TIDM95HX
RNS Number : 8920B
GFH Financial Group B.S.C
16 February 2022
GFH Financial Group BSC
CONSOLIDATED
FINANCIAL STATEMENTS
31 DECEMBER 2021
Commercial registration : 44136 (registered with Central Bank of Bahrain
as an Islamic wholesale Bank)
Registered Office : Bahrain Financial Harbour
Office: 2901, 29(th) Floor
Building 1398, East Tower
Block: 346, Road: 4626
Manama, Kingdom of Bahrain
Telephone +973 17538538
Directors : Jassim Al Seddiqi, Chairman
Sheikh Ahmed Bin Khalifa Al-Khalifa (till 25 Feb 2021)
Ghazi Faisal Ebrahim Alhajeri , (Vice Chairman from 7 July
2021)
Hisham Ahmed Alrayes
Rashid Nasser Al Kaabi
Ali Murad (from 9 April 2020)
Ahmed Abdulhamid AlAhmadi (from 9 April 2020)
Alia Al Falasi (from 30 September 2020)
Fawaz Talal Al Tamimi (from 30 September 2020)
Edris Mohammed Rafi Alrafi (from 24 December 2020)
Chief Executive Officer : Hisham Ahmed Alrayes
Auditors :KPMG Fakhro
CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2021
CONTENTS Page
Chairman's report 1-5
Report of the Shari'a Supervisory Board 6
Independent auditors' report to the shareholders 7-13
Consolidated financial statements
Consolidated statement of financial position 14
Consolidated income statement 15
Consolidated statement of changes in owners' equity 16-17
Consolidated statement of cash flows 18
Consolidated statement of changes in restricted investment
accounts 19
Consolidated statement of sources and uses of zakah
and charity fund 20
Notes to the consolidated financial statements 21-102
Supplementary information (not audited) 103-105
CHAIRMAN'S REPORT
for the year ended 31 December 2021
Dear Shareholders,
On behalf of the Board of Directors of GFH Financial Group, I am
pleased to present the Group ' s financial results for the fiscal
year ended 31 December 2021. While 2021 saw the continuation of the
COVID-19 pandemic and its impact across communities and markets
globally, it also bore witness to the resilience and innovation
that are spurred in the midst of uncertainty. Throughout the
pandemic ' s peaks and troughs, economies began a road to recovery
infused with a view towards long-term sustainability, while
businesses found ways to adapt that inspired future-proofed
strategies and processes.
As for us at GFH, 2021 marked a year in which we made great
strides across the Group and delivered remarkable growth in profits
and income year-over-year. COVID-19 allowed us to reveal the
strength of our diversified business lines, and enabled us to
demonstrate the Group ' s resilience - a trait that has underpinned
our growth and successful diversification throughout our 22-year
history. We continued to grow our investment banking, commercial
banking, asset management and treasury businesses, as well as our
investment portfolio and presence in key markets including the GCC,
UK, Europe and the US.
Instrumental to our sustained growth despite the pandemic ' s
challenges is our strategy of dynamic diversification and
persistent pursuit of value creation. Long before the pandemic, our
investment strategy prioritised identifying opportunities across a
range of defensive sectors and recession-proof markets. In 2021,
this allowed us to continue expanding our geographic reach, the
sectors we are active in and the variety of asset classes that we
invest in. As a result, we have exponentially grown our global
portfolio of income-yielding, high-return investments assets and
secured long-term value creation opportunities for our investors
and shareholders.
The Group's total consolidated revenue was US$368.5 million
compared with US$323.4 million in 2020, reflecting a year-on-year
increase of 13.9%. Achieving this growth is made possible through
the continued success of our business lines, and our pursuit of
investments and activities that facilitate steady income
generation. In addition to investment management, real estate and
treasury activities have also recorded particularly positive
contributions to our revenues.
Furthermore, we were able to report strong results for 2021 -
made possible by our dedicated team's successful execution of the
Group's strategy. Through a keen-eyed and responsive evaluation,
they identified new income yielding opportunities while building on
and extracting value from existing assets. For the year, the Group
reported a consolidated net profit of US$92.6 million as compared
with US$49.3 million from the previous year, an increase of 87.8%,
and a net profit attributable to shareholders of US$84.2 million
compared with US$45.1 million for the previous year, an increase of
86.7%.
The Group ' s total assets for the year grew from US$6.6 billion
in 2020 to US$8.1 billion in 2021, an increase of 22.7%. The Group
' s Total Assets and Funds Under Management (AUM) increased from
US$12 billion in 2020 to around US$15 billion in 2021, marking a
year-on-year increase of 25%. The Group also ended the year with a
Capital Adequacy Ratio of 13.2% and Return on Equity (ROE) ratio of
9%, confirming our sustained positive financial performance.
We are pleased to have been recognised for our efforts and
significant progress towards improving our model and reducing our
overall credit risk profile over the last few years. Despite the
challenging market headwinds caused by COVID-19, we have managed to
continue to
CHAIRMAN'S REPORT
for the year ended 31 December 2021
effectively implement our ongoing strategy to transform GFH from
a purely Islamic wholesale bank into a fully integrated Sharia ' a
compliant financial group. Additionally, GFH ' s outlook has been
upgraded to Stable by Capital Intelligence Ratings, which now rates
the group ' s Long-Term Foreign Currency Rating (LT FCR) and
Short-Term Foreign Currency Rating (ST FCR) as ' BB- ' and ' B ' ,
respectively. The improvement reflects the group ' s sound
liquidity, coupled with a sizeable liquid sovereign Sukuk
portfolio, increasingly diversified sources of funding and
increased share of non-Bahrain assets. The updated corporate
ratings are also supported by GFH ' s extended debt maturity
profile following a US$500 million five-year Sukuk issue in 2020,
low refinancing risk and satisfactory debt service capacity.
We are proud of the tremendous progress we made throughout 2021,
which was made possible by the dedication and continued ingenuity
of our teams across the Group. While the commercial impact of the
pandemic continues to be felt by businesses and markets globally -
our Group included - we were still able to achieve sustained
positive progress and contributions across our business lines, and
maintain investor and market confidence. In the twelve months ended
December 2021, the Group successfully raised more than US$2.3
billion across its investment banking and treasury business lines.
The continuation of our financial performance and growth, combined
with our dividend policy, enabled the Board to recommend a total
cash dividend of USD XXmn at XX% on par value. Additional board
recommendations were discussed and raised as part of the Group ' s
Ordinary General Meeting (OGM), which successfully concluded on 14
October 2021 with several key ratifications and authorisations
received from shareholders. One of these approvals included the
continuation of listing the Group ' s shares on Boursa Kuwait as
well as the repurchase of the Group ' s shares (treasury shares),
up to a maximum of 10% of the total issued shares, for a number of
purposes, subject to the approval of the Central Bank of Bahrain
(CBB) including the acquisition of the shares of Khaleeji
Commercial Bank B.S.C. (KHCB), pursuant to an acquisition offer,
and strategic expansion in financial and investment institutions.
The OGM also saw shareholders authorise the Board of Directors or
its designees to take all necessary actions to implement the above
activities. Similarly, the EGM saw shareholders approve our
recommendation to issue sukuk in the amount of US$300 million in
the form of Additional Perpetual Tier 1 Capital.
While 2021 saw the continuation of uncertainty across markets
and industries globally, our commitment towards pursuing value
creation opportunities that generate strong returns for our
investors and shareholders has allowed us to achieve a year. The
corporate strategies we have established alongside the tireless
dedication of our teams across the Group demonstrated our ability
to not only persevere in the face of challenges, but to succeed
through them - and enable our clients ' success as well. In 2021,
we identified recession-proof opportunities and expanded our
offerings to include a wider range of geographies and defensive
subsectors, allowing our clients ' investment portfolios to grow
more resilient and profitable.
It is important to note here that an investment opportunity ' s
resilience and profitability is increasingly inextricably linked to
its sustainability - not only in relation to operational
efficiencies and financial soundness, but also in relation to how
closely it integrates Environmental, Social & Governance (ESG)
principles. To ensure we are able to continue realising value and
solid returns for our investors and shareholders, and serving the
communities in which we are operating, we are committed towards
continually embedding ESG principles into our Group ' s policies
and frameworks.
CHAIRMAN'S REPORT
for the year ended 31 December 2021
Building on this promise to deepen the integration of ESG
principles across our Group ' s platforms and subsidiaries, and in
recognition of our responsibility towards all our stakeholders -
including investors, shareholders, employees and the communities we
invest in - we are proud to have announced in January 2022 the
establishment of " Infracorp " . With over US$3 billion of the
Group ' s infrastructure and related assets now under its
management, " Infracorp " specialises in investments that are
hyper-focused on accelerating the growth and development of
sustainable infrastructure assets across the MENA region and global
markets.
With that, we have entered 2022 in a stronger position to
execute our strategy to deliver solid returns and sustainable value
creation opportunities through continued diversification and
operational innovation. As we have done long before the onset of
the pandemic and since our inception over twenty years ago, we will
continue to navigate the challenges ahead and seek out the
opportunities that will further accelerate our growth, and enhance
value generation opportunities in the years ahead.
On behalf of the Group ' s Board of Directors, we would like to
extend our appreciation to the Central Bank of Bahrain, the
Government of the Kingdom of Bahrain and its visionary leadership:
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 for their dedicated leadership and
progressive vision that have allowed for Bahrain to become a
regional hub for advancement and innovation within the financial
sector.
I would also like to take this opportunity to express our
appreciation for our investors ' and shareholders' continued trust
and confidence in the face of ongoing market uncertainties, which
have enabled us to persist in our growth throughout the past year.
I would like to acknowledge the tireless efforts, ingenuity and
commitment of our management team and employees across the GFH
Financial Group and its subsidiaries, which allowed the Group to
deliver on its promise of value creation through dynamic
diversification. I also want to thank our Board of Directors for
their ongoing guidance and support in steering the Group towards
further growth and success.
As part of the Group's obligation to maintain utmost
transparency with our valued shareholders, we are pleased to attach
the table below that shows the remuneration of members of the Board
of Directors and the Executive Management for the fiscal year
ending 31st December 2021.
CHAIRMAN'S REPORT
for the year ended 31 December 2021
First: Remuneration of the Board of directors
Fixed remunerations
Name Remunerations Total allowance Salaries Others Total
of the Chairman for attending
and BOD Board and committee
----------------- --------------------- --------- ------- ----------
First: Independent Directors
Alia Al Falasi 22,500 9,000 - - 31,500
----------------- --------------------- --------- ------- ----------
Ghazi Al Hajer 90,000 5,000 - - 95,000
----------------- --------------------- --------- ------- ----------
Fawaz Al Tamimi 22,500 4,000 - - 26,500
----------------- --------------------- --------- ------- ----------
Ali Murad 67,500 4,000 - - 71,500
----------------- --------------------- --------- ------- ----------
Ahmed Al Ahmadi 67,500 9,000 - - 76,500
----------------- --------------------- --------- ------- ----------
Edris Al Rafi - 10,000 - - 10,000
----------------- --------------------- --------- ------- ----------
Amro Almenhali* 67,500 - - - 67,500
----------------- --------------------- --------- ------- ----------
Bashar Al-mutawa* 22,500 - - - 22,500
----------------- --------------------- --------- ------- ----------
Mazin Alsaeed* 22,500 - - - 22,500
----------------- --------------------- --------- ------- ----------
Mosabah Almutairi* 67,500 - - - 67,500
----------------- --------------------- --------- ------- ----------
Second: Non-Executive Directors:
Jassim Alseddiqi 150,000 4,000 - - 154,000
----------------- --------------------- --------- ------- ----------
Rashed Alkaabi 90,000 5,000 - - 95,000
----------------- --------------------- --------- ------- ----------
Third: Executive Directors:
Sheikh Ahmed AlKhalifa** 180,000 1,000 - - 181,000
----------------- --------------------- --------- ------- ----------
Hisham Alrayes 90,000 4,000 - - 94,000
----------------- --------------------- --------- ------- ----------
Mustafa Kheriba* 90,000 - - - 90,000
----------------- --------------------- --------- ------- ----------
Total 1,050,000 55,000 - - 1,105,000
----------------- --------------------- --------- ------- ----------
Note: All amounts in US Dollars.
* These directors either resigned or their term ended during the
year 2020. The remuneration they received during the year 2021
relates to the year 2020.
** This director resigned during the year 2021. The remuneration
he received during the year 2021 relates to the year 2020.
Notes:
1. The Bank does not have any variable remuneration payments, end
of service benefits, or expense allowances paid to its directors.
2. Board remuneration represents payments made during the year
2021 based on approval of the Annual General Meeting dated 6(th)
April 2021.
CHAIRMAN'S REPORT
for the year ended 31 December 2021
Second: Executive Management Remuneration Details for Top 6
Executives:
Executive management Total paid salaries Total paid Any other Aggregate
and allowances remuneration cash/ in kind Amount
(Bonus) remuneration
for 2021
Remunerations of top 6
executives, including CEO 7,625,300
and CFO 2,762,781 (1) - 10,388,081
-------------------- -------------- --------------- -----------
Note: All amounts in US Dollars.
Notes:
1. The total bonus included USD 3,885,148 as cash based remuneration
and USD 3,740,152 as shares based remuneration.
2. Remuneration details exclude any Board remuneration earned
by executive management from their role in investee companies
or other subsidiaries.
[Signature HERE]
Jassim AlSeddiqi
Chairman
SHARI'A REPORT
for the year ended 31 December 2021
6 February 2022
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 2021
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 2021.
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 2021
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 AUSDulla Al Menai
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 Bank B.S.C. (the "Bank"), and its
subsidiaries (together the "Group") which comprise the consolidated
statement of financial position as at 31 December 2021, 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
2021, and 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") as
modified by the Central Bank of Bahrain (the "CBB").
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 2021.
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,
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.
INDEPENT AUDITORS REPORT TO THE SHAREHOLDERS (continued)
GFH Financial Group B.S.C.
Key Audit Matters (continued)
Impairment allowance on financing assets and assets acquired
for leasing
Refer accounting policy in note 4(p), use of estimates and
judgments in note 5 and management of credit risk in note 36
(a).
The key audit matter How the matter was addressed
in our audit
We focused on this area because: Our audit procedures included:
* of the significance of financing assets and assets Control testing
acquired for leasing representing 16 % of total We performed walk throughs to
assets. identify the key systems, applications
and controls used in the ECL
processes.
Key aspects of our controls testing
* The estimation of expected credit losses ("ECL") on involved the following:
financing assets and assets acquired for leasing testing the design and operating
involve significant judgment and estimates. The key effectiveness of the key controls
areas where we identified greater level of management over the completion and accuracy
judgment and estimates are: of the key inputs and assumptions
into the ECL Model;
a. Use of complex models * evaluating the design and operating effectiveness of
Use of inherently judgmental the key controls over the application of staging
complex models to estimate ECL criteria;
which involves determining Probabilities
of default ("PD"), Loss Given
Default ("LGD") and Exposure * Evaluating controls over validation, implementation
At default ("EAD"). The PD models and model monitoring;
are considered the drivers of
the ECLs.
* evaluating controls over authorization and
b. Economic scenarios calculation of post model adjustments and management
The need to measure ECLs on an overlays; and
unbiased forward-looking basis
incorporating a range of economic
conditions. Significant management * testing key controls relating to selection and
judgment is applied in determining implementation of material macro-economic variables
the economic scenarios used and and the controls over the scenario selection and
the probability weightings applied probabilities.
to them.
c. Management overlays
Adjustments to the ECL model Tests of details
results are made by management a) Sample testing over key inputs
to address known impairment model and assumptions impacting ECL
limitations or emerging trends calculations to assess the reasonableness
or risks, including the potential of economic forecast, weights,
impacts of COVID-19. Such adjustments and PD assumptions applied; and
are inherently uncertain and b) Selecting a sample of post
significant management judgment model adjustments to assess the
is involved in estimating these reasonableness of the adjustments
amounts especially in the current by challenging key assumptions,
COVID-19 environment. inspecting the calculation methodology
and tracing a sample of the data
used back to the source data.
