finance expense. The Group derecognises a financial liability when its contractual obligations are discharged, cancelled or expire.

 

(w)  Financial guarantees

Financial guarantees are contracts that require the Group to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument. A financial guarantee contract is recognised from the date of its issue. The liability arising from a financial guarantee contract is recognised at the present value of any expected payment to settle the liability, when a payment under the guarantee has become probable. The Group has issued financial guarantees to support its development projects (note 34).

 

(x)  Dividends

Dividends to shareholders is recognised as liabilities in the period in which they are declared.

 

(y)  Share capital and reserves

The Group classifies capital instruments as financial liabilities or equity instruments in accordance with the substance of the contractual terms of the instruments. Equity instruments of the group comprise ordinary shares and equity component of share-based payments and convertible instruments. Incremental costs directly attributable to the issue of an equity instrument are deducted from the initial measurement of the equity instruments. 

 

Treasury shares

The amount of consideration paid including all directly attributable costs incurred in connection with the acquisition of the treasury shares are recognised in equity. Consideration received on sale of treasury shares is presented in the financial statements as a change in equity. No gain or loss is recognised on the Group's consolidated income statement on the sale of treasury shares.

 



 

4          SIGNIFICANT ACCOUNTING POLICIES (continued)

(y)        Share capital and reserves (continued)

 

Statutory reserve

The Commercial Companies Law requires that 10 percent of the annual net profit be appropriated to a statutory reserve which is normally distributable only on dissolution. Appropriations may cease when the reserve reaches 50 percent of the paid up share capital.  Appropriation to statutory reserve is made when approved by the shareholders.

 

(z)  Equity of investment account holders

Equity of investment account holders are funds held by the Group in unrestricted investment accounts, which it can invest at its own discretion. The investment account holder authorises the Group to invest the account holders' funds in a manner which the Group deems appropriate without laying down any restrictions as to where, how and for what purpose the funds should be invested.

 

The Group charges management fee (Mudarib fees) to investment account holders. Of the total income from investment accounts, the income attributable to customers is allocated to investment accounts after setting aside provisions, reserves (Profit equalisation reserve and Investment risk reserve) and deducting the Group's share of income as a Mudarib. The allocation of income is determined by the management of the Group within the allowed profit sharing limits as per the terms and conditions of the investment accounts. Only the income earned on pool of assets funded from IAH are allocated between the owners' equity and investment account holders. Administrative expenses incurred in connection with the management of the funds are borne directly by the Group and are not charged separately to investment accounts.

 

The Group allocates specific provision and collective provision to owners' equity. Amounts recovered from these impaired assets is not subject to allocation between the IAH and owners' equity.

 

Investment accounts are carried at their book values and include amounts retained towards profit equalisation, investment risk reserves, if any. Profit equalisation reserve is the amount appropriated by the Group out of the Mudaraba income, before allocating the Mudarib share, in order to maintain a certain level of return to the deposit holders on the investments. Investment risk reserve is the amount appropriated by the Group out of the income of investment account holders, after allocating the Mudarib share, in order to cater against future losses for investment account holders. Creation of any of these reserves results in an increase in the liability towards the pool of unrestricted investment accounts.

 

Restricted investment accounts

Restricted investment accounts represent assets acquired by funds provided by holders of restricted investment accounts and their equivalent and managed by the Group as an investment manager based on either a Mudaraba contract or agency contract. The restricted investment accounts are exclusively restricted for investment in specified projects as directed by the investments account holders. Assets that are held in such capacity are not included as assets of the Group in the consolidated financial statements.

 

(aa) Revenue recognition

Revenue is measured at the fair value of consideration received or receivable. Revenue is recognised to the extent that it is probable that future economic benefits associated with the item of revenue will flow to the Group, the revenue can be measured with reliability and specific criteria have been met for each of the Group's activities as described below:

 

Banking business

 

Income from investment banking activities include deal related income and fee based income.  Deal related income is earned by the Group from structuring and sale of assets at the time of placement of products. Fee based income, in the nature of management fees, performance fee, acquisition fee and exit fee, is recognised when the associated service is provided and income is earned. 

 

 

 

 

 

 

 

4          SIGNIFICANT ACCOUNTING POLICIES (continued)

(aa)       Revenue recognition  (continued)

 

Deal related income are embedded in the gains made from the placement of deals to investors and the portion of the gains relating to each performance obligations is recognized over the investment period. The Group has reviewed and analyzed the terms of the contracts that it has entered into with its investors arising from the placement of its investments and has identified its performance obligations arising from its contracts with investors and its expected continuing involvement with such products. Based on this review, the Group has determined the following two types of performance obligations that the Group is expected to satisfy: (i) by the Group during the year from purchase to the placement of the investment with investors, including deal identification, evaluation, funding, underwriting, maintaining a placement infrastructure, preparing the marketing materials for each deal etc; and (ii) services provided, either on a continuous or adhoc basis, over the period of the investment. As part of its revenue recognition assessment, the Group allocates the gains from deal placements to each of the above distinct performance obligations. The Group completes all of its performance obligations described in (i) above before placing an investment with its investors. Accordingly, the fee relating to this performance obligation is recognized upfront upon placement of the investment with investors. This portion of the placement fee is included under "Deal related income".  A portion of placement gains received upfront for the performance obligation described in (ii) above is deferred and recognized over time, as part of Fees based income, over the expected period of managing the investments.

 

Asset Management fee is recognized as per contractual terms when services are rendered over the period of the contract. Acquisition fee and exit fee are recognized when earned on completion of the underlying transactions. Performance fees are only recognized once it is highly probable that there would be no significant reversal of any accumulated revenue in the future. Estimates are needed to assess the risk that achieved earnings may be reversed before realization due to the risk of lower future overall performance of the underlying investments.

 

Income from placements with / from financial institutions are recognised on a time-apportioned basis over the period of the related contract using the effective profit rate.

 

Dividend income from investment securities is recognised when the right to receive is established.  This is usually the ex-dividend date for equity securities.

 

Finance income / expenses are recognised using the amortised cost method at the effective profit rate of the financial asset / liability.

 

Fees and commission income that are integral to the effective profit rate on a financial asset carried at amortised cost are included in the measurement of the effective profit rate of the financial asset. Other fees and commission income, including account servicing fees, sales commission, management fees, placement and arrangement fees and syndication fees, are recognised as the related services are performed.

 

Income from Murabaha and Wakala contracts are recognised on a time-apportioned basis over the period of the contract using the effective profit method.

 

Profit or losses in respect of the Bank's share in Musharaka financing transaction that commence and end during a single financial period is recognised in the income statement at the time of liquidation (closure of the contract). Where the Musharaka financing continues for more than one financial period, profit is recognised to the extent that such profits are being distributed during that period in accordance with profit sharing ratio as stipulated in the Musharaka agreement.

 

Income from assets acquired for leasing (Ijarah Muntahia Bittamleek) are recognised proportionately over the lease term.

 

Income from sukuk and income / expenses on placements is recognised at its effective profit rate over the term of the instrument.

 

 

 

 

 

4          SIGNIFICANT ACCOUNTING POLICIES (continued)

(aa)       Revenue recognition  (continued)

 

Non-banking business

Revenue is recognised when a customer obtains control of the goods or services. Determining the timing of the transfer of control - at a point in time or over time - requires judgement.

 

Revenue is recognised when the goods are provided to the customer, which was taken to be the point in time at which the customer accepted the goods and the related risks and rewards of ownership transferred. Revenue was recognised at that point provided that the revenue and cost could be measured reliably, the recovery of the consideration was probable and there was no continuing managerial involvement with the goods.

 

(bb)  Earnings prohibited by Shari'a

The Group is committed to avoid recognising any income generated from non-Islamic sources.  Accordingly, all non-Islamic income is credited to a charity account where the Group uses these funds for charitable means.

 

(cc)  Zakah

Zakah is calculated on the Zakah base of the Group in accordance with FAS 39 issued by AAOIFI using the net assets method. Zakah is paid by the Group based on the consolidated figures of statutory reserve, general reserve and retained earning balances at the beginning of the year. The remaining Zakah is payable by individual shareholders. Payment of Zakah on equity of investment account holders and other accounts is the responsibility of investment account holders.

 

(dd)  Employees benefits

 

Short-term benefits

Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided.  A provision is recognised for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.  Termination benefits are recognised as an expense when the Group is committed demonstrably, without realistic possibility of withdrawal, to a formal detailed plan to either terminate employment before the normal retirement date, or to provide termination benefits as a result of an offer made to encourage voluntary redundancy.

Post employment benefits

Pensions and other social benefits for Bahraini employees are covered by the Social Insurance Organisation scheme, which is a "defined contribution scheme" in nature under, and to which employees and employers contribute monthly on a fixed-percentage-of-salaries basis.  Contributions by the Bank are recognised as an expense in consolidated income statement when they are due.

Expatriate and certain Bahraini employees on fixed contracts are entitled to leaving indemnities payable, based on length of service and final remuneration. Provision for this unfunded commitment, has been made by calculating the notional liability had all employees left at the reporting date.  These benefits are in the nature of a "defined benefit scheme" and any increase or decrease in the benefit obligation is recognised in the consolidated income statement.

The Group also operates a voluntary employee saving scheme under which the Group and the employee contribute monthly on a fixed percentage of salaries basis. The scheme is managed and administered by a board of trustees who are employees of the Group. The scheme is in the nature of a defined contribution scheme and contributions by the Group are recognised as an expense in the consolidated income statement when they are due.



 

4          SIGNIFICANT ACCOUNTING POLICIES (continued)

(dd)       Employees benefits  (continued)

Share-based employee incentive scheme

The Bank operates a share-based incentive scheme for its employees (the "Scheme") whereby employee are granted the Bank's shares as compensation on achievement of certain non-market based performance conditions and service conditions (the 'vesting conditions'). The grant date fair value of equity instruments granted to employees is recognised as an employee expense, with a corresponding increase in equity over the period in which the employees become unconditionally entitled to the share awards.

Non-vesting conditions are taken into account when estimating the fair value of the equity instrument but are not considered for the purpose of estimating the number of equity instruments that will vest.  Service and non-market performance conditions attached to the transactions are not taken into account in determining fair value but are considered for the purpose of estimating the number of equity instruments that will vest. The amount recognised as an expense is adjusted to reflect the number of share awards for which the related service and non-market performance vesting conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number of share awards that do meet the related service and non-market performance conditions at the vesting date. Amount recognised as expense are not trued-up for failure to satisfy a market condition.

 

(ee)       Provisions

A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation.

 

(ff)    Onerous contracts

A provision for onerous contracts is recognised when the expected benefits to be derived by the Group from the contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. 

 

(gg)      Trade date accounting

All "regular way" purchases and sales of financial assets are recognised on the trade date, i.e. the date that the Group commits to purchase or sell the asset.

 

(hh)      Investment account holder protection scheme

Funds held with the Group in unrestricted investment accounts and current accounts of its retail banking subsidiary are covered by the Deposit Protection Scheme (the Scheme) established by the Central Bank of Bahrain regulation in accordance with Resolution No (34) of 2010.

 

(ii)  Income tax

The Group is exposed to taxation by virtue of operations of subsidiaries. Income tax expense comprises current and deferred tax. Income tax expense is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.

Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. A deferred tax asset is recognised to the extent that it is probable that future taxable profits will be available against which the temporary difference can be realised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. 

Currently, the Group does not have any material current or deferred tax exposure that requires recognition in the consolidated financial statements.

4          SIGNIFICANT ACCOUNTING POLICIES (continued)

 

(jj)  Ijarah

Identifying an Ijarah

At inception of a contract, the Group assesses whether the contract is Ijarah, or contains an Ijarah. A contract is Ijarah, or contains an Ijarah if the contract transfers the usufruct (but not control) of an identified asset for a period of time in exchange for an agreed consideration.

At the commencement date, the Group shall recognises a right-of-use (usufruct) asset and a net ijarah liability

 

i)      Right-of-use (usufruct) asset

On initial recognition, the lessee measures the right-of-use asset at cost. The cost of the right-of-use asset comprises of:

•      The prime cost of the right-of-use asset;

•      Initial direct costs incurred by the lessee; and

•      Dismantling or decommissioning costs.

 

The prime cost is reduced by the expected terminal value of the underlying asset. If the prime cost of the right-of-use asset is not determinable based on the underlying cost method (particularly in the case of an operating Ijarah), the prime cost at commencement date may be estimated based on the fair value of the total consideration paid/ payable (i.e. total Ijarah rentals) against the right-of-use assets, under a similar transaction.

 

After the commencement date, the lessee measures the right-of-use asset at cost less accumulated amortisation and impairment losses, adjusted for the effect of any Ijarah modification or reassessment.

 

The Group amortises the right-of-use asset from the commencement date to the end of the useful economic life of the right-of-use asset, according to a systematic basis that is reflective of the pattern of utilization of benefits from the right-of-use asset. The amortizable amount comprises of the right-of-use asset less residual value, if any.

 

The Group determines the Ijarah term, including the contractually binding period, as well as reasonably certain optional periods, including:

•      Extension periods if it is reasonably certain that the Group will exercise that option; and/ or

•      Termination options if it is reasonably certain that the Bank will not exercise that option.

 

The Group carries out impairment assessment to determine whether the right-of-use asset is impaired and to account for any impairment losses. The impairment assessment takes into consideration the salvage value, if any. Any related commitments, including promises to purchase the underlying asset, are also considered.

 

ii)      Net ijarah liability

The net ijarah liability comprises of the gross Ijarah liability, plus deferred Ijarah cost (shown as a contra-liability).

The gross Ijarah liability shall be initially recognised as the gross amount of total Ijarah rental payables for the Ijarah term. The rentals payable comprise of the following payments for the right to use the underlying asset during the Ijarah term:

•      Fixed Ijarah rentals less any incentives receivable;

•      Variable Ijarah rentals including supplementary rentals; and

• Payment of additional rentals, if any, for terminating the Ijarah (if the Ijarah term reflects the lessee  exercising the termination option).

 



 

4    SIGNIFICANT ACCOUNTING POLICIES (continued)

(jj)         Ijarah (continued)

 

Advance rentals paid are netted-off with the gross Ijarah liability.

Variable Ijarah rentals are Ijarah rentals that depend on an index or rate, such as payments linked to a consumer price index, financial markets, regulatory benchmark rates, or changes in market rental rates. Supplementary rentals are rentals contingent on certain items, such as additional rental charge after provision of additional services or incurring major repair or maintenance. As of 31 December 2023, the Group did not have any contracts with variable or supplementary rentals.

After the commencement date, the Group measures the net Ijarah liability by:

•      Increasing the net carrying amount to reflect return on the Ijarah liability (amortisation of deferred Ijarah cost);

•      Reducing the carrying amount of the gross Ijarah liability to reflect the Ijarah rentals paid; and

•      Re-measuring the carrying amount in the event of reassessment or modifications to Ijarah contract, or reflect revised Ijarah rentals.

•      The deferred Ijarah cost is amortised to income over the Ijarah terms on a time proportionate basis, using the effective rate of return method.

After the commencement date, the Group recognises the following in the income statement:

•      Amortisation of deferred Ijarah cost; and

•      Variable Ijarah rentals (not already included in the measurement of Ijarah liability) as and when the triggering events/ conditions occur.

 

Ijarah contract modifications

After the commencement date, the Group accounts for Ijarah contract modifications as follows:

•      Change in the Ijarah term: re-calculation and adjustment of the right-of-use asset, the Ijarah liability, and the deferred Ijarah cost; or

•      Change in future Ijarah rentals only: re-calculation of the Ijarah liability and the deferred Ijarah cost only, without impacting the right-of- use asset.

