TIDM95HX
RNS Number : 5155P
GFH Financial Group B.S.C
09 February 2023
GFH Financial Group BSC
CONSOLIDATED
FINANCIAL STATEMENTS
31 DECEMBER 2022
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 : Ghazi Faisal Ebrahim Alhajeri, Chairman
Edris Mohd Rafi Mohd Saeed Alrafi, Vice Chairman
Jassim Al Seddiqi, (resigned wef 04 April 2022)
Hisham Ahmed Alrayes
Rashid Nasser Al Kaabi
Ali Murad
Ahmed Abdulhamid AlAhmadi, (resigned wef 07 June 2022)
Alia Al Falasi, (resigned wef 9 November 2022)
Fawaz Talal Al Tamimi
Darwish Al Ketbi
Yusuf Abdulla Taqi, (appointed wef 19 June 2022)
Chief Executive Officer : Hisham Ahmed Alrayes
Auditors :KPMG Fakhro
CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2022
CONTENTS Page
Chairman's report 1-5
Report of the Shari'a Supervisory Board 6-7
Independent auditors' report to the shareholders 8-13
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 21-106
CHAIRMAN'S REPORT
for the year ended 31 December 2022
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 2022. While 2022 had initially been penned a
year of global economic recovery, an unpredictable geopolitical
landscape and strong macroeconomic forces threatened to push major
economies into recession.
GFH in 2022 successfully mitigated the impact of the Ukraine
crisis, inflation, and market volatility by implementing the same
robust model that saw the Group through the COVID-19 pandemic.
Following a strategy of long-term, sustainable growth, GFH was able
to consolidate its position while also expanding its global
footprint, placing the Group in good stead for what could be a
turbulent year ahead.
Building on 2021, in which we achieved remarkable growth in
profits and income, we continued to demonstrate resilience,
diversity, and agility during 2022. Our strength was reflected
across verticals, including our investment banking, commercial
banking, asset management and treasury business lines.
Our diverse investment portfolio, which spans the GCC, UK,
Europe and the US, also continued to perform robustly, with our
strategy of targeting defensive, recession-proof sectors once again
proving its effectiveness in creating value for investors and
shareholders in the face of significant headwinds.
With a stable platform from which to build, GFH was able to
expand into global markets through acquiring new portfolios and
majority stakes in several leading asset managers. The acquisitions
will help the Group to unlock significant value in some of the most
promising and resilient sectors in the US and Europe, exposing
investors to a raft of opportunities.
As a result of our strategic manoeuvres in 2022, we maintained
our sustainable, 22-year-long growth trajectory by enhancing
profits and increasing income. The Group's total consolidated
revenue was US$441.7 million compared with US$ 398.7 million in
2021, reflecting a year-on-year increase of 10.8%. This growth was
due to the success of our business lines and the steady income
generated from our investment portfolio as well as strategic exits.
Investment management, proprietary, co-investment and treasury
activities were all valuable revenue streams in 2022, with the
Group actively seeking new income yielding opportunities and ways
to maximise value from existing assets.
The Group reported a consolidated net profit of US$97.7 million
in 2022 compared to US$92.6 million from the previous year,
reflecting an increase of 5.5%, and a net profit attributable to
shareholders of US$90.3 million compared with US$ 84.2 million for
the previous year, an increase of 7.2%. The Group's total assets
for the year grew from US$8.1 billion in 2021 to US$9.8 billion in
2022, an increase of 21%. The Group's Total Assets and Funds Under
Management (AUM) increased from $15 billion in 2021 to around
US$17.6 billion in 2022, marking a year-on-year increase of 17.3%.
The Group also ended the year with a Capital Adequacy Ratio of
14.73% and a Return on Equity (ROE) ratio of 9%.
CHAIRMAN'S REPORT
for the year ended 31 December 2022 (continued)
One of the positive reflections of our robust performance in
2022 was a reduction in our credit risk profile, which has
continually improved over the last few years. Despite significant
market volatility, the Group has been able to command a stable and
positive position owing to strong liquidity and increasing
diversity across asset classes and geographies. Consequently, GFH's
long-term issuer credit rating was raised by S&P Global Ratings
to 'B' from 'B-', with a stable outlook. At the same time, the
agency also raised the credit ratings on sukuk issued by GFH Sukuk
Company Ltd to 'B' from 'B-'.
The Improved ratings were partly due to continued revenue
resilience over the 2020-2022 period as well as an improvement in
ROE to 9% over the twelve month period ended 31 December 2022.
Despite pressure on the Group's treasury activities from rising
interest rates in 2022, GFH was able to deliver good investment
banking revenue, building on its real estate specialisation in
Europe and the US as well as steady commercial banking performance
after a restructuring in 2020. The stable outlook indicates that
GFH is well placed to reduce its exposure to real estate assets
while maintaining moderate capitalisation in the near-term.
We are proud of the confidence ratings agencies and shareholders
have consistently shown in GFH. We are equally proud of the
milestones we achieved in 2022 which have improved our overall
position and prospects, such as introducing new innovative and
Sharia-compliant products. For instance, the Group launched and
seeded a $100 million sukuk fund which holds a diversified
portfolio of sukuk to provide attractive financing and fund
administration services.
Additionally, Infracorp, the infrastructure and sustainability
arm of GFH, issued a $900 million sukuk on London Stock Exchange,
marking the first-ever green sukuk issued by a Bahraini entity. The
landmark transaction reflects Infracorp's strategy to accelerate
the growth of sustainable infrastructure development across MENA
and South Asia regions, while generating long-term returns for
investors and adding lasting value to communities. The issuance
builds on the Group's sustainability roadmap which aims to position
Infracorp as the region's pioneer in sustainability
investments.
We also made several important enhancements internally in line
with our ESG commitment. In 2022, we formed the ESG Committee, a
management level body representing internal departments to oversee
the implementation of our ESG strategies. Also, in efforts to
develop further the integration of ESG into our investment
decision-making processes, a thorough assessment was exercised via
external consultants to bridge policy and procedure gaps, and
identifying the most significant ESG key topics that impact GFH's
business performance in the future. This was developed to be
essential part of our annual disclosures, to provide a significant
value for all our stakeholders, including the communities within
which we operate.As part of its commitment to value creation, GFH
sought to further expand its investor base and enhance liquidity in
its shares. The Group achieved this through listing on the Abu
Dhabi Securities Exchange (ADX), marking GFH's fourth regional
listing, with shares also traded on the Bahrain Bourse (BHB), Dubai
Financial Market (DFM) and Boursa Kuwait (BK). Not only has the
listing boosted liquidity and investor mix, but it has also helped
to ensure the highest levels of disclosure and transparency for the
benefit of our shareholders.
Despite tough market conditions in 2022, investor sentiment
remained buoyant, with many investors keen to deploy capital at a
time when asset valuations underwent a correction. In the twelve
months ended December 2022, the Group successfully raised more than
US$3.54 billion across its investment banking and treasury business
lines. As a result of our robust performance, the Board has
recommended a total cash dividend of 6% on par value for our
shareholders.
CHAIRMAN'S REPORT
for the year ended 31 December 2022 (continued)
Additional board recommendations were discussed and raised as
part of the Group's Annual General Meeting (AGM), which took place
on 03 April 2022. Shareholders ratified and approved a total
dividend distribution of $60 million. The dividend includes cash
profits for all ordinary shares, save for treasury shares at 4.57%
of the nominal value of the share (equal to $0.0231 per share,
BD0.004562, AED0.0444), equal to $45 million. The recommendation
also includes bonus shares of 1.5% of the nominal value of all the
ordinary shares (one share per 66.71 shares), equal to $15 million
.
As we enter 2023, we are buoyed by our performance in 2022 as
well as our proven ability to pivot and adapt during economic
downturns. Our elevated position will enable us to navigate the
challenges 2023 could bring and continue creating value,
capitalising on opportunities and accelerating growth.
On behalf of the Group's Board of Directors, I wish to extend
our sincere gratitude to 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. Their
vision and leadership have created an enabling environment that
provides a stable and robust foundation for Bahrain's leading
financial sector. I would also like to note our appreciation of the
Central Bank of Bahrain and the Government of the Kingdom of
Bahrain, which have facilitated the rapid growth of Bahrain as a
leading regional hub for innovation, fintech and Islamic finance.
And of course, I wish to sincerely thank our investors and
shareholders for believing in our vision, joining us on our journey
of growth and demonstrating continued faith and confidence in our
model.
Finally, I wish to congratulate GFH's team on their remarkable
achievements in 2022, which have paved the way for another
successful year ahead. The commitment and efforts of management and
employees across the Group and its subsidiaries have enabled
collective value creation that we can all be proud of. Further, the
Board of Directors has played a critical role in GFH's growth in
2022, helping to shepherd the Group through uncharted waters.
We are pleased to attach the remuneration of members of the
Board of Directors and the Executive Management for the fiscal year
ending 31 December 2022.
CHAIRMAN'S REPORT
for the year ended 31 December 2022 (continued)
First: Remuneration of the Board of directors:
Name Fixed remunerations Variable remunerations End-of-service Aggregate amount Expenses
award (Does not include Allowance
expense
allowance)
Remunerations Total Others Total Remunerations Incentive Others** Total
of the allowance of the plans
chairman and for chairman and
BOD attending BOD
Board and
committee
meetings
--------------- ----------- -------- ----------- --------------- ----------- ---------- -------
First: Independent Directors:
Alia Al
Falasi* 75,000 149,626 - 224,626 - - - - - 224,626 -
--------------- ----------- -------- ----------- --------------- ----------- ---------- ------- ---------------- ------------------- -----------
Ghazi
Faisal
Ebrahim
Alhajeri 300,000 285,252 - 585,252 - - - - - 585,252 -
--------------- ----------- -------- ----------- --------------- ----------- ---------- ------- ---------------- ------------------- -----------
Fawaz Al
Tamimi 150,000 152,626 - 302,626 - - - - - 302,626 -
--------------- ----------- -------- ----------- --------------- ----------- ---------- ------- ---------------- ------------------- -----------
Ali Murad 150,000 146,626 - 296,626 - - - - - 296,626 -
--------------- ----------- -------- ----------- --------------- ----------- ---------- ------- ---------------- ------------------- -----------
Ahmed Al
Ahmadi* 75,000 71,313 - 146,313 - - - - - 146,313 -
--------------- ----------- -------- ----------- --------------- ----------- ---------- ------- ---------------- ------------------- -----------
Edris Mohd
Rafi Mohd
Saeed
Alrafi 225,000 154,626 - 379,626 - - - - - 379,626 -
--------------- ----------- -------- ----------- --------------- ----------- ---------- ------- ---------------- ------------------- -----------
Darwish
AlKetbi 150,000 145,626 - 295,626 - - - - - 295,626 -
--------------- ----------- -------- ----------- --------------- ----------- ---------- ------- ---------------- ------------------- -----------
Yousif
Abdulla
Taqi 75,000 73,313 - 148,313 - - - - - 148,313 -
--------------- ----------- -------- ----------- --------------- ----------- ---------- ------- ---------------- ------------------- -----------
Second: Non-Executive Directors:
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Jassim
Alseddiqi* - 1,000 - 1,000 - - - - - 1,000 -
--------------- ----------- -------- ----------- --------------- ----------- ---------- ------- ---------------- ------------------- -----------
Rashed
Alkaabi 150,000 154,828 - 304,828 - - - - - 304,828 -
--------------- ----------- -------- ----------- --------------- ----------- ---------- ------- ---------------- ------------------- -----------
Third: Executive Directors:
Hisham
Alrayes 150,000 146,626 - 296,626 - - - - - 296,626 -
--------------- ----------- -------- ----------- --------------- ----------- ---------- ------- ---------------- ------------------- -----------
Total 1,500,000 1,481,462 - 2,981,462 - - - - - 2,981,462 -
--------------- ----------- -------- ----------- --------------- ----------- ---------- ------- ---------------- ------------------- -----------
CHAIRMAN'S REPORT
for the year ended 31 December 2022 (continued)
* These directors resigned during the year 2022 .
Notes:
1. All amounts in Bahraini Dinars. .
2. The Bank does not have any variable remuneration payments,
end of service benefits, or expense allowances paid to its
directors .
3. Salaries and other benefits in their capacity as employee is reported in second table below.
Board remuneration represents allocation of proposed
remuneration for 2022 subject to approval of the Annual General
Meeting .
Second: Executive Management Remuneration Details for Top 6
Executives:
Executive management Total paid Total paid Any other Aggregate
salaries and remuneration cash/ in Amount
allowances (Bonus) kind remuneration
for 2021
Remunerations of top
6 executives, including
CEO* and CFO** 2,735,797 8,100,000 1,800,000 12,635,797
-------------- -------------- ------------------- -------------
All amounts in Bahraini Dinars.
* The highest authority in the executive management of the company,
the name may vary: (CEO, President, General Manager (GM), Managing
Director...etc.
** The company's highest financial officer (CFO, Finance Director,
...etc)
Notes:
1. A significant portion of executive management remuneration
are subject to deferral over a minimum period of 3 years as per
regulations of the Central Bank of Bahrain. In addition to the
paid benefits reported above, the Bank also operates a long-term
share incentive scheme award that that allows employees to participate
in a share-ownership plan. The Bank allocates shares awards that
vest over a period of 6 years under normal terms and are subject
to future performance conditions. The non-cash accounting charge
recognized for 2022 amounted to BD 2,613 thousand determined in
accordance with the requirements of IFRS 2. Refer to the Remuneration
related and share-based payment disclosures in the Annual Report
for a better understanding of the Bank's variable remuneration
framework components.