------------------------------------------------------------------- ------------------------------------------------------------
INDEPENT 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
Use of specialists
* We involved our information technology specialists in
testing the relevant general IT and applications
controls over the key systems used in the ECL
process;
* We involved our credit risk 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 weighing
applied to them; and
d. evaluating the overall reasonableness
of the management economic forecast
by comparing it to external market
data.
Disclosure s
Evaluating the adequacy of the
Group's disclosures related to
ECL on financing assets and assets
acquired for leasing by reference
to the relevant accounting standards.
==================================================================
Valuation of unquoted equity investments
Refer accounting policy in note 4g(iv) and fair value of
financial instruments in note 34.
The key audit matter How the matter was addressed
in our audit
We considered this as a key audit Our audit procedures included:
area we focused on because the
valuation of unquoted equity * we involved our own valuation specialists to assist
securities held at fair value us in:
requires the application of valuation
techniques which often involve
the exercise of significant judgment * evaluating the appropriateness of the valuation
by the Group and the use of significant methodologies used by comparing with observed
unobservable inputs and assumptions. 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.
===============================================================
INDEPENT 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 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.
=====================================================================
Carrying value of development properties
Refer accounting policy in note 4(m) and note 9 for disclosures
related to development properties
The key audit matter How the matter was addressed
in our audit
Development projects comprise Our audit procedures included:
projects under construction and
long-term infrastructure projects. * evaluating whether management's classification of
Development properties are stated real estate under development properties was
at the lower of cost and net appropriate;
realisable value.
We focused on this area due to:
* the significance of development property representing * evaluating the qualifications and competence of the
16% of total assets (by value); and external valuers and reviewing the terms of their
engagement to determine whether there were any
matters that might have affected their objectivity or
* and complexity associated with the accounting for limited their scope of work;
development properties under construction. The Group
engages external valuers to assess the expected net
realisable values of these development properties. * for projects under construction, to evaluate
The assessment of net realisable value involves appropriateness of carrying value of the work in
significant judgment and estimation uncertainty progress at the balance sheet date, on a sample basis
,
we performed audit procedures over costs of
construction to date, surveyor reports on physical
completion and sub-developer contract arrangements;
* we involved our valuation specialists, who used their
knowledge of the industry and available historical
data to assist in:
* evaluating the appropriateness of the valuation
methodologies used by the external valuers;
==============================================================
INDEPENT 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
* evaluating the reasonableness of key inputs and
assumptions such as expected sale prices on
completion and estimates of costs to complete. Where
any component was out of our expected range, we
undertook additional procedures including sensitivity
analysis, to understand the effect on the assessed
values and carrying amounts in the consolidated
financial statements; and
* on a sample basis, performed audit procedures to
assess whether the source data used for the
assessment of the net realisable values are
reasonable by comparing it to the underlying
supporting information to obtain insight into the
calculation model used to determine the net
realisable value.
Disclosures
Based on the outcome of our evaluation,
we assessed the adequacy of disclosures
in the consolidated financial
statements.
===============================================================
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.
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.
INDEPENT AUDITORS REPORT TO THE SHAREHOLDERS (continued)
GFH Financial Group B.S.C.
Responsibilities of Board of Directors for the Consolidated
Financial Statements (continued)
The board of directors is also responsible for the preparation
and fair presentation of the consolidated financial statements in
accordance with FAS as modified by CBB, 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.
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 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.
INDEPENT AUDITORS REPORT TO THE SHAREHOLDERS (continued)
GFH Financial Group B.S.C.
Auditors' Responsibilities for the Audit of the Consolidated
Financial Statements (continued)
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.
Report on Other Regulatory Requirements
As required by the Commercial Companies Law 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, 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
09 February 2022
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
as at 31 December 2021 US$ 000's
note 31 December 31 December
2021 2020
ASSETS
Cash and bank balances 6 722,471 536,502
Treasury portfolio 7 3,089,925 1,838,546
Financing assets 8 1,311,002 1,267,266
Investment in real estate 9 1,905,598 1,812,315
Proprietary investments 10 211,638 256,108
Co-investments 11 171,877 126,319
Receivables and other assets 12 531,488 605,658
Property and equipment 13 139,687 144,149
------------ ------------
Total assets 8,083,686 6,586,863
============ ============
LIABILITIES
Clients' funds 216,762 130,935
Placements from financial, non-financial
institutions and individuals 14 3,052,092 2,418,000
Customer current accounts 133,046 140,756
Term financing 15 1,750,667 1,089,077
Other liabilities 16 404,654 465,038
------------ ------------
Total liabilities 5,557,221 4,243,806
------------ ------------
Total equity of investment account
holders 17 1,358,344 1,156,993
OWNERS' EQUITY
Share capital 18 1,000,638 975,638
Treasury shares 18 (48,498) (63,979)
Statutory reserve 27,970 19,548
Investment fair value reserve (28,561) 5,593
Foreign currency translation reserve (70,266) (46,947)
Retained earnings 81,811 22,385
Share grant reserve 19 - 1,093
------------ ------------
Total equity attributable to shareholders
of Bank 963,094 913,331
Non-controlling interests 205,027 272,733
------------ ------------
Total owners' equity 1,168,121 1,186,064
------------ ------------
Total liabilities, equity of investment
account holders and owners' equity 8,083,686 6,586,863
============ ============
The consolidated financial statements were approved by the Board
of Directors on 09 February 2022 and signed on its behalf by:
Jassim Al Seddiqi Ghazi Faisal Ebrahim Alhajeri Hisham Alrayes
Chairman Vice 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 2021 US$ 000's
note 2021 2020
Investment banking income
Asset management 8,083 4,895
Deal related income 102,304 75,736
110,387 80,631
---------
Commercial banking income
Income from financing 79,333 80,400
Treasury and investment income 55,258 42,864
Fee and other income 4,630 4,582
Less: Return to investment account
holders 17 (31,710) (32,587)
Less: Finance expense (35,685) (29,946)
71,826 65,313
---------
Income from proprietary and co-investments
Direct investment income, net 14,609 20,436
Dividend from co-investments 14,280 8,854
28,889 29,290
---------
Real estate income
Development and sale 24,885 14,209
Rental and operating income 4,959 5,248
---------
29,844 19,457
---------
Treasury and other income
Finance income 11,400 19,395
Dividend and net gain on treasury
investments 95,759 70,282
Other income, net 21 50,643 39,026
157,802 128,703
---------
Total income 398,748 323,394
--------- ---------
Staff costs 22 63,231 47,072
Other operating expenses 23 70,299 65,186
Finance expense 137,020 134,994
Impairment allowances 24 35,581 26,799
Total expenses 306,131 274,051
---------
Profit for the year 92,617 49,343
========= =========
Attributable to:
Shareholders of the Bank 84,224 45,095
Non-controlling interests 8,393 4,248
92,617 49,343
======= =======
Earnings per share
Basic and diluted earnings per share
(US cents) 2.50 1.33
----- -----
Jassim Al Seddiqi Ghazi Faisal Ebrahim Alhajeri Hisham Alrayes
Chairman Vice 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 2021 US$ 000's
Attributable to shareholders of the Bank Non Total
-controlling owners'
interests equity
Share Treasury Statutory Investment Foreign Retained Share Total
capital shares reserve fair value currency earnings grant
reserve translation reserve
2021 reserve
------------- ----------
Balance at 1 January
2021 (as previously
reported) 975,638 (63,979) 19,548 5,592 (46,947) 22,385 1,093 913,330 272,733 1,186,063
Effect of adoption
of FAS 32 (note 4) - - - - - (2,096) - (2,096) - (2,096)
---------- --------- ---------- ----------- ------------ --------- -------- --------- ------------- ----------
Balance at 1 January
2021 (restated) 975,638 (63,979) 19,548 5,592 (46,947) 20,289 1,093 911,234 272,733 1,183,967
Profit for the year - - - - - 84,224 - 84,224 8,393 92,617
Fair value changes
during the year - - - (786) - - - (786) 62 (724)
Transfer to income
statement on
disposal of sukuk - - - (33,367) - - - (33,367) - (33,367)
---------- --------- ---------- ----------- ------------ --------- -------- --------- ------------- ----------
Total recognised
income and expense - - - (34,153) - 84,224 - 50,071 8,455 58,526
---------- --------- ---------- ----------- ------------ --------- -------- --------- ------------- ----------
Bonus Shares issued
for 2020 25,000 - - - - (25,000) - - - -
Dividends declared
for 2020 - - - - - (17,000) - (17,000) - (17,000)
Transfer to zakah
and charity fund - - - - - (1,572) - (1,572) (142) (1,714)
Transfer to
statutory reserve - - 8,422 - - (8,422) - - - -
Purchase of treasury
shares - (45,025) - - - - - (45,025) - (45,025)
Sale of treasury
shares - 60,506 - - - 5,121 - 65,627 - 65,627
Foreign currency
translation
differences - - - - (23,319) - - (23,319) (5,965) (29,284)
Acquisition of NCI
without a change in
control (note 20) - - - - - 23,078 - 23,078 (70,054) (46,976)
Extinguishment of
Share grant reserve
to (retained
earnings) - - - - - 1,093 (1,093) - - -
Balance at 31
December 2021 1,000,638 (48,498) 27,970 (28,561) (70,266) 81,811 - 963,094 205,027 1,168,121
========== ========= ========== =========== ============ ========= ======== ========= ============= ==========
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 2020 (continued) US$ 000's
Attributable to shareholders of the Bank Non Total
-controlling owners'
interests equity
Share Treasury Statutory Investment Foreign Retained Share Total
capital shares reserve fair value currency earnings grant
reserve translation reserve
2020 reserve
------------- ----------
Balance at 1
January 2020 975,638 (73,419) 125,312 9,245 (29,425) (4,005) 1,198 1,004,544 288,327 1,292,871
Profit for
the year - - - - - 45,095 - 45,095 4,248 49,343
Fair value
changes
during the
year - - - 5,036 - - - 5,036 412 5,448
Reclassified
to income on
impairment
of quoted
equity
securities - - - 12,000 - - - 12,000 - 12,000
Reclassified
to income on
disposal of
sukuk - - - (20,688) - - - (20,688) - (20,688)
-------- ---------- ---------- ----------- ------------ --------- -------- ---------- ------------- ----------
Total
recognised
income and
expense - - - (3,652) - 45,095 - 41,443 4,660 46,103
-------- ---------- ---------- ----------- ------------ --------- -------- ---------- ------------- ----------
Additional
capital
contribution
to
subsidiary - - - - - (59,893) - (59,893) (14,311) (74,204)
Modification
loss on
financing
assets (note
2) - - - - - (13,893) - (13,893) (11,179) (25,072)
Government
grant (note
2) - - - - - 3,690 - 3,690 1,267 4,957
Dividends
declared for
2019 - - - - - (30,000) - (30,000) - (30,000)
Transfer to
zakah and
charity fund - - - - - (1,388) - (1,388) (258) (1,646)
Transfer to
statutory
reserve - - 4,509 - - (4,509) - - - -
Purchase of
treasury
shares - (107,518) - - - - - (107,518) - (107,518)
Sale of
treasury
shares - 133,483 - - - (22,985) - 110,498 - 110,498
Treasury
shares
acquired for
share
incentive
scheme - (16,525) - - - - (105) (16,630) 130 (16,500)
Foreign
currency
translation
differences - - - - (17,522) - - (17,522) (3,084) (20,606)
NCI arising
from
acquisition
of a
subsidiary
(note 20) - - - - - - - - 64,147 64,147
Distribution
to NCI - - - - - - - - (56,966) (56,966)
Adjustment of
accumulated
losses
against
statutory
reserve
(note 18) - - (110,273) - - 110,273 - - - -
-------- ---------- ---------- ----------- ------------ --------- -------- ---------- ------------- ----------
Balance at 31
December
2020 975,638 (63,979) 19,548 5,593 (46,947) 22,385 1,093 913,331 272,733 1,186,064
======== ========== ========== =========== ============ ========= ======== ========== ============= ==========
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 2021 US$ 000's
31 December 31 December
2021 2020
OPERATING ACTIVITIES
Profit for the year 92,617 49,34 3
Adjustments for:
Income from commercial banking (54,819) (41,402)
Income from proprietary investments (28,889) (29,290)
Income from treasury and other income (187,646) (88,915)
Foreign exchange gain / (loss) (2,190) (1,329)
Finance expense 172,707 164,940
Impairment allowances 35,581 26,79 8
Depreciation and amortisation 4,776 6,150
-------------
32,137 86,295
Changes in:
Placements with financial institutions (original
maturities of more than 3 months) 6,541 450,752
Financing assets (43,736) 5,511
Other assets (7,800) (161,469)
CBB Reserve and restricted bank balance (13,612) 39,623
Clients' funds 85,827 60,077
Placements from financial and non-financial
institutions 634,092 (29,250)
Customer current accounts (7,710) (6,732)
Equity of investment account holders 201,351 (61,552)
Payables and accruals (60,384) (30,204)
------------- ------------
Net cash generated from operating activities 826,706 353,051
------------- ------------
INVESTING ACTIVITIES
Payments for purchase of equipment (3,604) (674)
Proceeds from sale of proprietary and co-investments,
net 13,391 (39,230)
Purchase of treasury portfolio, net (1,177,088) (621,110)
Proceeds from sale of investment in real
estate 9,741 6,256
Dividends received from proprietary investments
and co-investments 18,030 11,936
Advance paid for development of real estate (6,515) (19,751)
Net cash flows from acquisition of subsidiaries - 26,803
Net cash used in investing activities ( 1,146,045) (635,770)
FINANCING ACTIVITIES
Term financing, net 701,035 787,666
Purchase of GFH sukuk, net (39,445) -
Finance expense paid (151,268) (165,778)
Dividends paid (17,575) (37,433)
Sale (Purchase) of treasury shares, net 15,481 (13,814)
------------
Net cash generated from financing activities 508,228 570,641
------------
Net increase in cash and cash equivalents
during the year 188,889 287,922
Cash and cash equivalents at 1 January * 655,455 367,533
------------- ------------
Cash and cash equivalents at 31 December 844,344 655,455
============= ------------
Cash and cash equivalents comprise: *
Cash and balances with banks (excluding
CBB Reserve balance and restricted cash) 664,388 492,031
Placements with financial institutions (original
maturities of 3 months or less) 179,956 163,424
------------- ------------
844,344 655,455
============= ============
* net of expected credit loss of US$ 24 thousand (31 December
2020: US$ 15 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 2021
31 December Balance at 1 January Balance at 31 December
2021 2021 Movements during the year 2021
Average Average
No. value Group's value
of per Investment/ Gross Dividends fees as Administration No. of per
units share Total (withdrawal) Revalua-tion income paid an agent expenses units share Total
Company (000) US$ US$ 000's US$ 000's US$ 000's US$ 000's US$ 000's US$ 000's US$ 000's (000) US$ US$ 000's
----- ------- --------- ------------ ------------ --------- --------- --------- -------------- --------- ------- ---------
Mena Real
Estate
Company
KSCC 150 0.33 50 - - - - - 150 0.33 50
Al Basha'er
Fund 12 7.91 95 (2) - - - - - 12 7.87 94
Safana
Investment
(RIA
1) (#) 6,254 2.65 16,573 - - - - - - 6,254 2.65 16,573
Shaden Real
Estate
Investment
WLL (RIA 5)
(#) 3,434 2.65 9,100 - - - - - - 3,434 2.65 9,100
Locata
Corporation
Pty
Ltd (RIA 6)
(#) 2,633 1.00 2,633 (45) 5 119 - - - 2,633 1.03 2,712
--------- ---------
28,451 (47) 5 119 - - - 28,529
========= ============ ============ ========= ========= ========= ============== =========
31 December Balance at 1 January Balance at 31 December
2020 2020 Movements during the year 2020
Average Average
No. value Group's value
of per Investment/ Gross Dividends fees as Administration No. of per
units share Total (withdrawal) Revalua-tion income paid an agent expenses units share Total
Company (000) US$ US$ 000's US$ 000's US$ 000's US$ 000's US$ 000's US$ 000's US$ 000's (000) US$ US$ 000's
----- ------- --------- ------------ ------------ --------- --------- --------- -------------- --------- ------- ---------
Mena Real
Estate
Company
KSCC 150 0.33 50 - - - - - - 150 0.33 50
Al Basha'er
Fund 13 7.91 103 (10) - - - - - 12 7.91 95
Safana
Investment
(RIA
1) (#) 6,254 2.65 16,573 - - - - - - 6,254 2.65 16,573
Shaden Real
Estate
Investment
WLL (RIA 5)
(#) 3,434 2.65 9,100 - - - - - - 3,434 2.65 9,100
Locata
Corporation
Pty
Ltd (RIA 6)
(#) 2,633 1.00 2,633 - - - - - - 2,633 1 2,633
--------- ---------
28,459 (10) - - - - - 28,451
========= ============ ============ ========= ========= ========= ============== =========
(#) Represents restricted investment accounts of Khaleeji
Commercial Bank BSC, a consolidated subsidiary
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 2021 US$ 000's
2021 2020
Sources of zakah and charity fund
Contributions by the Group 1,766 1,646
Non-Sharia income (note 29) 31 129
Total sources 1,797 1,775
-------- --------
Uses of zakah and charity fund
Utilisation of zakah and charity fund (1,970) (1,839)
(1,970
Total uses ) (1,839)
-------- --------
Surplus of sources over uses (173) (64)
Undistributed zakah and charity fund at
1 January 5,346 5,407
Undistributed zakah and charity fund at
31 December (note 16) 5,173 5,343
======== ========
Represented by:
Zakah payable 954 1,493
Charity fund 4,219 3,850
5,173 5,343
====== ======
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 and Dubai 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 subsidiaries (together referred to as
"the Group"). The significant subsidiaries of the Bank which
consolidated in these financial statements are:
Effective
ownership
Country of interests
Investee name incorporation 2021 Activities
Khaleeji Commercial Bank BSC Kingdom of 81.17% Islamic retail
('KHCB') * Bahrain bank
---------------- ----------- ------------------------
Al Areen Project companies 100% Real estate development
---------------- ----------- ------------------------
Falcon Cement Company BSC (c) 51.72% Cement manufacturing
('FCC')
----------- ------------------------
GBCORP BSC (c) (GBCORP) (note 62.91% Islamic investment
20) firm
----------- ------------------------
Residential South Real Estate 100% Real estate development
Development Company (RSRED)
----------- ------------------------
Infracorp B.S.C (c) (Previously 100% Real estate development
known as GFH Properties W.L.L.) and management
----------- ------------------------
Athena Private School for Special 100% Educational institution
Education WLL
---------------- ----------- ------------------------
GFH Capital Limited United Arab 100% Investment management
Emirates
---------------- ----------- ------------------------
Morocco Gateway Investment Company Cayman Islands 90.27% Real estate development
('MGIC')
---------------- ----------- ------------------------
Tunis Bay Investment Company 82.97% Real estate development
('TBIC')
---------------- ----------- ------------------------
Energy City Navi Mumbai Investment 80.27% Real estate development
Company & Mumbai IT & Telecom
Technology Investment Company
(together "India Projects")
---------------- ----------- ------------------------
Gulf Holding Company KSCC State of Kuwait 53.63% Investment in
real estate
---------------- ----------- ------------------------
Roebuck A M LLP ("RAM") United Kingdom 60% Property asset
management Company
---------------- ----------- ------------------------
The Bank has other SPE holding companies and subsidiaries, which
are set up to supplement the activities of the Bank and its
principal subsidiaries.