 

An Ijarah modification is considered as a new Ijarah component to be accounted for as a separate Ijarah for the lessee, if the modification both additionally transfers the right to use of an identifiable underlying asset and the Ijarah rentals are increased corresponding to the additional right-of-use asset.  For modifications not meeting any of the conditions stated above, the Group considers the Ijarah as a modified Ijarah as of the effective date and recognises a new Ijarah transaction. The Group recalculates the Ijarah liability, deferred Ijarah cost, and right-of-use asset, and de-recognise the existing Ijarah transaction and balances.

 

Expenses relating to underlying asset.

Operational expenses relating to the underlying asset, including any expenses contractually agreed to be borne by the Group, are recognised by the Group in income statement in the period incurred. Major repair and maintenance, takaful, and other expenses incidental to ownership of underlying assets (if incurred by lessee as agent) are recorded as receivable from lessor.

 

Recognition exemptions and simplified accounting for the lessee

The Group does not to apply the requirements of Ijarah recognition and measurement of recognizing right-of-use asset and lease liability for the following:

•      Short-term Ijarah; and

•      Ijarah for which the underlying asset is of low value.

 

Short-term Ijarah exemption is applied on a whole class of underlying assets if they have similar characteristics and operational utility. However, low-value Ijarah exemption is applied on an individual asset/ Ijarah transaction, and not on group/ combination basis.

 



 

 

5    JUDGEMENTS AND ESTIMATES IN APPLYING ACCOUNTING POLICIES

The Group makes estimates and assumptions that effect the reported amounts of assets and liabilities within the next financial year. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectation of future events.

 

(a)    Judgements

Establishing the criteria for determining whether credit risk on an exposure subject to credit risk has increased significantly since initial recognition, determining methodology for incorporating forward looking information into measurement of ECL and selection and approval of models used to measure ECL is set out in note 4(q) and note 35(a).

 

(i)         Classification of investments

In the process of applying the Group's accounting policies, management decides on acquisition of an investment whether it should be classified as investments carried at fair value through income statement or investments carried at fair value through equity or investments carried at amortised cost. The classification of each investment reflects the management's intention in relation to each investment and is subject to different accounting treatments based on such classification (note 4g(i)). 

 

(ii)        Special purpose entities

The Group sponsors the formation of special purpose entities (SPE's) primarily for the purpose of allowing clients to hold investments. The Group provides corporate administration, investment management and advisory services to these SPE's, which involve the Group making decisions on behalf of such entities. The Group administers and manages these entities on behalf of its clients, who are by and large third parties and are the economic beneficiaries of the underlying investments. The Group does not consolidate SPE's that it does not have the power to control. In determining whether the Group has the power to control an SPE, judgements are made about the objectives of the SPE's activities, its exposure to the risks and rewards, as well as about the Group intention and ability to make operational decisions for the SPE and whether the Group derives benefits from such decisions.

 

(iii)       Impairment of equity investments at fair value through equity - (refer to note 4 (g) (iii)

 

(b)    Estimations

 

(i)    Impairment of exposures subject to credit risk carried at amortised cost

Determining inputs into ECL measurement model including incorporation of forward-looking information is set out in note 4(q) and note 35(a).

 

(ii)   Measurement of fair value of unquoted equity investments

The group determines fair value of equity investments that are not quoted in active markets by using valuation techniques such as discounted cashflows, income approach and market approaches. Fair value estimates are made at a specific point in time, based on market conditions and information about the investee companies. These estimates are subjective in nature and involve uncertainties and matter of significant judgment and therefore, cannot be determined with precision. There is no certainty about future events such as continued operating profits and financial strengths. It is reasonably possible based on existing knowledge, that outcomes within the next financial year that are different from assumptions could require a material adjustment to the carrying amount of the investments. In case where discounted cash flows models have been used to estimate fair values, the future cashflows have been estimated by the management based on information form and discussion with representatives of investee companies and based on the latest available audited and unaudited financial statements. The basis of valuation has been reviewed by the management in terms of the appropriateness of the methodology, soundness of assumptions and correctness of calculations and have been approved by the board of directors for inclusion in the consolidated financial statements.



 

5          JUDGEMENTS AND ESTIMATES IN APPLYING ACCOUNTING POLICIES (continued)

 

Valuation of equity investments are measured at fair value through equity which involves judgment and is normally based on one of the following:

-    Valuation by independent external value for underlying properties / projects;

-    Recent arms-length market transaction;

-    Current fair value of another contract that is substantially similar;

-    Present value of expected cash flows at current rates applicable for items with similar terms and risk characteristics; or

-    Application of other valuation models.

 

(iii)  Impairment of investment property

The Group conducts impairment assessment of investment property periodically using external independent property valuers to value the property. The fair value is determined based on the market value of the property using either sales comparable approach, the residual value basis, replacement cost or the market value of the property considering its current physical condition. The Group's investment properties are situated in Bahrain, UAE and Morocco. Given the dislocation in the property market and infrequent property transactions, it is reasonably possible, based on existing knowledge, that the current assessment of impairment could require a material adjustment to the carrying amount of these assets within the next financial year due to significant changes in assumptions underlying such assessments.

 

(iv)   Impairment of other non-financial assets and cash generating units

Investment in associates and recognised goodwill are subject to an impairment based on indicators of performance and market conditions. Cash generating units include the Group's investments in certain subsidiaries and equity-accounted investees and investment property that generate cash flows that are largely independent from other assets and activities of the Group. The basis of impairment assessment for such cash generating units is described in accounting policy note 4 (s). For equity-accounted investees with indicators of impairment, the recoverable amounts is determined based on higher of fair value less costs to sell (FVLCTS); and value in use.

 

The recoverable amount for the equity-accounted investees was determined using a combination of income and market approaches of valuations. The objective of valuation techniques is to determine whether the recoverable amount is greater than the carrying amount.

 

 

(v)    Estimating net realisable value of development property

Development property is stated at lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business less estimated selling expenses. The board of directors of the Group has forecasted the cost of completion of development property and has engaged independent valuers to estimate the residual value of the development property based on estimated market selling prices for similar properties. Net realisable value estimates are made at a specific point in time, based on market conditions and information about the expected use of development property. These estimates involve uncertainties and matters of significant judgement and therefore, cannot be determined with precision. There is no certainty about future events. It is reasonably possible, based on existing knowledge, that outcomes within the next financial year that are different from assumptions could require a material adjustment to the carrying amount of the development property.

 



 

 

6          CASH AND BANK BALANCES


31 December 2023


31 December 2022


 

 


Cash

8,193

 

9,098

Balances with banks

185,857

 

714,968

Balances with Central Bank of Bahrain:


 


-     Current account

107,524


65,751

-     Reserve account*

75,310


68,422

 

 

376,884


858,239

 

*The reserve account with the Central Bank of Bahrain are not available for day-to-day operational purposes. The cash and bank balances are net of ECL of US$ 27 thousand (2022: US$ 11 thousand).

 

7          TREASURY PORTFOLIO

 


31 December

2023

 

31 December 2022

 








Placements with financial institutions

1,458,368


729,311

 




 

Profit rate swap and foreign currency forwards (a)

2,195


2,675

 




Equity type investments




At fair value through equity




-     Quoted sukuk (b)

33,326


32,966

 

At fair value through income statement

-     Structured notes  (a)

-     Quoted fund   (a)

404,839

27,099


371,978

-  

 




Debt type investments




At fair value through equity




-     Quoted sukuk (b)

784,300


     846,205





At amortised cost


 


-     Quoted sukuk *

2,447,489


2,240,354

-     Unquoted sukuk

3,494


3,494





Less: Impairment allowances (note 23)

(26,078)


(16,963)


 




5,135,032

 

4,210,020

 

* Short-term and medium-term facilities of US$ 1,857,388 thousand (31 December 2022: US$ 1,653,875 thousand) are secured by quoted sukuk of US$ 2,762,506 thousand (31 December 2022: US$ 2,506,041 thousand), structured notes of US$ 404,839 thousand (31 December 2022: US$ 371,928  thousand). Additionally this amount is net of restatement of US$ 7,482 thousands (refer note 38).



 

7     TREASURY PORTFOLIO (continued)

 

a)     Investments - At fair value through income statement


2023

 

2022





At 1 January

374,653


445,183

Additions

102,857


52,602

Disposals

(86,547)


(74,734)

Fair value changes, net

43,170


(48,398)

 




At 31 December

434,133

 

374,653

 

b)     Investments - At fair value through equity


2023

 

2022





At 1 January

879,171


1,656,088

Additions

9,951


319,192

Disposals / Transfers

(69,273)


(123,495)

Amortization

(1,346)


(7,192)

Reclassification to amortized cost

-


(935,514)

Restatement Impact (note 38)

(15,271)


-

Fair value changes

14,394


(29,908)

 




At 31 December

817,626

 

879,171

8          FINANCING CONTRACTS


31 December

2023

 

31 December 2022





Murabaha

1,029,324


982,170

Wakala

-


239

Mudharaba

20,564


17,336

Ijarah assets

559,409


499,865


1,609,297


1,499,610

Less: Impairment allowances

(71,983)


(64,372)






1,537,314


1,435,238

 

Murabaha financing receivables are net of deferred profits of US$ 41,727 thousand                                                           (2022: US$ 50,133 thousand).

 

31 December 2023

Stage 1

Stage 2

Stage 3

Total

 

 

 

 

 

Financing contracts (gross)

1,192,748

284,047

132,502

1,609,297

Expected credit loss

(8,091)

 (23,360)

(40,532)

( 71,983)

 

Financing contracts (net)

1,184,657

260,687

91,970

1,537,314

 

31 December 2022

Stage 1

Stage 2

Stage 3

Total

 





Financing contracts (gross)

1,286,549

143,496

69,565

1,499,610

Expected credit loss

(18,046)

(11,990)

(34,336)

(64,372)

 

Financing contracts (net)

1,268,503

131,506

35,229

1,435,238

8     FINANCING CONTRACTS (continued)

 

The movement on impairment allowances is as follows:

 

Impairment allowances

Stage 1

Stage 2

Stage 3

Total

 

 

 

 

 

Balance at 1 January 2023

18,046

11,990

34,336

64,372

Net transfers

(3,576)

3,130

446

-

Net charge for the year (note 23)

(6,379)

8,240

8,349

10,210

Write-off

-

-

(2,599)

(2,599)

At 31 December 2023

8,091

23,360

40,532

71,983

 

Impairment allowances

Stage 1

Stage 2

Stage 3

Total

 





Balance at 1 January 2022

19,995

7,109

44,345

71,449

Net transfers

2,403

(1,411)

(992)

-

Net charge for the year (note 23)

(4,352)

6,292

4,995

6,935

Write-off

-

-

(14,012)

(14,012)

At 31 December 2022

18,046

11,990

34,336

64,372

 

9          INVESTMENT IN REAL ESTATE


31 December

2023

 

31 December 2022

Investment Property




-     Land

483,685


556,215

-     Building

141,471


194,050


625,156


750,265

Development Property




-     Land

165,565


147,393

-     Building

581,211


389,427


746,776


536,820






1,371,932


1,287,085

 

(i)   Investment property

Investment property includes land plots and buildings in GCC, Europe and North Africa. Investment property of carrying amount of US$ Nil million (2022: US$ 39.9 million) is pledged against Wakala facilities and Ijarah facility (note 15).

 

The fair value of the Group's investment property at 31 December 2023 was US$ 746,496 thousand
(31 December 2022: US$ 931,291 thousand) based on a valuation carried out by an independent external property valuers who have recent experience in the location and category of the asset being valued. These are level 3 valuations in fair value hierarchy.

 


2023


2022


 



At 1 January

750,265


592,834

Additions during the year

69,737


195,008

Depreciation

(3,271)


(2,805)

Disposals / transfers

(191,575)


(34,772)

At 31 December

625,156


750,265



9     INVESTMENTS IN REAL ESTATE (continued)

 

(ii)   Development properties

 

This represent properties under development for sale.

 


2023


2022


 



At 1 January

536,820


1,312,764

Additions

227,823


70,849

Disposals / transfers

(17,867)


(846,793)





At 31 December

746,776


536,820

 

10         PROPRIETARY INVESTMENTS


31 December

2023

 

31 December 2022

Equity type investments




At fair value through income statement (i)




-     Unquoted securities

2,942


9,480

-     Listed securities

14,252


-


17,194


9,480

At fair value through equity




-     Equity type Sukuk

827,012


836,251

-     Unquoted equity securities (iii)

64,045


55,893

 

891,057

 

892,144

 


 


Equity-accounted investees (iv)

137,390

 

103,471

Impairment allowance

(914)

 

(42)

 


 



1,044,727


1,005,053

 

(i)         Equity type investments - At fair value through income statement

 


2023

 

 2022





At 1 January

9,480


10,000

Disposals,net

(6,538)


(520)

 




At 31 December

2,942

 

9,480

 

(ii)         Listed equity securities at fair value through equity


2023

 

2022





At 1 January

-


13

Additions

16,619


-

Fair value

(2,367)


(13)





At 31 December

14,252


-



 

10   PROPRIETARY INVESTMENTS (continued)

(iii)        Unquoted equity securities fair value through equity


2023

 

2022





At 1 January

55,893


91,425

Additions

9,319


6,050

Disposal / Transfers

(1,167)


(41,582)





At 31 December

64,045


55,893

 

(iv)        Equity-accounted investees

Equity-accounted investees represents investments in the following material entities:

 

Name

Country of incorporation

% Holding

Nature of business

2023

2022

 

Capital Real Estate Projects Company B.S.C. (c)

Kingdom of Bahrain

30%

30%

Real estate holding and development

Enshaa Development Real Estate B.S.C. (c)

Kingdom of Bahrain

33.33%

33.33%

Holding plot of land in Kingdom of Bahrain.

Infracorp B.S.C. (c)

Kingdom of Bahrain

40%

40%

Management of Real Estate

LPOD and Domina*

Kingdom of Bahrain

28.14%

-

Real estate holding and development

 


2023


2022


 



At 1 January

103,471


69,003

Additions

37,024


80,000

Disposals

-


(57,437)

Other reserves of equity accounted investee

(13,612)


-0

Share of profit for the year, net

10,507


11,905





At 31 December 2023

137,390


103,471

 

Summarised financial information of entities that have been equity-accounted investments not adjusted for the percentage ownership held by the Group (based on most recent management accounts):

 

Infracorp B.S.C. (c)

2023


2022





Total assets

1,645,707


1,687,534

Total liabilities

402,983


418,012

Equity type sukuk

900,000


900,000

Total revenues

216,075


130,360

Total profit (attributable to shareholders)

45,466


33,190





 

Other equity-accounted investees

2023


2022





Total assets

211,202


286,223

Total liabilities

63,172


20,647

Total revenues

5,955


12,097

Total loss

(4,223)


(4,630)


 



 

11         CO-INVESTMENTS


31 December

2023

 

31 December 2022

 




At fair value through equity




-     Unquoted equity securities

247,048


131,553

At fair value through income statement




-     Unquoted equity securities

9,168


10,498

Provision

(1,606)


-

 


 



254,610


142,051

 


2023


2022


 



At 1 January

142,051


171,877

Additions

116,214


58,751

Disposals

(915)


(92,195)

Impairment allowance

(1,606)


-

Fair value change

(1,134)


3,618





At 31 December

254,610


142,051

 

12         RECEIVABLES AND OTHER ASSETS


31 December 2023

 

31 December 2022

 




Investment banking receivables

307,597


193,923

Receivable from equity-accounted investee

72,923


62,000

Financing to projects, net

12,241


26,744

Receivable on sale of development properties

16,376


16,341

Advances and deposits

62,416


61,613

Employee receivables

7,443


5,067

Profit on sukuk receivable

17,409


18,766

Lease rentals receivable

4,025


6,117

Prepayments and other receivables

295,158


208,614

Less: impairment allowance net (note 23)

(7,948)


(9,316)



 


 

 

787,640

 

589,869

 

13         PROPERTY AND EQUIPMENT


31 December 2023

 

31 December 2022


 

 


Land

73,291


86,839

Buildings and other leased assets

158,541


80,709

Others including furniture, vehicles and equipment

42,889


65,188





 

274,721

 

232,736

Depreciation on property and equipment during the year was US$ 8,132 thousand                                                (2022: US$ 3,036 thousand).