2. Remuneration information above exclude any Board remuneration
earned by executive management from their role in the board of
investee companies or other subsidiaries.
Ghazi Faisal Ebrahim Alhajeri
Chairman
SHARI'A REPORT
for the year ended 31 December 2022
6 February 2023
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 2022
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 2022.
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 2022
to our satisfaction.
Opinion
The Sharia Supervisory Board believes that,
-- The contracts, transactions and dealings entered into by the
Bank are in compliance with Islamic Sharia rules and principles
-- The distribution of profit and allocation of losses on
investments was in line with the basis and principles approved by
the Sharia Supervisory Board and in accordance to the Islamic
Sharia rules and principles
-- Any earnings resulted from sources or means prohibited by the
Islamic Sharia rules and principles, have been directed to the
Charity account.
-- Zakah was calculated according to the Islamic Sharia rules
and principles, by the net assets method. And the shareholders
should pay their portion of Zakah on their shares as stated in the
Zakah guide.
-- The Bank was committed to comply with Islamic Sharia rules
and principles, the Sharia Supervisory Board fatawa and guidelines,
Sharia related policies and procedures, AAOIFI's Sharia standards,
and Sharia directives issued by the CBB.
Praise be to Allah, Lord of the worlds.
Prayer on Prophet Mohammed (Peace Be Upon Him), all his family
and Companions.
Sheikh Nedham Yaqoubi Sheikh Abdulla Al Menai
Sheikh Abdulaziz Al Qassar Sheikh Fareed Hadi
Independent auditors' report
To the Shareholders of
GFH Financial Group B.S.C.
PO Box 10006
Manama
Kingdom of Bahrain
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 2022, 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
2022, 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").
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 2022.
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 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)
Refer accounting policy in note 4(h) (i) and (q) , use of
estimates and judgments in note 5 and management of credit risk in
note 35 (a).
The key audit matter How the matter was addressed
in our audit
We focused on this area because: Our procedures included:
* of the significance of financing assets representing Control testing
15% of total assets. We performed walk throughs to
identify the key systems, applications
and controls used in the ECL
processes. Key aspects of our
* The estimation of expected credit losses ("ECL") on controls testing involved the
financing assets involve significant judgment and following:
estimates. The key areas where we identified greater
level of management judgment and estimates are: * testing the design and operating effectiveness of the
key controls over the completion and accuracy of the
key inputs and assumptions into the ECL Model;
a. Use of complex models
Use of inherently judgmental
complex models to estimate ECL * evaluating the design and operating effectiveness of
which involves determining Probabilities the key controls over the application of staging
of default ("PD"), Loss Given criteria;
Default ("LGD") and Exposure
At default ("EAD"). The PD models
are considered the drivers of
the ECLs. * evaluating controls over validation, implementation,
and model monitoring;
b. Economic scenarios
The need to measure ECLs on an
unbiased forward-looking basis
incorporating a range of economic * evaluating controls over authorization and
conditions. Significant management calculation of post model adjustments and management
judgment is applied in determining overlays; and
the economic scenarios used and
the probability weightings applied
to them.
* testing key controls relating to selection and
c. Management overlays implementation of material macro-economic variables
Adjustments to the ECL model and the controls over the scenario selection and
results are made by management probabilities.
to address known impairment model
limitations or emerging trends
or risks. Such adjustments are
inherently uncertain and significant Tests of details
management judgment is involved * Sample testing over key inputs and assumptions
in estimating these amounts. impacting ECL calculations to assess the
reasonableness of economic forecast, weights, and PD
assumptions applied; and
* Selecting a sample of post model adjustments to
assess the reasonableness of the adjustments by
challenging key assumptions, 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 by reference
to the relevant accounting standards.
==================================================================
Refer accounting policy in note 4g(iv) and fair value of level 3
financial instruments in note 33.
The key audit matter How the matter was addressed
in our audit
We considered this as a key audit Our 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:
(level 3) requires the application
of valuation techniques which
often involve the exercise of * evaluating the appropriateness of the valuation
significant judgment by the Group methodologies used by comparing with observed
and the use of significant unobservable industry practice;
inputs and assumptions.
* 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 and
inputs used in the valuation to external sources,
investee company financial and management information,
as applicable.
Disclosures
Evaluating the adequacy of the
Group's disclosures related to
valuation of unquoted equity
instruments by reference to the
relevant accounting standards.
========================================================================
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.
The board of directors is responsible for the Group's
undertaking to operate in accordance with Islamic Sharia Rules and
Principles as determined by the Group's Shariah Supervisory
Board.
The board of directors is also responsible for the preparation
and fair presentation of the consolidated financial statements in
accordance with FAS, and for such internal control as the board of
directors determines is necessary to enable the preparation of
consolidated financial statements that are free from material
misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, the board of
directors is responsible for assessing the Group's ability to
continue as a going concern, disclosing, as applicable, matters
related to going concern and using the going concern basis of
accounting unless the board of directors either intends to
liquidate the Group or to cease operations, or has no realistic
alternative but to do so.
INDEPENT AUDITORS REPORT TO THE SHAREHOLDERS (continued)
GFH Financial Group B.S.C.
Our objectives are to obtain reasonable assurance about whether
the consolidated financial statements as a whole are free from
material misstatement, whether due to fraud or error, and to issue
an auditors' report that includes our opinion. Reasonable assurance
is a high level of assurance, but is not a guarantee that an audit
conducted in accordance with ASIFIs will always detect a material
misstatement when it exists. Misstatements can arise from fraud or
error and are considered material if, individually or in the
aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these
consolidated financial statements.
As part of an audit in accordance with ASIFIs, we exercise
professional judgement and maintain professional scepticism
throughout the audit. We also:
- Identify and assess the risks of material misstatement of the
consolidated financial statements, whether due to fraud or error,
design and perform audit procedures responsive to those risks, and
obtain audit evidence that is sufficient and appropriate to provide
a basis for our opinion. The risk of not detecting a material
misstatement resulting from fraud is higher than for one resulting
from error, as fraud may involve collusion, forgery, intentional
omissions, misrepresentations, or the override of internal
control.
- Obtain an understanding of internal control relevant to the
audit in order to design audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Group's internal control.
- Evaluate the appropriateness of accounting policies used and
the reasonableness of accounting estimates and related disclosures
made by the board of directors.
- Conclude on the appropriateness of the board of directors' use
of the going concern basis of accounting and, based on the audit
evidence obtained, whether a material uncertainty exists related to
events or conditions that may cast significant doubt on the Group's
ability to continue as a going concern. If we conclude that a
material uncertainty exists, we are required to draw attention in
our auditors' report to the related disclosures in the consolidated
financial statements or, if such disclosures are inadequate, to
modify our opinion. Our conclusions are based on the audit evidence
obtained up to the date of our auditors' report. However, future
events or conditions may cause the Bank to cease to continue as a
going concern.
- Evaluate the overall presentation, structure and content of
the consolidated financial statements, including the disclosures,
and whether the consolidated financial statements represent the
underlying transactions and events in a manner that achieves fair
presentation.
- Obtain sufficient appropriate audit evidence regarding the
financial information of the entities or business activities within
the Group to express an opinion on the consolidated financial
statements. We are responsible for the direction, supervision and
performance of the Group audit. We remain solely responsible for
our audit opinion.
We communicate with the board of directors regarding, among
other matters, the planned scope and timing of the audit and
significant audit findings, including any significant deficiencies
in internal control that we identify during our audit.
We also provide the board of directors with a statement that we
have complied with relevant ethical requirements regarding
independence and communicate with them all relationships and other
matters that may reasonably be thought to bear on our independence,
and where applicable, actions taken to eliminate threats or
safeguards applied.
From the matters communicated with the board of directors, we
determine those matters that were of most significance in the audit
of the consolidated financial statements of the current period and
are therefore the key audit matters. We describe these matters in
our auditors' report unless law or regulation precludes public
disclosure about the matter or when, in extremely rare
circumstances, we determine that a matter should not be
communicated in our report because the adverse consequences of
doing so would reasonably be expected to outweigh the public
interest benefits of such communication.
INDEPENT AUDITORS REPORT TO THE SHAREHOLDERS (continued)
GFH Financial Group B.S.C.
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
9 February 2023
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
as at 31 December 2022 US$ 000's
Note 31 December 31 December
2022 2021
ASSETS
Cash and bank balances 6 858,239 722,471
Treasury portfolio 7 4,210,020 3,131,246
Financing assets 8 1,435,238 1,311,002
Investment in real estate 9 1,287,085 1,905,598
Proprietary investments 10 1,005,053 170,317
Co-investments 11 142,051 171,877
Receivables and other assets 12 589,869 531,488
Property and equipment 13 232,736 139,687
------------ ------------
Total assets 9,760,291 8,083,686
============ ============
LIABILITIES
Clients' funds 123,300 216,762
Placements from financial institutions 3,790,870 2,278,480
Placements from non-financial institutions
and individuals 14 1,064,258 773,612
Current accounts 131,234 133,046
Term financing 15 1,942,198 1,750,667
Other liabilities 16 423,363 404,654
------------ ------------
Total liabilities 7,475,223 5,557,221
------------ ------------
Total equity of investment account
holders 17 1,213,674 1,358,344
OWNERS' EQUITY
Share capital 18 1,015,637 1,000,637
Treasury shares (105,598) (48,497)
Statutory reserve 36,995 27,970
Investment fair value reserve (53,195) (28,561)
Foreign currency translation reserve - (70,266)
Retained earnings 95,831 81,811
Share grant reserve 19 6,930 -
Total equity attributable to shareholders
of Bank 996,600 963,094
Non-controlling interests 74,794 205,027
------------ ------------
Total owners' equity 1,071,394 1,168,121
------------ ------------
Total liabilities, equity of investment
account holders and owners' equity 9,760,291 8,083,686
============ ============
The consolidated financial statements were approved by the Board
of Directors on 9 February 2023 and signed on its behalf by:
Ghazi Faisal Ebrahim Alhajeri Hisham Alrayes
Chairman Chief Executive Officer & Board member
The accompanying notes 1 to 39 form an integral part of these
consolidated financial statements
CONSOLIDATED INCOME STATEMENT
for the year ended 31 December 2022 US$ 000's
Note 2022 2021
Investment banking income
Deal related income 86,967 102,304
Fees based income 33,536 8,083
120,503 110,387
---------
Commercial banking income
Income from financing 94,751 79,333
Treasury and investment income 61,021 55,258
Fee and other income 9,211 4,630
Less: Return to investment account
holders 17 (38,051) (31,710)
Less: Finance expense (47,960) (35,685)
78,972 71,826
---------
Income from proprietary and co-investments
Direct investment income, net 68,815 14,670
Income from co-investments, net 22,915 14,280
Share of profit / (loss) from equity-accounted
investees 12,437 (61)
Income from sale of assets 13,388 24,885
Leasing and operating income 7,753 4,959
---------
125,308 58,733
---------
Treasury and other income
Finance and treasury portfolio income,
net 96,977 107,159
Other income, net 20 19,910 50,643
116,887 157,802
---------
Total income 441,670 398,748
--------- ---------
Staff costs 21 70,415 63,231
Other operating expenses 22 77,532 70,299
Finance expense 192,706 137,020
Impairment allowances 23 3,310 35,581
Total expenses 343,963 306,131
---------
Profit for the year 97,707 92,617
========= =========
Attributable to:
Shareholders of the Bank 90,253 84,224
Non-controlling interests 7,454 8,393
97,707 92,617
======= =======
Earnings per share
Basic and diluted earnings per share
(US cents) 2.65 2.60
----- -----
Ghazi Faisal Ebrahim Alhajeri Hisham Alrayes
Chairman Chief Executive Officer & Board member
The accompanying notes 1 to 39 form an integral part of these
consolidated financial statements .
CONSOLIDATED STATEMENT OF CHANGES IN OWNERS' EQUITY
for the year ended 31 December 2022 US$ 000's
Attributable to shareholders of the Bank
Foreign
Investment currency Total
Share Treasury Statutory fair value translation Retained Share grant Non-Controlling owners'
31 December 2022 capital shares reserve reserve reserve earnings reserve Total Interests (NCI) equity
---------- ---------
Balance at 1
January 2022 1,000,637 (48,497) 27,970 (28,561) (70,266) 81,811 - 963,094 205,027 1,168,121
Profit for the
period - - - - - 90,253 - 90,253 7,454 97,707
Transfer on
reclassification
from FVTE to
amortised cost
(Note 7) - - - 41,320 - - - 41,320 - 41,320
Fair value
changes during
the period - - - (63,312) - - - (63,312) (2,462) (65,774)
Transfer to
income statement
on disposal of
sukuk - - - (2,642) - - - (2,642) - (2,642)
Total recognised
income and
expense - - - (24,634) - 90,253 - 65,619 4,992 70,611
Bonus shares
issued for 2021 15,000 - - - - (15,000) - - - -
Dividend declared
for 2021 - - - - - (45,000) - (45,000) - (45,000)
Purchase of
treasury shares - (79,141) - - - - - (79,141) - (79,141)
Sale / vesting of
treasury shares - 22,040 - - - (5,725) - 16,315 - 16,315
Transfer to zakah
and charity fund - - - - - (1,483) - (1,483) - (1,483)
Transferred to
income statement
on
deconsolidation
of subsidiaries
(Note 37) - - - - 70,266 - - 70,266 - 70,266
Transfer to
statutory
reserve - - 9,025 - - (9,025) - - - -
Increase in NCI - - - - - - - - 6,492 6,492
Issue of shares
under incentive
scheme (note 19) - - - - - - 6,930 6,930 - 6,930
Adjusted on
deconsolidation
of subsidiaries
(note 37) - - - - - - - - (141,717) (141,717)
Balance at 31
December 2022 1,015,637 (105,598) 36,995 (53,195) - 95,831 6,930 996,600 74,794 1,071,394
========== ========== =========== =========== ============ ========= ============== ========= ================ ==========
The accompanying notes 1 to 39 form an integral part of these
consolidated financial statements.