*During the year, the Group has made a voluntary pre-conditional
offer to acquire up to 100% of the issued and paid-up ordinary
shares of Khaleeji Commercial Bank BSC ("KHCB"), representing up to
187,589,034 ordinary shares of KHCB (constituting voting rights),
not currently owned by the Group representing up to 21.03% stake of
KHCB's issued and paid-up share capital, by way of shares exchange
of 0.914 GFH shares per KHCB Share at the discretion of each
shareholder of Khaleeji Commercial Bank BSC.
GFH Group is carrying out a group restructuring program (the
'program') which involves the spinning out of its infrastructure
and real estate assets under a newly established entity "Infracorp
B.S.C." ("Infracorp"), which will be capitalized with more than
US$1 billion in infrastructure and development assets. Infracorp
will specialise in investments focusing on accelerating growth and
development of sustainable infrastructure assets and environments
across the gulf and global markets.
1 REPORTING ENTITY (continued)
Under this program certain real estate and infrastructure assets
as well as certain investments in securities, equity accounted
investees and subsidiaries will be transferred from the group to
Infracorp for an in-kind consideration in the form of Sukuk and/ or
equity shares issued by Infracorp. The final holding of the Group
in the spin-off structure is still being ascertained.
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 International Financial Reporting
Standards (IFRS), except for:
i. recognition of modification losses on financial assets
arising from payment holidays provided to customers impacted by
COVID-19 without charging additional profits, in equity instead of
profit or loss as required by FAS. Any other modification gain or
loss on financial assets are recognised in accordance with the
requirements of applicable FAS.;
ii. recognition of financial assistance received from the
government and/ or regulators as part of its COVID-19 support
measures that meets the government grant requirement, in equity,
instead of profit or loss as required by the statement on
"Accounting implications of the impact of COVID-19 pandemic" issued
by AAOIFI to the extent of any modification loss recognised in
equity as a result of (i) above. In case this exceeds the
modification loss amount, the balance amount is recognized in the
profit or loss account. Any other financial assistance is
recognised in accordance with the requirements of FAS; and
iii. recognition of specific impairment allowances and expected
credit losses in line with the specific CBB guidelines for
application of staging rules issued as part of its COVID-19
response measures.
The above framework for basis of preparation of the condensed
consolidated interim financial information is hereinafter referred
to as 'Financial Accounting Standards as modified by CBB'. The
modification to accounting policies have been applied
retrospectively and did not result in any change to the
comparatives.
Impact of COVID-19 concessionary measures
Modification of financial assets
During the second quarter of 2020, based on a regulatory
directive issued by the CBB as concessionary measures to mitigate
the impact of COVID-19, the one-off modification losses amounting
to USD 25,072 thousand arising from the 6-month payment holidays
provided to financing customers without charging additional profit
was recognized directly in equity. The modification loss was
calculated as the difference between the net present value of the
modified cash flows calculated using the original effective profit
rate and the current carrying value of the financial assets on the
date of modification. The Group had provided payment holidays on
financing exposures amounting to USD 118,257 thousand (first
deferral - March 2020 to September 2020) as part of its support to
impacted customers. As at 31 December 2021, the Group has customers
with financing facilities of USD 493,721 thousand under continuing
deferral arrangement.
Financial assistance
Governments and central banks across the world have responded
with monetary and fiscal interventions to stabilize economic
conditions. The Government of Kingdom of Bahrain has announced
various economic stimulus programmes ("Packages") to support
businesses in these challenging times. As per the regulatory
directive during 2020, financial assistance amounting to USD 2,098
thousand (representing specified reimbursement of a portion of
staff costs, waiver of fees, levies and utility charges) and zero
cost funding received from the government and/or regulators, in
response to its COVID-19 support measures, was recognized directly
in equity.
2. STATEMENT OF COMPLIANCE (continued)
Fair valuation
The COVID-19 pandemic has resulted in a global economic slowdown
with uncertainties in the economic environment. The global capital
and commodity markets have also experienced great volatility and a
significant drop in prices. The Group's fair valuation exercise
primarily relies on quoted prices from active markets for each
financial instrument (i.e. Level 1 input) or using observable or
derived prices for similar instruments from active markets (i.e.
Level 2 input) and has reflected the volatility evidenced during
the period and as at the end of the reporting date in its
measurement of its financial assets and liabilities carried at fair
value. Where fair value measurements was based in full or in part
on unobservable inputs (i.e. Level 3), management has used its
knowledge of the specific asset/ investee, its ability to respond
to or recover from the crisis, its industry and country of
operations to determine the necessary adjustments to its fair value
determination process.
Government grant
Due to Covid-19, the Government of Kingdom of Bahrain has
announced various economic stimulus programmes ("Packages") to
support businesses in these challenging times. During the year, the
Group received financial assistance in the form of reimbursement of
staff costs and waiver of utility and other charges and zero-cost
repo funding from the government of the Kingdom of Bahrain that has
been recognised directly in equity.
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, 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 or listed businesses at prices lower
than anticipated values. 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 proprietary
private equity, co-investments and strategic
non-banking investments.
Commercial banking This includes all sharia compliant corporate
banking and retail banking activities of the
Group provided through the Group's subsidiary,
Khaleeji Commercial Bank BSC. The subsidiary
also manages its own treasury and proprietary
investment book within this operating segment.
--------------------------------------------------------
Real Estate development This business unit is primarily involved in origination
and management of large scale economic infrastructure
projects. The business unit also covers the Group's
investment in development real estate and related
assets.
--------------------------------------------------------
Corporate and All common costs and activities that are undertaken
treasury at the Group level, including treasury and residual
investment assets, is considered as part of the
Corporate 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.
3 BASIS OF MEASUREMENT (continued)
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.
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 Deal related income , earned
activity of private equity, income by the Group from investee
yielding asset opportunities companies in connection
with new acquisitions
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 Financing income, fees and
income corporate, institutional investment income (net of
and retail banking financing direct funding costs)
and cash management
products and services
-------------------------------- ------------------------------------
Proprietary investments Proprietary investments Includes dividends, gain
comprise the Group's / (loss) on sale and remeasurement
strategic and co-investment of proprietary investments,
exposure. This also co-investments and share
includes non-banking of profit / (loss) of equity
subsidiaries and equity accounted investees
-accounted investees
where the Bank has significant Income from restructuring
influence of liabilities and funding
arrangements are also considered
as income from proprietary
investments
-------------------------------- ------------------------------------
Co-investment Represent the Group's Dividends, gain / (loss)
co-investment along on co-investments of the
with its clients in Bank
the products promoted
by the Group
-------------------------------- ------------------------------------
Real estate Proprietary holdings Development and sale income
of real estate for direct , from development and sale
sale, development and of real estate projects
sale, and/ or rental of the Group based on percentage
yields. This also includes of completion (POC) method.
the group's holding
or participation in Rental and operating income
leisure and hospitality , from rental and other
assets. ancillary income from investment
in real estate.
-------------------------------- ------------------------------------
Treasury operations Represents the Bank's Income arising from the
liquidity management deployment of the Bank's
operations, including excess liquidity, through
its fund raising and but not limited to short
deployment activities term placements with bank
to earn a commercial and financial institutions,
profit margin. 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 except as described in note 2
"statement of compliance" above and those arising from adoption of
the following standards and amendments to standards.
(a) Adoption of new standards during the year
(i) FAS 32 - Ijarah
AAOIFI issued FAS 32 "Ijarah" in 2020, this standard is
effective for financial periods beginning on or after 1 January
2021. The standard supersedes the existing FAS 8 "Ijarah and Ijarah
Muntahia Bittamleek"
FAS 32 sets out principles for the classification, recognition,
measurement, presentation and disclosure of Ijarah (Ijarah asset,
including different forms of Ijarah Muntahia Bittamleek)
transactions entered into by the Islamic financial institutions as
a lessor and lessee.
The Group has applied FAS 32 "Ijarah" from 1 January 2021. The
impact of adoption of this standard is disclosed in (b) below.
(a) Change in accounting policy
Identifying an Ijarah
At inception of a contract, the Bank 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.
Measurement
For a contract that contains an Ijarah component and one or more
additional Ijarah or non-Ijarah components, the Bank allocates the
consideration in the contract to each Ijarah component on the basis
of relative stand-alone price of the Ijarah component and the
aggregate estimated stand-alone price of the non-Ijarah components,
that may be charged by the lessor, or a similar supplier, to the
lessee.
At the commencement date, a lessee shall recognise 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.
4 SIGNIFICANT ACCOUNTING POLICIES (continued)
(a) Adoption of new standards during the year (continued)
The Bank 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 Bank 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 Bank
will exercise that option; and/ or
-- Termination options if it is reasonably certain that the Bank
will not exercise that option.
The Bank carries out impairment assessment in line with the
requirements of FAS 30 "Impairment, Credit Losses and Onerous
Commitments" 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 in line with FAS 30 "Impairment, Credit
Losses and Onerous Commitments".
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).
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 maintanence. As of
31 December 2021, the Bank did not have any contracts with variable
or supplementary rentals.
After the commencement date, the Bank 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 Bank
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 Bank 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.
4 SIGNIFICANT ACCOUNTING POLICIES (continued)
(a) Adoption of new standards during the year (continued)
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
Bank considers the Ijarah as a modified Ijarah as of the effective
date and recognises a new Ijarah transaction. The Bank 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 Bank, are
recognised by the Bank 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
A lessee may elect 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 can be applied on a whole class of
underlying assets if they have similar characteristics and
operational utility. However, low-value Ijarah exemption can only
be applied on an individual asset/ Ijarah transaction, and not on
group/ combination basis.
Impact as lessor on accounting for Ijara Muntahia Bittamleek
contracts
There was no change in the accounting policies for Ijarah
Muntahia Bittamleek portfolio upon adoption of this standard.
(b) Impact on adoption of FAS 32
The impact of adoption of FAS 32 as at 1 January 2021 has
resulted in an increase in right-of-use asset and an increase in
lease liability as stated below. The lease contracts comprise
office premises, school premises, leasehold lands, ATM sites,
branches etc.
Total Assets Total Liabilities Total Equity
and EIAH
Closing balance (31 December
2020) 6,586,863 5,400,799 1,186,064
Impact on adoption:
Right-of-use asset 58,949 - -
Lease liability - 61,045 -
Opening impact of FAS 32 - - (2,096)
------------- ------------------ -------------
Balance on date of initial
application of 1 January
2021 6,645,812 5,461,844 1,183,968
------------- ------------------ -------------
4 SIGNIFICANT ACCOUNTING POLICIES (continued)
(b) New standards, amendments and interpretations issued but not
yet effective
The following new standards and amendments to standards are
effective for financial years beginning after 1 January 2022 with
an option to early adopt. However, the Group has not early adopted
any of these standards.
(i) FAS 38 Wa'ad, Khiyar and Tahawwut
AAOIFI has issued FAS 38 Wa'ad, Khiyar and Tahawwut in 2020. The
objective of this standard is to prescribe the accounting and
reporting principles for recognition, measurement and disclosures
in relation to shariah compliant Wa'ad (promise), Khiyar (option)
and Tahawwut (hedging) arrangements for Islamic financial
institutions. This standard is effective for the financial
reporting periods beginning on or after 1 January 2022 with an
option to early adopt.
This standard classifies Wa'ad and Khiyar arrangements into two
categories as follows:
i) "ancillary Wa'ad or Khiyar" which is related to a structure
of transaction carried out using other products i.e. Murabaha,
Ijarah Muntahia Bittamleek, etc.; and
ii) "product Wa'ad and Khiyar" which is used as a stand-alone
Shariah compliant arrangement.
Further, the standard prescribes accounting for constructive
obligations and constructive rights arising from the stand-alone
Wa'ad and Khiyar products and accounting for Tahawwut (hedging)
arrangements based on a series of Wa'ad and Khiyar contracts.
The Group does not expect any significant impact on adoption
this standard.
(ii) 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 with an option to
early adopt.
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).
The Group is assessing the impact of adoption of this
standard.