 

 

14         PLACEMENTS FROM NON-FINANCIAL INSITUTIONS AND INDIVIDUALS

 

These comprise placements in the form of murabaha and wakala contracts with financial, non-financial institutions, and individuals part of the Group's treasury activities. This includes US$ 84.3 million             (2022: US$ 84.3 million) from a non-financial entity which is currently subject to regulatory sanctions.  

 

15         TERM FINANCING


31 December 2023

 

31 December 2022


 

 


Murabaha financing

1,880,910


1,680,940

Sukuk

241,777


242,076

Ijarah financing

-


17,603

Other borrowings

1,620


1,579





 

2,124,307

 

1,942,198

 


31 December 2023

 

31 December 2022


 

 


Current portion

757,075


987,320

Non-current portion

1,367,232


954,878

 


 

 

 

2,124,307

 

1,942,198

 

Murabaha financing comprise:

Short-term and medium-term facilities of US$ 1,857,388 thousand (31 December 2022: US$ 1,653,875 thousand) are secured by quoted sukuk of US$ 2,762,506 thousand (31 December 2022: US$ 2,506,041 thousand) and structured notes of US$ 404,839 thousand (31 December 2022: US$ 301,853 thousand).

 

Sukuk

During 2020, the Group raised US$ 500,000 thousand through issuance of unsecured sukuk certificates with a profit rate of 7.5% p.a. repayable by 2025 till date. The Group has repurchased cumulative sukuk of         US$ 265,610 thousand. The outstanding sukuk also includes accrued profit of US$ 8,743 thousand.



 

 

16         OTHER LIABILITIES


31 December 2023


31 December 2022





Employee related accruals

15,764


15,544

Board member allowances and accruals

1,500


1,500

Unclaimed dividends

2,312


4,754

Mudaraba profit accrual

22,814


13,184

Provision for employees' leaving indemnities

5,127


4,125

Zakah and Charity fund

6,553


5,924

Advance received from customers

2,105


6,648

Accounts payable

236,443


127,878

Deal related payables

192,288


138,657

Other accrued expenses and payables

63,150


105,149






548,056


423,363

 

 

17         EQUITY OF INVESTMENT ACCOUNT HOLDERS (EIAH)


31 December

2023


31 December

2022

 


 


Placements and borrowings from financial institutions - Wakala

2,312,153

 

25,458

Mudaraba

1,138,853

 

1,188,216






3,451,006


1,213,674

 

The funds received from investment account holders have been commingled and jointly invested with the Group in the following asset classes as at 31 December:

 


31 December 2023


31 December 2022



 


Balances with banks

2,030,152

 

274,502

CBB reserve account

75,310

 

68,422

Placements with financial institutions

-

 

166,130

Debt type instruments - sukuk

222,448

 

456,310

Financing contracts

1,004,809

 

248,310

Investment securities

71,334

 

-

Investment in real estate

45,618

 

-

Other Assets

1,335

 

-



 



3,451,006

 

1,213,674

 

As at 31 December 2023, the balance of profit equalisation reserve and investment risk reserve was Nil (2022: Nil).

 

The Group does not allocate non-performing assets to IAH pool. All the impairment allowances are allocated to owners' equity. Recoveries from non-performing financial assets are also not allocated to IAH accountholders. Only profits earned on pool of assets funded from IAH are allocated between the owners' equity and IAH. The Group did not charge any administration expenses to investment accounts.



 

17   EQUITY OF INVESTMENT ACCOUNT HOLDERS (EIAH) (continued)

 

Following is the average percentage for profit allocation between owner's equity and investment accountholders.


2023


2022


Mudarib share

 

IAH shares


Mudarib share

 

IAH shares

1 month Mudharaba *

50.36%

49.64%

 

65.01%

34.99%

3 months Mudharaba

14.08%

85.92%

 

52.56%

47.44%

6 months Mudharaba

10.48%

89.52%

 

52.53%

47.47%

12 months Mudharaba

20.63%

79.37%

 

42.04%

57.96%

18 months Mudharaba

22.74%

77.26%

 

53.58%

46.42%

24 months Mudharaba

1.81%

98.19%

 

24.67%

75.33%

36 months Mudharaba

23.12%

76.88%

 

38.08%

61.92%

* Includes savings, Al Waffer and Call Mudaraba accounts.

 

The investors' share of the return on jointly invested assets and distribution to investment account holders were as follows:


2023


2022



 


Returns from jointly invested assets

(75,236)

 

(79,210)

Banks share as Mudarib

18,053

 

41,159



 


Return to investment account holders

(57,183)

 

(38,051)

 

The above returns as the Mudarib are forming part of Income from commercial banking in the statement of income. During the year, average mudarib share as a percentage of total income allocated to IAH was 28.13% (2022: 45.06%) as against the average mudarib share contractually agreed with IAH. Hence the Group sacrificed average mudarib fees of 38.44% (2022: 23.50%).

 

The Group does not share profits resulting from the assets funded through current accounts and other funds received on the basis other than mudarba contract and wakala contract.

The funds raised from IAH are deployed in the assets on a priority basis after setting aside certain amount in cash and placement with Banks for liquidity management purposes.



 

 

18   SHARE CAPITAL

Authorised:

31 December 2023


31 December 2022

9,433,962,264 shares of US$ 0.265 each (2022: 9,433,962,264 shares of US$ 0.265 each)

2,500,000


2,500,000

Issued and fully paid up:

 



3,832,593,838 shares of US$ 0.265 each (2022: 3,832,593,838 shares of US$ 0.265 each)

1,015,637


1,015,637

 

The movement in the share capital during the year is as follows:


2023

 

2022

 

 

 


At 1 January

1,015,637


1,000,637

Issue of bonus shares

-


15,000



 


At 31 December

1,015,637

 

1,015,637

 

As at 31 December 2023, the Bank held 353,456,810 (31 December 2022: 341,150,768) treasury shares..

 

Additional information on shareholding pattern

(i)         The Bank has only one class of equity shares and the holders of these shares have equal voting rights.

(ii)           Distribution schedule of equity shares, setting out the number of holders and percentage in the following categories:

 

31 December 2023

Categories*

Number of shares  

Number of

Shareholders

% of total outstanding shares

 

 

 

 

Less than 1%

2,344,580,087

8,632

61.17%

1% up to less than 5%

1,239,114,234

17

32.33%

5% to less than 10%

248,899,517

1

6.50%

 

Total

3,832,593,838

8,650

100%

           

 

31 December 2022

Categories*

Number of shares 

Number of

Shareholders

% of total outstanding shares





Less than 1%

2,260,705,577

8,304

58.98%

1% up to less than 5%

1,023,998,191

 14

26.72%

5% to less than 10%

547,890,070

2

14.30%

 

Total

 

3,832,593,838

8,320

100%

 

                * Expressed as a percentage of total outstanding shares of the Bank.

           

Appropriations and changes in capital structure

Appropriations, if any, are made when approved by the shareholders.



 

18  SHARE CAPITAL (continued)

 

Proposed appropriations

 

The Board of Directors proposes the following appropriations for 2023 subject to shareholders' and regulatory approval:

 

·      Cash dividend of 6.2% of the paid-up share capital net of treasury shares;

·      To allocate an amount of US$ 2,000,000 to charity activities and civil society organizations;

·      Transfer of US$ 10,522,700 to statutory reserve; and;

·      Board remuneration of US$ 1,750,000,

·     

 

19   SHARE GRANT RESERVE

 

The Bank operates a share-based incentive scheme for its employees (the "Scheme") whereby employee are granted the Bank's shares as compensation on achievement of certain non-market based performance conditions and service conditions (the 'vesting conditions'). The grant date fair value of equity instruments granted to employees is recognised as an employee expense, with a corresponding increase in equity over the period in which the employees become unconditionally entitled to the share awards. During the year the Bank has recognized US$ 1,000 thousands.

 

20   OTHER INCOME

 

Other income includes write back of liabilities no longer required of US$ 4.35 million (2022: US$ 10.31 million) after settlement arrangements were concluded for some of the non-banking subsidiaries and income of non-financial subsidiaries of US$ 9 million (2022: US$ 9.6 million).

 

21   STAFF COST


2023


2022



 


Salaries and benefits

74,009

 

60,232

Social insurance and end of service benefits

2,728

 

3,253

Share-based payments

1,000

 

6,930






77,737


70,415

 



 

21      STAFF COST (continued)

 

As per the Group's Variable Incentive Policy, a portion of the annual performance bonus is issued in the form of share awards to its senior management employees. These awards include deferred incentives in the form of shares, share purchase plans and long-term incentive plans with different conditions.  The terms of the award, including the type of plan, extent of funding, pricing and deferral period is determined for each year by the Board Nomination, Remuneration and Governance Committee of the Bank.

 

Performance year

Nature of award

Staff coverage

Summary of deferral and vesting conditions

Annual Awards

Employee Share Purchase Plan & Deferred Annual Bonus (DAB)

Covered persons in business and control functions who exceed total compensation thresholds as per CBB Remuneration Regulations and Bank's Variable Remuneration policy.

 

A portioned of the annual incentive is issued in form of shares / awards and released rateably over the 3 year deferral period. The issue price is determined based on a defined adjustment to market price on the date of the award. No future performance conditions or service conditions associated with the DAB shares.  DAB Shares are entitled for dividends, if any, but released over the deferral period.

 

2020 - 2022

Long term incentive plan (LTIP) share awards

Select Senior Management

 

 

Under the future performance awards structure of the Bank, an LTIP scheme was introduced where the employees are compensated in form of shares on achievement of certain pre-determined performance conditions.  The LTIP sets performance and service conditions and has a rateable vesting schedule over a period of 3 - 6 years. Accelerated vesting may occur on exceeding performance conditions leading to true up of share-based payment charges. The issue price is determined based on a defined adjustment to market price on the date of the award. The LTIP shares include leverage features and are entitled to dividends, if any, released along with the vested shares.

 

 

 

2023

2022


No. of Shares

US$ 000's

No. of Shares

US$ 000's

 

 

 



Opening balance

203,507,210

28,657

184,325,599

17,082

Awarded during the year

43,845,042

16,950

145,490,734

22,532

Bonus shares



4,461,209

-

Forfeiture and other adjustments

(1,300,687)


-

-

Transfer to employees / settlement

(96,976,385)

(12,398)

(130,770,332)

(10,957)

Closing balance

149,075,180

33,209

203,507,210

28,657

 

 

In case of the employee share purchase plans including LTIP, the US$ amounts reported in the table above represents the gross vesting charge of the respective schemes as determined under IFRS 2 - Share-based payments at the date of the award and not the value of the shares.  The release of these shares are subject to future retention, performance and service conditions.  The number of shares included in the table above refer to the total employee participation in the various plans that remain unvested and undelivered as at the reporting date.



 

 

22   OTHER OPERATING EXPENSES


2023


2022



 


Investment advisory expenses

18,895

 

18,571

Rent

5,629

 

2,925

Professional and consultancy fees

12,510

 

13,213

Legal expenses

2,593

 

2,183

Depreciation

11,244

 

5,841

Expenses relating to non-banking subsidiaries

5,850

 

11,570

Other operating expenses

46,915

 

23,229






103,636


77,532

 

23   IMPAIRMENT ALLOWANCES


2023


2022



 


Bank balances

16

 

(13)

Treasury portfolio (note 7)

9,115

 

2,836

Financing contracts (note 8)

10,210

 

6,935

Co-investments (note 11)

1,606


-

Proprietary investments (note 10)

872


(82)

Other receivables (note 12)

(1,368)

 

(6,320)

Commitments and financial guarantees

8

 

(46)






20,459


3,310

 



 

 

24   RELATED PARTY TRANSACTIONS

 

Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial and operating decisions. Related parties include entities over which the Group exercises significant influence, major shareholders, directors and executive management of the Group. A significant portion of the Group's management fees are from entities over which the Group exercises influence (assets under management). Although these entities are considered related parties, the Group administers and manages these entities on behalf of its clients, who are by and large third parties and are the economic beneficiaries of the underlying investments. The transactions with these entities are based on agreed terms.

 

The significant related party transactions during the year and balances as at year end included in these consolidated financial statements are as follows:

 

 

Related parties

 

 

2023

Associates / Joint venture

Key management personnel

Significant shareholders / entities in which directors are interested

Assets under management including special purpose and other entities

Total

Assets





 

Cash and bank balances





 

Treasury portfolio




70,546

70,546

Financing contracts

-

11,202

 85,055

19,489

 

115,746

Proprietary investment

827,161

-

7,686

13,667

848,514

Co investment

-

-

-

243,393

243,393

Receivables and other assets

190,505

6,731

1,507

330,038

528,781






 

Liabilities





 

Current account

2,971

16

29,233

19,122

51,342

Placements from financial, non-financial institutions and individuals

-

5,602

8,622

-

14,224

Payables and accruals

96,115

7,196

-

198,943

302,254






 

Equity of investment account holders

2,485

5,027

44,145

14,422

66,079

 






 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

24      RELATED PARTY TRANSACTIONS (continued)

 

 

Related parties

 

 

2023

Associates / Joint venture

Key management personnel

Significant shareholders / entities in which directors are interested

Assets under management including special purpose and other entities

Total

Income






Income from investment banking

-

-

-

182,173

182,173

Income from commercial banking





 

-           Income from financing

-

790

8,536

-

9,326

-           Less: Return to investment account holders

 

(37)

(249)

(14,257)

(16)

(14,559)

- Less: Finance expense

-

(271)

(11,655)

-

(11,926)

Treasury and other income

35,069

-

-

6,333

41,402

 





 

Expenses






Operating expenses

-

(1,180)

-

(151)

(1,331)

Staff Cost

-

(18,206)

-

-

(18,206)

Finance Cost

-

-

-

(3,188)

(3,188)






 



 

24      RELATED PARTY TRANSACTIONS (continued)

 


Related parties



2022

Associates / Joint venture

Key management personnel

Significant shareholders / entities in which directors are interested

Assets under management including special purpose and other entities

Total

Assets






Cash and bank balances

-

-

-

12,777

12,777

Treasury portfolio




70,656

70,656

Financing contracts

-

8,411

38,181

18,201

64,793

Proprietary investment

836,251

-

6,058

-

842,309

Co investment

-

-

-

142,665

142,665

Receivables and other assets

62,045

5,326

721

198,231

266,323







Liabilities






Current account

1,918

183

2,003

13,973

18,077

Placements from financial, non-financial institutions and individuals

-

3,379

22,697

24,077

50,153

Payables and accruals

36,009

1,565

-

139,529

177,103







Equity of investment account holders

3,239

2,875

33,328

148,114

187,556







 

 

 

Related parties

 

 

2022

Associates / Joint venture

Key management personnel

Significant shareholders / entities in which directors are interested

Assets under management including special purpose and other entities

Total

Income






Income from investment banking

-

-

-

124,244

124,244

Income from commercial banking

-

-

-

-

-

-           Income from financing

-

525

1,263

-

1,788

-           Fee and other income

-

-

-

-

-

-           Less: Return to investment account holders

 

27

101

8,631

11

8,770

- Less: Finance expense

-

-

-

-

-

Income from proprietary and co-investments

27,246

-

1,932

25,154

54,332

Treasury and other income

8

-

-

797

805

 






Expenses






Operating expenses






Staff Cost

-

(8,116)*

-

-

(8,116)

Finance Cost

-

(6)

(3,989)

-

(3,995)







* The amount presented excluded bonus to key management personnel for 2022 as allocation has not been finalized at the date of approval of these consolidated financial statements.