CONSOLIDATED STATEMENT OF CHANGES IN OWNERS' EQUITY
for the year ended 31 December 2022 (continued) US$ 000's
Attributable to shareholders of the Bank
Share Treasury Statutory Investment Foreign Retained Share Total
capital shares reserve fair value currency earnings grant Non Total
reserve translation reserve -controlling owners'
31 December 2021 reserve interests equity
------------- ----------
Balance at 1 January
2021 (as previously
reported) 975,637 (63,978) 19,548 5,592 (46,947) 22,385 1,093 913,330 272,733 1,186,063
Effect of adoption
of FAS 32 - - - - - (2,096) - (2,096) - (2,096)
---------- --------- ---------- ----------- ------------ --------- -------- --------- ------------- ----------
Balance at 1 January
2021 (restated) 975,637 (63,978) 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 / vesting 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 - - - - - 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 1,000,637 (48,497) 27,970 (28,561) (70,266) 81,811 - 963,094 205,027 1,168,121
========== ========= ========== =========== ============ ========= ======== ========= ============= ==========
The accompanying notes 1 to 39 form an integral part of these
consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
for the year ended 31 December 2022 US$ 000's
31 December 31 December
2022 2021
OPERATING ACTIVITIES
Profit for the year 97,707 92,617
Adjustments for:
Income from proprietary and co-investments (125,308) (58,733)
Income from treasury and other income (116,887) (157,802)
Foreign exchange gain (4,853) (2,190)
Finance expense 192,706 137,020
Impairment allowances 3,310 35,581
Depreciation and amortisation 5,841 2,541
------------
52,516 49,034
Changes in:
Placements with financial institutions (original
maturities of more than 3 months) (475,696) 6,541
Financing assets (169,271) (98,555)
Receivables and other assets (177,000) (65,637)
CBB Reserve and restricted bank balance (12,676) (13,612)
Clients' funds (93,462) 85,827
Placements from financial institutions 1,520,053 366,126
Placements from non-financial institutions
and individuals 290,646 267,966
Current accounts (1,812) (7,710)
(Return to) / receipt from equity of investment
account holders (144,670) 201,351
Other liabilities (113,660) (60,384)
------------ ------------
Net cash generated from operating activities 674,968 730,947
------------ ------------
INVESTING ACTIVITIES
Payments for purchase of equipment, net (1,818) (3,604)
Proceeds from sale of proprietary and co-investments,
net 30,441 13,391
Cash transferred on deconsolidation of a (80,119) -
subsidiary
Purchase of treasury portfolio, net (467,860) (1,177,088)
Profit received on treasury portfolio and
other income 111,054 95,759
Proceeds from sale of investment in real
estate 19,209 9,741
Dividends received from proprietary and
co-investments 55,235 18,030
Payment for development of real estate asset (65,809) (6,515)
Cash paid on acquisition of subsidiaries (7,112) -
Net cash used in investing activities (406,779) (1,050,286)
FINANCING ACTIVITIES
Term financing, net 215,998 701,035
Finance expense paid (204,649) (190,713)
Dividends paid (44,818) (17,575)
(Purchase) / sale of treasury shares, net (38,000) 15,481
------------
Net cash (used) in / generated from financing
activities (71,469) 508,228
------------
Net increase in cash and cash equivalents
during the year 196,720 188,889
Cash and cash equivalents at 1 January * 844,344 655,455
------------ ------------
Cash and cash equivalents at 31 December 1,041,064 844,344
============ ------------
Cash and cash equivalents comprise: *
Cash and balances with banks (excluding
CBB Reserve balance and restricted cash) 787,479 664,388
Placements with financial institutions (original
maturities of 3 months or less) 253,585 179,956
------------ ------------
1,041,064 844,344
============ ============
* net of expected credit loss of US$ 11 thousand (31 December
2021: US$ 24 thousand)
The accompanying notes 1 to 39 form an integral part of these
consolidated financial statements .
CONSOLIDATED STATEMENT OF CHANGES IN RESTRICTED INVESTMENT
ACCOUNTS
for the year ended 31 December 2022
31 December Balance at 1 January Balance at 31 December
2022 2022 Movements during the year 2022
Average Average
No. value Group's No. value
of per Investment/ Gross Dividends fees as Administration of per Total
units share Total (withdrawal) Revaluation income paid an agent expenses units share US$
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$ 000's
----- ------- --------- ------------ ----------- --------- --------- --------- -------------- ----- ------- -----
Mena Real
Estate
Company
KSCC 150 0.33 50 - - - - - - 150 0.33 50
Al Basha'er
Fund 12 7.87 94 - - - - - - 12 7.87 94
Safana
Investment
(RIA
1) (#) 1,247 2.65 3,305 - - - - - - 1,247 2.65 3,305
Shaden Real
Estate
Investment
WLL (RIA
5) (#) 269 2.65 713 - - - - - - 269 2.65 713
4,162 - - - - - - 4,162
========= ============ =========== ========= ========= ========= ============== =====
31 December Balance at 1 January Balance at 31 December
2021 2021 Movements during the year 2021
Average Average
No. value Group's No. value
of per Investment/ Gross Dividends fees as Administration of per Total
units share Total (withdrawal) Revaluation income paid an agent expenses units share US$
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$ 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 (13,268) - - - - - 1,247 2.65 3,305
Shaden Real
Estate
Investment
WLL (RIA 5)
(#) 3,434 2.65 9,100 (8,387) - - - - - 269 2.65 713
Locata
Corporation
Pty
Ltd (RIA 6)
(#) 2,633 1.00 2,633 (2,633) - - - - - - - -
--------- ------
28,451 (24,290) - - - - - 4,162
========= ============ =========== ========= ========= ========= ============== ======
(#) Represents restricted investment accounts of Khaleeji
Commercial Bank BSC, a consolidated subsidiary
The accompanying notes 1 to 39 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 2022 US$ 000's
2022 2021
Sources of zakah and charity fund
Contributions by the Group 2,531 1,766
Non-Sharia income (note 28) 88 31
Total sources 2,619 1,797
-------- --------
Uses of zakah and charity fund
Utilisation of zakah and charity fund (1,903) (1,970)
Total uses (1,903) (1,970)
-------- --------
Surplus of sources over uses 716 (173)
Undistributed zakah and charity fund at
1 January 5,208 5,346
Undistributed zakah and charity fund at
31 December (note 16) 5,924 5,173
======== ========
Represented by:
Zakah payable 753 954
Charity fund 5,171 4,219
5,924 5,173
====== ======
The accompanying notes 1 to 39 form an integral part of these
consolidated financial statements .
1 REPORTING ENTITY
GFH Financial Group BSC ("the Bank") was incorporated as Gulf
Finance House BSC in 1999 in the Kingdom of Bahrain under
Commercial Registration No. 44136 and operates under an Islamic
Wholesale Investment Banking license issued by the Central Bank of
Bahrain ("CBB"). The Bank's shares are listed on the Bahrain,
Kuwait, Dubai and Abu Dhabi Financial Market Stock Exchanges. The
Bank's sukuk certificates are listed on London Stock Exchange.
The Bank's activities are regulated by the CBB and supervised by
a Shari'a Supervisory Board. The principal activities of the Bank
include investment advisory services and investment transactions
which comply with Islamic rules and principles determined by the
Bank's Shari'a Supervisory Board.
The consolidated financial statements for the year comprise the
results of the Bank and its subsidiaries (together referred to as
"the Group"). The significant subsidiaries of the Bank which
consolidated in these financial statements are:
Effective
ownership
interests
as at 31
Country of December
Investee name incorporation 2022 Activities
GFH Capital Limited United Arab 100% Investment
Emirates management
---------------- ----------- -------------------
GFH Capital S.A. Saudi Arabia 100% Investment
management
---------------- ----------- -------------------
Khaleeji Commercial Bank Kingdom of 85.14% Islamic retail
BSC ('KHCB') Bahrain bank
---------------- ----------- -------------------
Al Areen Project companies 100% Real estate
development
---------------- ----------- -------------------
GBCORP Tower Group Ltd 62.91% Own & lease
real estate
----------- -------------------
GBCORP B.S.C (c)* 42.91% Islamic investment
firm
----------- -------------------
Residential South Real Estate 100% Real estate
Development Company (RSRED) development
----------- -------------------
Harbour House Row Towers 100% Own & lease
W.L.L. real estate
----------- -------------------
Al Areen Hotels W.L.L. (Note 100% Hospitality
38) management
services
----------- -------------------
Britus International School 100% Educational
for Special Education W.L.L institution
---------------- ----------- -------------------
Gulf Holding Company KSCC State of Kuwait 53.63% Investment
in real estate
---------------- ----------- -------------------
SQ Topco II LLC (Note 38) United States 51% Property
asset management
Company
---------------- ----------- -------------------
Big Sky Asset Management United States 51% Real estate
LLC investment
(Note 38) manager
---------------- ----------- -------------------
Roebuck A M LLP 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 Bank divested 20% equity stake without
losing controlling interest in the entity.
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).
The accounting policies used in the preparation of annual
audited consolidated financial statements of the Group for the year
ended 31 December 2020 and 31 December 2021 were in accordance with
FAS as modified by CBB (refer to the Group's audited financial
statements for the year ended 31 December 2021 for the details of
the COVID-19 related modifications applied). Since the CBB
modification were specific to the financial year 2020 and no longer
apply to both the current and comparative periods presented, the
Group's financial statements for the year ended 31 December 2022
has been prepared in accordance with FAS issued by AAOIFI (without
any modifications).
3 BASIS OF MEASUREMENT
The consolidated financial statements are prepared on the
historical cost basis except for the measurement at fair value of
investment securities.
The Group classifies its expenses in the consolidated income
statement by the nature of expense method. The consolidated
financial statements are presented in United States Dollars (US$),
which is also the functional currency of the Group's operations.
All financial information presented in US$ has been rounded to the
nearest thousands, except when otherwise indicated.
The preparation of consolidated financial statements requires
the use of certain critical accounting estimates. It also requires
management to exercise judgement in the process of applying the
Group's accounting policies. Estimates and underlying assumptions
are reviewed on an ongoing basis. Revisions to accounting estimates
are recognised in the period in which the estimate is revised and
in any future periods affected. Management believes that the
underlying assumptions are appropriate and the Group's consolidated
financial statements therefore present the financial position and
results fairly. The areas involving a higher degree of judgement or
complexity, or areas where assumptions and estimates are
significant to the consolidated financial statements are disclosed
in note 5.
The below paragraphs and tables describe the Group's significant
lines of business and sources of revenue they are associated
with.
Activities:
The Group's primary activities include:
a) to provide investment opportunities and manage assets on
behalf of its clients as an agent,
b) to provide commercial banking services,
c) to undertake targeted development and sale of infrastructure
and real estate projects for enhanced returns, and
d) to co-invest with clients and hold strategic proprietary
assets as a principal. In addition, the Group also manages its
treasury portfolio with the objective of earning higher returns
from capital and money market opportunities.
3 BASIS OF MEASUREMENT (continued)
Segments:
To undertake the above activities, the Group has organised
itself in the following operating segments units:
Investment banking Investment banking segment focuses on private
equity and asset management activities. Private
equity activities include acquisition of interests
in unlisted businesses at average prices with
potential for growth. The Group acts as both
a principal and an intermediary by acquiring,
managing and realizing investments in investment
assets for institutional and high net worth clients.
The asset management unit is responsible for
identifying and managing investments in income
yielding real estate and leased assets in the
target markets.
Investment banking activities focuses on acquiring,
managing and realizing investments to achieve
and exceed benchmark returns.
Investment banking activities produce fee-based,
activity-based and asset-based income for the
Group. Assets under this segment include investment
banking receivables.
Commercial banking This includes all sharia compliant corporate
banking and retail banking activities of the
Group provided through the Group's subsidiary,
Khaleeji Commercial Bank BSC. The subsidiary
also manages its own treasury and proprietary
investment book within this operating segment.
------------------------------------------------------
Proprietary All common costs and activities that are undertaken
and treasury at the Group level, including treasury and residual
proprietary and co-investment assets, is considered
as part of the Proprietary and treasury activities
of the Group.
------------------------------------------------------
Each of the above operating segments, except commercial banking
which is a separate subsidiary, has its own dedicated team of
professionals and are supported by a common placement team and
support units.
The strategic business units offer different products and
services and are managed separately because they require different
strategies for management and resource allocation within the Group.
For each of the strategic business units, the Group's Board of
Directors (chief operating decision makers) review internal
management reports on a quarterly basis.
The performance of each operating segment is measured based on
segment results and are reviewed by the management committee and
the Board of Directors on a quarterly basis. Segment results is
used to measure performance as management believes that such
information is most relevant in evaluating the results of certain
segments relative to other entities that operate within these
industries. Inter-segment pricing, if any is determined on an arm's
length basis.
The Group classifies directly attributable revenue and cost
relating to transactions originating from respective segments as
segment revenue and segment expenses respectively. Indirect costs
is allocated based on cost drivers/factors that can be identified
with the segment and/ or the related activities. The internal
management reports are designed to reflect revenue and cost for
respective segments which are measured against the budgeted
figures. The unallocated revenues, expenses, assets and liabilities
related to entity-wide corporate activities and treasury activities
at the Group level. Expenses are not allocated to the business
segment.