(iii) 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 2023 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 Quasi 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;
4 SIGNIFICANT ACCOUNTING POLICIES (continued)
(b) New standards, amendments and interpretations issued but not yet effective (continued)
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 statements
(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 Group. Control exists when the Group
has the power, directly or indirectly, to govern the financial and
operating policies of an enterprise so as to obtain benefits from
its activities. Subsidiaries are consolidated from the date on
which control commences until when control ceases.
(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:
4 SIGNIFICANT ACCOUNTING POLICIES (continued)
(c) Basis of consolidation (continued)
(iii) Non-controlling interests (NCI) (continued)
-- 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
The consolidated financial statements of the Group comprise the
financial statements of the Bank and its subsidiaries. Subsidiaries
are those enterprises (including special purpose entities)
controlled by the Bank. Control exists when the Group has the
power, directly or indirectly, to govern the financial and
operating policies of an enterprise so as to obtain benefits from
its activities. Subsidiaries are consolidated from the date on
which control is transferred to the Group and de-consolidated from
the date that control ceases. Control is presumed to exist, when
the Bank owns majority of voting rights in an investee.
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.
When the decision maker is an agent, the link between power and
returns is absent and the decision maker's delegated power does not
lead to a control conclusion. Where the Group's voluntary actions,
such as lending amounts in excess of existing liquidity facilities
or extending terms beyond those established originally, change the
relationship between the Group and an SPE, the Group performs a
reassessment of control over the SPE.
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 26. 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.
(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.
4 SIGNIFICANT ACCOUNTING POLICIES (continued)
(c) Basis of consolidation (continued)
(vi) Equity accounted investees (continued)
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.
(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.
4 SIGNIFICANT ACCOUNTING POLICIES (continued)
(e) Foreign currency transactions (continued)
(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 proprietory
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 assets
Financing assets comprise Shari'a compliant financing contracts
with fixed or determinable payments. These include financing
provided through Murabaha, Musharaka, Istisna and Wakala contracts.
Financing assets 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) 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.
4 SIGNIFICANT ACCOUNTING POLICIES (continued)
(l) Investment property (continued)
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.
(m) 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.
(n) 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 15 - 30 years
Machinery 8 - 40 years
Other equipment comprising:
Tools and dies 3 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 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.
4 SIGNIFICANT ACCOUNTING POLICIES (continued)
(o) 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.
(p) 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 assets;
-- 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)
(p) 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)
(p) 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:
Ø significant financial difficulty of the borrower or
issuer;
Ø a breach of contract such as a default or being more than 90
days past due;
Ø the restructuring of a financing facility or advance by the
Bank on terms that the Bank would not consider otherwise;
Ø it is probable that the borrower will enter bankruptcy or
other financial reorganisation; or
Ø 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.
(q) 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.
(r) 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)
(r) 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.
(s) Clients' funds
These represent funds of projects set-up and promoted by the
Group and placed with the Group pending disbursement to the
projects concerned and carried at amortised cost.
(t) Customers' 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.
(u) 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.
(v) 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 35).
(w) Dividends
Dividends to shareholders is recognised as liabilities in the
period in which they are declared.
(x) 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)
(x) 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.
(y) 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 Mudharaba 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.
(z) 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 is recognised when the
service is provided and income is earned. This is usually when the
Group has performed all significant acts in relation to a
transaction and it is highly probable that the economic benefits
from the transaction will flow to the Group. Significant acts in
relation to a transaction are determined based on the terms agreed
in the private placement memorandum/ contracts for each
transaction. The assessment of whether economic benefits from a
transaction will flow to the Group is determined when legally
binding commitments have been obtained from underwriters and
external investors for a substantial investment in the
transaction.
4 SIGNIFICANT ACCOUNTING POLICIES (continued)
(z) Revenue recognition (continued)
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.
Non-banking business
Revenue from the sale of goods is recognised at a point in time
when customer takes possession. Revenue from rendering of services
is recognised when services are rendered.
(aa) 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.
(bb) Zakah
Zakah is calculated on the Zakah base of the Group in accordance
with FAS 9 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.
(cc) Employees benefits
Ø 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.
4 SIGNIFICANT ACCOUNTING POLICIES (continued)
(cc) Employees benefits (continued)
Ø 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.
Ø 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.
(dd) 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.
(ee) 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.
(ff) 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.
(gg) 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.
4 SIGNIFICANT ACCOUNTING POLICIES (continued)
(hh) Income tax
The Group is exposed to taxation by virtue of operations of
subsidiaries in Morocco, Tunis and India. 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.
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. However, the process of making the
required estimates and assumptions involved further challenges due
to the prevailing uncertainties arising from COVID-19 and required
use of management judgements.
(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(p) and note 36(a).
Covid-19 impact
Covid-19 was declared a worldwide pandemic by the World Health
Organisation in March 2020. Covid-19 and related measures taken by
governments worldwide to slow the spread of the virus, have since
had a significant impact on the local and global economy, supply
chains and financial markets.
The Group has considered the impact of COVID-19 and related
market volatility in preparing these consolidated financial
statements.
The Group's risk and capital management framework continues to
be applied and the Group continues to monitor the impact of
COVID-19 on the Group's risk and capital profile. Non-financial
risks emerging from local and global movement restrictions, and
remote working by staff, counterparties, clients and suppliers, are
being identified, assessed, managed and governed through timely
application of the Group's Risk Management Framework.
5 JUDGEMENTS AND ESTIMATES IN APPLYING ACCOUNTING POLICIES (continued)
(a) Judgements (continued)
Financing portfolio
In accordance with the CBB relief measures, the Group has
introduced a number of support measures for customers impacted by
COVID-19, including the deferral of payments with profit for retail
and small business customers.
Impairment allowance on financing portfolio at amortised
cost
In determining the appropriate level of expected credit losses
(ECLs) the Group considered the macro-economic outlook, customer
credit quality, the type of collateral held, exposure at default,
and the effect of payment deferral options as at the reporting
date.
The ECL methodology, significant increase in credit risk (SICR)
thresholds, and definition of default remain consistent with those
used as at 31 December 2020.
The model inputs, including forward-looking information,
scenarios and associated weightings, were revised to reflect the
current outlook. Noting the wide range of possible scenarios and
macroeconomic outcomes, and the relative uncertainty of how the
social and economic consequences of COVID-19 will materialize,
these scenarios represent reasonable and supportable
forward-looking views as at the reporting date.
The Group's models are calibrated to consider past performance
and macrocosmic forward-looking variables as inputs. The global
regulators have issued guidance to consider the exceptional
circumstances of the Covid-19 pandemic. This includes consideration
of significant government support and the high degree of
uncertainty around historic long-term trends used in determining
reasonable and supportable forward-looking information as well as
the assessment of underlying credit deterioration and migration of
balances to progressive stages.
The Group considers both qualitative and quantitative
information in the assessment of significant increase in credit
risk. The utilisation of a payment deferral program was not
considered an immediate trigger for a significant increase in
credit risk ("SICR") or a staging migration for the purposes of
calculating ECL, given the purpose of these programs is to provide
temporary cash flow relief to the Group's customers affected by the
COVID-19.
The Group continues to assess borrowers for other indicators of
unlikeliness to pay, taking into consideration the underlying cause
of any financial difficulty and whether it is likely to be
temporary as a result of COVID-19 or longer term.
(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)).
5 JUDGEMENTS AND ESTIMATES IN APPLYING ACCOUNTING POLICIES (continued)
(a) Judgements (continued)
(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(p) and note 36(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.
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.
5 JUDGEMENTS AND ESTIMATES IN APPLYING ACCOUNTING POLICIES (continued)
(b) Estimations (continued)
(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 (r). 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 management 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 31 December
2021 2020
Cash 12,153 13,339
Balances with banks 523,735 404,580
Balances with Central Bank of Bahrain:
* Current account 146,026 77,697
* Reserve account 40,557 40,886
------------ ------------
722,471 536,502
============ ============
The reserve account with the Central Bank of Bahrain of US$
40,557 thousand (2020: US$ 40,886 thousand) and balances with banks
of US$ 17,526 thousand (2020: US$ 3,585 thousand) are not available
for day-to-day operational purposes. The cash and bank balances are
net of ECL of US$ 24 thousand (2020: US$ 15 thousand).
7 TREASURY PORTFOLIO
31 December 31 December
2021 2020
Placements with financial institutions 180,000 169,998
Equity type investments
At fair value through income statement
* Structured notes 403,986 328,431
Debt type investments
At fair value through equity
* Quoted sukuk 1,656,088 648,991
At amortised cost
* Quoted sukuk * 860,616 693,737
* Unquoted sukuk 3,486 3,493
Less: Impairment allowances (14,251) (6,104)
3,089,925 1,838,546
============ ============
7 TREASURY PORTFOLIO (continued)
* Includes quoted sukuk of US$ 290,642 thousand (31 December
2020: US$ 302,260 thousand) pledged against term-financing of US$
215,077 thousand (31 December 2020: US$ 200,204 thousand ) (note
15).
a) Equity type investments - At fair value through income statement
2021 2020
At 1 January 328,431 239,807
Additions 557,681 687,496
Disposals during the year, at carrying
value (464,903) (597,273)
Fair value changes (17,223) (1,599)
At31December 403,986 328,431
========= =========
8 FINANCING ASSETS
31 December 31 December
2021 2020
Murabaha 995,324 971,164
Musharaka - 276
Wakala 239 239
Mudharaba 2,576 2,690
Istisnaa - 3,565
Assets held-for-leasing (Ijarah) 384,312 345,342
------------ ------------
1,382,451 1,323,276
Less: Impairment allowances (71,449) (56,010)
------------ ------------
1,311,002 1,267,266
============ ============
Murabaha financing receivables are net of deferred profits of
US$ 46,130 thousand (2020: US$ 50,032 thousand).
The movement on impairment allowances is as follows:
Impairment allowances Stage 1 Stage 2 Stage 3 Total
Balance at 1 January 2021 20,841 6,255 28,914 56,010
Net transfers 796 822 (1,618) -
Net charge for the period
(note 24) (1,640) (64) 18,080 16,376
Transfer to off balance
sheet - - (12) (12)
Disposal (2) 96 (1,019) (925)
------- ------- ------- ------
At 31 December 2021 19,995 7,109 44,345 71,449
======= ======= ======= ======
Impairment allowances Stage 1 Stage 2 Stage 3 Total
Balance at 1 January 2020 11,601 8,366 89,754 109,721
Net transfers 228 (4,512) 4,285 1
Net charge for the period
(note 24) 9,301 2,401 (2,542) 9,160
Write-offs - - (29,204) (29,204)
Disposal (289) - (33,379) (33,668)
------- ------- -------- --------
At 31 December 2020 20,841 6,255 28,914 56,010
======= ======= ======== ========
9 INVESTMENT IN REAL ESTATE
31 December 31 December
2021 2020
Investment Property
* Land 529,076 481,315
* Building 63,758 63,757
------------ ------------
592,834 545,072
------------ ------------
Development Property
* Land 592,926 761,032
* Building 719,838 506,211
------------ ------------
1,312,764 1,267,243
------------ ------------
1,905,598 1,812,315
============ ============
(i) Investment property
Investment property includes land plots and buildings in
Bahrain, UAE and Morocco. Investment property of carrying amount of
US$ 40.84 million (2020: US$ 40.84 million) is pledged against
Wakala facilities and Ijarah facility (note 15).
The fair value of the Group's investment property at 31 December
2021 was US$ 766,848 thousand
(31 December 2020: US$ 686,913 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.
For sensitivity analysis of investment properties, an increase
or decrease of 5% in value of properties will not impact the income
statement as the carrying value of the properties are much lower
than the impacted fair values.
2021 2020
At 1 January 545,072 531,253
Reclassification from Other Assets 17,338
Additions during the year 30,424 21,035
Disposals - (7,216)
-------
At 31 December 592,834 545,072
======= =======
(ii) Development properties
This represent properties under development for sale in UAE,
Bahrain, North Africa and India.
2021 2020
At 1 January 1,296,803 1,274,756
Additions during the year 21,151 10,637
Disposals (5,190) (18,150)
---------
At 31 December 1,312,764 1,267,243
========= =========
10 PROPRIETARY INVESTMENTS
31 December 31 December
2021 2020
Equity type investments
At fair value through income statement
(i)
* Structured notes 41,197 40,000
* Unquoted securities 10,000 10,000
------------ ------------
51,197 50,000
------------ ------------
At fair value through equity
* Listed equity securities * (ii) 13 19,060
* Unquoted equity securities (iii) 91,425 108,998
------------ ------------
91,438 128,058
Equity-accounted investees (iv) 69,003 78,050
------------ ------------
211,638 256,108
============ ============
* Listed equity securities of US$ Nil thousand (2020: US$ 19,047
thousand) are pledged against Murabaha facility (note 15).
(i) Equity type investments - At fair value through income statement
2021 2020
At 1 January 50,000 -
Additions during the year - 50,000
Fair value changes during the year 1,197 -
At 31 December 51,197 50,000
====== ======
(ii) Listed equity securities at fair value through equity
2021 2020
At 1 January 19,060 27,324
Disposals during the year (19,047) (1,095)
Transfer from fair value reserve - 4,831
Impairment during the year - (12,000)
At 31 December 13 19,060
======== ========
10 PROPRIETARY INVESTMENTS (continued)
(iii) Unquoted equity securities fair value through equity
2021 2020
At 1 January 108,998 125,234
Distributions during the year 9,286 -
Sale during the year (21,003) -
Capital repayments during the year (5,856) (6885)
Impairment during the year - (1,476)
Fair value changes - (7,875)
At 31 December 91,425 108,998
======== =======
(iv) Equity-accounted investees
Equity-accounted investees represents investments in the
following material associates:
Name Country of % holding Nature of business
incorporation
2021 2020
------- ------------------------
Capital Real Estate
Projects Company B.S.C. Kingdom of Real estate holding
(c) Bahrain 40% 40% and development
------- ------- ------------------------
Purchase and sale
of real estate in
Amlak II SPV Cayman Islands 23.51% 23.51% Bahrain
---------------- ------- ------- ------------------------
Bahrain Aluminium
Extrusion Company Kingdom of Extrusion and sale
B.S.C (c) ('Balexco') Bahrain 17.92% 17.92% of aluminium products
---------------- ------- ------- ------------------------
Enshaa Development
Real Estate B.S.C. Kingdom of Holding plot of land
(c) Bahrain 33.33% 33.33% in Kingdom of Bahrain.
---------------- ------- ------- ------------------------
Kingdom of
AlAreen Hotel SPC Bahrain 60% 60% Hospitality
---------------- ------- ------- ------------------------
Kingdom of Investment in Real
NS 12 Bahrain 28.41% 28.41% Estate
---------------- ------- ------- ------------------------
Lagoon Real Estate Kingdom of Real estate holding
Development Bahrain 22.97% 23.01% and development
---------------- ------- ------- ------------------------
2021 2020
At 1 January 78,050 115,617
De-recognition on acquiring a controlling
stake - (34,812)
Additions during the year - 33,327
Disposals during the year (6,111) (35,168)
Share of loss for the year, net (2,936) (914)
At 31 December 69,003 78,050
======= ========
Equity-accounted investees includes the Group's investment of
less than 20% in Balexco. As the Group exercises significant
influence over the entity by way of its presence on the board of
directors, the investment is accounted for as an investment in
equity-accounted investee. The Group through shareholder's
agreement agreed to exercise joint control with 40% shareholding
over AlAreen Hotel SPC with another partner, hence, it is
considered as an equity-accounted investee.