 

24      RELATED PARTY TRANSACTIONS (continued)

 

 

Key management personnel

Key management personnel of the Group comprise of the Board of Directors and key members of management having authority and responsibility for planning, directing and controlling the activities of the Group and its significant banking subsidiary.

 

During the year, there were no direct participation of directors in investments promoted by the Group.

 

The key management personnel compensation is as follows:


2023


2022

 


 


Board members' remuneration, fees and allowance

2,944

 

2,981

Salaries, other short-term benefits and expenses

17,811

 

15,203

Post-employment benefits

1,028

 

289

 

25   ASSETS UNDER MANAGEMENT AND CUSTODIAL ASSETS

 

i.   The Group provides corporate administration, investment management and advisory services to its project companies, which involve the Group making decisions on behalf of such entities. Assets that are held in such capacity are not included in these consolidated financial statements.  At the reporting date, the Group had assets under management of US$ 10,028 million (31 December 2022: US$ 7,845 million). During the year, the Group had charged management fees and performance fee amounting to US$ 18,652 thousand (31 December 2022: US$ 33,536 thousand).

 

ii.  Custodial assets comprise assets of the discretionary portfolio management ('DPM') accounts amounting to US$ 3,351,184 thousand, of which US$ 1,040,768 thousand related to the Bank's investment products.

 



 

 

26   EARNINGS PER SHARE

 

Basic earnings per share

Basic earnings per share is calculated by dividing the profit for the year by the weighted average number of equity shares outstanding during the year.

 

The weighted average number of ordinary equity shares for the comparative periods presented are adjusted for the issue of shares during the year without corresponding change in resources.

 

 

2023


2022

In thousands of shares

 

 


Weighted average number of shares for basic and diluted earnings

3,493,154

 

3,426,503

 

Diluted earnings per share

Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. Potential ordinary shares are considered to be dilutive when, and only when, their conversion to ordinary shares would decrease earnings per share or increase the loss per share.

 

27   ZAKAH AND SOCIAL RESPONSIBILITY

 

Zakah is directly borne by the shareholders on distributed profits and investors in restricted investment accounts. The Bank does not collect or pay Zakah on behalf of its shareholders and investors in restricted investment accounts. Zakah payable by the shareholders is computed by the Bank on the basis of the method prescribed (net assets method) by the Bank's Shari'a Supervisory Board and notified to shareholders annually.

 

The Group discharges its social responsibilities through donations to charitable causes and social organisations.  

 

28   EARNINGS PROHIBITED BY SHARI'A

 

The Group is committed to avoid recognising any income generated from non-sharia sources.  Accordingly, all non-sharia income is credited to a charity account where the Group uses these funds for charitable means.  Movements in non-sharia funds are shown in the statement of sources and uses of charity funds. The Group receives interest from deposits placed with the CBB and other incidental or required deposits. These earnings are utilised exclusively for charitable purposes and amount to US$ 278 thousand (2022: US$ 88 thousand).

 

29   SHARI'A SUPERVISORY BOARD

 

The Group's Shari'a Supervisory Board comprise four Islamic scholars who review the Group's compliance with general Shari'a principles and specific fatwas, rulings and guidelines issued. Their review includes examination of evidence relating to the documentation and procedures adopted by the Group to ensure that its activities are conducted in accordance with Islamic Shari'a principles.



 

 

30   MATURITY PROFILE

 

The table below shows the maturity profile of the Group's assets and unrecognised commitments on the basis of their contractual maturity. Where such contractual maturity is not available, the Group has considered expected realisation / settlement profile for assets and liabilities respectively. For undiscounted contractual maturity of financial liabilities, refer note 36.

 

 

31 December 2023

Up to 3 months

3 to 6 months

6 months

to 1 year

1 to 3 years

Over 3 years

Total

Assets







Cash and bank balances

343,314

8,660

22,976

1,934


376,884

Treasury portfolio

2,490,581

68,210

62,469

787,230

1,726,542

5,135,032

Financing contracts

182,611

48,429

185,568

315,080

805,626

1,537,314

Real estate investment

-

-


-

1,371,932

1,371,932

Proprietary investments

-

-


967,123

77,604

1,044,727

Co-investments

-

-


254,610

-

254,610

Receivables and prepayments

99,635

10,548

244,732

69,265

363,460

787,640

Property and equipment 

-

-



274,721

274,721

Asset held for sale

338,619

-

-

-

-

338,619

Total assets

3,454,760

135,847

515,745

2,395,242

4,619,885

11,121,479

Liabilities

 

 

 

 

 

 

Client's funds

145,221

-

61,001

-

-

206,222

Placements from financial institutions

1,512,670

302,464

311,295

160,780

36,008

2,323,217

Placements from non-financial institutions and individuals

209,240

86,071

243,599

121,703

299,437

960,050

Current account

11,517

25,408

-

13,902

152,870

203,697

Term financing

606,741

149,239

1,095

1,089,757

277,475

2,124,307

Payables and accruals

206,274

137,068

14,519

85,524

104,671

548,056

Liabilities held for sale

230,562

-

-

-

-

230,562

Total liabilities

2,922,225

700,250

631,509

1,471,666

870,461

6,596,111

Equity of investment account holders

2,031,934

272,393

656,972

395,218

94,489

3,451,006

 

 

 

 

 

 

 

Off-balance sheet items

 

 

 

 

 

 

Commitments

92,478

18,366

33,483

59,232

138

203,697

Restricted investment accounts

-

-

-

4,208

-

4,208

 

 



 

30  MATURITY PROFILE (continued)

 

 

31 December 2022

Up to 3 months

3 to 6 months

6 months

to 1 year

1 to 3 years

Over 3 years

Total

Assets







Cash and bank balances

826,393

7,374

13,552

10,920

-

858,239

Treasury portfolio

1,291,520

249,557

447,769

417,228

1,803,946

4,210,020

Financing contracts

156,765

56,091

164,272

291,676

766,434

1,435,238

Real estate investment

-

-

-

-

1,287,085

1,287,085

Proprietary investments

-

-

-

927,704

77,349

1,005,053

Co-investments

-

1,852

-

140,199

-

142,051

Receivables and prepayments

213,908

105,435

56,540

50,526

163,460

589,869

Property and equipment 

-

-

-

-

232,736

232,736








Total assets

2,488,586

420,309

682,133

1,838,253

4,331,010

9,760,291

Liabilities







Client's funds

87,488

-

35,812

-

-

123,300

Placements from financial institutions

2,361,964 

516,253

639,419

210,554

62,680

3,790,870 

Placements from non-financial institutions and individuals

159,739

121,865

251,034

423,025

108,595

1,064,258

Current account

5,497

16,623

-

54,557

54,557

131,234

Term financing

519,046

192,074

276,200

649,172

305,706

1,942,198

Payables and accruals

227,764

116,763

36,390

42,446

-

423,363

Total liabilities

3,361,498

963,578

1,238,855

1,379,754

531,538

7,475,223

Equity of investment account holders

99,588

35,406

86,546

288,470

703,664

1,213,674








Off-balance sheet items







Commitments

56,565

4,098

48,923

95,664

234

205,484

Restricted investment accounts

-

-

-

4,162

-

4,162

 

 

 

 

 


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

for the year ended 31 December 2023                                                                                                                                                               US$ 000's

 

31         CONCENTRATION OF ASSETS, LIABILITIES AND EQUITY OF INVESTMENT ACCOUNT HOLDERS

 

(a)    Industry sector

31 December 2023

Banks and financial institutions

 

Real estate

Others

 

Total

Assets 

 

 

 


Cash and bank balances

359,436

13,253

4,195

376,884

Treasury portfolio

4,071,499

207,677

855,856

5,135,032

Financing contracts

90,540  

735,117

711,657

1,537,314

Real estate investments

-

1,371,932

-

1,371,932

Proprietary investment

720,208

153,916

170,603

1,044,727

Co-investment

143,140

111,470

-

254,610

Receivables and prepayments

40,528

125,420

621,692

787,640

Property and equipment

4,927

78,683

191,111

274,721

Asset held for sale

-

338,619

-

338,619

 

Total assets

5,430,278

3,136,087

2,555,114

11,121,479

Liabilities





Client's funds

203,341

-

2,881

206,222

Placements from financial institutions

2,323,217

-

-

2,323,217

Placements from non-financial institutions and individuals

4,027

-

956,023

960,050

Customer accounts

934

9,899

192,864

203,697

Term financing

2,110,286

14,021

-

2,124,307

Payables and accruals

414,074

-

133,982

548,056

Liabilities held for sale

-

-

230,562

230,562





 

Total liabilities

5,055,879

23,920

1,516,312

6,596,111

 

 

 

 

 

Equity of Investment account holders

348,787

166,159

2,936,060

3,451,006

Off-balance sheet items




 

Commitments

654

78,463

124,581

203,698

Restricted investment accounts


4,208


4,208

Notional amount of Derivative

558,500

-

-

558,500



 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS                                                   

for the year ended 31 December 2023                                                                                                                                                                    US$ 000's

31         Concentration of assets, liabilities and equity of investment account holders (continued)

a          Industry sector (continued)

 

31 December 2022

Banks and financial institutions

 

Real estate

Others

 

Total

Assets 





Cash and bank balances

845,828

11,596

815

858,239

Treasury portfolio

3,134,903

73,182

1,001,935

4,210,020

Financing contracts

107,608

561,420

766,210

1,435,238

Real estate investments

-

1,287,085

-

1,287,085

Proprietary investment

757,834

229,337

17,882

1,005,053

Co-investment

130,833

11,218

-

142,051

Receivables and prepayments

139,696

97,951

352,222

589,869

Property and equipment

2,189

37,165

193,382

232,736

 

Total assets

5,118,891

2,308,954

    2,332,446

9,760,291






Liabilities





Client's funds

119,375

-

3,925

123,300

Placements from financial institutions

3,790,870

-

-

3,790,870

Placements from non-financial institutions and individuals

9,821

1,477

1,052,960

1,064,258

Customer accounts

4,138

18,735

108,361

131,234

Term financing

1,926,760

15,438

-

1,942,198

Payables and accruals

240,730

50,054

132,579

423,363






Total liabilities

6,091,694

85,704

1,297,825

7,475,223






Equity of Investment account holders

272,093

51,262

890,319

1,213,674






Off-balance sheet items





Commitments

-

117,301

88,183

205,484

Restricted investment accounts

-

4,162

-

4,162

Notional amount of Derivative

58,500

-

-

58,500

 



 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

for the year ended 31 December 2023                                                                                                                                                                                                                                                                                                     US$ 000's

31         Concentration of assets, liabilities and equity of investment account holders (continued)

b          Geographic region

 

31 December 2023

GCC countries

MENA

Asia

North America

Others

Total

Assets







Cash and bank balances

322,098

361

82

50,188

4,155

376,884

Treasury portfolio

3,239,875

445,603

-

269,765

1,179,789

5,135,032

Financing contracts

1,489,776

-

-

31,514

16,024

1,537,314

Real estate investment

1,362,718

-

7,430

-

1,784

1,371,932

Proprietary investment

1,035,609

-

-

1,976

7,142

1,044,727

Co-investments

167,221

-

505

28,077

58,807

254,610

Receivables and prepayments

622,346

22,552

3,520

131,310

7,912

787,640

Property and equipment

274,721

-

-

-

-

274,721

Assets held for sale

338,619

-

-

-

-

338,619

Total assets

8,852,983

468,516

11,537

512,830

1,275,613

11,121,479

Liabilities







Client's funds

203,341

-

-

-

2,881

206,222

Placements from financial,

2,323,217

-

-

-

-

2,323,217

Placements non-financial institutions and individuals

733,239

226,487

-

-

324

960,050

Customer accounts

149,968

-

53,729

-

-

203,697

Financing liabilities

1,629,941

-

-

-

494,366

2,124,307

Payables and accruals

414,283

-

-

82,590

51,183

548,056

Liabilities held for sale

230,562

-

-

-

-

230,562

Total liabilities

5,684,551

226,487

53,729

82,590

548,754

6,596,111








Equity of investment account holders

3,360,289

2,329

4,218

-

84,170

3,451,006

Off-balance sheet items






 

Commitments

154,550

-

-

49,147

-

203,697

Restricted investment accounts

4,067

-

-

141

-

4,208

Notional amount of Derivative

-

-

-

558,500

-

558,500

Concentration by location for assets is measured based on the location of the underlying operating assets, and not based on the location of the investment (which is generally based in tax efficient jurisdictions).

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

for the year ended 31 December 2022                                                                                                                                                                                                                                                                                                     US$ 000's

31         Concentration of assets, liabilities and equity of investment account holders (continued)

b          Geography sector (continued)

 

 

31 December 2022

GCC countries

MENA

Asia

North America

Others

Total

Assets







Cash and bank balances

691,915

361

40

74,484

91,439

858,239

Treasury portfolio

3,318,666

135,813

-

108,785

646,756

4,210,020

Financing contracts

1,379,761

39,526

-

12

15,939

1,435,238

Real estate investment

1,037,847

232,284

7,609

-

9,345

1,287,085

Proprietary investment

993,219

-

-

-

11,834

1,005,053

Co-investments

46,780

-

505

93,028

1,738

142,051

Receivables and prepayments

550,502

22,387

3,477

9,873

3,630

589,869

Property and equipment

224,358

-

-

8,244

134

232,736

Total assets

8,243,048

430,371

11,631

294,426

780,815

9,760,291

Liabilities







Client's funds

119,375

-

-

-

3,925

123,300

Placements from financial,

3,790,870 

-

-

-

-

3,790,870

Placements non-financial institutions and individuals

903,367

160,666

-

225

-

1,064,258

Customer accounts

131,019

-

215

-

-

131,234

Financing liabilities

773,566

-

-

447,647

720,985

1,942,198

Payables and accruals

257,100

6,010

-

141,637

18,616

423,363

Total liabilities

5,975,297

166,676

215

589,509

743,526

7,475,223








Equity of investment account holders

1,191,653

-

21,910

-

111

1,213,674

Off-balance sheet items





-


Commitments

142,992

-

-

62,492

-

205,484

Restricted investment accounts

4,022

-

-

140

-

4,162

Notional amount of Derivative

-

-

-

58,500

-

58,500

 

Concentration by location for assets is measured based on the location of the underlying operating assets, and not based on the location of the investment (which is generally based in tax efficient jurisdictions).


 

32   OPERATING SEGMENTS

The Group has three distinct operating segments, Real Estate Development, Investment Banking and Commercial Banking, which are the Group's strategic business units. The strategic business units offer different products and services and are managed separately because they require different strategies for management and resource allocation within the Group. For each of the strategic business units, the Group's Board of Directors (chief operating decision makers) review internal management reports on a quarterly basis.

 

The following summary describes the operations in each of the Group's operating reportable segments:

 

·    Investment Banking: The Banking segment of the Group is focused on private equity and asset management domains. The private equity activities include acquisition of interests in unlisted or listed businesses at prices lower than anticipated values. The asset management unit is responsible for identifying and managing investments in yielding real estate in the target markets of the GCC. The investment banking activities focuses on providing structuring capabilities in Islamic asset-backed and equity capital markets, Islamic financial advisory and mid-sized mergers and acquisition transactions.

 

·      Commercial Banking: These include commercial and corporate banking, retail banking, wealth management, structured investment products and project financing facilities of the Group's commercial banking subsidiary.

 

·      Proprietary and treasury - All common costs and activities treasury and residual investment assets, excluding those that are carried independently by the reportable segments which are included within the respective segment, are considered as part of the proprietary and treasury activities of the Group.

The performance of each operating segment is measured based on segment results and are reviewed by the management committee and the Board of Directors on a quarterly basis. Segment results is used to measure performance as management believes that such information is most relevant in evaluating the results of certain segments relative to other entities that operate within these industries. Inter-segment pricing, if any is determined on an arm's length basis.