3 BASIS OF MEASUREMENT (continued)
Sources of revenue:
The Group primarily earns its revenue from the following sources
and presents its statement of income accordingly:
Activity/ Source Products Types of revenue
Investment banking Deal-by-deal offerings Deal related income , earned
of private equity, income by the Group from structuring
yielding asset opportunities and sale of assets.
Fee based income , in the
nature of management fees,
performance fee, acquisition
fee and exit fee which are
contractual in nature
------------------------------ ------------------------------------
Commercial banking Islamic Shari'ah compliant Financing income, fees and
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 investment of proprietary investments
exposure. This also and share of profit / (loss)
includes equity -accounted of equity accounted investees
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
------------------------------ ------------------------------------
Sale of assets Proprietary holdings Development and sale income
of real estate for direct arises from development
sale, development and and 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 Leasing and operating income,
leisure and hospitality from rental and other ancillary
assets. income from investment in
real estate and other assets.
------------------------------ ------------------------------------
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.
(a) New standards, amendments, and interpretations effective for
annual periods beginning on or after 1 January 2022
The following new standards and amendments to standards are
effective for financial years beginning on or 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:
a) "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
b) "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 did not have any significant impact on adoption this
standard.
(b) New standards, amendments, and interpretations issued but
not yet effective
The following new standards and amendments to standards are
issued but not yet effective which are relevant for the Group with
an option to early adopt. However, the Group has not early adopted
any of these standards.
(i) FAS 39 Financial Reporting for Zakah
AAOIFI has issued FAS 39 Financial Reporting for Zakah in 2021.
The objective of this standard is to establish principles of
financial reporting related to Zakah attributable to different
stakeholders of an Islamic financial Institution. This standard
supersedes FAS 9 Zakah and is effective for the financial reporting
periods beginning on or after 1 January 2023 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.
4 SIGNIFICANT ACCOUNTING POLICIES (continued)
(ii) FAS 1 General Presentation and Disclosures in the Financial
Statements
AAOIFI has issued the revised FAS 1 General Presentation and
Disclosures in the Financial Statements in 2021. This standard
describes and improves the overall presentation and disclosure
requirements prescribed in line with the global best practices and
supersedes the earlier FAS 1. It is applicable to all the Islamic
Financial Institutions and other institutions following AAOIFI
FAS's. This standard is effective for the financial reporting
periods beginning on or after 1 January 2024 with an option to
early adopt.
The revision of FAS 1 is in line with the modifications made to
the AAOIFI conceptual framework for financial reporting.
Some of the significant revisions to the standard are as
follows:
a) Revised conceptual framework is now integral part of the AAOIFI FAS's;
b) Definition of Quassi equity is introduced;
c) Definitions have been modified and improved;
d) Concept of comprehensive income has been introduced;
e) Institutions other than Banking institutions are allowed to
classify assets and liabilities as current and non-current;
f) Disclosure of Zakah and Charity have been relocated to the notes;
g) True and fair override has been introduced;
h) Treatment for change in accounting policies, change in
estimates and correction of errors has been introduced;
i) Disclosures of related parties, subsequent events and going concern have been improved;
j) Improvement in reporting for foreign currency, segment reporting;
k) Presentation and disclosure requirements have been divided
into three parts. First part is applicable to all institutions,
second part is applicable only to banks and similar IFI's and third
part prescribes the authoritative status, effective date an
amendments to other AAOIFI FAS's; and
l) The illustrative financial statements are not part of this
standard and will be issued separately.
The Group is assessing the impact of adoption of this standard
and expects changes in certain presentation and disclosures in its
consolidated financial statement in line with the wider market
practice.
(iii) FAS 41 Interim financial reporting
This standard prescribes the principles for the preparation of
condensed interim financial information and the relevant
presentation and disclosure requirements, emphasizing the minimum
disclosures specific to Islamic financial institutions in line with
various financial accounting standards issued by AAOIFI. This
standard also provides an option for the institution to prepare a
complete set of financial statements at interim reporting dates in
line with the respective FAS's.
This standard will be effective for financial statements for the
period beginning on or after 1 January 2023 and is not expected to
have any significant impact on the Group's interim financial
information.
4 SIGNIFICANT ACCOUNTING POLICIES (continued)
(c) Basis of consolidation
(i) Business combinations
Business combinations are accounted for using the acquisition
method as at the acquisition date, which is the date on which
control is transferred to the Group. Control is the power to govern
the financial and operating policies of an entity so as to obtain
benefits from its activities. In assessing control, the Group takes
into consideration potential voting rights that are currently
exercisable.
The Group measures goodwill at the acquisition date as:
-- the fair value of the consideration transferred; plus
-- the recognised amount of any non-controlling interest in the acquiree; plus
-- if the business combination achieved in stages, the fair
value of the pre-existing equity
interest in the acquiree; less
-- the net recognised amount (generally fair value) of the
identifiable assets acquired and liabilities assumed.
When the excess is negative, a bargain purchase gain is
recognised immediately in the consolidated income statement.
The consideration transferred does not include amounts related
to settlement of pre-existing relationships. Such amounts are
generally recognised in the consolidated income statement.
Transaction costs, other than those associated with the issue of
debt or equity securities, that the Group incurs in connection with
a business combination are expensed as incurred.
Any contingent consideration payable is measured at fair value
at the acquisition date. If the contingent consideration is
classified as equity, then it is not re-measured and settlement is
accounted within equity. Otherwise subsequent changes in the fair
value of the contingent consideration are recognised in the
consolidated income statement.
(ii) Subsidiaries
Subsidiaries are those enterprises (including special purpose
entities) controlled by the 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 proprietary
investments, co-investments and treasury portfolio.
(refer note 3 for categorisation)
Investment securities comprise debt type and equity type
instruments but exclude investment in subsidiaries and
equity-accounted investees (note 4 (c) (ii) and (vi)).
(i) Categorization and classification
The classification and measurement approach for investments in
sukuk, shares and similar instruments that reflects the business
model in which such investments are managed and the underlying cash
flow characteristics. Under the standard, each investment is to be
categorized as either investment in:
i) equity-type instruments
ii) debt-type instruments, including:
-- monetary debt-type instruments; and
-- non-monetary debt-type instruments.
iii) other investment instruments
Unless irrevocable initial recognition choices as per the
standard are exercised, an institution shall classify investments
as subsequently measured at either of:
-- amortised cost;
-- fair value through equity (FVTE) or
-- fair value through income statement (FVTIS), on the basis of both:
Ø the Group's business model for managing the investments;
and
Ø the expected cash flow characteristics of the investment in
line with the nature of the underlying Islamic finance
contracts.
4 SIGNIFICANT ACCOUNTING POLICIES (continued)
(g) Investment securities (continued)
(ii) Recognition and de-recognition
Investment securities are recognised at the trade date i.e. the
date that the Group commits to purchase or sell the asset, at which
date the Group becomes party to the contractual provisions of the
instrument. Investment securities are derecognised when the rights
to receive cash flows from the financial assets have expired or
where the Group has transferred substantially all risk and rewards
of ownership.
(iii) Measurement
Investment securities are measured initially at fair value plus,
except for investment securities carried at FVTIS, transaction
costs that are directly attributable to its acquisition or
issue.
Subsequent to initial recognition, investments carried at FVTIS
and FVTE are re-measured to fair value. Gains and losses arising
from a change in the fair value of investments carried at FVTIS are
recognised in the consolidated income statement in the period in
which they arise. Gains and losses arising from a change in the
fair value of investments carried at FVTE are recognised in the
consolidated statement of changes in owners equity and presented in
a separate investment fair value reserve in equity.
The fair value gains / (losses) are recognised taking into
consideration the split between portions related to owners' equity
and equity of investment account holders. When the investments
carried at FVTE are sold, impaired, collected or otherwise disposed
of, the cumulative gain or loss previously recognised in the
statement of changes in owners' equity is transferred to the income
statement.
Investments at FVTE where the entity is unable to determine a
reliable measure of fair value on a continuing basis, such as
investments that do not have a quoted market price or there are no
other appropriate methods from which to derive reliable fair
values, are stated at cost less impairment allowances.
(iv) Measurement principles
Amortised cost measurement
The amortised cost of a financial asset or liability is the
amount at which the financial asset or liability is measured at
initial recognition, minus capital repayments, plus or minus the
cumulative amortisation using the effective profit method of any
difference between the initial amount recognised and the maturity
amount, minus any reduction (directly or through use of an
allowance account) for impairment or uncollectibility. The
calculation of the effective profit rate includes all fees and
points paid or received that are an integral part of the effective
profit rate.
Fair value measurement
Fair value is the amount for which an asset could be exchanged,
or a liability settled, between knowledgeable, willing parties in
an arm's length transaction on the measurement date. When
available, the Group measures the fair value of an instrument using
quoted prices in an active market for that instrument. A market is
regarded as active if quoted prices are readily and regularly
available and represent actual and regularly occurring market
transactions on an arm's length basis.
The best evidence of the fair value of a financial instrument on
initial recognition is normally the transaction price - i.e. the
fair value of the consideration given or received.
If a market for a financial instrument is not active, the Group
establishes fair value using a valuation technique. Valuation
techniques include using recent arm's length transactions between
knowledgeable, willing parties (if available), discounted cash flow
analyses, price / earnings multiples and other valuation models
with accepted economic methodologies for pricing financial
instruments.
Some or all of the inputs into these models may not be market
observable, but are estimated based on assumptions. Inputs to
valuation techniques reasonably represent market expectations and
measures of the risk-return factors inherent in the financial
instrument.
4 SIGNIFICANT ACCOUNTING POLICIES (continued)
(g) Investment securities (continued)
(iv) Measurement principles (continued)
Fair value estimates involve uncertainties and matters of
significant judgement and therefore, cannot be determined with
precision. There is no certainty about future events (such as
continued operating profits and financial strengths). It is
reasonably possible, based on existing knowledge, that outcomes
within the next financial year that are different from assumptions
could require a material adjustment to the carrying amount of the
investments.
The fair value of a financial liability with a demand feature
(e.g. a demand deposit) is not less than the amount payable on
demand, discounted from the first date on which the amount could be
required to be paid.
The Group recognises transfers between levels of the fair value
hierarchy as of the end of the reporting period during which the
change has occurred.
(h) Financing 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) Non-trading derivatives
Non-trading derivatives are recognised on balance sheet at fair
value. If a derivative is not held for trading, and is not
designated in a qualifying hedging relationship, then all changes
in its fair value are recognised immediately in profit and loss as
a component of net income from other financial instruments at
FVTPL.
(m) Investment property
Investment property comprise land plots and buildings.
Investment property is property held to earn rental income or for
capital appreciation or both but not for sale in the ordinary
course of business, use in the supply of services or for
administrative purposes. Investment property is measured initially
at cost, including directly attributable expenses. Subsequent to
initial recognition, investment property is carried at cost less
accumulated depreciation and accumulated impairment allowances (if
any). Land is not depreciated, and building is depreciated over the
period of 30 to 45 years.
4 SIGNIFICANT ACCOUNTING POLICIES (continued)
(m) 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.
(n) Development properties
Development properties are properties held for sale or
development and sale in the ordinary course of business.
Development properties are measured at the lower of cost and net
realisable value.
(o) Property and equipment
Property and equipment is stated at cost less accumulated
depreciation and accumulated impairment losses, if any. Cost
includes the cost of replacing part of the property, plant and
equipment and borrowing costs for long-term construction projection
if the recognition criteria are met. All other repair and
maintenance costs are recognised in the consolidated income
statement as incurred.
Depreciation is calculated to write off the cost of items of
property, plant and equipment less their estimated residual values
using the straight line method over their estimated useful lives,
and is generally recognised in the consolidated income
statement.
The estimated useful lives of property and equipment of the
industrial business assets are as follows:
Buildings and infrastructure on lease hold 30 - 50 years
Computers 3 - 5 years
Furniture and fixtures 5 - 8 years
Motor vehicles 4 - 5 years
The carrying values of property and equipment are reviewed for
impairment when events or changes in circumstances indicate the
carrying values may not be recoverable. If any such indication
exists and where 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)
(p) Intangible assets
Goodwill
Goodwill that arises on the acquisition of subsidiaries is
measured at cost less accumulated impairment losses.
Other Intangible assets
Intangible assets acquired separately are initially measured at
cost. The cost of intangible assets acquired in a business
combination are their fair values as at the date of acquisition.
Subsequently, intangible assets are recognised at cost less any
accumulated amortisation and accumulated impairment losses.
Internally generated intangible assets, excluding capitalised
development costs, are not capitalised and expenditure is
recognised in the consolidated income statement in the period in
which the expenditure is incurred. The useful lives of intangible
assets are assessed to be either finite or indefinite.
Intangible assets with finite lives are amortised over the
useful economic life of ten years and assessed for impairment
whenever there is an indication that the intangible asset may be
impaired. The amortisation period and the amortisation method for
an intangible asset with a finite useful life is reviewed at each
reporting date. Changes in the expected useful life or the expected
pattern of consumption of future economic benefits embodied in the
asset is accounted for by changing the amortisation period or
method, as appropriate, and are treated as changes in accounting
estimates.
The amortisation expense on intangible assets with finite lives
is recognised in the consolidated statement of income in the
expenses category consistent with the function if intangible
assets.