10 PROPRIETARY INVESTMENTS (continued)
Summarised financial information of associates that have been
equity-accounted investments not adjusted for the percentage
ownership held by the Group (based on most recent management
accounts):
2021 2020
Total assets 269,790 293,817
Total liabilities 43,936 23,717
Total revenues 100,940 10,384
Total profit / (loss) (3,720) (10,494)
11 CO-INVESTMENTS
31 December 31 December
2021 2020
At fair value through equity
* Unquoted equity securities 164,548 126,319
At fair value through income statement
* Unquoted equity securities 7,330 -
------------ ------------
171,877 126,319
============ ============
12 RECEIVABLES AND OTHER ASSETS
31 December 31 December
2021 2020
Investment banking receivables 148,985 115,740
Financing to projects, net 42,383 40,803
Receivable on sale of development properties 59,914 59,733
Advances and deposits 58,222 74,276
Employee receivables 18,898 15,578
Profit on sukuk receivable 17,273 10,174
Lease rentals receivable 2,175 34,005
Goodwill on acquisition 6,810 6,810
Prepayments and other receivables 187,503 253,652
Less: Impairment allowances net of write-off (10,675) (5,113)
------------
531,488 605,658
============ ============
13 PROPERTY AND EQUIPMENT
31 December 31 December
2021 2020
Land 17,958 17,811
Buildings and other leased assets 31,323 46,936
Others including furniture, vehicles and
equipment 90,406 79,402
139,687 144,149
=========== ===========
Depreciation on property and equipment during the year was US$
thousand 4,776
(2020: US$ 6,150 thousand).
14 PLACEMENTS FROM FINANCIAL AND 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$ 84.3M million
(2020: US$ 84.3 million) from a non-financial entity which is
currently subject to regulatory sanctions.
31 December 31 December
2021 2020
Financial institutions 2,112,577 1,639,923
Non-financial institutions and individuals 939,515 778,077
3,052,092 2,418,000
============ ============
15 TERM FINANCING
31 December 31 December
2021 2020
Murabaha financing 1,449,852 748,265
Sukuk 250,943 289,818
Ijarah financing 20,093 22,303
Other borrowings 29,779 28,691
1,750,667 1,089,077
=========== ===========
31 December 31 December
2021 2020
Current portion 1,275,981 466,812
Non-current portion 474,686 622,265
1,750,667 1,089,077
=========== ===========
Murabaha financing comprise:
-- US$ 14 million facility obtained for general corporate
purposes for a period of 5 years at a profit rate of 3 month LIBOR
plus margin of 6% p.a. (subject to a minimum of 7% p.a.). The
facility is secured by a pledge on Group's investment in shares of
KHCB and matures in 2022; and
-- Short-term and medium-term facilities of US$ 1,417,800
thousand (2020: US$ 724,653 thousand) are secured by quoted sukuk
of US$ 2,070,315 thousand (2020: US$ 585,000 thousand), structured
notes of US$ 403,986 thousand (2020: US$ 328,431 thousand) (note 7)
and equity type investments of Nil (2020: US$ 19,047 thousand)
(note 10).
Sukuk
During 2020, the Group raised US$ 300 million through issuance
of unsecured sukuk certificates with a profit rate of 7.5% p.a.
repayable by 2025. The Bank has repurchased cumulative sukuk of USD
49 million during the year ended 2020 and 2021.
Ijarah financing facility
This represents facility obtained from a financial institution
in 2016 to part finance the acquisition of an investment property
of US$ 40.84 million (note 9(i)), repayable over a period of 8
years at a profit rate of LIBOR plus margin of 5.7% p.a. (subject
to minimum of 7% p.a.).
Other borrowings
These comprise financing availed by non-banking subsidiaries to
fund project development and working capital requirements. The
financing is secured against investment in real estate and are held
through
15 TERM FINANCING (continued)
special purpose vehicle that do not have any recourse to the
Bank. The Bank is not a party to these financing contracts and has
not guaranteed repayment in any form. These balances are reported
in the consolidated financial statements as a result of
consolidation of subsidiaries.
16 OTHER LIABILITIES
31 December 31 December
2021 2020
Employee related accruals 18,089 5,364
Board member allowances and accruals 2,499 499
Unclaimed dividends 4,574 5,150
Mudaraba profit accrual 12,992 14,805
Provision for employees' leaving indemnities 3,155 3,302
Zakah and Charity fund 5,173 5,344
Advance received from customers * 70,051 71,547
Accounts payable 136,838 150,046
Other accrued expenses and payables 151,283 208,981
404,654 465,038
============ ============
* Represents amount received in advance from the customers on
account of real estate assets to be delivered by the Group.
17 EQUITY OF INVESTMENT ACCOUNT HOLDERS (EIAH)
31 December 31 December
2021 2020
Placements and borrowings from financial
institutions - Wakala 231,722 298,337
Mudaraba 1,126,622 858,656
1,358,344 1,156,993
============ ============
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 31 December
2021 2020
Balances with banks 46,368 88,294
CBB reserve account 40,557 40,886
Placements with financial institutions 70,003 76,950
Debt type instruments - sukuk 456,310 693,576
Financing assets 745,106 257,287
------------ ------------
1,358,344 1,156,993
============ ============
As at 31 December 2021, the balance of profit equalisation
reserve and investment risk reserve was Nil (2020: Nil).
17 EQUITY OF INVESTMENT ACCOUNT HOLDERS (EIAH) (continued)
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.
Following is the average percentage for profit allocation
between owner's equity and investment accountholders.
2021 2020
Mudarib IAH shares Mudarib IAH shares
share share
1 month Mudharaba * 89.08% 10.92% 87.96% 12.04%
3 months Mudharaba 76.60% 23.40% 75.35% 24.65%
6 months Mudharaba 69.15% 30.85% 71.57% 28.43%
12 months Mudharaba 59.52% 40.48% 62.50% 37.50%
18 months Mudharaba 52.84% 47.16% 60.09% 39.91%
24 months Mudharaba 73.67% 26.33% 67.35% 32.65%
36 months Mudharaba 52.43% 47.57% 55.72% 44.28%
-------- ----------- -------- -----------
* Includes savings, Al Waffer and Call Mudaraba accounts of
KHCB.
The investors' share of the return on jointly invested assets
and distribution to investment account holders were as follows:
2021 2020
Returns from jointly invested assets (65,862) (57,401)
Banks share as Mudarib 34,152 24,812
Return to investment account holders (31,711) (32,589)
========= =========
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 61.73% (2020: 60.72%) as against the average mudarib share
contractually agreed with IAH. Hence the Group sacrificed average
mudarib fees of 3.11% (2020: 3.17%) .
In addition to the Murabaha allocation, the Groups also provides
wakala services to the investors wherein the Group's has generated
a total returns from the jointly invested assets of USD 15,372
million (2020: USD 11,145 million) which is forming part of the
Income from the treasury operations and the income from the
propritory and co-investments in the statement of income. The
returns to investment account holders are USD 10,145 million (2020:
USD 7,356 million) which are included with the finance expenses in
the statement of income. The difference between the returns from
the invested assets and the returns to the investment account
holder of USD 4,227 million (2020: USD 2,790 million) is the
Group's share of return in its capacity of the wakil.
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
31 December 31 December
Authorised: 2021 2020
9,433,962,264 shares of US$ 0.265 each
(2020: 9,433,962,264 shares of US$ 0.265
each) 2,500,000 2,500,000
Issued and fully paid up:
3, 775 , 990 , 064 shares of US$ 0.265
each (2020: 3,681,650,441 shares of US$
0.265 each) 1,000,638 975,638
------------ ------------
The movement in the share capital during the year is as
follows:
2021 2020
At 1 January 975,638 975,638
Issue of bonus shares 25,000 -
At 31 December 1,000,638 975,638
========== ========
As at 31 December 2021, the Bank held 213,806,890 (31 December
2020: 313,358,202) of treasury shares. Furthermore, the bank had
vested shares of 54,196,667 for US$ 11,963,207 (2020:
38,657,329).
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:
Categories* % of total
Number of Number of outstanding
shares Shareholders shares
Less than 1% 2,271,927,550 8,142 60%
1% up to less than 5% 1,504,062,514 20 40%
Total 3,775,990,064 8,162 100%
================ ============== =============
* 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.
In the shareholders meeting held on 6 April 2021, the following
were approved:
-- Cash dividend of 1.86% of the paid-up share capital amounting to US$ 17 million;
-- Stock dividend of 2.56% of the paid-up share capital amounting to US$ 25 million;
-- Appropriation of US$ 1,104,000 towards charity, civil society
institutions and Zakat for the year 2020; and
-- Transfer of US$ 4,509,500 to statutory reserve.
18 SHARE CAPITAL (continued)
Proposed appropriations
The Board of Directors proposes the following appropriations for
2021 subject to shareholders' and
regulatory approval:
-- Cash dividend of 4.57% of the paid-up share capital amounting to US$ 45 million;
-- Stock dividend of 1.50% of the paid-up share capital amounting to US$ 15 million;
-- Transfer of US$ 8.42 million to statutory reserve; and
-- US$ 1 million towards charity and US$ 484 thousand towards zakah for the year.
Treasury shares
As at 31 December 2021, the Bank holds 85,100,000 (31 December
2020 - 94,300,000) shares as part of its treasury shares which are
held under a market making arrangement with an approved securities
broker.
19 SHARE GRANT RESERVE
2021 2020
At 1 January 1,093 1,198
Extinguishment of share grant reserve to (1,093) -
retained earnings
Issue/disposal of share under incentive
scheme - (105)
At 31 December - 1,093
======== ======
20 ACQUISITION OF ADDITIONAL INTERESTS IN AN EXISTING SUBSIDIARY
During the year, the Group acquired additional stake in the
following key subsidiaries:
The Group's existing stake and additional stake acquired are
given below.
Current Additional Total
Stake stake acquired Stake
Khaleeji Commercial Bank BSC ('KHCB') 55.41% 25.76% 81.17%
GBCORP BSC (c) ('GBCORP') 50.41% 12.5% 62.91%
--------------- -------
The consideration transferred for the acquisition was in the
form of cash and non-cash assets held. The change in net assets
arising out of the acquisition of additional interests has the
following effect on the consolidated financial statements:
US$ 000's
Carrying amount of NCI acquired (based on historical
cost) 66,647
Consideration to NCI (based on transaction price) 43,569
Increase in equity attributable to shareholders of the
Bank 23,078
=========
21 OTHER INCOME
Other income includes write back of liabilities no longer
required of US$ 24.3 (2020: US$ 23.2 million) after settlement
arrangements were concluded for some of the non-banking
subsidiaries, recoveries of expenses from project companies of US$
0.3 million (2020: US$ 8.4 million) and income of non-financial
subsidiaries of US$ 26.0 million (2020: US$ 7.4 million).
22 STAFF COST
2021 2020
Salaries and benefits 55,294 39,706
Social insurance and end of service benefits 3,111 3,154
Share-based payments 4,196 4,212
63,231 47,072
======= =======
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 Nature of award Staff coverage Summary of deferral and
year vesting conditions
2018 - Employee Share Covered persons Shares are released rateably
2021 * Purchase Plan in business and over the 3 year deferral
Awards & Deferred control functions period. The issue price
Annual Bonus who exceed total is determined based on
(DAB) compensation thresholds a defined adjustment to
as per CBB Remuneration market price on the date
Regulations and of the award. No future
Bank's Variable performance conditions
Remuneration policy. or service conditions
associated with the DAB
shares. DAB Shares are
entitled for dividends,
if any, but released over
the deferral period.
-------------------- ------------------------- --------------------------------
2020 Awards Long term incentive Select Senior Management During 2020, under the
plan (LTIP) future performance awards
share awards structure of the Bank,
an LTIP scheme was introduced
where the employees are
compensated in form of
shares as a percentage
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 six 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.
-------------------- ------------------------- --------------------------------
Share incentive scheme 2021 2020
No. of Shares USD 000's No. of Shares USD 000's
-------------- -------------- ----------
Opening balance 245,264,354 29,763 37,531,546 11,039
Awarded during the period
* Deferred Annual Bonus 42,087,569 6,429 5,316,072 1,259
* LTIP shares - - 257,715,531 26,860
Bonus shares
* Deferred Annual Bonus 1,679,932
* LTIP shares 4,569,552
Forfeiture and other adjustments (1,369,114) (9,426) - -
Transfer to employees
/ settlement (107,906,694) (9,684) (55,298,795) (9,395)
-------------- ---------- -------------- ----------
Closing balance 184,325,599 17,082 245,264,354 29,763
-------------- ---------- -------------- ----------
22 STAFF COST (continued)
In case of the employee share purchase plans and LTIP, the
amounts reported in the table represents the vesting charge or
benefit which is charged to the income statement and not the gross
value of issued shares
23 OTHER OPERATING EXPENSES
2021 2020
Investment advisory expenses 10,860 13,091
Rent 2,523 4,002
Professional and consultancy fees 10,211 9,073
Legal expenses 579 4,379
Depreciation 2,541 2,268
Expenses relating to non-banking subsidiaries 22,797 17,428
Other operating expenses 20,788 14,945
70,299 65,186
======= =======
24 IMPAIRMENT ALLOWANCES
2021 2020
Bank balances 8 5
Treasury portfolio
* Placements with financial institutions 12 (1,077)
* Equity and debt type securities 8,135 2,556
Financing assets (note 8) 16,376 9,160
Proprietary investments (note 10 (ii) and
(iii)) - 13,476
Co-investments (note 11) 690 -
Other receivables 11,428 2,761
Commitments and financial guarantees (1,068) (82)
35,581 26,799
======== ========
25 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.
25 RELATED PARTY TRANSACTIONS (continued)
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
---------------------------------------------- ----------------- --------
Significant Assets under
shareholders management
/ entities including
Associates in which special purpose
/ Joint Key management directors and other
2021 venture personnel are interested entities Total
----------- ----------------- --------
Assets
Treasury portfolio - - 37,148 - 37,148
Financing assets - 7,817 33,407 16,482 57,706
Proprietary investment 114,387 - 20,328 48,011 182,726
Co investment - - - 76,794 76,794
Receivables and
other assets 8,060 623 300 171,559 180,542
Liabilities
Customer current
account 1,488 366 10,517 64 12,435
Placements from
financial, non-financial
institutions and
individuals - 4,430 - - 4,430
Payables and accruals - 2,688 1,528 33,678 37,894
Equity of investment
account holders 1,088 355 54,276 772 56,491
Related parties
Significant Assets under
shareholders management
/ entities including
in which special
Associates Key directors purpose
/ Joint management are and other
2021 venture personnel interested entities Total
Income
Income from investment
banking - - - 119,389 119,389
Income from commercial
banking
* Income from financing - 310 2,332 - 2,642
* Fee and other income (3,005) - - 698 (2,307)
* Less: Return to investment account holders 24 3 5,111 13 5,151
* Less: Finance expense - 50 - - 50
Income from proprietary
and co-investments 4 - 8,017 19,727 27,748
Real Estate Income - 120 - - 120
Treasury and other
income - - (440) 1,742 1,302
Expenses
Operating expenses - 7,174 743 117 8,034
* The amount presented excluded bonus to key management
personnel for 2021 as allocation has not been finalized at the date
of approval of these consolidated financial statements.
25 RELATED PARTY TRANSACTIONS (continued)
Significant Assets under
shareholders management
/ entities including
Associates in which special purpose
/ Joint Key management directors and other
2020 venture personnel are interested entities Total
Assets
Treasury portfolio - - 35,000 - 35,000
Financing assets - 9,485 17,695 29,848 57,028
Proprietary investment 114,250 - 16,058 49,170 179,478
Co investment - - - 70,715 70,715
Receivables and
other assets 4,622 - - 132,616 137,238
Liabilities
Customer current
account 358 225 17,995 3,212 21,790
Placements from
financial, non-financial
institutions and
individuals - 5,584 112,568 - 118,152
Payables and accruals - 500 2,732 74,242 77,474
Equity of investment
account holders 1,095 639 99,579 865 102,178
Related parties
Significant Assets under
shareholders management
/ entities including
in which special
Associates Key directors purpose
/ Joint management are and other
2020 venture personnel interested entities Total
Income
Income from investment
banking - - - 73,266 73,266
Income from commercial
banking (886) (5) (7,342) (24) (8,257)
* Income from financing - 265 2,618 - 2,883
* Fee and other income - - 5 - 5
* Less: Return to investment account holders 37 5 4,828 24 4,894
* Less: Finance expense - 265 5,138 - 5,403
Income from proprietary
and co-investments (1,015) - - 8,854 7,839
Treasury and
other income - - - 5,159 5,159
Expenses
Operating expenses - 11,171* 385 66 11,622
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.