The Group classifies directly attributable revenue and cost relating to transactions originating from respective segments as segment revenue and segment expenses respectively. Indirect costs is allocated based on cost drivers/factors that can be identified with the segment and/ or the related activities. The internal management reports are designed to reflect revenue and cost for respective segments which are measured against the budgeted figures. The unallocated revenues, expenses, assets and liabilities related to entity-wide corporate activities and treasury activities at the Group level. Segment revenue and expenses were net-off inter segment revenue and expenses.

The Group has primary operations in Bahrain and the Group does not have any significant independent overseas branches/divisions in the banking business. The geographic concentration of assets and liabilities is disclosed in note 31 (b) to the consolidated financial statements.

 

 

                       


32   OPERATING SEGMENTS (continued)

Information regarding the results of each reportable segment is included below:

 

 

Investment banking

Commercial banking

Proprietary and Treasury

Total

31 December 2023  





Segment revenue

201,371

67,793

100,363

369,527

Segment expenses

(145,620)

(51,106)

(47,115)

(243,841)

Impairment allowance

-

(3,896)

(16,563)

(20,459)

Segment result 

55,751

12,791

36,685 

105,227

Segment assets

278,056

3,985,192

6,858,231

11,121,479

Segment liabilities

208,859

2,146,851

4,240,401

6,596,111  

Equity of investment account holders

-

1,420,854

2,030,152

3,451,006

Other segment information




 

Equity accounted investees

-

8,656

128,734

137,390

Commitments

49,147

154,550

-  

203,697

                                                                                         

 



 

32   OPERATING SEGMENTS (continued)

 


Investment banking

Commercial banking

Proprietary and Treasury

Total

31 December 2022 





Segment revenue

120,503

78,972

98,287

297,762

Segment expenses (including impairment allowances)

(69,675)

(50,538)

(76,532)

(196,745)

Impairment allowance

-

(4,770)

1,460

(3,310)

Segment result 

50,828

23,664

23,215

97,707

Segment assets

201,828

3,785,535

5,772,928

9,760,291

Segment liabilities

171,359

1,761,879

5,541,985

7,475,223

Equity of investment account holders

-

1,189,016

24,658

1,213,674

Other segment information





Equity accounted investees

-

5,303

98,168

103,471

Commitments

55,485

142,992

7,007

205,484

 

 

 


 

33         FAIR VALUE OF FINANCIAL INSTRUMENTS

 

Fair value is an amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction. This represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

 

Underlying the definition of fair value is a presumption that an enterprise is a going concern without any intention or need to liquidate, curtail materially the scale of its operations or undertake a transaction on adverse terms.

 

As at 31 December 2023 and 31 December 2022, the fair value of bank balances, placements with financial institutions, other financial assets, investors' fund, placements from financial and other institutions and other financial liabilities are not expected to be materially different from their carrying values as these are short term in nature and are re-priced frequently to market rates, where applicable.  Investment securities carried at fair value through income statement are carried at their fair values determined using quoted market prices and internal valuation models.

           

The fair value of quoted Sukuk carried at amortised cost (net of impairment allowances) of US$ 2,448,322 thousand (31 December 2022: US$ 2,240,360 thousand). There are no material changes in the fair values of the Sukuk's carried at amortised cost subsequent to the reporting date until the date of signing the consolidated financial statements for the year ended 31 December 2023.

 

Fair value hierarchy

The table below analyses the financial instruments carried at fair value, by valuation method. The different levels have been defined as follows:

·   Level 1: quoted prices (unadjusted) in active markets for identical assets and liabilities

·   Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e.as prices) or indirectly (i.e. derived from prices)

·   Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

 

 

 

 

 



 

33   FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

 

b)   FAIR VALUE HIERARCHY (continued)

 

31 December 2023

Level 1

Level 2

Level 3

Total


US$ 000's

US$ 000's

US$ 000's

US$ 000's

(i) Proprietary investments





Investment securities carried at fair value through:





-     income statement

17,194

-

-

17,194

-     equity

-

827,012

64,045

891,057


17,194

827,012

64,045

908,251

(ii) Treasury portfolio

 

 

 

 

Investment securities carried at fair value through:

 

 

 

 

-     income statement

-

434,133

-

434,133

-     equity

817,626

-

-

817,626


817,626

434,133

-

1,251,759

iii)  Co-investments

 

 

 

 

Investment securities carried at fair value through equity

-

-

247,048

247,048

Investment securities carried at fair value through income statement

-

-

9,168

9,168


-

-

256,216

256,216


834,820

1,261,145

320,261

2,416,226

 

31 December 2022

Level 1

Level 2

Level 3

Total


US$ 000's

US$ 000's

US$ 000's

US$ 000's

(iii)       Proprietary investments

 

 

 

 

Investment securities carried at fair value through:

 

 

 

 

-     income statement

9,480

-

-

9,480

-     equity

836,251

-

55,893

892,144


845,731

-

55,893

901,624

(iv)      Treasury portfolio

 

 

 

 

Investment securities carried at fair value through:

 

 

 

 

-     income statement

-

374,653

-

374,653

-     equity

879,171

-

-

879,171


879,171

374,653

-

1,253,824

iii)  Co-investments

 

 

 

 

Investment securities carried at fair value through equity

 

 

131,553

131,553

Investment securities carried at fair value through income statement

 

 

10,498

10,498


 

 

142,051

142,051


1,724,902

374,653

197,944

2,297,499



33   FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

 

The table below shows the reconciliation of movements in value of investments measured using Level 3 inputs:

 


2023


2022





At 1 January

197,944


263,302

Disposals at carrying value

(3,682)


(54,521)

Purchases

127,134


37,561

Fair value changes during the year

(1,135)


(48,398)

 




At 31 December

320,261


197,944

 

The potential effect of using reasonable possible alternative assumptions for fair valuing certain equity investments classified as level 3 are summarised below:

As on 31 December 2023:

 

Valuation technique used

Key unobservable inputs

Fair value at 31 December 2023
US$ '000

Reasonable possible shift +/- (in average input)

Increase / (decrease) in valuation

Market multiples approach

Comparable Companies trading Multiple and Discounted Cashflows

                     44,905

+/- 5%

 2245 / (2,245)

Market multiples approach

Comparable Companies Method

                       1,700

+/- 5%

 85 / (85)

Discounted cash flow

Terminal growth rate

                     64,475

+/- 5%

 3224 / (3,224)

Discounted cash flow

Weighted average cost of capital

                     10,890

+/- 5%

 544 / (544)

Weighted Average

Discounted Cashflows and NAV

                     18,543

+/- 5%

 927 / (927)

Weighted Average

NAV and Comparable Transactions Multiple method

                       7,600

+/- 5%

 380 / (380)

Adjusted Net Asset Value

NAV

                   172,148

+/- 5%

 8,419 / (8,419)



                   320,261



 

As on 31 December 2022:

 

Valuation technique used

Key unobservable inputs

Fair value at 31 December 2022

Reasonable possible shift +/- (in average input)

Increase / (decrease) in valuation

Market multiples approach

Price to book

5,609

+/- 5%

280 / (280)

Market multiples approach

Enterprise value to EBITDA

6,151

+/- 5%

308 / (308)

Market multiples approach

Capitalised Earnings Method

2,814

+/- 5%

141 / (141)

Market multiples approach

Comparable Companies trading Multiple and Discounted Cashflows

16,505

+/- 5%

825 / (825)

Discounted cash flow

Terminal growth rate

15,003

+/- 5%

750 / (750)

 

Discounted cash flow

Weighted average cost of capital

69,085

+/- 5%

3,454 / (3,454)

Adjusted Net Asset Value


82,777

+/- 5%

4,139 / (4,139)

 

 


197,944


 

 


 


 

 

34         COMMITMENTS AND CONTINGENCIES

 

The commitments contracted in the normal course of business of the Group are as follows:

 


31 December

2023

 

31 December 2022


 

 


Undrawn commitments to extend finance

113,873

 

100,422

Financial guarantees

40,677

 

49,044

Capital commitments for infrastructure development projects

49,147

 

55,485

Commitment to lend

-

 

533


203,697

 

205,484

Performance obligations

During the ordinary course of business, the Group may enter into performance obligations in respect of its infrastructure development projects. It is the usual practice of the Group to pass these performance obligations, wherever possible, on to the companies that own the projects. In the opinion of the management, no liabilities are expected to materialise on the Group as at
31 December 2023 due to the performance of any of its projects.

 

Litigations and claims

The Group has a number of claims and litigations filed against it in connection with projects promoted by the Bank in the past and with certain transactions. Further, claims against the Bank also have been filed by former employees. Based on the advice of the Bank's external legal counsel, the management is of the opinion that the Bank has strong grounds to successfully defend itself against these claims. Appropriate provision have been made in the books of accounts. No further disclosures regarding contingent liabilities arising from any such claims are being made by the Bank as the directors of the Bank believe that such disclosures may be prejudicial to the Bank's legal position.

 

35   FINANCIAL RISK MANAGEMENT

 

Overview

Financial assets of the Group comprise bank balances, placements with financial and other institutions, investment securities and other receivable balances. Financial liabilities of the Group comprise investors' funds, placements from financial and other institutions, term financing and other payable balances. Accounting policies for financial assets and liabilities are set out in note 4.

 

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

 

·    credit risk;

·    liquidity risk;

·    market risks; and

·    operational risk

 

This note presents information about the Group's exposure to each of the above risks, the Bank's objectives, policies and processes for measuring and managing risk, and the Group's management of capital. The material subsidiaries consolidated in these financial statements have independent risk management frameworks which is monitored by the respective Board of Directors of the subsidiaries. Accordingly, such risk management policies, procedures and practices are not included in these consolidated financial statements.

 

Risk management framework

The key element of our risk management philosophy is for the Risk Management Department ('RMD') to provide independent monitoring and control while working closely with the business units which ultimately own the risks. The Head of Risk Management reports to the Board Audit and Risk Committee.

 

35   FINANCIAL RISK MANAGEMENT (continued)

 

The Board of Directors has overall responsibility for establishing our risk culture and ensuring that an effective risk management framework is in place. The Board has delegated its authority to the Board Audit and Risk Committee (ARC), which is responsible for implementing risk management policies, guidelines and limits and ensuring that monitoring processes are in place. The RMD, together with the Internal Audit and Compliance Departments, provide independent assurance that all types of risk are being measured and managed in accordance with the policies and guidelines set by the Board of Directors.

 

The RMD submits a quarterly Risk Overview Report along with a detailed Liquidity Risk Report to the Board of Directors. The Risk Overview Report describes the potential issues for a wide range of risk factors and classifies the risk factors from low to high. The Liquidity Risk Report measure the Group's liquidity risk profile against policy guidelines and regulatory benchmarks. An additional report is prepared by the respective investment units that give updated status and impairment assessment of each investment, a description of significant developments on projects or issues as well as an update on the strategy and exit plan for each project. 

 

a)   Credit risk

Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group's, placements with financial institutions, Financing contracts and other receivables from project companies. For risk management reporting purposes, the Group considers and consolidates all elements of credit risk exposure (such as individual obligor default risk, country, sector risk and sector concentration risk, related party exposure, etc.).

 

The Group had updated its inputs and assumptions for computation of ECL (refer note 4 p).

 

Management of investment and credit risk

The Board of Directors has delegated responsibility for the management of credit risk to its Board Investment Committee (BIC). This committee establishes operating guidelines and reviews and endorses the Management Investment and Credit Committee recommendations for investment strategies, products and services. Its actions are in accordance with the investment policies adopted by the Board of Directors.

 

The RMD is responsible for oversight of the Group's credit risk, including:

·    Ensuring that the Group has in place investment and credit policies, covering credit assessment, risk reporting, documentary and legal procedures, whilst the Compliance Department is responsible for ensuring compliance with regulatory and statutory requirements.

·    Overseeing the establishment of the authorisation structure for the approval and renewal of investment and credit facilities. Authorisation limits are governed by the Board approved Delegated Authority Limits (DAL) Matrix.

·    Reviewing and assessing credit risk. Risk Management department assesses all investment and credit exposures in excess of designated limits, prior to investments / facilities being committed. Renewals and reviews of investments / facilities are subject to the same review process.



 

35   FINANCIAL RISK MANAGEMENT (continued)

      a)   Credit risk (continued)

 

·    Ongoing review of credit exposures. The credit review of the commercial banking exposure is managed and governed by the Board of Directors of KHCB and is consistent with the practices appropriate for retail banks. The risk assessment approach is used by the Parent Bank in determining where impairment provisions may be required against specific investment / credit exposures at its board. The current risk assessment process classifies credit exposures into two broad categories "Unimpaired" and "Impaired", reflecting risk of default and the availability of collateral or other credit risk mitigation. Risk is assessed on an individual basis for each investment / receivable and is reviewed at least once a year. The Group does not perform a collective assessment of impairment for its credit exposures as the credit characteristics of each exposure is considered to be different.  Risk profile of exposures are subject to regular reviews.

·    Reviewing compliance of business units with agreed exposure limits, including those for selected industries, country risk and product types. Providing advice, guidance and specialist skills to business units to promote best practice throughout the Group in the management of investment / credit risk.

The Risk Management Department works alongside the Investment Department at all stages of the deal cycle, from pre-investment due diligence to exit, and provides an independent review of every transaction. A fair evaluation of investments takes place periodically with inputs from the Investment department. Quarterly updates of investments are presented to the Board of Directors or their respective committees. Regular audits of business units and Group credit processes are undertaken by Internal Audit.