Intangible assets with indefinite useful lives are not
amortised, but are tested for impairment annually, either
individually or at the cash generating unit level. The assessment
of indefinite life is reviewed annually to determine whether the
indefinite life continues to be supportable. If not, the change in
useful life from indefinite to finite is made on a prospective
basis. Intangible assets with indefinite useful life consists of a
license to construct and operate a cement plant in the Kingdom of
Bahrain.
Gains or losses arising from de-recognition of an intangible
asset are measured as the difference between the net disposal
proceeds and the carrying amount of the asset and are recognised in
the consolidated statement of income when the asset is
derecognised.
(q) Impairment of exposures subject to credit risk
The Group recognises loss allowances for the expected credit
losses "ECLs" on:
-- Bank balances;
-- Placements with financial institutions;
-- Financing 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)
(q) Impairment of exposures subject to credit risk (continued)
The Group measures loss allowances at an amount equal to
lifetime ECLs, except for the following, which are measured at
12-month ECLs:
-- Debt-type securities that are determined to have low credit risk at the reporting date; and
-- Other debt-type securities and bank balances for which credit
risk (i.e. the risk of default occurring over the expected life of
the financial instrument) has not increased significantly since
initial recognition.
When determining whether the credit risk of an exposure subject
to credit risk has increased significantly since initial
recognition when estimating ECLs, the Group considers reasonable
and supportable information that is relevant and available without
undue cost or effort. This includes both quantitative and
qualitative information and analysis, based on the Group's
historical experience and informed credit assessment including
forward-looking information.
The Group assumes that the credit risk on exposure subject to
credit risk increased significantly if it is more than 30 days past
due. The Group considers an exposure subject to credit risk to be
in default when:
-- the borrower is unlikely to pay its credit obligations to the
Group in full, without recourse by the Group to actions such as
realising security, if any is held; or
-- the exposure is more than 90 days past due.
The Group considers a debt security to have low credit risk when
its credit risk rating is equivalent to the globally understood
definition of 'investment grade'. The Group considers this to be
BBB- or higher per S&P.
The Group applies a three-stage approach to measuring ECL.
Assets migrate through the following three stages based on the
change in credit quality since initial recognition.
Stage 1: 12-months ECL
Stage 1 includes exposures that are subject to credit risk on
initial recognition and that do not have a significant increase in
credit risk since initial recognition or that have low credit risk.
12-month ECL is the expected credit losses that result from default
events that are possible within 12 months after the reporting date.
It is not the expected cash shortfalls over the 12-month period but
the entire credit loss on an asset weighted by the probability that
the loss will occur in the next 12-months.
Stage 2: Lifetime ECL - not credit impaired
Stage 2 includes exposures that are subject to credit risk that
have had a significant increase in credit risk since initial
recognition but that do not have objective evidence of impairment.
For these assets, lifetime ECL are recognised. Lifetime ECL are the
expected credit losses that result from all possible default events
over the expected life of the financial instrument. Expected credit
losses are the weighted average credit losses with the life-time
probability of default ('PD').
4 SIGNIFICANT ACCOUNTING POLICIES (continued)
(q) Impairment of exposures subject to credit risk (continued)
Stage 3: Lifetime ECL - credit impaired
Stage 3 includes exposures that are subject to credit risk that
have objective evidence of impairment at the reporting date in
accordance with the indicators specified in the CBB's rule book.
For these assets, lifetime ECL is recognised.
Measurement of ECLs
ECLs are a probability-weighted estimate of credit losses. They
are measured as follows:
-- Exposures subject to credit risk that are not credit-impaired
at the reporting date: as the present value of all cash shortfalls
(i.e. the difference between the cash flows due to the entity in
accordance with the contract and the cash flows that the Group
expects to receive);
-- Exposures subject to credit risk that are credit-impaired at
the reporting date: as the difference between the gross carrying
amount and the present value of estimated future cash flows;
-- Undrawn financing commitment: as the present value of the
difference between the contractual cash flows that are due to the
Group if the commitment is drawn and the cash flows that the Group
expects to receive;
-- Financial guarantee contracts: the expected payments to
reimburse the holder less any amounts that the Group expects to
recover; and
-- ECLs are discounted at the effective profit rate of the exposure subject to credit risk.
Credit-impaired exposures
At each reporting date, the Group assesses whether exposures
subject to credit risk are credit impaired. An exposure subject to
credit risk is 'credit-impaired' when one or more events that have
a detrimental impact on the estimated future cash flows of the
financial asset have occurred. Evidence that an exposure is
credit-impaired includes the following observable data:
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.
(r) Impairment of equity investments classified at fair value through equity (FVTE)
In the case of investments in equity securities classified as
FVTE. A significant or prolonged decline in the fair value of the
security below its cost is an objective evidence of impairment. The
Group considers a decline of 30% to be significant and a period of
nine months to be prolonged. If any such evidence exists, the
cumulative loss - measured as the difference between the
acquisition cost and the current fair value, less any impairment
loss on that investment previously recognised in income statement -
is removed from equity and recognised in the income statement.
Impairment losses recognised in the income statement on equity
instruments are subsequently reversed through equity.
(s) Impairment of non-financial assets
The carrying amount of the Group's non-financial assets (other
than those subject to credit risk covered above) are reviewed at
each reporting date to determine whether there is any indication of
impairment. If any such indication exists, the asset's recoverable
amount is estimated. The recoverable amount of an asset is the
greater of its value in use or fair value less costs to sell. An
impairment loss is recognised whenever the carrying amount of an
asset exceeds its estimated recoverable amount. Impairment losses
are recognised in the income statement. Impairment losses are
reversed only if there is an indication that the impairment loss
may no longer exist and there has been a change in the estimates
used to determine the recoverable amount.
4 SIGNIFICANT ACCOUNTING POLICIES (continued)
(s) Impairment of non-financial assets (continued)
In assessing value in use, the estimated future cash flows are
discounted to their present value using a discount rate that
reflects current market assessments of the time value of money and
the risks specific to the asset or cash generating unit. An
impairment loss is recognised whenever the carrying amount of an
asset or its cash generating unit exceeds its estimated recoverable
amount. Impairment losses are recognised in the income statement.
Impairment losses are reversed only if there is an indication that
the impairment loss may no longer exist and there has been a change
in the estimates used to determine the recoverable amount.
Separately recognised goodwill is not amortised and is tested
annually for impairment and carried at cost less accumulated
impairment losses. Impairment losses on separately recognised
goodwill are not reversed.
(t) Clients' funds
These represents amounts received from customers for investments
in SPEs or project companies formed as part of its investment
management activities pending transfer to these entities. These
funds are usually disbursed on capital calls from these entities
based on its activities and requirements and are payable on demand.
Such funds held by the Group are carried at amortised cost.
(u) Current accounts
Balances in current (non-investment) accounts are recognised
when received by the Group. The transactions are measured at the
cash equivalent amount received by the Group at the time of
contracting. At the end of the accounting period, the accounts are
measured at their book value.
(v) Term financing
Term financing represents facilities from financial
institutions, and financing raised through Sukuk. Term financing
are initially measured at fair value plus transaction costs, and
subsequently measured at their
amortised cost using the effective profit rate method. Financing
cost, dividends and losses relating to the term financing are
recognised in the consolidated income statement as finance expense.
The Group derecognises a financial liability when its contractual
obligations are discharged, cancelled or expire.
(w) Financial guarantees
Financial guarantees are contracts that require the Group to
make specified payments to reimburse the holder for a loss it
incurs because a specified debtor fails to make payment when due in
accordance with the terms of a debt instrument. A financial
guarantee contract is recognised from the date of its issue. The
liability arising from a financial guarantee contract is recognised
at the present value of any expected payment to settle the
liability, when a payment under the guarantee has become probable.
The Group has issued financial guarantees to support its
development projects (note 34).
(x) Dividends
Dividends to shareholders is recognised as liabilities in the
period in which they are declared.
(y) Share capital and reserves
The Group classifies capital instruments as financial
liabilities or equity instruments in accordance with the substance
of the contractual terms of the instruments. Equity instruments of
the group comprise ordinary shares and equity component of
share-based payments and convertible instruments. Incremental costs
directly attributable to the issue of an equity instrument are
deducted from the initial measurement of the equity
instruments.
Treasury shares
The amount of consideration paid including all directly
attributable costs incurred in connection with the acquisition of
the treasury shares are recognised in equity. Consideration
received on sale of treasury shares is presented in the financial
statements as a change in equity. No gain or loss is recognised on
the Group's consolidated income statement on the sale of treasury
shares.
4 SIGNIFICANT ACCOUNTING POLICIES (continued)
(y) Share capital and reserves (continued)
Statutory reserve
The Commercial Companies Law requires that 10 percent of the
annual net profit be appropriated to a statutory reserve which is
normally distributable only on dissolution. Appropriations may
cease when the reserve reaches 50 percent of the paid up share
capital. Appropriation to statutory reserve is made when approved
by the shareholders.
(z) Equity of investment account holders
Equity of investment account holders are funds held by the Group
in unrestricted investment accounts, which it can invest at its own
discretion. The investment account holder authorises the Group to
invest the account holders' funds in a manner which the Group deems
appropriate without laying down any restrictions as to where, how
and for what purpose the funds should be invested.
The Group charges management fee (Mudarib fees) to investment
account holders. Of the total income from investment accounts, the
income attributable to customers is allocated to investment
accounts after setting aside provisions, reserves (Profit
equalisation reserve and Investment risk reserve) and deducting the
Group's share of income as a Mudarib. The allocation of income is
determined by the management of the Group within the allowed profit
sharing limits as per the terms and conditions of the investment
accounts. Only the income earned on pool of assets funded from IAH
are allocated between the owners' equity and investment account
holders. Administrative expenses incurred in connection with the
management of the funds are borne directly by the Group and are not
charged separately to investment accounts.
The Group allocates specific provision and collective provision
to owners' equity. Amounts recovered from these impaired assets is
not subject to allocation between the IAH and owners' equity.
Investment accounts are carried at their book values and include
amounts retained towards profit equalisation, investment risk
reserves, if any. Profit equalisation reserve is the amount
appropriated by the Group out of the Mudaraba income, before
allocating the Mudarib share, in order to maintain a certain level
of return to the deposit holders on the investments. Investment
risk reserve is the amount appropriated by the Group out of the
income of investment account holders, after allocating the Mudarib
share, in order to cater against future losses for investment
account holders. Creation of any of these reserves results in an
increase in the liability towards the pool of unrestricted
investment accounts.
Restricted investment accounts
Restricted investment accounts represent assets acquired by
funds provided by holders of restricted investment accounts and
their equivalent and managed by the Group as an investment manager
based on either a 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.
(aa) Revenue recognition
Revenue is measured at the fair value of consideration received
or receivable. Revenue is recognised to the extent that it is
probable that future economic benefits associated with the item of
revenue will flow to the Group, the revenue can be measured with
reliability and specific criteria have been met for each of the
Group's activities as described below:
Banking business
Income from investment banking activities 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)
(aa) 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 is recognised when a customer obtains control of the
goods or services. Determining the timing of the transfer of
control - at a point in time or over time - requires judgement.
Revenue is recognised when the goods are provided to the
customer, which was taken to be the point in time at which the
customer accepted the goods and the related risks and rewards of
ownership transferred. Revenue was recognised at that point
provided that the revenue and cost could be measured reliably, the
recovery of the consideration was probable and there was no
continuing managerial involvement with the goods.
(bb) Earnings prohibited by Shari'a
The Group is committed to avoid recognising any income generated
from non-Islamic sources. Accordingly, all non-Islamic income is
credited to a charity account where the Group uses these funds for
charitable means.
(cc) Zakah
Zakah is calculated on the Zakah base of the Group in accordance
with FAS 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.
4 SIGNIFICANT ACCOUNTING POLICIES (continued)
(dd) Employees benefits
Short-term benefits
Short-term employee benefit obligations are measured on an
undiscounted basis and are expensed as the related service is
provided. A provision is recognised for the amount expected to be
paid under short-term cash bonus or profit-sharing plans if the
Group has a present legal or constructive obligation to pay this
amount as a result of past service provided by the employee and the
obligation can be estimated reliably. Termination benefits are
recognised as an expense when the Group is committed demonstrably,
without realistic possibility of withdrawal, to a formal detailed
plan to either terminate employment before the normal retirement
date, or to provide termination benefits as a result of an offer
made to encourage voluntary redundancy.
Post employment benefits
Pensions and other social benefits for Bahraini employees are
covered by the Social Insurance Organisation scheme, which is a
"defined contribution scheme" in nature under, and to which
employees and employers contribute monthly on a
fixed-percentage-of-salaries basis. Contributions by the Bank are
recognised as an expense in consolidated income statement when they
are due.
Expatriate and certain Bahraini employees on fixed contracts are
entitled to leaving indemnities payable, based on length of service
and final remuneration. Provision for this unfunded commitment, has
been made by calculating the notional liability had all employees
left at the reporting date. These benefits are in the nature of a
"defined benefit scheme" and any increase or decrease in the
benefit obligation is recognised in the consolidated income
statement.
The Group also operates a voluntary employee saving scheme under
which the Group and the employee contribute monthly on a fixed
percentage of salaries basis. The scheme is managed and
administered by a board of trustees who are employees of the Group.
The scheme is in the nature of a defined contribution scheme and
contributions by the Group are recognised as an expense in the
consolidated income statement when they are due.
Share-based employee incentive scheme
The Bank operates a share-based incentive scheme for its
employees (the "Scheme") whereby employee are granted the Bank's
shares as compensation on achievement of certain non-market based
performance conditions and service conditions (the 'vesting
conditions'). The grant date fair value of equity instruments
granted to employees is recognised as an employee expense, with a
corresponding increase in equity over the period in which the
employees become unconditionally entitled to the share awards.