25 RELATED PARTY TRANSACTIONS (continued)
The key management personnel compensation is as follows:
2021 2020
Board members' remuneration, fees and allowance 1,154 1,673
Salaries, other short-term benefits and
expenses 7,643 9,222
Post-employment benefits 685 276
26 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$ 5,297 million (31 December 2020:
US$ 4,360 million). During the year, the Group had charged
management fees and performance fee amounting to US$ 3,855 thousand
(31 December 2020: US$ 4,895 thousand) and US$ 4,228 thousand (31
December 2020: US$ Nil) respectively to its assets under
management.
ii. Custodial assets comprise discretionary portfolio management
('DPM') of US$ 639,599 thousand, of which US$ 407,877 thousand has
been invested in the Bank's investment products. Further, the Bank
is also holding Sukuk of US$ 16,256 thousand on behalf of its
customers.
27 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.
2021 2020
In thousands of shares
Weighted average number of shares for basic
and diluted earnings 3,375,296 3,378,454
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.
28 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 current year
calculations for zakah are yet to be approved by the Group's
Shari'a Supervisory Board and will be provided for in the Bank's
website.
The Group discharges its social responsibilities through
donations to charitable causes and social organisations.
29 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$ 30 thousand (2020: US$ 129
thousand).
30 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.
31 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.
6 months
Up to 3 to to 1 1 to Over
31 December 2021 3 months 6 months year 3 years 3 years Total
Assets
Cash and bank balances 704,672 6,772 9,650 1,377 - 722,471
Treasury portfolio 1,026,476 91,561 31,243 454,734 1,485,911 3,089,925
Financing assets 308,830 64,197 95,926 418,316 423,733 1,311,002
Real estate investment - - - 937,463 968,135 1,905,598
Proprietary investments - - 53,806 61,755 96,077 211,638
Co-investments - 2,676 23,607 139,535 6,059 171,877
Receivables and
prepayments 149,490 14,283 109,058 214,392 44,265 531,488
Property and equipment - - - - 139,687 139,687
Total assets 2,189,468 179,489 323,290 2,227,572 3,163,867 8,083,686
Liabilities
Client's funds 152,925 - 63,837 - - 216,762
Placements from
financial, non-financial
institutions and
individuals 1,367,734 731,689 653,020 194,187 105,462 3,052,092
Customer current
account 35,801 13,666 14,841 16,958 51,780 133,046
Term financing 578,012 185,494 512,475 84,031 390,655 1,750,667
Payables and accruals 96,565 22,225 229,286 56,578 - 404,654
Total liabilities 2,231,037 953,074 1,473,459 351,754 547,897 5,557,221
Equity of investment
account holders 237,280 269,297 377,042 235,597 239,128 1,358,344
Off-balance sheet
items
Commitments 114 3,308 17,268 118,611 16,127 155,428
Restricted investment
accounts - - - 28,529 - 28,529
31 MATURITY PROFILE (continued)
6 months
Up to 3 to to 1 1 to Over
31 December 2020 3 months 6 months year 3 years 3 years Total
Assets
Cash and bank balances 515,867 4,973 10,393 5,269 - 536,502
Treasury portfolio 880,830 60,209 26,401 374,068 497,038 1,838,546
Financing assets 129,080 59,849 133,727 457,629 486,981 1,267,266
Real estate investment - - - 871,993 940,322 1,812,315
Proprietary investments - 2,448 56,273 110,131 87,256 256,108
Co-investments - 2,676 8,987 108,597 6,059 126,319
Receivables and
prepayments 128,512 23,874 43,250 410,022 - 605,658
Property and equipment - - - - 144,149 144,149
Total assets 1,654,289 154,029 279,031 2,337,709 2,161,805 6,586,863
Liabilities
Client's funds 103,517 - - 27,418 - 130,935
Placements from
financial, non-financial
institutions and
individuals 1,001,195 634,641 491,597 214,101 76,466 2,418,000
Customer current
account 38,477 14,374 15,607 17,836 54,462 140,756
Term financing 307,241 53,340 143,357 271,774 313,365 1,089,077
Payables and accruals 81,145 25,548 288,748 69,597 - 465,038
Total liabilities 1,531,575 727,903 939,309 600,726 444,293 4,243,806
Equity of investment
account holders 283,905 194,080 285,764 193,745 199,499 1,156,993
Off-balance sheet
items
Commitments 21,171 15,601 25,133 65,444 18,363 145,712
Restricted investment
accounts - - - 28,451 - 28,451
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2021 US$ 000's
32 CONCENTRATION OF ASSETS, LIABILITIES AND EQUITY OF INVESTMENT ACCOUNT HOLDERS
(a) Industry sector
Banks and financial
31 December 2021 institutions Real estate Others Total
Assets
Cash and bank balances 709,908 5,691 6,872 722,471
Treasury portfolio 2,224,184 6,012 859,729 3,089,925
Financing Assets 124,783 499,559 686,660 1,311,002
Real estate investments 662,501 1,212,772 30,325 1,905,598
Proprietary investment 10,427 154,228 46,983 211,638
Co-investment - 153,270 18,607 171,877
Receivables and prepayments 444,477 7,245 79,766 531,488
Property and equipment 5,770 23,492 110,425 139,687
Total assets 4,182,050 2,062,269 1,839,367 8,083,686
Liabilities
Client's funds 212,789 - 3,973 216,762
Placements from financial, non-financial institutions
and individuals 2,579,106 790 472,196 3,052,092
Customer accounts 779 13,610 118,657 133,046
Term financing 1,706,299 19,919 24,449 1,750,667
Payables and accruals 135,118 138,440 131,096 404,654
Total liabilities 4,634,091 172,759 750,371 5,557,221
Equity of Investment account holders 220,935 60,469 1,076,940 1,358,344
Off-balance sheet items
Commitments - 68,701 86,727 155,428
Restricted investment accounts - 25,698 2,831 28,529
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2020 US$ 000's
32 Concentration of assets, liabilities and equity of investment
account holders (continued)
a Industry sector (continued)
Banks and financial
31 December 2020 institutions Real estate Others Total
Assets
Cash and bank balances 526,253 5,571 4,678 536,502
Treasury portfolio 1,140,276 56,184 642,086 1,838,546
Financing Assets 112,111 555,192 599,963 1,267,266
Real estate investments - 1,812,315 - 1,812,315
Proprietary investment 29,733 161,940 64,435 256,108
Co-investment - 103,837 22,482 126,319
Receivables and prepayments 458,794 36,820 110,044 605,658
Property and equipment 3,137 22,233 118,779 144,149
Total assets 2,270,304 2,754,092 1,562,467 6,586,863
Liabilities
Client's funds 3,152 - 127,783 130,935
Placements from financial, non-financial institutions
and individuals 1,533,003 113,523 771,474 2,418,000
Customer accounts 2,471 18,615 119,670 140,756
Term financing 1,045,797 19,919 23,361 1,089,077
Payables and accruals 188,460 174,676 101,902 465,038
Total liabilities 2,772,883 326,733 1,144,190 4,243,806
Equity of Investment account holders 82,707 156,952 917,334 1,156,993
Off-balance sheet items
Commitments - 65,102 80,610 145,712
Restricted investment accounts - 25,817 2,634 28,451
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2021 US$ 000's
32 Concentration of assets, liabilities and equity of investment
account holders (continued)
b Geographic region
31 December 2021 GCC countries MENA Asia North America Others Total
Assets
Cash and bank balances 577,879 2,097 1,097 67,254 74,144 722,471
Treasury portfolio 2,542,088 95,093 100,244 61,575 290,925 3,089,925
Financing assets 1,295,063 - - - 15,939 1,311,002
Real estate investment 1,076,694 489,903 329,444 - 9,557 1,905,598
Proprietary investment 157,830 - - - 53,808 211,638
Co-investments 52,459 - 72,235 44,701 2,482 171,877
Receivables and prepayments 496,230 10,440 11,589 8,072 5,157 531,488
Property and equipment 133,854 5,655 - - 178 139,687
Total assets 6,332,097 603,188 514,609 181,602 452,190 8,083,686
Liabilities
Client's funds 212,789 - - - 3,973 216,762
Placements from financial, non-financial
institutions and individuals 2,963,662 88,205 225 - - 3,052,092
Customer accounts 136,274 (260) (496) - (2,472) 133,046
Financing liabilities 732,099 - - 374,028 644,540 1,750,667
Payables and accruals 233,933 69,064 68,577 30,871 2,209 404,654
Total liabilities 4,278,757 157,009 68,306 404,899 648,250 5,557,221
Equity of investment account holders 1,334,623 1,700 21,907 3 111 1,358,344
Off-balance sheet items
Commitments 135,342 - - 20,086 - 155,428
Restricted investment accounts 25,896 - - - 2,633 28,529
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 2020 US$ 000's
32 Concentration of assets, liabilities and equity of investment
account holders (continued)
b Geography sector (continued)
31 December 2020 GCC countries MENA Asia North America Others Total
Assets
Cash and bank balances 451,512 4,105 1,349 32,788 46,748 536,502
Treasury portfolio 1,507,398 12 - 74,600 256,536 1,838,546
Financing assets 1,246,979 - 5,939 14,348 - 1,267,266
Real estate investment 982,767 490,031 339,517 - - 1,812,315
Proprietary investment 205,089 - - - 51,019 256,108
Co-investments 38,975 - 49,199 35,663 2,482 126,319
Receivables and prepayments 513,902 10,116 11,128 14,840 55,672 605,658
Property and equipment 139,794 4,333 - - 22 144,149
Total assets 5,086,416 508,597 407,132 172,239 412,479 6,586,863
Liabilities
Client's funds 115,817 - - 15,118 - 130,935
Placements from financial, non-financial
institutions and individuals 2,315,744 87,805 199 - 14,252 2,418,000
Customer accounts 142,812 (788) (1,958) - 690 140,756
Financing liabilities 717,236 - - - 371,841 1,089,077
Payables and accruals 290,972 90,852 65,104 2,987 15,123 465,038
Total liabilities 3,582,581 177,869 63,345 18,105 401,906 4,243,806
Equity of investment account holders 1,133,272 4,000 19,610 - 111 1,156,993
Off-balance sheet items
Commitments 113,141 2,879 10,558 19,134 - 145,712
Restricted investment accounts 25,817 - - - 2,634 28,451
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).
33 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:
-- Real Estate Development: This business unit primarily is
involved in origination and management of large-scale economic
infrastructure projects. The business unit also covers the Group's
investment in real estate and related assets.
-- 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.
-- Corporate 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
Corporate 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 32 (b) to the consolidated
financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2020 US$ 000's
33 OPERATING SEGMENTS (continued)
Information regarding the results of each reportable segment is
included below:
Real estate Investment Commercial Corporate
development banking banking and Treasury Total
31 December 2021
Segment revenue 29,844 110,387 71,825 186,692 398,748
Segment expenses (including impairment allowances) (15,801) (73,943) (43,144) (173,243) (306,131)
Segment result 14,043 36,244 28,682 13,648 92,617
Segment assets 1,758,446 1,068,340 3,095,984 2,160,916 8,083,686
Segment liabilities 159,790 576,991 1,228,774 3,591,666 5,557,221
Other segment information
Impairment allowance - 15,260 12,693 7,628 35,581
Equity accounted investees 5,764 18,339 44,900 - 69,003
Equity of investment account holders - - 1,126,622 231,722 1,358,344
Commitments 20,086 - 135,342 - 155,428
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2019 US$ 000's
33 OPERATING SEGMENTS (continued)
Real estate Investment Commercial Corporate
development banking banking and Treasury Total
31 December 2020
Segment revenue 19,457 80,631 65,313 157,993 323,394
Segment expenses (including impairment allowances) (21,628) (69,152) (44,343) (138,928) (274,051)
Segment result (2,071) 11,480 20,970 18,964 49,343
Segment assets 1,746,751 929,392 2,693,884 1,216,836 6,586,863
Segment liabilities 256,879 615,022 1,159,795 2,212,110 4,243,806
Other segment information
Impairment allowance 246 2,203 11,515 12,835 26,799
Equity accounted investees 5,702 18,335 54,013 - 78,050
Equity of investment account holders - - 858,057 298,936 1,156,993
Commitments 35,449 - 110,263 - 145,712
---------- ------------- ---------
34 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 2021 and 31 December 2020, 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.
As at 31 December 2021, the fair value of term financing was
estimated at US$ 1,089,077 thousand (carrying value US$ 1,089,077
thousand) (31 December 2020: fair value US$ 301,411 thousand
(carrying value US$ 301,411 thousand)). These may not necessarily
represent active market quotes. In a normal (and not stressed)
scenario excluding adjustments for own credit risk, the carrying
values would approximate fair value of term financing as these are
largely floating rate instruments.
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).
34 FINANCIAL INSTRUMENTS (continued)
b) FAIR VALUE HIERARCHY (continued)
31 December 2021 Level Level Level Total
1 2 3
US$ 000's US$ 000's US$ 000's US$ 000's-
(i) Proprietary investments
Investment securities carried
at fair value through:
* income statement - 51,197 - 51,197
* equity 13 - 91,425 91,438
13 51,197 91,425 142,635
(ii) Treasury portfolio
Investment securities carried
at fair value through:
* income statement - 224,086 179,900 403,986
* equity 1,656,088 - - 1,656,088
1,656,088 224,086 179,900 2,060,074
iii) Co-investments
Investment securities carried
at fair value through equity - - 164,548 164,548
Investment securities carried
at fair value through income
statement - - 7,330 7,330
- - 171,877 171,877
1,656,101 275,283 443,203 2,374,587
31 December 2020 Level Level Level Total
1 2 3
US$ 000's US$ 000's US$ 000's US$ 000's-
(iii) Proprietary investments
Investment securities carried
at fair value through:
* income statement - 50,000 - 50,000
* equity 19,060 - 108,998 128,058
19,060 50,000 108,998 178,058
(iv) Treasury portfolio
Investment securities carried
at fair value through:
* income statement - 173,181 155,250 328,431
* equity 648,991 - - 648,991
648,991 173,181 155,250 977,422
iii) Co-investments
Investment securities carried
at fair value through equity - - 126,319 126,319
668,051 223,181 390,567 1,281,799
34 FINANCIAL INSTRUMENTS (continued)
The table below shows the reconciliation of movements in value
of investments measured using Level 3 inputs:
2021 2020
At 1 January 390,567 221,741
Total gains / (losses) in income statement (17,223) (1,326)
Transfer from Level 2 24,650 155,250
Disposals at carrying value (27,531) (41,685)
Purchases 69,129 63,623
Fair value changes during the year 3,611 (7,036)
At 31 December 443,203 390,567
The sensitivity analysis for Level 3 of non-trading investments
were carried out using valuation techniques such as comparable
methods, discounted cash flow methods, asset valuations and
residual method with the key unobservable inputs such as market
multiples, discount rates and occupancy rates. The reasonable
possible shift in case of +/-5% in the real estate properties will
not lead to any impact on income statement as the carrying value of
such investments are kept at a reasonably lower value compared to
existing fair values. Similarly the reasonable possible shift of
+/-0.5% discount rate in the discounted cash flow method or +/-1x
of market multiple for equity investments or +/-1% in the occupancy
rates of the underlying properties will not impact the profit and
loss as the fair value of such investments are reasonably higher
than the carrying value of such investments.
35 COMMITMENTS AND CONTINGENCIES
The commitments contracted in the normal course of business of
the Group are as follows:
31 December 31 December
2021 2020
Undrawn commitments to extend finance 95,347 83,260
Financial guarantees 39,995 27,003
Capital commitments for infrastructure development
projects 16,171 22,449
Commitment to lend 3,915 13,000
155,428 145,712
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 2020 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.