 

35   FINANCIAL RISK MANAGEMENT (continued)

      a)   Credit risk (continued)

Exposures subject to credit risk

 

31 December 2023

Stage 1

Stage 2

Stage 3

Total

 

 

 

 

 

Balances with banks and placements with financial institutions

 

 

 


Grade 1 -6 Low-Fair Risk

1,834,947

361


1,835,308






Gross carrying amount

1,834,947

361


1,835,308

Less expected credit losses

(50)

(2)


(52)

Net carrying amount

1,834,897

359

 

1,835,256






Financing contracts





Grade 8 -10 Impaired

-

-

126,743

126,743






Past due but not impaired





Grade 1-6 Low-Fair Risk

51,387

129,006

-

180,393

Grade 7 Watch list

3,472

28,905

-

32,377

Past due comprises:





Up to 30 days

51,422

51,310


102,732

30-60 days

2,681

62,491


65,172

60-90 days

756

67,610


68,366






Neither past due nor impaired





Grade 1-6 Low-Fair Risk

1,143,064

98,987

-

1,242,051

Grade 7 Watch list

204

4,027

-

4,231






Gross carrying amount

1,198,127

284,425

126,743

1,609,295

Less expected credit losses

(5,002)

(25,798)

(41,183)

(71,983)

Net carrying amount

1,193,125

258,627

85,560

1,537,312



 

35   FINANCIAL RISK MANAGEMENT (continued)

      a)   Credit risk (continued)

 

31 December 2023

Stage 1

Stage 2

Stage 3

Total

Investment in Sukuk

 

 

 

 

Grade 8 -10 Impaired

-

-

3,496

3,496

Grade 1-6 Low-Fair Risk

2,936,026

329,087

-

3,265,113

Gross carrying amount

2,936,026

329,087

3,496

3,268,609

Less: expected credit losses

(4,317)

(18,265)

(3,496)

(26,078)

 

Net carrying amount

2,931,709

310,822

-

3,242,531

 

 

 

 

 

Commitments and financial guarantees

 

 

 

 

Grade 8 -10 Impaired

-

-

-

-

Grade 1-6 Low-Fair Risk

198,705

5,072

16

203,792

Grade 7 Watch list

-

-

-

-

Gross carrying amount (note 35)

198,705

5,072

16

203,792

Less: expected credit losses

-

(95)

-

(95)

Net carrying amount

198,705

4,977

16

203,697

 





Total net carrying amount

6,158,436

574,785

85,576

6,818,796

 



 

35   FINANCIAL RISK MANAGEMENT (continued)

      a)   Credit risk (continued)

 

 

31 December 2022

Stage 1

Stage 2

Stage 3

Total






Balances with banks and placements with financial institutions





Grade 1 -6 Low-Fair Risk

1,587,198

361

-

1,587,559


-

-

-

-

Gross carrying amount

1,587,198

361

-

1,587,559

Less expected credit losses

(27)

(2)

-

(29)

Net carrying amount

1,587,171

359

-

1,587,530






Financing facilities





Grade 8 -10 Impaired

-

-

69,565

69,565






Past due but not impaired





Grade 1-6 Low-Fair Risk

254,167

73,411

-

327,578

Grade 7 Watch list

194

37,319

-

37,513

Past due comprises:





55Up to 30 days

106,111

50,417

-

156,528

30-60 days

25,652

8,430

-

34,082

60-90 days

122,600

51,883

-

174,483






Neither past due nor impaired





Grade 1-6 Low-Fair Risk

1,002,997

39,393

-

1,042,390

Grade 7 Watch list

213

22,348

-

22,561






Gross carrying amount

1,257,573

172,471

69,565

1,499,609

Less expected credit losses

(18,047)

(12,810)

(33,514)

(64,371)

Net carrying amount

1,239,526

159,661

36,051

1,435,238

 



 

35   FINANCIAL RISK MANAGEMENT (continued)

      a)   Credit risk (continued)

 

31 December 2022

Stage 1

Stage 2

Stage 3

Total

Gross carrying amount

423,885

58,171

17,809

499,865

Less expected credit losses

2,205

2,655

7,851

12,711

Net carrying amount

421,680

55,516

9,958

487,154






Investment in Sukuk





Grade 8 -10 Impaired

-

-

3,496

3,496

Grade 1-6 Low-Fair Risk

2,930,803

156,004

-

3,086,807

Gross carrying amount

2,930,803

156,004

3,496

3,090,303

Less: expected credit losses

4,940

8,796

3,496

17,232

 

Net carrying amount

2,925,863

147,208

-

3,073,071






Commitments and financial guarantees





Grade 8 -10 Impaired





Grade 1-6 Low-Fair Risk

204,189

939

16

205,144

Grade 7 Watch list

-

342

-

342

Gross carrying amount (note 35)

204,189

1,281

16

205,486

Less: expected credit losses

-

3

-

3

Net carrying amount

204,189

1,278

16

205,483






Total net carrying amount

5,956,746

308,508

36,067

6,301,321

 

Significant increase in credit risk

When determining whether the risk of default on an exposure subject to credit risk has increased significantly since initial recognition, the Bank considers reasonable and supportable information that is relevant and available without undue cost or effort. This includes both quantitative and qualitative information and analysis, based on the Bank's historical experience and expert credit assessment and including forward-looking information.

 

In determining whether credit risk has increased significantly since initial recognition, the following criteria are considered:

·      Downgrade in risk rating according to the approved ECL policy;

·      Facilities restructured during previous twelve months;

·      Qualitative indicators; and

·      Facilities overdue by 30 days as at the reporting date subject to rebuttal in deserving circumstances.

 

Credit risk grades

The Group allocates each exposure to credit risk grade based on a variety of data that is determined to be predictive of the risk of default and applying experienced credit judgement. Credit risk grades are defined using qualitative and quantitative factors that are indicative of risk of default. These factors vary depending on the nature of the exposure and the type of borrower.

 

Credit risk grades are defined and calibrated such that the risk of default occurring increases exponentially as the credit risk deteriorates so, for example, the difference in risk of default between credit risk grades 1 and 2 is smaller than the difference between credit risk grades 2 and 3.

 

Each exposure is allocated to a credit risk grade at initial recognition based on available information about the borrower. Exposures are subject to ongoing monitoring, which may result in an exposure being moved to a different credit risk  grade. Exposers are rated 1 to 10 with 1 to being good and 7 being watch list and 8, 9 and 10 default grades. The monitoring typically involves use of the following data.

35   FINANCIAL RISK MANAGEMENT (continued)

 

Corporate exposures

·     Information obtained during periodic review of customer files- e.g. audited financial statements, management accounts, budgets and projections. Examples of areas of particular focus are: gross profit margins, financial leverage ratios, debt service coverage, compliance with covenants, quality of management, senior management changes

·     Data from credit reference agencies. press articles, changes in external credit ratings

·     Quoted bond and credit default swap (CDS) prices for the borrower where available

·     Actual and expected significant changes in the political, regulatory and technological environment of the borrower or in its business activities

 

Retail exposures

·     Internally collected data on customer behaviour -e.g. utilisation of credit card facilities

·     Affordability metrics

·     External data from credit reference agencies including industry-standard credit scores

 

All exposures

·     Payment record this includes overdue status as well as a range of variables about payment ratios

·     Utilisation of the granted limit

·     Requests for and granting of forbearance

·     Existing and forecast changes in business, financial and economic conditions

 

Generating the term structure of PD

Credit risk grades are a primary input into the determination of the term structure of PD for exposures. The Group collects performance and default information about its credit risk exposures analyzed by jurisdiction or region and by type of product and borrower as well as by credit risk grading.

 

The Group employs statistical models to analyze the data collected and generate estimates of the remaining lifetime PD of exposures and how these are expected to change as a result of the passage of time.

 

This analysis includes the identification and calibration of relationships between changes in default rates and changes in key macro-economic factors as well as in-depth analysis of the impact of certain other factors (e.g. forbearance experience) on the risk of default. For most exposures, key macro-economic indicators include: GDP growth, benchmark profit rates and oil price.  For exposures to specific industries and/or regions. The analysis may extend to relevant commodity and/or real estate prices.

 

Based on advice from the Group Market Risk Committee and economic experts and consideration of a variety of external actual and forecast information, the Group formulates a 'base case' view of the future direction of relevant economic variables as well as a representative range of other possible forecast scenarios (see discussion below on incorporation of forward-looking information). The Group then uses these forecasts to adjust its estimates of PDs.



 

35   FINANCIAL RISK MANAGEMENT (continued)

 

Determining whether credit risk has increased significantly.

The criteria for determining whether credit risk has increased significantly vary by portfolio and include quantitative changes in PDs and qualitative factors, including a backstop based on delinquency. Using its expert credit judgement and, where possible, relevant historical experience, the Group may determine that an exposure has undergone a significant increase in credit risk based on particular qualitative indicators that it considers are indicative of such and whose effect may not otherwise be fully reflected in its quantitative analysis on a timely basis.

 

Qualitative indicators, including different criteria used for different portfolios credit cards, commercial real estate etc.

 

As a backstop, the Group considers that a significant increase in credit risk occurs no later than when an asset is more than 30 days past due. Days past due are determined by counting the number of days since the earliest elapsed due date in respect of which full payment has not been received. Due dates are determined without considering any grace period that might be available to the borrower. For the purpose of calculating ECL for the year ended 31 December 2023, the Bank has applied the backstop of 74 days as against 30 days, in line with the CBB concessionary measures.

 

The Group monitors the effectiveness of the criteria used to identify significant increases in credit risk by regular reviews to confirm that:

·      the criteria are capable of identifying significant increases in credit risk before an exposure is in default;

·      the criteria do not align with the point in time when an asset becomes 30 days past due; and

·      there is no unwarranted volatility in loss allowance from transfers between 12-month PD                (stage 1) and lifetime PD (stage 2).

 

Definition of default

The Group considers an exposure subject to credit risk to be in default when:

·      the borrower is unlikely to pay its credit obligations to the Group in full, without recourse by the Group to actions such as realising security (if any is held);

·      the borrower is more than 90 days past due on any material obligation to the Group; or

·      It is becoming probable that the borrower will restructure the asset as a result of bankruptcy due to the borrower's inability to pay its credit obligation.

 

In assessing whether the borrower is in default, the Group considers qualitative and quantitative indicators. The definition of default aligns with that applied by the Group for regulatory capital purposes.

 

Incorporation of forward-looking information

The Group incorporates forward-looking information into both its assessment of whether the credit risk of an instrument has increased significantly since its initial recognition and its measurement of ECL. Based on advice from the Group Market Risk Committee and economic experts and consideration of a variety of external actual and forecast information. The Group formulates a 'base case' view of the future direction of relevant economic variables as well as a representative range of other possible forecast scenarios. This process involves developing two or more additional economic scenarios and considering the relative probabilities of each outcome.



 

35   FINANCIAL RISK MANAGEMENT (continued)

 

External information includes economic data and forecasts published by governmental bodies and monetary authorities in the countries where the Group operates, supranational organisations such as the OECD and the International Monetary Fund, and selected private-sector and academic forecasters.

 

The base case represents a most-likely outcome and is aligned with information used by the Group for other purposes such as strategic planning and budgeting. The other scenarios represent more optimistic and more pessimistic outcomes. Periodically, the Group carries out stress testing of more extreme shocks to calibrate its determination of these other representative scenarios.

 

The Group has identified and documented key drivers of credit risk and credit losses for each portfolio of financial instruments and, using an analysis of historical data, has estimated relationships between macro-economic variables and credit risk and credit losses. The economic scenarios used as at 31 December 2023 included the key indicators for the selected countries such as the unemployment rates, profit rates and the GDP growth.

 

Modified exposures subject to credit risk

The contractual terms of an exposure subject to credit risk may be modified for a number of reasons, including changing market conditions, customer retention and other factors not related to a current or potential credit deterioration of the customer.

 

When the terms of a financial asset are modified and the modification does not result in de-recognition, the determination of whether the asset's credit risk has increased significantly reflects comparison of:

 

·      Its remaining lifetime PD at the reporting date based on the modified terms; with

·      The remaining lifetime PD estimated based on data at initial recognition and the original contractual terms.

 

The Group renegotiates financing to customers in financial difficulties (referred to as 'forbearance activities') to maximise collection opportunities and minimise the risk of default. Under the Group's forbearance policy, forbearance of Financing contracts is granted on a selective basis if the debtor is currently in default on its debt or if there is a high risk of default, there is evidence that the debtor made all reasonable efforts to pay under the original contractual terms and the debtor is expected to be able to meet the revised terms.

 

The revised terms usually include extending the maturity, changing the timing of profit payments and amending the terms of loan covenants. Both retail and corporate loans are subject to the forbearance policy.

 

Generally, forbearance is a qualitative indicator of a significant increase in credit risk and an expectation of forbearance may constitute evidence that an exposure is credit-impaired / in default (refer note 4). A customer needs to demonstrate consistently good payment behaviour over a period of  time (12 months) before the exposure is no longer considered to be credit-impaired/ in default or the PD is considered to have decreased such that the loss allowance reverts to being measured at an amount equal to 12-month ECL.

                  

35   FINANCIAL RISK MANAGEMENT (continued)

 

Measurement of ECLs

ECLs are a probability-weighted estimate of credit losses. Credit losses are measured as the present value of all cash shortfalls (i.e. the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Group expects to receive). ECLs are discounted at the effective profit rate of the exposure subject to credit risk.

 

The key inputs into the measurement of ECL are the term structure of the following variables:

 

·      probability of default (PD);

·      loss given default (LGD); and

·      exposure at default (EAD).

 

These parameters are generally derived from internally developed statistical models and other historical data. They are adjusted to reflect forward-looking information as described above.

 

PD estimates are estimates at a certain date, which are calculated based on statistical rating models, and assessed using rating tools tailored to the various categories of counterparties and exposures. These statistical models are based on internally compiled data comprising both quantitative and qualitative factors. Where it is available, market data may also be used to derive the PD for large corporate counterparties. If a counterparty or exposure migrates between rating classes, then this will lead to a change in the estimate of the associated PD.

 

LGD is the magnitude of the likely loss if there is a default. The Group estimates LGD parameters based on the history of recovery rates of claims against defaulted counterparties. The LGD models consider the structure, collateral, seniority of the claim, counterparty industry and recovery costs of any collateral that is integral to the financial asset. For Financing contracts secured by retail property, LTV ratios are a key parameter in determining LGD. They are calculated on a discounted cash flow basis using the effective profit rate as the discounting factor.

 

EAD represents the expected exposure in the event of a default. The Group derives the EAD from the current exposure to the counterparty and potential changes to the current amount allowed under the contract including amortisation. The EAD of a financial asset is its gross carrying amount. For lending commitments and financial guarantees, the EAD includes the amount drawn, as well as potential future amounts that may be drawn under the contract, which are estimated based on historical observations. 

 

The following tables show reconciliations from the opening to the closing balance of the loss allowance: 12-month ECL, lifetime ECL and credit-impaired.

 

 

 

 

 



 

35   FINANCIAL RISK MANAGEMENT (continued)

 

2023

12month

ECL

(Stage1)

Lifetime ECL not credit impaired

(Stage2)

Lifetime ECL

Credit impaired

(Stage3)

Total

2023

 

 

 

 

 

Balance at 1 January

33,243

20,785

36,855

90,883

 





Transfer to 12-month ECL

(1,554)

2,429

(875)

-

Transfer to lifetime ECL non-credit-impaired

 

(4,562)

 

4,711

 

(149)

 

-

Transfer to lifetime ECL credit-impaired

 

(2,313)

 

(602)

 

2,915

 

-

Write-off

-

-

(2,596)

(2,596)

Charge for the period

(6,577)

16,877

10,159

20,459

Balance at 31 December

 

18,237

 

44,200

 

46,309

 

108,746

 

Break down of ECL by category of assets in the consolidated statement of financial position and off-balance sheet commitments:

 

2023

12 month

ECL

(Stage 1)

Lifetime ECL not credit impaired

(Stage 2)

Lifetime ECL credit impaired

(Stage 3)

Total

2023

 

 

 

 

 

Balances with banks

18

21

-

39

Treasury portfolio

4,300

18,265

3,513

26,078

Financing contracts

4,788

25,804

41,390

71,982

Other financial receivables

7,945

13

-

7,958

Investment securities

912

-

1,606

2,518

Financing commitments and financial guarantees

274

97

(200)

171

Balance at 31 December

18,237

44,200

46,309

108,746

 

2022

12month

ECL

(Stage1)

Lifetime ECL not credit impaired

(Stage2)

Lifetime ECL

Credit impaired

(Stage3)

Total

2022

 

 

 

 

 

Balance at 1 January

 

 27,656

 

   10,632  

 

  63,297 

101,585

 





Transfer to 12-month ECL

3,128

(2,056)

(1,072)

-

Transfer to lifetime ECL non-credit-impaired

6,417

1,738

(8,155)

-

Transfer to lifetime ECL credit-impaired

 

(149)

 

(34)

 

183

-

Write-off

-

-

(14,012)

(14,012)

Charge for the period

(3,809)

10,505

(3,386)

3,310

Balance at 31 December

 

33,243

 

20,785

 

36,855 

 

90,883



 

35   FINANCIAL RISK MANAGEMENT (continued)

 

2022

12month

ECL

(Stage 1)

Lifetime ECL not credit impaired

(Stage 2)

Lifetime ECL credit impaired

(Stage 3)

Total

2022

 

 

 

 

 

Balances with banks

11

2


13

Treasury portfolio

5,482

8,796

2,684

16,962

Financing contracts

18,130

11,911

34,332

64,373

Other financial receivables

9,240

76

-

9,316

Investment securities

42

-

-

42

Financing commitments and financial guarantees

338

-

(161)

177

Balance at 31 December 2022

33,243

20,785

36,855

90,883

 

Break down of ECL by category of assets in the consolidated statement of financial position and off-balance sheet commitments:

 

Renegotiated facilities

During the year, facilities of BD 31,733 thousand (2022: BD 2,559 thousand) were renegotiated, out of which BD 18,076 thousand (2022: BD 920 thousand) are classified as neither past due nor impaired as of 31 December 2023. The renegotiated terms usually require settlement of profits accrued till date on the facility and/or part payment of the principal and/or obtaining of additional collateral coverage. The renegotiated facilities are subject to revised credit assessments and independent review by the RMD. Of the total past due facilities of BD 107,870 thousand (2022: BD 126,815 thousand) only instalments of BD 6,294 thousand (2022: BD 78,729 thousand) are past due as at 31 December 2023.