Non-vesting conditions are taken into account when estimating
the fair value of the equity instrument but are not considered for
the purpose of estimating the number of equity instruments that
will vest. Service and non-market performance conditions attached
to the transactions are not taken into account in determining fair
value but are considered for the purpose of estimating the number
of equity instruments that will vest. The amount recognised as an
expense is adjusted to reflect the number of share awards for which
the related service and non-market performance vesting conditions
are expected to be met, such that the amount ultimately recognised
as an expense is based on the number of share awards that do meet
the related service and non-market performance conditions at the
vesting date. Amount recognised as expense are not trued-up for
failure to satisfy a market condition.
(ee) Provisions
A provision is recognised if, as a result of a past event, the
Group has a present legal or constructive obligation that can be
estimated reliably, and it is probable that an outflow of economic
benefits will be required to settle the obligation.
(ff) Onerous contracts
A provision for onerous contracts is recognised when the
expected benefits to be derived by the Group from the contract are
lower than the unavoidable cost of meeting its obligations under
the contract. The provision is measured at the present value of the
lower of the expected cost of terminating the contract and the
expected net cost of continuing with the contract.
4 SIGNIFICANT ACCOUNTING POLICIES (continued)
(gg) Trade date accounting
All "regular way" purchases and sales of financial assets are
recognised on the trade date, i.e. the date that the Group commits
to purchase or sell the asset.
(hh) Investment account holder protection scheme
Funds held with the Group in unrestricted investment accounts
and current accounts of its retail banking subsidiary are covered
by the Deposit Protection Scheme (the Scheme) established by the
Central Bank of Bahrain regulation in accordance with Resolution No
(34) of 2010.
(ii) Income tax
The Group is exposed to taxation by virtue of operations of
subsidiaries. Income tax expense comprises current and deferred
tax. Income tax expense is recognised in the income statement
except to the extent that it relates to items recognised directly
in equity, in which case it is recognised in equity. Current tax is
the expected tax payable or receivable on the taxable income or
loss for the year, using tax rates enacted or substantively enacted
at the reporting date, and any adjustment to tax payable in respect
of previous years.
Deferred tax is recognised in respect of temporary differences
between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for taxation
purposes. Deferred tax is measured at the tax rates that are
expected to be applied to the temporary differences when they
reverse, based on the laws that have been enacted or substantively
enacted by the reporting date. A deferred tax asset is recognised
to the extent that it is probable that future taxable profits will
be available against which the temporary difference can be
realised. Deferred tax assets are reviewed at each reporting date
and are reduced to the extent that it is no longer probable that
the related tax benefit will be realised.
Currently, the Group does not have any material current or
deferred tax exposure that requires recognition in the consolidated
financial statements.
(jj) Ijarah
Identifying an Ijarah
At inception of a contract, the Group assesses whether the
contract is Ijarah, or contains an Ijarah. A contract is Ijarah, or
contains an Ijarah if the contract transfers the usufruct (but not
control) of an identified asset for a period of time in exchange
for an agreed consideration.
At the commencement date, the Group shall recognises a
right-of-use (usufruct) asset and a net ijarah liability
i) Right-of-use (usufruct) asset
On initial recognition, the lessee measures the right-of-use
asset at cost. The cost of the right-of-use asset comprises of:
-- The prime cost of the right-of-use asset;
-- Initial direct costs incurred by the lessee; and
-- Dismantling or decommissioning costs.
The prime cost is reduced by the expected terminal value of the
underlying asset. If the prime cost of the right-of-use asset is
not determinable based on the underlying cost method (particularly
in the case of an operating Ijarah), the prime cost at commencement
date may be estimated based on the fair value of the total
consideration paid/ payable (i.e. total Ijarah rentals) against the
right-of-use assets, under a similar transaction.
After the commencement date, the lessee measures the
right-of-use asset at cost less accumulated amortisation and
impairment losses, adjusted for the effect of any Ijarah
modification or reassessment.
The Group amortises the right-of-use asset from the commencement
date to the end of the useful economic life of the right-of-use
asset, according to a systematic basis that is reflective of the
pattern of utilization of benefits from the right-of-use asset. The
amortizable amount comprises of the right-of-use asset less
residual value, if any.
4 SIGNIFICANT ACCOUNTING POLICIES (continued)
The Group determines the Ijarah term, including the
contractually binding period, as well as reasonably certain
optional periods, including:
-- Extension periods if it is reasonably certain that the Group
will exercise that option; and/ or
-- Termination options if it is reasonably certain that the Bank
will not exercise that option.
The Group carries out impairment assessment to determine whether
the right-of-use asset is impaired and to account for any
impairment losses. The impairment assessment takes into
consideration the salvage value, if any. Any related commitments,
including promises to purchase the underlying asset, are also
considered.
ii) Net ijarah liability
The net ijarah liability comprises of the gross Ijarah
liability, plus deferred Ijarah cost (shown as a
contra-liability).
The gross Ijarah liability shall be initially recognised as the
gross amount of total Ijarah rental payables for the Ijarah term.
The rentals payable comprise of the following payments for the
right to use the underlying asset during the Ijarah term:
-- Fixed Ijarah rentals less any incentives receivable;
-- Variable Ijarah rentals including supplementary rentals; and
-- Payment of additional rentals, if any, for terminating the
Ijarah (if the Ijarah term reflects the lessee exercising the
termination option).
Advance rentals paid are netted-off with the gross Ijarah
liability.
Variable Ijarah rentals are Ijarah rentals that depend on an
index or rate, such as payments linked to a consumer price index,
financial markets, regulatory benchmark rates, or changes in market
rental rates. Supplementary rentals are rentals contingent on
certain items, such as additional rental charge after provision of
additional services or incurring major repair or maintenance. As of
31 December 2022, the Group did not have any contracts with
variable or supplementary rentals.
After the commencement date, the Group measures the net Ijarah
liability by:
-- Increasing the net carrying amount to reflect return on the
Ijarah liability (amortisation of deferred Ijarah cost);
-- Reducing the carrying amount of the gross Ijarah liability to
reflect the Ijarah rentals paid; and
-- Re-measuring the carrying amount in the event of reassessment
or modifications to Ijarah contract, or reflect revised Ijarah
rentals.
-- The deferred Ijarah cost is amortised to income over the
Ijarah terms on a time proportionate basis, using the effective
rate of return method.
After the commencement date, the Group recognises the following
in the income statement:
-- Amortisation of deferred Ijarah cost; and
-- Variable Ijarah rentals (not already included in the
measurement of Ijarah liability) as and when the triggering events/
conditions occur.
Ijarah contract modifications
After the commencement date, the Group accounts for Ijarah
contract modifications as follows:
-- Change in the Ijarah term: re-calculation and adjustment of
the right-of-use asset, the Ijarah liability, and the deferred
Ijarah cost; or
-- Change in future Ijarah rentals only: re-calculation of the
Ijarah liability and the deferred Ijarah cost only, without
impacting the right-of- use asset.
An Ijarah modification is considered as a new Ijarah component
to be accounted for as a separate Ijarah for the lessee, if the
modification both additionally transfers the right to use of an
identifiable underlying asset and the Ijarah rentals are increased
corresponding to the additional right-of-use asset. For
modifications not meeting any of the conditions stated above, the
Group considers the Ijarah as a modified Ijarah as of the effective
date and recognises a new Ijarah transaction. The Group
recalculates the Ijarah liability, deferred Ijarah cost, and
right-of-use asset, and de-recognise the existing Ijarah
transaction and balances.
4 SIGNIFICANT ACCOUNTING POLICIES (continued)
Expenses relating to underlying asset.
Operational expenses relating to the underlying asset, including
any expenses contractually agreed to be borne by the Group, are
recognised by the Group in income statement in the period incurred.
Major repair and maintenance, takaful, and other expenses
incidental to ownership of underlying assets (if incurred by lessee
as agent) are recorded as receivable from lessor.
Recognition exemptions and simplified accounting for the
lessee
The Group does not to apply the requirements of Ijarah
recognition and measurement of recognizing right-of-use asset and
lease liability for the following:
-- Short-term Ijarah; and
-- Ijarah for which the underlying asset is of low value.
Short-term Ijarah exemption is applied on a whole class of
underlying assets if they have similar characteristics and
operational utility. However, low-value Ijarah exemption is applied
on an individual asset/ Ijarah transaction, and not on group/
combination basis.
Lessor accounting for Ijara Muntahia Bittamleek contracts Refer
note 4(g)
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.
Russia-Ukraine conflict
On 24 February 2022, a military conflict between Russia and
Ukraine emerged (the "conflict"). Owing to this various countries
and international bodies have imposed trade and financial sanctions
on Russia and Belarus. Further, various organisations have
discontinued their operations in Russia. This conflict has resulted
in an economic downturn and increased volatility in commodity
prices due to disruption of supply chain.
The management has carried out an assessment of its portfolio
and has concluded that it does not have any direct exposures to /
from the impacted countries. However, indirect impact is pervasive
in the market and at this stage it is difficult to quantify the
full impact of this conflict since it depends largely on the nature
and duration of uncertain and unpredictable events, such as further
military action, additional sanctions, and reactions to ongoing
developments by global financial markets. The management will
continue to closely monitor impact of this evolving situation on
its portfolio to assess indirect impact, if any. During the year
ended 31 December 2022, the Group's investment portfolio reduced in
market value by US$ 63,312 thousand for investments carried as FVTE
and US$ 48,399 thousand for investments carried as FVTPL due to
volatile market movements. However, the Group does not trade in
such securities and does not expect to liquidate any of it's market
portfolio in short term.
(a) Judgements
Establishing the criteria for determining whether credit risk on
an exposure subject to credit risk has increased significantly
since initial recognition, determining methodology for
incorporating forward looking information into measurement of ECL
and selection and approval of models used to measure ECL is set out
in note 4(q) and note 35(a).
(i) Classification of investments
In the process of applying the Group's accounting policies,
management decides on acquisition of an investment whether it
should be classified as investments carried at fair value through
income statement or investments carried at fair value through
equity or investments carried at amortised cost. The classification
of each investment reflects the management's intention in relation
to each investment and is subject to different accounting
treatments based on such classification (note 4g(i)).
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(q) and note 35(a).
(ii) Measurement of fair value of unquoted equity investments
The group determines fair value of equity investments that are
not quoted in active markets by using valuation techniques such as
discounted cashflows, income approach and market approaches. Fair
value estimates are made at a specific point in time, based on
market conditions and information about the investee companies.
These estimates are subjective in nature and involve uncertainties
and matter of significant judgment and therefore, cannot be
determined with precision. There is no certainty about future
events such as continued operating profits and financial strengths.
It is reasonably possible based on existing knowledge, that
outcomes within the next financial year that are different from
assumptions could require a material adjustment to the carrying
amount of the investments. In case where discounted cash flows
models have been used to estimate fair values, the future cashflows
have been estimated by the management based on information form and
discussion with representatives of investee companies and based on
the latest available audited and unaudited financial statements.
The basis of valuation has been reviewed by the management in terms
of the appropriateness of the methodology, soundness of assumptions
and correctness of calculations and have been approved by the board
of directors for inclusion in the consolidated financial
statements.
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 (s). For equity-accounted
investees with indicators of impairment, the recoverable amounts is
determined based on higher of fair value less costs to sell
(FVLCTS); and value in use.
The recoverable amount for the equity-accounted investees was
determined using a combination of income and market approaches of
valuations. The objective of valuation techniques is to determine
whether the recoverable amount is greater than the carrying
amount.
6 CASH AND BANK BALANCES
31 December 31 December
2022 2021
Cash 9,098 12,153
Balances with banks 714,968 523,735
Balances with Central Bank of Bahrain:
* Current account 65,751 146,026
* Reserve account 68,422 40,557
------------ ------------
858,239 722,471
============ ============
The reserve account with the Central Bank of Bahrain of US$
68,422 thousand (2021: US$ 40,557 thousand) are not available for
day-to-day operational purposes. The cash and bank balances are net
of ECL of US$ 11 thousand (2021: US$ 24 thousand).
7 TREASURY PORTFOLIO
31 December 31 December
2022 2021
Placements with financial institutions 729,311 180,000
Derivatives
At fair value through income statement 2,675 -
Equity type investments
At fair value through equity
* Quoted sukuk 32,966 20,344
At fair value through income statement
* Structured notes 371,978 445,183
Debt type investments
At fair value through equity
* Quoted sukuk 846,205 1,635,744
At amortised cost
* Quoted sukuk * 2,240,354 860,616
* Unquoted sukuk 3,494 3,486
Less: Impairment allowances (note
23) (16,963) (14,127)
4,210,020 3,131,246
============ ============
* Short-term and medium-term facilities of US$ 1,653,875
thousand (31 December 2021: US$ 1,417,800 thousand) are secured by
quoted sukuk of US$ 2,506,041 thousand (31 December 2021: US$
2,070,315 thousand), structured notes of US$ 371,928 thousand (31
December 2021: US$ 445,183 thousand).