36 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.
36 FINANCIAL RISK MANAGEMENT
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 assets
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 uncertainties due to COVID-19
and resultant economic volatility has impacted the Group's
financing operations.
The Group had updated its inputs and assumptions for computation
of ECL (refer note 4 p).
36 FINANCIAL RISK MANAGEMENT (continued)
a) Credit risk (continued)
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.
-- 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.
36 FINANCIAL RISK MANAGEMENT (continued)
a) Credit risk (continued)
Exposures subject to credit risk
Stage Stage Stage
31 December 2021 1 2 3 Total
Balances with banks and placements
with financial institutions
Grade 1 -6 Low-Fair Risk 902,427 - - 902,427
Gross carrying amount 902,427 - - 902,427
Less expected credit losses - - -
Net carrying amount 902,427 - - 902,427
Financing facilities
Grade 8 -10 Impaired - - 97,592 97,592
Past due but not impaired
Grade 1-6 Low-Fair Risk 16,618 19,313 - 35,931
Grade 7 Watch list 19 7,536 - 7,555
Past due comprises :
Up to 30 days 15,311 26,491 - 41,802
30-60 days 281 - - 281
60-90 days 1,045 358 - 1,403
Neither past due nor impaired
Grade 1-6 Low-Fair Risk 686,667 66,544 - 753,211
Grade 7 Watch list 5,305 64,538 - 69,843
Gross carrying amount 708,609 157,931 97,592 964,134
Less expected credit losses 19,246 4,645 33,467 57,358
Net carrying amount 689,363 153,286 64,125 906,774
Assets acquired for leasing
Grade 8-10 impaired - - 33,984 33,984
Past due but not impaired
Grade 1-6 Low-Fair Risk 16,249 - - 16,249
Grade 7 Watch list 732 745 - 1,477
Past due comprises :
Up to 30 days 8,222 - - 8,222
30-60 days 1,902 64 - 1,966
60-90 days 6,857 681 - 7,538
Neither past due nor impaired
Grade 1-6 Low-Fair Risk 273,124 65,268 - 338,392
Grade 7 Watch list 650 27,565 - 28,215
36 FINANCIAL RISK MANAGEMENT (continued)
a) Credit risk (continued)
31 December 2021 Stage Stage Stage Total
1 2 3
Gross carrying amount 290,755 93,578 33,984 418,317
Less expected credit losses 643 2,464 10,984 14,091
Net carrying amount 290,112 91,114 23,000 404,226
Investment in Sukuk
Grade 8 -10 Impaired - - 3,496 3,496
Grade 1-6 Low-Fair Risk 2,449,638 67,011 - 2,516,649
Gross carrying amount 2,449,638 67,011 3,496 2,520,145
Less: expected credit losses 7,183 3,571 3,496 14,250
Net carrying amount 2,442,455 63,440 - 2,505,895
Commitments and financial
guarantees
Grade 8 -10 Impaired - - 16 16
Grade 1-6 Low-Fair Risk 138,887 16,501 - 155,388
Grade 7 Watch list - 24 - 24
Gross carrying amount (note
35) 138,887 16,525 16 155,428
Less: expected credit losses - - - -
Net carrying amount 138,887 16,525 16 155,428
Total net carrying amount 4,463,244 324,365 87,141 4,874,750
36 FINANCIAL RISK MANAGEMENT (continued)
a) Credit risk (continued)
31 December 2020 Stage Stage Stage Total
1 2 3
Balances with banks and placements
with financial institutions
Grade 1 -6 Low-Fair Risk 706,500 - - 706,500
Gross carrying amount 706,500 - - 706,500
Less expected credit losses - - - -
Net carrying amount 706,500 - - 706,500
Financing facilities
Grade 8 -10 Impaired - - 106,040 106,040
Past due but not impaired
Grade 1-6 Low-Fair Risk 24,531 2,639 - 27,170
Grade 7 Watch list 69 43,875 - 43,944
Past due comprises :
Up to 30 days 22,804 41,981 - 64,785
30-60 days 218 3,334 - 3,552
60-90 days 1,578 1,199 - 2,777
Neither past due nor impaired
Grade 1-6 Low-Fair Risk 756,304 27,748 - 784,052
Grade 7 Watch list 554 14,163 - 14,717
Gross carrying amount 781,458 88,425 106,040 975,923
Less expected credit losses 19,178 5,130 20,928 45,236
Net carrying amount 762,280 83,295 85,112 930,687
Assets acquired for leasing
Grade 8-10 impaired - - 42,353 42,353
Past due but not impaired
Grade 1-6 Low-Fair Risk 28,602 28,576 - 57,178
Grade 7 Watch list 3,337 849 - 4,186
Past due comprises :
Up to 30 days 7,377 955 - 8,332
30-60 days 5,347 295 - 5,642
60-90 days 19,215 28,175 - 47,390
Neither past due nor impaired
Grade 1-6 Low-Fair Risk 185,891 28,061 - 213,952
Grade 7 Watch list 26,244 3,440 29,684
36 FINANCIAL RISK MANAGEMENT (continued)
a) Credit risk (continued)
31 December 2020 Stage Stage Stage Total
1 2 3
Gross carrying amount 244,074 60,926 42,353 347,353
Less expected credit losses 1,446 1,127 8,201 10,774
Net carrying amount 242,628 59,799 34,152 336,579
Investment in Sukuk
Grade 8 -10 Impaired - - 3,493 3,493
Grade 1-6 Low-Fair Risk 1,297,516 45,210 - 1,342,726
Gross carrying amount 1,297,516 45,210 3,493 1,346,219
Less: expected credit losses 1,738 870 3,493 6,101
Net carrying amount 1,295,778 44,340 - 1,340,118
Commitments and financial
guarantees
Grade 8 -10 Impaired - - 1,928 1,928
Grade 1-6 Low-Fair Risk 136,532 6,968 - 143,500
Grade 7 Watch list - 284 - 284
Gross carrying amount (note
35) 136,532 7,252 1,928 145,712
Less: expected credit losses 411 13 202 626
Net carrying amount 136,121 7,239 1,726 145,086
Total net carrying amount 3,143,307 194,673 120,990 3,458,970
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.
36 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.
36 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 2021 and 2020, 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.
36 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 2021
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 assets 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. For the purpose of calculating ECL
on the commercial bank's financial assets and assets acquired for
leasing for the year ended 31 December 2021, the Group has applied
the 3 months as against 12 months, in order to assess consistent
good payment behaviour of customer this is in line with the CBB
concessionary measures.
36 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 assets 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.
36 FINANCIAL RISK MANAGEMENT (continued)
2021 12month Lifetime Lifetime Total 2021
ECL (Stage1) ECL not ECL Credit
credit impaired impaired
(Stage2) (Stage3)
Balance
at
1
January 22,346 6,271 37,239 65,856
Transfer
to
12-month
ECL 3,512 (1,772) (1,740) -
Transfer
to
lifetime
ECL
non-credit-impaired (3,029) 3,928 (899) -
Transfer
to
lifetime
ECL
credit-impaired (435) (512) 947 -
Write-off - - (4,811) (4,811)
Charge
for
the
period 5,264 2,717 27,600 35,581
Balance
at
31
December 27,658 10,632 58,336 96,626
Break down of ECL by category of assets in the consolidated
statement of financial position and off-balance sheet
commitments:
2021 12 month Lifetime Lifetime Total 2021
ECL (Stage ECL not ECL credit
1) credit impaired impaired
(Stage 2) (Stage 3)
Balances
with
banks 24 - - 24
Treasury
portfolio 7,232 3,523 3,496 14,251
Financing
assets 19,886 7,109 44,454 71,449
Other
financial
receivables 307 - 10,368 10,675
Financing commitments
and financial guarantees 209 - 18 227
Balance
at
31
December 27,658 10,632 58,336 96,626
2020 12 month Lifetime Lifetime Total 2020
ECL (Stage ECL not ECL credit
1) credit impaired impaired
(Stage 2) (Stage 3)
Balance
at
1
January 14,395 2,655 98,082 115,132
Transfer
to
12-month
ECL 3,793 (2,597) (1,196) -
Transfer
to
lifetime
ECL
non-credit-impaired (324) 955 (631) -
Transfer
to
lifetime
ECL
credit-impaired (2,629) (3,101) 5,730 -
Net
re-measurement
of
loss
allowance (1,024) 5,630 (80,681) (76,075)
Charge
for
the
period 8,135 2,729 15,935 26,799
Balance at 31 December 22,346 6,271 37,239 65,856
36 FINANCIAL RISK MANAGEMENT (continued)
Break down of ECL by category of assets in the consolidated
statement of financial position and off-balance sheet
commitments:
2020 12 month Lifetime Lifetime Total 2020
ECL (Stage ECL not ECL credit
1) credit impaired impaired
(Stage 2) (Stage 3)
Balances with banks 15 - - 15
Treasury portfolio 1,109 - 4,995 6,104
Financing assets 19,289 5,130 31,591 56,010
Other financial receivables 1,522 1,127 452 3,101
Financing commitments
and financial guarantees 411 14 201 626
Balance at 31 December 22,346 6,271 37,239 65,856
Renegotiated facilities
During the year, facilities of USD 50,942 thousands (2020: USD
52,191 thousand) were renegotiated, out of which USD 47,936
thousand (2020: USD 16,064 thousand) are classified as neither past
due nor impaired as of 31 December 2021. 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 USD 108,488 thousand
(2020: USD 221,782 thousand) only instalments of USD 48,560
thousand (2020: USD 112,878 thousand) are past due as at 31
December 2021.
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 USD 13
thousand (2020: USD 29,204 thousand) which were fully impaired. The
Group has recovered USD 1,918 thousand from a financing facility
written off in previous years (2020: USD 1,665 thousand).
36 FINANCIAL RISK MANAGEMENT (continued)
Collaterals
The Group holds collateral against financing assets 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 2021 31 December 2020
Assets
acquired Assets
for leasing acquired
(including for leasing
lease (including
Financing rentals Financing lease rentals
assets receivable) Total assets receivable) Total
Against impaired
Property 47,584 34,241 81,825 45,141 31,401 76,542
Other 3,249 - 3,249 3,082 - 3,082
Against past
due but not
impaired
Property 65,342 65,605 130,947 61,987 60,894 122,881
Other 1,756 - 1,756 1,666 - 1,666
Against neither
past due nor
impaired
Property 393,867 304,204 698,071 373,642 278,973 652,615
Other 48,475 - 48,475 45,987 - 45,987
Total 560,273 404,050 964,323 531,505 371,268 902,773
The average collateral coverage ratio on secured facilities is
148.99% as at 31 December 2021
(31 December 2020: 149.71%).
Concentration risk
The geographical and industry wise distribution of assets and
liabilities are set out in
notes 32 (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.
36 FINANCIAL RISK MANAGEMENT (continued)
An analysis of concentrations of credit risk of financing assets
of the Group's business at the reporting date is shown below:
Concentration 31 December 2021 31 December 2020
by
Sector Financing Assets Total Financing Assets Total
assets acquired assets acquired
for leasing for leasing
Banking and
finance 12,156 - 12,156 11,725 - 11,725
Real estate 235,845 340,058 575,903 351,829 303,748 655,577
Construction 143,714 - 143,714 150,194 - 150,194
Trading 136,464 - 136,464 129,844 - 129,844
Manufacturing 35,923 - 35,923 38,772 - 38,772
Others 342,672 64,170 406,842 248,207 32,947 281,154
Total carrying
amount 906,774 404,228 1,311,002 930,571 336,695 1,267,266
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 effect of COVID-19 on the liquidity and funding risk profile
of the banking system is evolving and is subject to ongoing
monitoring and evaluation.
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.
Payment holidays have been extended to customers, including
private and SME sector, in line with the instructions of CBB from
March 2020 to 30 June 2022. This payment holiday is expected to
delay expected contractual cash inflows of the Group. However, the
management will take appropriate steps to mitigate its impact on
the liquidity position.
The CBB has announced various measures to combat the effects of
COVID-19 and to ease liquidity in the banking sector including,
concessionary repos at zero percent, reduction of cash reserve
ratio from 5% to 3%; and reduction in LCR and NSFR ratio from 100%
to 80%;
In response to COVID-19 outbreak, the Group continues to monitor
and respond to all liquidity and funding requirements that are
presented. The Group continues to calibrate stress testing
scenarios to current market conditions in order to assess the
impact on the Group in current extreme stress.
As at the reporting date, the liquidity and funding position of
the Group remains strong and is well placed to absorb and manage
the impacts of this disruption. Further information on the
regulatory liquidity and capital ratios as at 31 December 2021 have
been disclosed below.
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.
36 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.
36 FINANCIAL RISK MANAGEMENT (continued)
Gross undiscounted cash flows
6 months
31 December 2021 Up to 3 to to 1 1 to Over Carrying
3 months 6 months year 3 years 3 years Total amount
Financial liabilities
Clients' funds 152,925 - 63,837 - - 216,762 216,762
Placements from
financial, non-financial
institutions and
individuals 1,367,734 731,689 653,020 194,187 105,462 3,052,092 3,052,092
Customer current
accounts 35,801 13,666 14,841 16,958 51,780 133,046 133,046
Term financing 578,012 185,494 512,475 84,031 390,655 1,750,667 1,750,667
Payables and accruals 96,562 22,225 229,286 56,581 - 404,654 404,654
Total liabilities 2,231,034 953,074 1,473,459 351,757 547,897 5,557,221 5,557,221
Equity of investment
account holders 981,081 269,297 377,042 235,597 239,127 2,102,144 1,358,344
Commitment and
contingencies 228 3,308 17,268 118,611 16,128 155,543 155,428
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
6 months
31 December 2020 Up to 3 to to 1 1 to Over Carrying
3 months 6 months year 3 years 3 years Total amount
Financial liabilities
Clients' funds 103,517 - - 27,418 - 130,935 130,935
Placements from
financial, non-financial
institutions and
individuals 972,171 565,735 544,618 358,306 84,380 2,525,210 2,418,000
Customer current
accounts 38,477 14,374 15,607 17,836 54,462 140,756 140,756
Term financing 308,917 65,516 168,124 324,314 328,747 1,195,618 1,089,077
Payables and accruals 81,145 25,548 288,748 69,597 - 465,038 465,038
Total liabilities 1,504,227 671,173 1,017,097 797,471 467,589 4,457,557 4,243,806
Equity of investment
account holders 762,918 194,080 285,764 193,745 199,499 1,636,006 1,156,993
Commitment and
contingencies 21,171 15,601 25,133 65,444 18,363 145,712 145,712
36 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
2021 2020
At 31 December 47.16% 36.35%
Average for the year 43.14% 35.62%
Maximum for the year 47.16% 36.35%
Minimum for the year 40.14% 34.48%
The Central Bank of Bahrain introduced Liquidity Coverage Ratio
(LCR) and Net Stable Funding Ratio (NSFR) during 2019.
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. Until 31 December 2021,
the Bank is required to maintain LCR greater than 80%. As of 31
December 2021, the Bank had LCR ratio of 221%.
Average balance
31 December 31 December
2021 2020
Stock of HQLA 292,998 244,049
Net cashflows 148,599 103,188
LCR % 221% 240%
Minimum required by CBB 80% 80%
36 FINANCIAL RISK MANAGEMENT (continued)
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.
NSFR as a percentage is calculated as "Available stable funding"
divided by "Required stable funding". Until 31 December 2021, the
Bank is required to maintain NSFR ratio greater than 80%. As of 31
December 2021, the Bank had NSFR ratio of 101%.