     

Allowances for impairment

The Group makes provisions for impairment on individual assets classified under grades 8,9 and 10. This is done on the basis of the present value of projected future cash flows from the assets themselves and consideration of the value of the collateral securities available. On a collective basis, the Bank has provided for impairment losses based on management's judgment of the extent of losses incurred but not identified based on the current economic and credit conditions.

 

Non-accrual basis

The Group classifies financing facility/Sukuk as non-accrual status, if the facility/Sukuk is past due greater than 90 days or there is reasonable doubt about the collectability of the receivable amount. The profits on such facilities are not recognized in the income statement until there are repayments from the borrower or the exposure is upgraded to regular status.

 

Write-off policy

The gross carrying amount of a financial asset is written off when the Group has no reasonable expectations of recovering a financial asset in its entirety or a portion thereof. The Group expects no significant recovery from the amount written off. However, financial assets that are written off could still be subject to enforcement activities in order to comply with the Group's procedures for recovery of amounts due. During the year, the Group has written off financing facilities amounting to BD 90 thousand (2022: BD 4,129 thousand) which were fully impaired. The Group has recovered BD 3,199 thousand from a financing facility written off in previous years (2022: BD 1,808 thousand).

 



 

35   FINANCIAL RISK MANAGEMENT (continued)

 

Collaterals

The Group holds collateral against Financing contracts and receivables from assets acquired for leasing in the form of mortgage/ pledge over property, listed securities, other assets and guarantees. Estimates of fair value are based on the value of collateral assessed at the time of borrowing. Valuation of collateral is updated when the loan is put on a watch list and the loan is monitored more closely. Collateral generally is not held against exposure to other banks and financial institutions. An estimate of the fair value of collateral and other security enhancements held against financial assets is shown below. This includes the value of financial guarantees from banks, but not corporate and personal guarantees as the values thereof are not readily quantifiable. The collateral values considered for disclosure are restricted to the extent of the outstanding exposures.

 

 

31 December 2023


31 December 2022

 

Financing contracts

Assets acquired for leasing (including lease rentals receivable)

Total


Financing contracts

Assets acquired for leasing (including lease rentals receivable)

Total

 








Against impaired








Property

11,408

21,716

33,124


47,292

50,594

97,886

Other

1,973

-

1,973


5,987


5,987




 





Against past due but not impaired



 





Property

157,111

36,719

193,830


81,939

37,589

119,528

Other

13,897

-

13,897


1,053


1,053




 





Against neither past due nor impaired



 





Property

347,817

373,714

721,531


1,038,080

804,483

1,842,563

Other

22,499

-

22,499


117,048


117,048


 

 

 





Total

554,705

432,149

986,854


1,291,399

892,666

2,184,065

 

The average collateral coverage ratio on secured facilities is 147.47% at 31 December 2023                                               (31 December 2022: 149.71%).

Concentration risk

The geographical and industry wise distribution of assets and liabilities are set out in                                    notes 31 (a) and (b).

Concentration risk arises when a number of counterparties are engaged in similar economic activities or activities in the same geographic region or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. The Group seeks to manage its concentration risk by establishing and constantly monitoring geographic and industry wise concentration limits.

 



 

35 FINANCIAL RISK MANAGEMENT (continued)

 

An analysis of concentrations of credit risk of Financing contracts of the Group's business at the reporting date is shown below:  

 

Concentration by

31 December 2023


31 December 2022

Sector

Financing contracts

Assets acquired for leasing

Total


Financing contracts

Assets acquired for leasing

Total

Banking and finance

7,568

-

7,568


9,247


9,247

Real estate

187,324

478,212

665,536


292,944

415,849

708,793

Construction

152,557

-

152,557


138,886

-

138,886

Trading

159,735

-

159,735


133,706

-

133,706

Manufacturing

27,658

-

27,658


144,143

-

144,143

Others

454,282

69,979

524,261


229,158

71,305

300,463

Total carrying amount

989,124

548,191

1,537,315


948,084

487,154

1,435,238

 

b)  Liquidity risk

Liquidity risk is defined as the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset.

 

Management of liquidity risk

The Group's approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group's reputation.

 

Treasury receives information from other business units regarding the liquidity profile of their financial assets and liabilities and details of other projected cash flows arising from projected future business. Treasury then aims to maintain a portfolio of short-term liquid assets, largely made up of short-term placements with financial and other institutions and other inter-bank facilities, to ensure that sufficient liquidity is maintained within the Group as a whole.

 



 

35 FINANCIAL RISK MANAGEMENT (continued)

 

The liquidity requirements of business units are met through treasury to cover any short-term fluctuations and longer-term funding to address any structural liquidity requirements.

 

The daily liquidity position is monitored, and regular liquidity stress testing is conducted under a variety of scenarios covering both normal and more severe market conditions. All liquidity policies and procedures are subject to review and approval by the Board of Directors. Daily reports cover the liquidity position of the Bank and is circulated to Management Committee (MANCOM). Moreover, quarterly reports are submitted to the Board of Directors on the liquidity position by RMD.

 

The table below shows the undiscounted cash flows on the Group's financial liabilities, including issued financial guarantee contracts, and unrecognised financing commitments on the basis of their earliest possible contractual maturity. For issued financial guarantee contracts, the maximum amount of the guarantee is allocated to the earliest period in which the guarantee could be called. The Group's expected cash flows on these instruments vary significantly from this analysis. Refer note 31 for the expected maturity profile of assets and liabilities.



 

35 FINANCIAL RISK MANAGEMENT (continued)

 


Gross undiscounted cash flows

Carrying amount

 

31 December 2023

Up to 3 months

3 to 6 months

6 months to 1 year

1 to 3 years

Over 3 years

Total

Financial liabilities








Clients' funds

145,221

-

61,001

-

-

206,222

206,222

Placements from financial institutions

1,512,670

302,464

311,295

160,780

36,008

2,323,217

2,323,217

Placements from non-financial institutions and individuals

209,243

243,599

121,703

299,434

960,050

960,050

Current accounts

11,517

25,408

-

13,902

152,870

203,697

203,697

Term financing

606,741

149,239

1,095

1,089,757

277,475

2,124,307

2,124,307

Payables and accruals

206,271

137,068

14,519

85,524

104,671

548,053

548,056

Liability held for sale

230,562

-

-

-

-

230,562

230,562








 

Total liabilities

2,922,225

700,250

631,509

1,471,666

870,458

6,365,546

6,596,111

 






 

 

Equity of investment account holders

2,775,736

272,393

656,972

395,218

94,489

4,194,808

3,451,006

Commitment and contingencies

92,593

18,366

33,483

59,232

138

203,812

-

 

To manage the liquidity risk arising from financial liabilities, the Group aims to hold liquid assets comprising cash and cash equivalents, investment in managed funds and treasury shares for which there is an active and liquid market. These assets can be readily sold to meet liquidity requirements. Further, the Group is focussed on developing a pipeline of steady revenues and has undertaken cost reduction exercises that would improve its operating cash flows.

 


Gross undiscounted cash flows

Carrying amount

 

31 December 2022

Up to 3 months

3 to 6 months

6 months to 1 year

1 to 3 years

Over 3 years

Total

Financial liabilities








Clients' funds

87,488

-

35,812

-

-

123,300

123,300

Placements from financial institutions

2,361,964

516,253

639,419

210,554

62,680

3,790,870

3,790,870

Placements from non-financial institutions and individuals

159,739

251,034

423,025

108,595

1,064,258

1,064,258

Current accounts

5,497

16,623

-

54,557

54,557

131,234

131,234

Term financing

519,046

192,074

276,200

649,172

305,706

1,942,198

1,942,198

Payables and accruals

227,764

116,763

36,390

42,446

-

423,363

423,363









Total liabilities

3,361,498

963,578

1,238,855

1,379,754

531,538

7,475,223

7,475,223









Equity of investment account holders

843,389

35,406

86,546

288,470

703,664

1,957,475

1,213,674

Commitment and contingencies

56,679

4,098

48,923

95,664

234

205,598

205,484

 

 



 

35 FINANCIAL RISK MANAGEMENT (continued)

 

Measures of liquidity

Liquidity is managed at an entity level and is not a Group wide measure. The Bank follows certain internal measures of liquidity. These metrics are intended to better reflect the liquidity position from a cash flow perspective and provide a target for the Group. These are liquidity coverage ratio, net stable funding ratio and stock of liquid assets.

 

For this purpose, the liquidity coverage ratio is based on an internally defined management criteria which identifies the amount of liquid assets (including inter- bank placements) the Bank holds that can be used to offset the net cash outflows for 30, 60 and 90 days time horizon. The net stable funding ratio measures the amount of long-term, stable sources of funding employed by an institution relative to the liquidity profiles of the assets funded and the potential for contingent calls on funding liquidity arising from off-balance sheet commitments and obligations.

 

Details of the ratio of liquid assets to total assets at the reporting date and during the year were as follows:

 


Liquid asset / Total asset

 

2023

2022

At 31 December

49.56%

51.93%

Average for the year

47.57%

48.04%

Maximum for the year

49.56%

51.93%

Minimum for the year

46.16%

45.65%

 

LCR has been developed to promote short-term resilience of a bank's liquidity risk profile. The LCR requirements aim to ensure that a bank has an adequate stock of unencumbered high quality liquidity assets (HQLA) that consists of assets that can be converted into cash immediately to meet its liquidity needs for a 30 calendar day stressed liquidity period. The stock of unencumbered HQLA should enable the Bank to survive until day 30 of the stress scenario, by which time appropriate corrective actions would have been taken by management to find the necessary solutions to the liquidity crisis.

 

LCR is computed as a ratio of Stock of HQLA over the Net cash outflows over the next 30 calendar days. As of 31 December 2023, the Bank had an consolidated average LCR ratio for the year is 233%.

 


Average balance for the year


31 December

2023

31 December

2022

 


 


 

Stock of HQLA

444,865

272,429

 

Net cashflows

196,313

213,055

 

LCR %

233%

134%

 




 

Minimum required by CBB

100%

100%

 

 

NSFR is to promote the resilience of banks' liquidity risk profiles and to incentivise a more resilient banking sector over a longer time horizon. The NSFR will require banks to maintain a stable funding profile in relation to the composition of their assets and off-balance sheet activities. A sustainable funding structure is intended to reduce the likelihood that disruptions to a bank's regular sources of funding will erode its liquidity position in a way that would increase the risk of its failure and potentially lead to broader systemic stress. The NSFR limits overreliance on short-term wholesale funding, encourages better assessment of funding risk across all on-balance sheet and off-balance sheet items, and promotes funding stability.



 

35 FINANCIAL RISK MANAGEMENT (continued)

 

NSFR as a percentage is calculated as "Available stable funding" divided by "Required stable funding". As of 31 December 2023, the Bank had an consolidated NSFR ratio of 148%.

 

As at 31 December 2023

 

 

No.

Item

 No Specified Maturity

 Less than 6 months

 More than 6 months and less than one year

 Over one year

 Total weighted value

Available Stable Funding (ASF):

1

Capital:






2

Regulatory Capital

              1,023,275

                       -  

                              -  

               64,133

              1,087,409

3

Other Capital Instruments

                                -  

                       -  

                              -  

                          -  

                                -  

4

Retail deposits and deposits from small business customers:






5

Stable deposits


         159,304

                   36,446

                 3,763

                  189,725

6

Less stable deposits

                                -  

     1,964,119

                518,381

            503,663

              2,737,913

7

Wholesale funding:






8

Operational deposits






9

Other Wholesale funding

                                -  

     4,157,571

                544,672

        1,438,472

              5,452,622

10

Other liabilities:






11

NSFR Shari'a-compliant hedging contract liabilities


                       -  

                              -  

                          -  


12

All other liabilities not included in the above categories

                                -  

         481,509

                              -  

               36,139

                     36,139

13

Total ASF





              9,503,808

Required Stable Funding (RSF):

14

Total NSFR high-quality liquid assets (HQLA)

        2,040,051.61

                       -  

                              -  

                          -  

                     97,918

15

Depsoits held at other financial institutions for opetational purposes






16

Performing financing and sukuk/ securities:

                                -  

     1,841,985

                              -  

            791,830

                  949,354

17

Performing financial to financial institutions by level 1 HQLA

                                -  

                       -  

                              -  

                          -  

                                -  

18

Performing financing to financial institutions secured by non-level 1 HQLA and unsecured performing financing to financial institutions

                                -  

            19,610

                         934

        1,041,445

                  895,500

19

Performing financing to non- financial corporate clients, financing to retail and small business customers, and financing to sovereigns, central banks and PSEs, of which:

                                -  

         254,059

                   76,796

            364,685

                  402,473

20

With a risk weight of less than or equal to 35% as per the CBB Capital Adequacy Ratio guidelines

                                -  

                       -  

                              -  

                          -  

                                -  

21

Performing residential mortgages, of which:

                                -  

                       -  

                              -  

                          -  

                                -  

22

With a risk weight of less than or equal to 35% under the CBB Capital Adequacy Ratio Guidelines

                                -  

                       -  

                              -  

                          -  

                                -  

23

Securities/sukuk that are not in default and do not qualify as HQLA, including exchange-traded equities

                                -  

     1,048,701

                   25,995

            578,308

              1,115,656

24

Other assets:






25

Physical traded commodities, including gold

                                -  




                                -  

26

Assets posted as initial margin for Shari'a-compliant hedging contracts contracts and
contributions to default funds of CCPs


                       -  

                              -  

                          -  

                                -   

27

NSFR Shari'a-compliant hedging assets


                       -  

                              -  

                          -  

                       2,195

28

NSFR Shari'a-compliant hedging contract liabilities before deduction of variation
margin posted


                       -  

                              -  

                          -  

                                -  

29

All other assets not included in the above categories

              2,908,175

                       -  

                              -  

                          -  

              2,908,175

30

OBS items


                       -  

                              -  

                          -  

                     62,381

31

Total RSF


     3,164,354

                103,726

        2,776,269

              6,433,652

32

NSFR(%)





148%

 



 

36 FINANCIAL RISK MANAGEMENT (continued)

 

As at 31 December 2022

 

No.

Item

No Specified Maturity

Less than 6 months

More than 6 months and less than one year

Over one year

Total weighted value

 

Available Stable Funding (ASF):

1

Capital:






 

2

Regulatory Capital

1,004,974

-

-

53,171

1,058,145

 

3

Other Capital Instruments

-

-

-

-

-

 

4

Retail deposits and deposits from small business customers:






 

5

Stable deposits

-

158,056

15,076

26,054

190,530

 

6

Less stable deposits

-

1,684,867

423,803

328,355

2,226,158

 

7

Wholesale funding:






 

8

Operational deposits

-

-

-

-

-

 

9

Other Wholesale funding

-

3,548,055

931,464

1,303,542

2,656,368

 

10

Other liabilities:






 

11

NSFR Shari'a-compliant hedging contract liabilities


-

-

-


 

12

All other liabilities not included in the above categories

-

311,371

-

43,201

43,201

 

13

Total ASF






 

Required Stable Funding (RSF):

14

Total NSFR high-quality liquid assets (HQLA)

1,761,766




87,048

 

15

Deposits held at other financial institutions for operational purposes






 

16

Performing financing and sukuk/ securities:


1,576,916


790,425

908,398

 

17

Performing financial to financial institutions by level 1 HQLA

-

-

-

-

-

 

18

Performing financing to financial institutions secured by non-level 1 HQLA and unsecured performing financing to financial institutions

-

-

94,704

1,050,345

940,145

 



 

 

36 FINANCIAL RISK MANAGEMENT (continued)

 

No.