Reclassification
During the period, based on completion of the Group
re-organization and on review of the overall balance sheet funding
structure the Bank has reassessed its business model of managing
its yielding treasury portfolio. In anticipation of the short-term
and long-term liquidity needs, during the first quarter of 2022,
the Bank has re-assessed the objective of its treasury portfolio
wherein it would manage the underlying assets the following
distinct business models:
7 TREASURY PORTFOLIO (continued)
Reclassification (continued)
i) Held-to-collect business model
This portfolio includes short-term and long-term Sukuk and
treasury instruments that are held to meet core liquidity
requirements of high-quality liquid assets and are typically held
to their contractual maturity. Assets under this model are
classified and measured at amortised cost. Although management
considers fair value information, it does so from a liquidity
perspective, and the main focus of its review of financial
information under this business model is on the credit quality and
contractual returns.
ii) Classified as fair value through P&L
These include instruments that do not meet the contractual cash
flow characteristic and include embedded option features or
instruments held under an active trading portfolio for short-term
profit taking. This portfolio includes structured notes and other
hybrid debt-type instruments that are do not have a typical
constant yield features.
iii) Both held-to-collect and for sale business model
The remaining fixed income treasury portfolio is held under
active treasury management to collect both contract cash flows and
for sale. These include Sukuk and other treasury instruments where
yield is determinable. The key management personnel consider both
of these activities as integral in achieving the objectives set for
the Treasury business unit. This portfolio, while generating
returns primarily through yield, is also held to meet expected or
unexpected commitments, or to fund anticipated acquisitions or
growth in other business units. Assets under this model are
classified and measured at fair value through equity.
Until 31 December 2021, the Bank classified its whole Sukuk
portfolio as FVTE only under a 'both held-to-collect and for sale'
business model. The Board of Directors have assessed that the group
re-organisation has significantly changed the liquidity management
and strategy within the Bank and the above classification of the
treasury portfolio best reflects the way the assets will be managed
in order to meet the objectives of the new business model and the
way information is provided to management. Due to the above change
in the business model, the Bank has reclassified its treasury
portfolio as at 1 January 2022 as follows:
Assets subject to Fair value through Reversal of Reclassified
reclassification equity (FVTE) amounts recognized to amortised
in investment cost
fair value reserve
Sukuk 894,194 41,320 935,514
------------------- -------------------- --------------
a) Investments - At fair value through income statement
2022 2021
At 1 January 445,183 369,628
Additions 52,602 557,681
Disposals (74,734) (464,903)
Fair value changes, net (48,398) (17,223)
At 31 December 2022 374,653 445,183
======== ==============
7 TREASURY PORTFOLIO (continued)
b) Investments - At fair value through equity
2022 2021
At 1 January 1,656,088 648,991
Additions during the year 319,192 1,122,544
Disposals / Transfers (123,495) (76,033)
Amortization (7,192) (5,340)
Reclassification to amortized cost (935,514) -
Fair value changes (29,908) (34,074)
At 31 December 2022 879,171 1,656,088
========= =========
8 FINANCING ASSETS
31 December 31 December
2022 2021
Murabaha 982,170 995,324
Wakala 239 239
Mudharaba 17,336 2,576
Ijarah assets 499,865 384,312
------------ ------------
1,499,610 1,382,451
Less: Impairment allowances (64,372) (71,449)
------------ ------------
1,435,238 1,311,002
============ ============
Murabaha financing receivables are net of deferred profits of
US$ 50,133 thousand
(2021: US$ 46,130 thousand).
31 December 2022 Stage 1 Stage 2 Stage 3 Total
Financing assets (gross) 1,286,549 143,496 69,565 1,499,610
Expected credit loss (18,046) (11,990) (34,336) (64,372)
--------- -------- --------
Financing assets (net) 1,268,503 131,506 35,229 1,435,238
========= ======== ======== =========
31 December 2021 Stage 1 Stage 2 Stage 3 Total
Financing assets (gross) 1,015,953 251,500 114,998 1,382,451
Expected credit loss (19,995) (7,109) (44,345) (71,449)
--------- ------- --------
Financing assets (net) 995,958 244,391 70,653 1,311,002
========= ======= ======== =========
The movement on impairment allowances is as follows:
Impairment allowances Stage 1 Stage 2 Stage 3 Total
Balance at 1 January 2022 19,995 7,109 44,345 71,449
Net transfers 2,403 (1,411) (992) -
Net charge for the year
(note 23) (4,245) 6,292 4,888 6,935
Write-off - - (14,012) (14,012)
------- ------- -------- --------
At 31 December 2022 18,153 11,990 34,229 64,372
======= ======= ======== ========
8 FINANCING ASSETS (continued)
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 year
(note 23) (1,640) (64) 18,080 16,376
Write-off - - (12) (12)
Disposal (2) 96 (1,019) (925)
------- ------- ------- ------
At 31 December 2021 19,995 7,109 44,345 71,449
======= ======= ======= ======
9 INVESTMENT IN REAL ESTATE
31 December 31 December
2022 2021
Investment Property
* Land 560,627 529,076
* Building 152,484 63,758
------------ ------------
713,111 592,834
------------ ------------
Development Property
* Land 143,488 592,926
* Building 430,486 719,838
------------ ------------
573,974 1,312,764
------------ ------------
1,287,085 1,905,598
============ ============
(i) Investment property
Investment property includes land plots and buildings in GCC,
Europe and North Africa. Investment property of carrying amount of
US$ 39.9 million (2021: 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
2022 was US$ 931,291 thousand
(31 December 2021: US$ 766,848 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.
2022 2021
At 1 January 592,834 545,072
Reclassification from other assets - 17,338
Additions during the year 175,834 30,424
Depreciation (2,805) -
Disposals / transfers (52,752) -
-------
At 31 December 713,111 592,834
======== =======
9 INVESTMENTS IN REAL ESTATE (continued)
(ii) Development properties
This represent properties under development for sale.
2022 2021
At 1 January 1,312,764 1,296,803
Additions 88,829 21,151
Disposals (827,619) (5,190)
---------
At 31 December 2022 573,974 1,312,764
========= =========
10 PROPRIETARY INVESTMENTS
31 December 31 December
2022 2021
Equity type investments
At fair value through income statement
(i)
* Unquoted securities 9,480 10,000
------------ ------------
9,480 10,000
------------ ------------
At fair value through equity
* Listed equity securities (ii) - 13
836,251 -
* Equity type Sukuk (iv)
* Unquoted equity securities (iii) 55,893 91,425
------------ ------------
892,144 91,438
Equity-accounted investees (iv) 103,471 69,003
Impairment allowance (42) (124)
------------ ------------
1,005,053 170,317
============ ============
(i) Equity type investments - At fair value through income statement
2022 2021
At 1 January 10,000 10,000
Disposals (520) -
At 31 December 2022 9,480 10,000
====== ======
(ii) Listed equity securities at fair value through equity
2022 2021
At 1 January 13 19,060
Disposals (13) (19,047)
At 31 December 2022 - 13
==== ========
10 PROPRIETARY INVESTMENTS (continued)
(iii) Unquoted equity securities fair value through equity
2022 2021
At 1 January 91,425 108,998
Sale during the year - (21,003)
Capital repayments during the year (520) (5,856)
Additions during the year 6,050 9,286
Disposal / Transfers (41,062) -
At 31 December 55,893 91,425
======== ========
(iv) Equity-accounted investees
Equity-accounted investees represents investments in the
following material entities:
Name Country % Holding Nature of business
of incorporation
2022 2021
------- ------------------------
Capital Real Estate
Projects Company B.S.C. Kingdom of Real estate holding
(c) Bahrain 30% 40% and development
------- ------- ------------------------
Bahrain Aluminium Kingdom of - 17.92% Extrusion and sale
Extrusion Company Bahrain of aluminium products
B.S.C (c) ('Balexco')
------------------- ------- ------- ------------------------
Enshaa Development
Real Estate B.S.C. Kingdom of Holding plot of land
(c) Bahrain 33.33% 33.33% in Kingdom of Bahrain.
------------------- ------- ------- ------------------------
Infracorp B.S.C. (c) Kingdom of 40.0% - Management of Real
Bahrain Estate
------------------- ------- ------- ------------------------
2022 2021
At 1 January 69,003 78,050
Additions 80,000 -
Disposals (57,437) (6,111)
Share of profit / (loss) for the year, net 11,905 (2,936)
At 31 December 2022 103,471 69,003
======== =======
Summarised financial information of entities that have been
equity-accounted investments not adjusted for the percentage
ownership held by the Group (based on most recent management
accounts):
Infracorp B.S.C. (c) 2022 2021
Total assets 1,687,534 202,396
Total liabilities 418,012 667
Equity type sukuk 900,000 -
Total revenues 130,360 3,548
Total profit/ (loss) 33,190 (799)
Other equity-accounted investees 2022 2021
Total assets 286,223 269,790
Total liabilities 20,647 43,936
Total revenues 12,097 100,940
Total loss (4,630) (3,720)
11 CO-INVESTMENTS
31 December 31 December
2022 2021
At fair value through equity
* Unquoted equity securities 131,553 164,547
At fair value through income statement
* Unquoted equity securities 10,498 7,330
------------ ------------
142,051 171,877
============ ============
2022 2021
At 1 January 171,877 126,319
Additions 58,751 57,620
Disposals (92,195) (12,062)
Fair value change 3,618 -
At 31 December 2022 142,051 171,877
======== ========
12 RECEIVABLES AND OTHER ASSETS
31 December 31 December
2022 2021
Investment banking receivables 193,923 148,985
Receivable from equity-accounted investees 62,000 -
Financing to projects, net 26,744 42,383
Receivable on sale of development properties 16,341 59,914
Advances and deposits 61,613 58,222
Employee receivables 5,067 18,898
Profit on sukuk receivable 18,766 17,273
Lease rentals receivable 6,117 2,175
Prepayments and other receivables 208,614 199,274
Less: impairment allowance net (note 23) (9,316) (15,636)
589,869 531,488
============ ============
13 PROPERTY AND EQUIPMENT
31 December 31 December
2022 2021
Land 86,839 17,958
Buildings and other leased assets 80,709 31,323
Others including furniture, vehicles and
equipment 65,188 90,406
232,736 139,687
=========== ===========
Depreciation on property and equipment during the year was US$
thousand 3,036
(2021: US$ 2,541 thousand).
14 PLACEMENTS FROM NON-FINANCIAL INSITUTIONS AND INDIVIDUALS
These comprise placements in the form of murabaha and wakala
contracts with financial, non-financial institutions, and
individuals part of the Group's treasury activities. This includes
US$ 84.3 million (2021: US$ 84.3 million) from a non-financial
entity which is currently subject to regulatory sanctions.
15 TERM FINANCING
31 December 31 December
2022 2021
Murabaha financing 1,680,940 1,449,852
Sukuk 242,076 250,943
Ijarah financing 17,603 20,093
Other borrowings 1,579 29,779
1,942,198 1,750,667
=========== ===========
31 December 31 December
2022 2021
Current portion 987,320 1,275,981
Non-current portion 954,878 474,686
1,942,198 1,750,667
=========== ===========
Murabaha financing comprise:
Short-term and medium-term facilities of US$ 1,653,875 thousand
(31 December 2021: US$ 1,417,800 thousand) are secured by quoted
sukuk of US$ 2,506,041 thousand (31 December 2021: US$ 2,070,315
thousand) and structured notes of US$ 301,853 thousand (31 December
2021: US$ 403,986 thousand).
Sukuk
During 2020, the Group raised US$ 500,000 thousand through
issuance of unsecured sukuk certificates with a profit rate of 7.5%
p.a. repayable by 2025 till date. The Group has repurchased
cumulative sukuk of US$ 265,588 thousand. The outstanding sukuk
also includes accrued profit of US$ 7,664 thousand.
16 OTHER LIABILITIES
31 December 31 December
2022 2021
Employee related accruals 15,544 18,089
Board member allowances and accruals 1,500 2,499
Unclaimed dividends 4,754 4,574
Mudaraba profit accrual 13,184 12,992
Provision for employees' leaving indemnities 4,125 3,155
Zakah and Charity fund 5,924 5,173
Advance received from customers * 6,648 70,051
Accounts payable 266,535 136,838
Other accrued expenses and payables 105,149 151,283
423,363 404,654
============ ============
* 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
2022 2021
Placements and borrowings from financial
institutions - Wakala 25,458 231,722
Mudaraba 1,188,216 1,126,622
1,213,674 1,358,344
============ ============
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
2022 2021
Balances with banks 274,502 46,368
CBB reserve account 68,422 40,557
Placements with financial institutions 166,130 70,003
Debt type instruments - sukuk 456,310 456,310
Financing assets 248,310 745,106
------------ ------------
1,213,674 1,358,344
============ ============
As at 31 December 2022, the balance of profit equalisation
reserve and investment risk reserve was Nil (2021: Nil).
The Group does not allocate non-performing assets to IAH pool.
All the impairment allowances are allocated to owners' equity.
Recoveries from non-performing financial assets are also not
allocated to IAH accountholders. Only profits earned on pool of
assets funded from IAH are allocated between the owners' equity and
IAH. The Group did not charge any administration expenses to
investment accounts.
17 EQUITY OF INVESTMENT ACCOUNT HOLDERS (EIAH) (continued)
Following is the average percentage for profit allocation
between owner's equity and investment accountholders.
2022 2021
Mudarib IAH shares Mudarib IAH shares
share share
1 month Mudharaba * 65.01% 34.99% 82.97% 17.03%
3 months Mudharaba 52.56% 47.44% 63.20% 36.80%
6 months Mudharaba 52.53% 47.47% 58.49% 41.51%
12 months Mudharaba 42.04% 57.96% 51.13% 48.87%
18 months Mudharaba 53.58% 46.42% 46.85% 53.15%
24 months Mudharaba 24.67% 75.33% 53.01% 46.99%
36 months Mudharaba 38.08% 61.92% 43.31% 56.69%
-------- ----------- -------- -----------
* Includes savings, Al Waffer and Call Mudaraba accounts.