No. Item No Specified Less than More than Over one Total weighted
Maturity 6 months 6 months year value
and less
than one
year
Available Stable Funding (ASF):
1 Capital:
2 Regulatory Capital 1,070,314 - - 49,953 1,120,267
Other Capital
3 Instruments - - - - -
Retail deposits
and deposits
from small business
4 customers:
5 Stable deposits 182,112 25,962 2,749 200,420
6 Less stable deposits - 1,314,514 430,372 90,957 1,661,355
7 Wholesale funding:
8 Operational deposits
Other Wholesale
9 funding - 2,860,814 861,346 773,058 1,896,078
10 Other liabilities:
NSFR Shari'a-compliant
hedging contract
11 liabilities - - -
All other liabilities
not included
in the above
12 categories - 136,864 18,759 71,437 71,437
13 Total ASF 4,949,558
Required Stable Funding (RSF):
Total NSFR high-quality
liquid assets
14 (HQLA) 1,493,881 - - - 73,941
Depsoits held
at other financial
institutions
for opetational
15 purposes
Performing financing
16 and sukuk/ securities: - 636,283 - 720,739 708,071
Performing financial
to financial
institutions
17 by level 1 HQLA - - - - -
Performing financing
to financial
institutions
secured by non-level
1 HQLA and unsecured
performing financing
to financial
18 institutions - 5,000 - 174,023 150,419
36 FINANCIAL RISK MANAGEMENT (continued)
No. Item No Specified Less than More than Over one Total weighted
Maturity 6 months 6 months year value
and less
than one
year
Performing financing
to non- financial
corporate clients,
financing to
retail and small
business customers,
and financing
to sovereigns,
central banks
and PSEs, of
19 which: - 320,720 91,696 205,595 339,845
With a risk weight
of less than
or equal to 35%
as per the CBB
Capital Adequacy
20 Ratio guidelines - - - - -
Performing residential
mortgages, of
21 which: - - - - -
With a risk weight
of less than
or equal to 35%
under the CBB
Capital Adequacy
22 Ratio Guidelines - - - - -
Securities/sukuk
that are not
in default and
do not qualify
as HQLA, including
exchange-traded
23 equities - 615,521 634,536 291,421 916,449
24 Other assets:
Physical traded
commodities,
25 including gold - -
Assets posted
as initial margin
for Shari'a-compliant
hedging contracts
contracts and
contributions
to default funds
26 of CCPs - - - -
NSFR Shari'a-compliant
27 hedging assets - - - -
NSFR Shari'a-compliant
hedging contract
liabilities before
deduction of
variation
28 margin posted - - - -
All other assets
not included
in the above
29 categories 2,672,214 - - - 2,672,214
30 OBS items - - - 27,946
31 Total RSF 1,577,524 726,232 1,391,778 4,888,886
32 NSFR(%) 101%
36 FINANCIAL RISK MANAGEMENT (continued)
As at 31 December 2020
More than
6 months
and less Total
No Specified Less than than one Over one weighted
No. Item Maturity 6 months year year value
Available Stable Funding (ASF):
1 Capital:
2 Regulatory Capital 1,009,571 - - 85,635 1,095,206
3 Other Capital Instruments - - - - -
4 Retail deposits and deposits from small business customers:
5 Stable deposits - - - - -
6 Less stable deposits - 793,480 306,688 231,458 1,221,609
7 Wholesale funding:
8 Operational deposits - - - - -
9 Other Wholesale funding - 2,042,390 485,665 1,016,610 1,845,431
10 Other liabilities:
NSFR Shari'a-compliant
11 hedging contract liabilities - - - - -
All other liabilities
not included in the
12 above categories - 81,718 29,287 182,725 182,725
13 Total ASF - - - - 4,344,971
Required Stable Funding (RSF):
Total NSFR high-quality
14 liquid assets (HQLA) - - - - 50,531
Deposits held at other
financial institutions
15 for operational purposes - - - - -
Performing financing
16 and sukuk/ securities: - 453,447 20,628 906,357 838,420
Performing financial
to financial institutions
17 by level 1 HQLA - - - - -
Performing financing
to financial institutions
secured by non-level
1 HQLA and unsecured
performing financing
18 to financial institutions - 127,045 - 214,171 245,568
Performing financing
to non- financial
corporate clients,
financing to retail
and small business
customers, and financing
to sovereigns, central
banks and PSEs, of
19 which: - 147,516 101,279 - 124,398
With a risk weight
of less than or equal
to 35% as per the
CBB Capital Adequacy
20 Ratio guidelines - - - 22,064 14,342
Performing residential
21 mortgages, of which: - - - - -
With a risk weight
of less than or equal
to 35% under the CBB
Capital Adequacy Ratio
22 Guidelines - - - - -
36 FINANCIAL RISK MANAGEMENT (continued)
Securities/sukuk
that are not in
default and do not
qualify as HQLA,
including exchange-traded
23 equities - 260,664 19,500 395,881 535,963
24 Other assets: - - - - -
Physical traded
commodities, including
25 gold - -
Assets posted as
initial margin for
Shari'a-compliant
hedging contracts
and
contributions to
default funds of
26 CCPs - - - - -
NSFR Shari'a-compliant
27 hedging assets - - - - -
NSFR Shari'a-compliant
hedging contract
liabilities before
deduction of variation
28 margin posted - - - - -
All other assets
not included in
29 the above categories 2,652,216 - - - 2,652,216
30 OBS items - - - - 13,743
31 Total RSF - 988,673 141,407 1,538,473 4,475,181
32 NSFR (%) - - - - 97%
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.
36 FINANCIAL RISK MANAGEMENT (continued)
A summary of the Group's profit rate gap position on non-trading
portfolios is as follows:
Up to 3 to 6 6 months 1 to 3 Over 3
31 December 2021 3 months months to 1 year years years Total
Assets
Treasury portfolio 1,026,479 91,561 31,243 454,734 1,485,908 3,089,925
Financing assets 308,832 64,197 95,926 418,316 423,731 1,311,002
Total assets 1,335,311 155,758 127,169 873,050 1,909,639 4,400,927
Liabilities
Client's fund 152,925 - 63,837 - - 216,762
Placements from
financial institutions,
non-financial institutions
and individuals 1,367,734 731,689 653,020 194,187 105,462 3,052,092
Term financing 578,012 185,494 512,475 84,031 390,655 1,750,667
Total liabilities 2,098,671 917,183 1,229,332 278,218 496,117 5,019,521
Equity of investment
account holders 237,281 269,297 377,042 235,597 239,127 1,358,344
Profit rate sensitivity
gap (1,000,641) (1,030,722) (1,479,205) 359,235 1,174,395 (1,976,938)
Up to 3 to 6 6 months 1 to 3 Over 3
31 December 2020 3 months months to 1 year years years Total
Assets
Treasury portfolio 880,830 60,209 26,401 374,068 497,038 1,838,546
Financing assets 129,080 59,849 133,727 457,629 486,981 1,267,266
Total assets 1,009,910 120,058 160,128 831,697 984,019 3,105,812
Liabilities
Client's fund 103,517 - - 27,418 - 130,935
Placements from
financial institutions,
non-financial institutions
and individuals 1,001,195 634,641 491,597 214,101 76,466 2,418,000
Term financing 307,241 53,340 143,357 271,774 313,365 1,089,077
Total liabilities 1,411,953 687,981 634,954 513,293 389,831 3,638,012
Equity of investment
account holders 283,905 194,080 285,764 193,745 199,499 1,156,993
Profit rate sensitivity
gap (685,948) (762,003) (760,590) 124,659 394,689 (1,689,193)
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:
36 FINANCIAL RISK MANAGEMENT (continued)
100 bps parallel increase / (decrease) 2021 2020
At 31 December +/- 19,769 +/- 16,892
Average for the year +/- 18,108 +/- 15,584
Maximum for the year +/- 19,879 +/- 16,892
Minimum for the year +/- 16,082 +/- 15,593
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:
2021 2020
Placements with financial institutions 3.18% 3.68%
Financing assets 6.09% 6.59%
Debt type investments Sukuk 6.38% 6.57%
Placements from financial institutions,
other entities and individuals 4.76% 4.38%
Term financing 2.55% 6.80%
Equity of investment account holders 2.56% 3.55%
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:
2021 2020
US$ '000 US$ '000
Equivalent Equivalent
Sterling Pounds 1,895 1,449
Euro (2,619) (2,654)
Australian Dollars 13,528 13,528
Kuwaiti Dinar 39,793 39,887
Other GCC Currencies (*) (1,376,341) (1,380,093)
(*) 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:
36 FINANCIAL RISK MANAGEMENT (continued)
2021 2020
US$ '000 US$ '000
Equivalent Equivalent
Sterling Pounds +/- 95 +/- 72
Euros +/- (131) +/- 133
Australian dollar +/- 676 +/- 676
Kuwaiti dinar +/- 1,990 +/- 1,994
Egyptian Pound - +/- 0.32
Structural positions of foreign operation
Moroccan Dirham +/- 7,891 +/- 7,513
Tunisian Dinar +/- 15,238 +/- 14,617
Indian rupee +/- 13,635 +/- 15,328
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.
In response to COVID-19 outbreak, there were various changes in
the working model, interaction with customers, digital modes of
payment and settlement, customer acquisition and executing
contracts and carrying out transactions with and on behalf of the
customers. The management of the Group has enhanced its monitoring
to identify risk events arising out of the current situation and
the changes in the way business is conducted. The operational risk
department has carried out a review of the existing control
environment and has considered whether to update the risk registers
by identifying potential loss events based on their review of the
business processes in the current environment.
During 2021, the Group did not have any significant issues
relating to operational risks.
37 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.
37 CAPITAL MANAGEMENT (continued)
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.
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 ending 31 December 2022, 31 December 2023 and 31 December
2024.
37 CAPITAL MANAGEMENT (continued)
The Bank's regulatory capital position was as follows:
31 December 31 December
2021 2020
CET 1 Capital before regulatory adjustments 1,063,515 1,025,835
Less: regulatory adjustments - -
CET 1 Capital after regulatory adjustments 1,063,515 1,025,835
T 2 Capital adjustments 53,374 76,062
Regulatory Capital 1,116,889 1,101,897
Risk weighted exposure:
Credit Risk Weighted Assets 7,574,496 7,647,064
Market Risk Weighted Assets 38,325 72,038
Operational Risk Weighted Assets 655,034 552,821
Total Regulatory Risk Weighted Assets 8,267,855 8,271,923
Investment risk reserve (30% only) 2 2
Profit equalization reserve (30% only) 3 3
Total Adjusted Risk Weighted Exposures 8,267,850 8,271,918
Capital Adequacy Ratio 13.51% 13.49%
Tier 1 Capital Adequacy Ratio 12.86% 12.57%
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.
38 COMPARATIVES
Except for the prospective adoption of FAS-32 Ijara (refer note
4 (a) (ii)), certain prior year amounts have been regrouped to
conform to the current year's presentation. Such regrouping did not
affect previously reported profit for the year or total owners'
equity.
(The attached information do not form part of the consolidated
financial statement)
On 11 March 2020, the Coronavirus (COVID-19) outbreak was
declared, a pandemic by the World Health Organization (WHO) and has
rapidly evolved globally. This has resulted in a global slowdown
with uncertainties in the economic environment. This included
disruption to capital markets, deteriorating credit markets and
liquidity concerns. Authorities have taken various measures to
contain the spread including implementation of travel restrictions
and quarantine measures.
The pandemic as well as the resulting measures have had a
significant knock-on impact on the Bank and its principal
subsidiaries and its associates (collectively the "Group"). The
Group is actively monitoring the COVID-19 situation, and in
response to this outbreak, has activated its business continuity
plan and various other risk management practices to manage the
potential business disruption on its operations and financial
performance.
The Central Bank of Bahrain (CBB) announced various measures to
combat the effect of COVID-19 to ease liquidity conditions in the
economy as well as to assist banks in complying with regulatory
requirements. Theses measure include the following:
1) Payment holiday for 6 months to eligible customers without any additional profits;
2) Concessionary repo to eligible retail banks at zero Percent;
3) Reduction of cash reserve ratio from 5% to 3%;
4) Reductions of liquidity coverage ratio (LCR) and net stable
funding ratio (NSFR) from 100% to 80%;
5) Aggregate of modification loss and incremental expected
credit losses (ECL) provisions for stage 1 and stage 2 from March
to December 2020 to be added to Tier 1 capital for two years ending
31 December 2020 and 31 December 2021. And to deduct this amount
proportionality from Tier 1 capital on an annual basis for three
years ending 31 December 2022, 31 December 2023 and 31 December
2024.
The onset of COVID-19 and the aforementioned measures resulted
in the following significant effects to the financial position and
operations of the Group:
6) The CBB mandated 6-month payment holiday required the retail
banking subsidiary of the Group to recognize a one-off modification
loss directly in equity. The modification loss has been calculated
as the difference between the net present value of the modified
cash flows calculated using the original effective profit rate and
the carrying value of the financial assets on the date of
modification.
7) The Government of Kingdom of Bahrain has announced various
economic stimulus programmes ("Packages") to support businesses in
these challenging times. The Group received various forms of
financial assistance representing specified reimbursement of a
portion of staff costs, waives of fees, levies and utility charges
and zero cost funding received from the government and/or
regulators, in response to its COVID-19 support measures.
8) The mandated 6 months payments holiday also included the
requirement to suspend minimum payments and service fees on credit
card balances and reduction in transaction related charges, this
resulted in a significant decline in the Group's fees income from
its retail banking operations.
9) The strain caused by COVID-19 on the local economy resulted
in a slow-down in the booking of new financing assets by the Group.
During year ended 31 December 2021, financing assets bookings were
19.43% lower than the same period of the previous year.
a. Decreased consumer spending caused by the economic slow-down
in the booking of new consumer financing assets by the Bank,
whereas, deposit balances decreased compared to the same period of
the previous year. These effects partly alleviated the liquidity
stress faced by the Group due to the mandated 6 months payments
holiday. The Group's liquidity ratios and regulatory CAR were
impacted but it continues to meet the revised regulatory
requirement. The consolidated CAR, LCR and NSFR as of 31 December
2021 was 13.51%, 221% and 101% respectively.
b. The stressed economic situation resulted in the Bank
recognizing incremental ECL on its financing exposures.
c. The overall economic effect of the pandemic was also
reflected in the displacement and volatility in global debt and
capital markets in YTD 2021 due to which the group had to recognize
valuation losses on its Sukuk and investment portfolios.
In addition to the above areas of impact, due to the overall
economic situation certain strategic business and investment
initiatives have been postponed until there is further clarity on
the recovery indicators and its impact on the business environment.
Overall, for the period, the Bank achieved a net profit of USD 84.2
million, which is higher than USD 45.1 million in the same period
of the previous year, registering a increase of 86.7%.
A summary of the significant areas of financial impact during
2020 described above is as follows:
Net Impact recognized Net Impact Net Impact
in the Group's on the Group's recognized
consolidated consolidated in the Group's
income statement financial position consolidated
owners' equity
Average reduction of cash reserve - 26,257 -
Concessionary repo at 0% (737) 129,676 (737)
Modification loss - (25,072) 25,072
Investment portfolio decline (19,193) (31,576) (20,643)
Modification loss amortization 25,072 25,072 -
Incremental ECL provisions (7,161) (7,161) -
Government grants - - 4,953
Lower fee income (retail banking) (830) - -
Information reported in the table above only include components
or line items in the financial statements where impact was
quantifiable and material. Some of the amounts reported above
include notional loss of income or incremental costs and hence may
not necessarily reconcile with amounts reported in the interim
financial information for 31 December 2020.
The above supplementary information is provided to comply with
CBB circular number OG/259/2020 (reporting of Financial Impact of
COVID-19), dated 14 July 2020. This information should not be
considered as indication of the results if the entire year or
relied upon for any other purposes. Since the situation of COVID-19
is uncertain and is still evolving, the above impact is as of date
of preparation of this information. Circumstances may change which
may result in this information to be out-of-date. In addition, this
information does not represent a full comprehensive assessment of
COVID-19 impact on the Group. This information has not been subject
to a formal review by external auditors.
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END
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