Item

No Specified Maturity

Less than 6 months

More than 6 months and less than one year

Over one year

Total weighted value

 

19

Performing financing to non- financial corporate clients, financing to retail and small business customers, and financing to sovereigns, central banks and PSEs, of which:

-

294,926

102,548

279,352

380,316

 

20

With a risk weight of less than or equal to 35% as per the CBB Capital Adequacy Ratio guidelines

-

-

-

-

-

 

21

Performing residential mortgages, of which:

-

-

-

-

-

 

22

With a risk weight of less than or equal to 35% under the CBB Capital Adequacy Ratio Guidelines

-

-

-

-

-

 

23

Securities/sukuk that are not in default and do not qualify as HQLA, including exchange-traded equities

-

945,435

388,631

426,531

1,093,564

 

24

Other assets:

-

-

-

-

-

 

25

Physical traded commodities, including gold

-




-

 

26

Assets posted as initial margin for Shari'a-compliant hedging contracts and
contributions to default funds of CCPs


-

-

-

-

 

27

NSFR Shari'a-compliant hedging assets


-

-

-

-

 

28

NSFR Shari'a-compliant hedging contract liabilities before deduction of variation
margin posted


-

-

-

-

 

29

All other assets not included in the above categories

2,090,285

-

-

-

2,090,285

 

30

OBS items


-

-

-

43,344

 

31

Total RSF


2,817,278

585,882

2,546,653

5,543,102

 

32

NSFR(%)





111%

 

 



 

35 FINANCIAL RISK MANAGEMENT (continued)

 

c)   Market risks

Market risk is the risk that changes in market prices, such as profit rate, equity prices, foreign exchange rates and credit spreads (not relating to changes in the obligor's / issuer's credit standing) will affect the Group's income, future cash flows or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return on risk.

 

Management of market risks

As a matter of general policy, the Group shall not assume trading positions on its assets and liabilities, and hence the entire balance sheet is a non-trading portfolio. All foreign exchange risk within the Group is transferred to Treasury. The Group seeks to manage currency risk by continually monitoring exchange rates. Profit rate risk is managed principally through monitoring profit rate gaps and by having pre-approved limits for repricing bands. Overall authority for market risk is vested in the Board Audit and Risk Committee ('BARC'). RMD is responsible for the development of detailed risk management policies (subject to review and approval of the BARC).

 

Exposure to profit rate risk 

The principal risk to which non-trading portfolios are exposed is the risk of loss from fluctuations in the future cash flows or fair values of financial instrument because of a change in market profit rates. Majority of the Group's profit based asset and liabilities are short term in nature, except for certain long term liabilities which have been utilised to fund the Group's strategic investments in its associates.



 

35 FINANCIAL RISK MANAGEMENT (continued)

 

A summary of the Group's profit rate gap position on non-trading portfolios is as follows:

 

 

31 December 2023

Up to 3 months

3 to 6 months

6 months   to 1 year

1 to 3 years

Over 3 years

Total

Assets







Treasury portfolio

2,490,581

68,210

62,469

787,230

1,726,542

5,135,032

Financing contracts

183,833

48,429

185,568

315,080

804,404

1,537,314

 

Total assets

2,674,414

116,639

248,037

1,102,310

2,530,946

6,672,346

Liabilities







Client's fund

145,221

-  

61,001

-  

-  

206,222

Placements from financial institutions

1,512,670

302,464

311,295

160,780

36,008

2,323,217

Placements from non-financial institutions and individuals

209,240

86,071

243,599

121,703

299,437

960,050

Term financing

606,741

149,239

1,095

1,089,757

277,475

2,124,307







 

Total liabilities

2,473,872

537,774

616,990

1,372,240

612,920

5,613,796

 

 

 

 

 

 

 

Equity of investment account holders

2,031,934

272,393

656,972

395,218

94,489

3,451,006


 

 

 

 

 

 

Profit rate sensitivity gap

(1,831,392)

(693,528)

(1,025,925)

(665,148)

1,823,537

(2,392,456)

 

 

31 December 2022

Up to 3 months

3 to 6 months

6 months   to 1 year

1 to 3 years

Over 3 years

Total

Assets







Treasury portfolio

1,291,520

249,557

447,769

417,228

1,803,946

4,210,020

Financing contracts

156,765

56,091

164,272

291,676

766,434

1,435,238

 

Total assets

1,448,285

305,648

612,041

708,904

2,570,380

5,645,258

Liabilities







Client's fund

87,488

-

35,812

-

-

123,300

Placements from financial institutions

2,361,964 

516,253

639,419

210,554

62,680

3,790,870 

Placements from non-financial institutions and individuals

159,739

121,865

251,034

423,025

108,595

1,064,258

Term financing

519,046

192,074

276,200

649,172

305,706

1,942,198








Total liabilities

3,128,237

830,192

1,202,465

1,282,751

476,981

6,920,626








Equity of investment account holders

99,588

35,406

86,546

288,470

703,664

1,213,674








Profit rate sensitivity gap

(1,779,540)

(559,950)

(676,970)

(862,317)

1,389,735

(2,489,042)

 

The management of profit rate risk against profit rate gap limits is supplemented by monitoring the sensitivity of the Group's financial assets and liabilities to various standard and non-standard profit rate scenarios. Standard scenarios that are considered include a 100 basis point (bp) parallel fall or rise in all yield curves worldwide. An analysis of the Group's sensitivity to an increase or decrease in market profit rates (assuming no asymmetrical movement in yield curves and a constant statement of financial position) is as follows:



 

35  FINANCIAL RISK MANAGEMENT (continued)

 

100 bps parallel increase / (decrease)

2023

 

2022

 

 



At 31 December

± 14,324


±24,890

Average for the year

± 15,798


±20,580

Maximum for the year

±20,633


±24,890

Minimum for the year

±7,971


±16,532

 

Overall, profit rate risk positions are managed by Treasury, which uses placements from / with financial institutions to manage the overall position arising from the Group's activities.

 

The effective average profit rates on the financial assets, liabilities and unrestricted investment accounts are as follows:


2023


2022

 


 


Placements with financial institutions

3.80%

 

3.46%

Financing contracts

7.04%

 

6.89%

Debt type investments Sukuk

5.77%

 

6.18%

Placements from financial institutions, other entities and individuals

4.13%


4.53%

Term financing

5.81%


5.43%

Equity of investment account holders

4.64%


3.28%

 

Derivatives held for risk management.

 

(i)  The following table describes the fair values of derivatives held for risk management purposes by type of risk exposure.

 


2023


2022

 

US$ '000

 

US$ '000


Asset

Liability

 



Profit rate



 



Designated in fair value hedges

58,500

-

 

-

-

Designated in cash flow hedges

-

500,000

 

-

-

Total profit rate derivatives

58,500

500,000

 

-

-

 

(ii) The amounts relating to items designated as hedging instruments at 31 December 2023 were as follows.


2023

 

US$ '000


Nominal amount

Carrying amount

Profit rate

 

Assets

Liabilities

Profit rate swaps - debt type investments

58,500

2,195

-

Profit rate swaps - Murabaha financing

500,000

-

3,213

 

558,500

56,269

496,787

 



 

35  FINANCIAL RISK MANAGEMENT (continued)

 

The amounts relating to items designated as hedging instruments at 31 December 2022 were US$ Nil.

 

Exposure to foreign exchange risk

Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Groups major exposure is in GCC currencies, which are primarily pegged to the US Dollar. The Group had the following significant net exposures denominated in foreign currency as of 31 December from its financial instruments:

 


2023


2022

 

US$ '000

 

US$ '000


 



 


Sterling Pounds

24,759

 

5,720

Euro

(625)

 

9,569

Australian Dollars

-

 

11,963

Kuwaiti Dinar

10,735

 

7,922

Turkish Lira

30,000

 

-



 


Other GCC Currencies (*)

(4,340,584)

 

(3,510,244)

(*) These currencies are pegged to the US Dollar.

 

The management of foreign exchange risk against net exposure limits is supplemented by monitoring the sensitivity of the Group's financial assets and liabilities to various foreign exchange scenarios. Standard scenarios that are considered include a 5% plus / minus increase in exchange rates, other than GCC pegged currencies. An analysis of the Group's sensitivity to an increase or decrease in foreign exchange rates (assuming all other variables, primarily profit rates, remain constant) is as follows:

 



 

35  FINANCIAL RISK MANAGEMENT (continued)

 


2023


2022

 

US$ '000

 

US$ '000


Equivalent

 

Equivalent



 


Sterling Pounds

±1,238

 

±286

Euros

±31

 

±478

Australian dollar

-

 

±598

Kuwaiti dinar

±537

 

±396

Turkish Lira

±1,500

 

-



 


 

Exposure to other market risks 

Equity price risk on quoted investments is subject to regular monitoring by the Group.  The price risk on managed funds is monitored using specified limits (stop loss limit, stop loss trigger and overall stop loss limit cap) set within the portfolio management contract for fund managers. The Group's equity type instruments carried at cost are exposed to risk of changes in equity values.

 

The significant estimates and judgements in relation to impairment assessment of fair value through equity investments carried at cost are included in note 5b(ii). The Group manages exposure to other price risks by actively monitoring the performance of the equity securities.

 

d)   Operational risk

Operational risk is the risk of loss arising from systems and control failures, fraud and human errors, which can result in financial and reputation loss, and legal and regulatory consequences.  The Group manages operational risk through appropriate controls, instituting segregation of duties and internal checks and balances, including internal audit and compliance. The Risk Management Department facilitates the management of Operational Risk by way of assisting in the identification of, monitoring and managing of operational risk in the Group.  

 

During 2023, the Group did not have any significant issues relating to operational risks.



 

 

36         CAPITAL MANAGEMENT

 

The Group's regulator Central Bank of Bahrain (CBB) sets and monitors capital requirements for the Group as a whole. In implementing current capital requirements CBB requires the Group to maintain a prescribed ratio of total capital to total risk-weighted assets. The total regulatory capital base is net of prudential deductions for large exposures based on specific limits agreed with the regulator. Banking operations are categorised as either trading book or banking book, and risk-weighted assets are determined according to specified requirements that seek to reflect the varying levels of risk attached to assets and off-balance sheet exposures. The Group does not have a trading book.

 

The Group aims to maintain strong capital base so as to maintain investor, creditor and market confidence and to sustain the future development of the business.

 

The CBB sets and monitors capital requirements for the Bank as a whole. In implementing current capital requirements CBB requires the Bank to maintain a prescribed ratio of total capital to total risk-weighted assets. Capital adequacy regulations of CBB is based on the principles of Basel III and the IFSB guidelines.

 

The Bank's regulatory capital is analysed into two tiers:

 

Tier 1 capital:  includes CET1 and AT1.

CET1 comprise of ordinary share capital that meet the classification as common shares for regulatory purposes, disclosed reserves including share premium, general reserves, legal / statutory reserve, common shares issued by consolidated banking subsidiaries of the Bank and held by third parties, retained earnings after regulatory adjustments relating to goodwill and items that are included in equity which are treated differently for capital adequacy purposes.

 

AT1 comprise of instruments that meet the criteria for inclusion in AT1, instruments issued by consolidated banking subsidiaries of the Bank held by third parties which meet the criteria of AT1, and regulatory adjustments applied in calculation of AT1.

 

Tier 2 capital

This includes instruments issued by the Bank that meet the criteria for inclusion in Tier 2 capital,  stock surplus resulting from issue of Tier 2 capital, instruments issued by consolidated banking subsidiaries of the Bank held by third parties that meet the criteria for inclusion in Tier 2, general provisions held against unidentified losses on financing and qualify for inclusion within Tier 2, asset revaluation reserve from revaluation of fixed assets and instruments purposes and regulatory adjustments applied in the calculation of Tier 2 capital

 

The regulatory adjustments are subject to limits prescribed by the CBB requirements, these deductions would be effective in a phased manner through transitional arrangements from 2015 to 2018. The regulations prescribe higher risk weights for certain exposures that exceeds materiality thresholds. These regulatory adjustments required for certain items such as goodwill on mortgage service right, deferred tax assets, cash flow hedge reserve, gain on sale of related securitization transactions, defined benefit pension fund assets and liabilities, investment in own shares and reciprocal cross holdings in the capital of Banking and financial entities, investment in the capital of Banking and financial entities that are outside the scope of regulatory consolidation and where the Bank does not own more than 10% of issued common shares capital of the entity and significant investments in the capital of banking and financial entities that are outside the scope of regulatory consolidation.    

 

Banking operations are categorised as either trading book or banking book, and risk-weighted assets are determined according to specified requirements that seek to reflect the varying levels of risk attached to assets and off-balance sheet exposures.

 

 

 

36 CAPITAL MANAGEMENT (continued)

 

To combined the effect of COVID-19, the CBB has allowed the aggregate of modification loss and incremental ECL provision for stage 1 and stage 2 for the period from March to December 2020 to be added back to Tier 1 capital for the two years ending 31 December 2020 and 31 December 2021 and to deduct this amount proportionately from Tier 1 capital on an annual basis for three years ended 31 December 2022, and ending 31 December 2023 and 31 December 2024.

 

The Bank's regulatory capital position was as follows:

 


31 December

2023

31 December                 2022




CET 1 Capital before regulatory adjustments

1,023,275

1,020,249

Less: regulatory adjustments

-

-

CET 1 Capital after regulatory adjustments

1,023,275

1,020,249

T 2 Capital adjustments

64,133

52,628

Regulatory Capital

1,087,409

1,072,877




Risk weighted exposure:



Credit Risk Weighted Assets

4,585,950  

6,799,081

Market Risk Weighted Assets

90,135

54,624

Operational Risk Weighted Assets

506,408  

431,784

Total Regulatory Risk Weighted Assets

5,182,493

7,285,489




Investment risk reserve (30% only)

2

2

Profit equalization reserve (30% only)

3

3

Total Adjusted Risk Weighted Exposures

5,182,488

7,285,484




Capital Adequacy Ratio

20.98%

14.73%

Tier 1 Capital Adequacy Ratio

19.74%

14.00%


 


Minimum required by CBB

12.50%

12.50%

 

The allocation of capital between specific operations and activities is primarily driven by regulatory requirements. The Group's capital management policy seeks to maximise return on risk adjusted capital while satisfying all the regulatory requirements. The Group's policy on capital allocation is subject to regular review by the Board of Directors. The Group has complied with the externally imposed capital requirements set by the regulator for its consolidated capital adequacy ratio throughout the year.



 

 

37         ASSETS AND LIABILITIES HELD FOR SALE

 


31 December

2023

 

31 December 2022

 




Assets

338,619


-

Liabilities

230,562


-

Non-controlling interests

16,470


-





 

Assets and related liabilities held-for-sale represents the assets and liabilities of certain real estate investment and project entities within the group. The Group has an active plan approved by the Board, to sell its stake in these entities, and accordingly, the asset, liabilities and non-controlling interests acquired are classified as held-for-sale in the consolidated statement of financial position.

       

38         PRIOR PERIOD ADJUSTMENT

 

During the year, the Bank rectified the cumulative impact of certain operational incidents identified in its treasury portfolio bookings that related to prior periods through the opening retained earnings.  These amounts would be recognized in future years as finance income as part of the amortized cost accounting of the yield in the treasury portfolio.  It was considered impracticable to perform profit attribution for prior periods due to these assets being part of the jointly financed asset pools and accordingly the cumulative impact has been recognized in opening retained earnings as of 1 January 2023.

 

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