The investors' share of the return on jointly invested assets
and distribution to investment account holders were as follows:
2022 2021
Returns from jointly invested assets (85,200) (65,862)
Banks share as Mudarib 47,149 34,152
Return to investment account holders (38,051) (31,710)
========= =========
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 45.06% (2021: 53.73%) as against the average mudarib share
contractually agreed with IAH. Hence the Group sacrificed average
mudarib fees of 23.50% (2021: 9.97%) .
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 25,304
million (2021: USD 15,372 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 21,027 million (2021:
USD 10,145 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 4,276 million (2021: USD 4,227 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: 2022 2021
9,433,962,264 shares of US$ 0.265 each
(2021: 9,433,962,264 shares of US$ 0.265
each) 2,500,000 2,500,000
Issued and fully paid up:
3,832,593,838 shares of US$ 0.265 each
(2021: 3,775,990,064 shares of US$ 0.265
each) 1,015,637 1,000,637
------------ ------------
The movement in the share capital during the year is as
follows:
2022 2021
At 1 January 1,000,637 975,637
Issue of bonus shares 15,000 25,000
At 31 December 1,015,637 1,000,637
========== ==========
As at 31 December 2022, the Bank held 341,150,768 (31 December
2021: 213,806,890) of treasury shares. Furthermore, the bank had
vested shares of 106,641,881 for US$ 29,958,453 (2021:
11,963,207).
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:
% of total
31 December 2022 Number of Number of outstanding
Categories* shares Shareholders shares
Less than 1% 2,260,705,577 8,304 58.98%
1% up to less than 5% 1,023,998,191 14 26.72%
5% to less than 10% 547,890,070 2 14.3%
Total 3,832,593,838 8,320 100%
================ ============== =============
% of total
31 December 2021 Number of Number of outstanding
Categories* 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.
18 SHARE CAPITAL (continued)
Proposed appropriations
The Board of Directors proposes the following appropriations for
2023 subject to shareholders' and regulatory approval :
-- Cash dividend of 6.0% of the paid-up share capital net of treasury shares;
-- To allocate an amount US $ 1,110,045 to Zakat Fund;
-- To allocate an amount equivalent to 3% of net profit
attributable to shareholders of US$ 2,707,590 to charity activities
and civil society organizations;
-- Transfer of US$ 9,025,300 to statutory reserve; and,
-- Board remuneration of US$ 1,500,000.
19 SHARE GRANT RESERVE
The Bank operates a share-based incentive scheme for its
employees (the "Scheme") whereby employee are granted the Bank's
shares as compensation on achievement of certain non-market based
performance conditions and service conditions (the 'vesting
conditions'). The grant date fair value of equity instruments
granted to employees is recognised as an employee expense, with a
corresponding increase in equity over the period in which the
employees become unconditionally entitled to the share awards.
During the year the Bank has recognized US$ 6,930 thousands.
20 OTHER INCOME
Other income includes write back of liabilities no longer
required of US$ 10.31 million (2021: US$ 24.3 million) after
settlement arrangements were concluded for some of the non-banking
subsidiaries, recoveries of expenses from project companies of US$
Nil (2021: US$ 0.3 million) and income of non-financial
subsidiaries of US$ 9.6 million (2021: US$ 26.0 million).
21 STAFF COST
2022 2021
Salaries and benefits 60,232 55,924
Social insurance and end of service benefits 3,253 3,111
Share-based payments 6,930 4,196
70,415 63,231
======= =======
21 STAFF COST (continued)
As per the Group's Variable Incentive Policy, a portion of the
annual performance bonus is issued in the form of share awards to
its senior management employees. These awards include deferred
incentives in the form of shares, share purchase plans and
long-term incentive plans with different conditions. The terms of
the award, including the type of plan, extent of funding, pricing
and deferral period is determined for each year by the Board
Nomination, Remuneration and Governance Committee of the Bank.
Performance Nature of Staff coverage Summary of deferral and
year award vesting conditions
2019 - Employee Share Covered persons Shares are released rateably
2022 * 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 - Long term incentive Select Senior Management Under the future performance
2022 plan (LTIP) awards structure of the
share awards 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.
-------------------- ------------------------- --------------------------------
2022 2021
No. of Shares USD 000's No. of Shares USD 000's
-------------- -------------- ----------
Opening balance 184,325,599 17,082 245,264,354 29,763
Awarded during the year 145,490,734 22,532 42,087,569 6,429
Bonus shares 4,461,209 - 6,249,484
Forfeiture and other adjustments - - (1,369,114) (9,426)
Transfer to employees
/ settlement (130,770,332) (10,957) (107,906,694) (9,684)
-------------- ---------- -------------- ----------
Closing balance 203,507,210 28,657 184,325,599 17,082
-------------- ---------- -------------- ----------
In case of the employee share purchase plans including LTIP, the
USD amounts reported in the table above represents the gross
vesting charge of the respective schemes as determined under IFRS 2
- Share-based payments at the date of the award and not the value
of the shares. The release of these shares are subject to future
retention, performance and service conditions. The number of shares
included in the table above refer to the total employee
participation in the various plans that remain unvested and
undelivered as at the reporting date.
22 OTHER OPERATING EXPENSES
2022 2021
Investment advisory expenses 18,571 10,860
Rent 2,925 2,523
Professional and consultancy fees 13,213 10,211
Legal expenses 2,183 579
Depreciation 5,841 2,541
Expenses relating to non-banking subsidiaries 11,570 22,797
Other operating expenses 23,229 20,788
77,532 70,299
======= =======
23 IMPAIRMENT ALLOWANCES
2022 2021
Bank balances (13) 8
Treasury portfolio 2,836 8,147
Financing assets (note 8) 6,935 16,376
Co-investments (note 11) (82) 690
Other receivables (note 12) (6,320) 11,428
Commitments and financial guarantees (46) (1,068)
3,310 35,581
======== ========
24 RELATED PARTY TRANSACTIONS
Parties are considered to be related if one party has the
ability to control the other party or exercise significant
influence over the other party in making financial and operating
decisions. Related parties include entities over which the Group
exercises significant influence, major shareholders, directors and
executive management of the Group. A significant portion of the
Group's management fees are from entities over which the Group
exercises influence (assets under management). Although these
entities are considered related parties, the Group administers and
manages these entities on behalf of its clients, who are by and
large third parties and are the economic beneficiaries of the
underlying investments. The transactions with these entities are
based on agreed terms.
The significant related party transactions during the year and
balances as at year end included in these consolidated financial
statements are as follows:
Related parties
---------------------------------------------- ---------------- -------
Significant Assets under
shareholders management
/ entities including
Associates in which special purpose
/ Joint Key management directors and other
2022 venture personnel are interested entities Total
-----------
Assets
Cash and bank
balances - - - 12,777 12,777
Treasury portfolio 70,656 70,656
Financing assets - 8,411 38,181 18,201 64,793
Proprietary investment 836,251 - 6,058 - 842,309
Co investment - - - 142,665 142,665
Receivables and
other assets 62,045 5,326 721 198,231 266,323
Liabilities
Current account 1,918 183 2,003 13,973 18,077
Placements from
financial, non-financial
institutions and
individuals - 3,379 22,697 24,077 50,153
Payables and accruals 36,009 1,565 - 139,529 177,103
Equity of investment
account holders 3,239 2,875 33,328 148,114 187,556
24 RELATED PARTY TRANSACTIONS (continued)
Related parties
Assets under
Significant management
shareholders including
/ entities special
Associates in which purpose
/ Joint Key management directors and other
2022 venture personnel are interested entities Total
Income
Income from investment
banking - - - 124,244 124,244
Income from commercial
banking - - - - -
* Income from financing - 525 1,263 - 1,788
* Fee and other income - - - - -
* Less: Return to investment account holders 27 101 8,631 11 8,770
* Less: Finance expense - - - - -
Income from proprietary
and co-investments 27,246 - 1,932 25,154 54,332
Treasury and other
income 8 - - 797 805
Expenses
Operating expenses
Staff Cost - (8,116)* - - (8,116)
Finance Cost - (6) (3,989) - (3,995)
* The amount presented excluded bonus to key management
personnel for 2022 as allocation has not been finalized at the date
of approval of these consolidated financial statements.
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
Cash and bank
balances - - - 15,196 15,196
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
Current account 326 902 592 15,427 17,247
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
24 RELATED PARTY TRANSACTIONS (continued)
Related parties
Assets under
Significant management
shareholders including
/ entities special
Associates in which purpose
/ Joint Key management directors and other
2021 venture personnel are 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 4 120 8,017 19,727 27,868
Treasury and other
income - - (440) 1,742 1,302
Expenses
Operating expenses
* Staff Cost - (5,671) - - (5,671)
* Finance Expenses - (1,676) - - (1,676)
Key management personnel
Key management personnel of the Group comprise of the Board of
Directors and key members of management having authority and
responsibility for planning, directing and controlling the
activities of the Group and its significant banking subsidiary.
During the year, there were no direct participation of directors
in investments promoted by the Group.
The key management personnel compensation is as follows:
2022 2021
Board members' remuneration, fees and allowance 2,981 2,455
Salaries, other short-term benefits and
expenses 15,203 14,862
Post-employment benefits 289 275
25 ASSETS UNDER MANAGEMENT AND CUSTODIAL ASSETS
i. The Group provides corporate administration, investment
management and advisory services to its project companies, which
involve the Group making decisions on behalf of such entities.
Assets that are held in such capacity are not included in these
consolidated financial statements. At the reporting date, the Group
had assets under management of US$ 7,845 million (31 December 2021:
US$ 5,297 million). During the year, the Group had charged
management fees and performance fee amounting to US$ 33,536
thousand (31 December 2021: US$ 8,083 thousand).
ii. Custodial assets comprise assets of the discretionary
portfolio management ('DPM') accounts amounting to US$ 663,201
thousand, of which US$ 639,124 thousand related to the Bank's
investment products.
26 EARNINGS PER SHARE
Basic earnings per share
Basic earnings per share is calculated by dividing the profit
for the year by the weighted average number of equity shares
outstanding during the year.
The weighted average number of ordinary equity shares for the
comparative periods presented are adjusted for the issue of shares
during the year without corresponding change in resources.
2022 2021
In thousands of shares
Weighted average number of shares for basic
and diluted earnings 3,426,503 3,412,835
Diluted earnings per share
Diluted earnings per share is calculated by adjusting the
weighted average number of ordinary shares outstanding to assume
conversion of all dilutive potential ordinary shares. Potential
ordinary shares are considered to be dilutive when, and only when,
their conversion to ordinary shares would decrease earnings per
share or increase the loss per share.
27 ZAKAH AND SOCIAL RESPONSIBILITY
Zakah is directly borne by the shareholders on distributed
profits and investors in restricted investment accounts. The Bank
does not collect or pay Zakah on behalf of its shareholders and
investors in restricted investment accounts. Zakah payable by the
shareholders is computed by the Bank on the basis of the method
prescribed (net assets method) by the Bank's Shari'a Supervisory
Board and notified to shareholders annually. The 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.
28 EARNINGS PROHIBITED BY SHARI'A
The Group is committed to avoid recognising any income generated
from non-sharia sources. Accordingly, all non-sharia income is
credited to a charity account where the Group uses these funds for
charitable means. Movements in non-sharia funds are shown in the
statement of sources and uses of charity funds. The Group receives
interest from deposits placed with the CBB and other incidental or
required deposits. These earnings are utilised exclusively for
charitable purposes and amount to US$ 88 thousand (2021: US$ 31
thousand).
29 SHARI'A SUPERVISORY BOARD
The Group's Shari'a Supervisory Board comprise four Islamic
scholars who review the Group's compliance with general Shari'a
principles and specific fatwas, rulings and guidelines issued.
Their review includes examination of evidence relating to the
documentation and procedures adopted by the Group to ensure that
its activities are conducted in accordance with Islamic Shari'a
principles.
30 MATURITY PROFILE
The table below shows the maturity profile of the Group's assets
and unrecognised commitments on the basis of their contractual
maturity. Where such contractual maturity is not available, the
Group has considered expected realisation / settlement profile for
assets and liabilities respectively. For undiscounted contractual
maturity of financial liabilities, refer note 36.
6 months
Up to 3 to to 1 1 to Over
31 December 2022 3 months 6 months year 3 years 3 years Total
Assets
Cash and bank balances 826,393 7,374 13,552 10,920 - 858,239
Treasury portfolio 1,291,520 249,557 447,769 417,228 1,803,946 4,210,020
Financing assets 156,765 56,091 164,272 291,676 766,434 1,435,238
Real estate investment - - - - 1,287,085 1,287,085
Proprietary investments - - - 927,704 77,349 1,005,053
Co-investments - 1,852 - 140,199 - 142,051
Receivables and
prepayments 213,908 105,435 56,540 50,526 163,460 589,869
Property and equipment - - - - 232,736 232,736
Total assets 2,488,586 420,309 682,133 1,838,253 4,331,010 9,760,291
Liabilities
Client's funds 87,488 - 35,812 - - 123,300
Placements from
financial institutions 2,361,964 516,253 639,419 210,554 62,680 3,790,870
Placements from
non-financial institutions
and individuals 159,739 121,865 251,034 423,025 108,595 1,064,258
Current account 5,497 16,623 - 54,557 54,557 131,234
Term financing 519,046 192,074 276,200 649,172 305,706 1,942,198
Payables and accruals 227,764 116,763 36,390 42,446 - 423,363
Total liabilities 3,361,498 963,578 1,238,855 1,379,754 531,538 7,475,223
Equity of investment
account holders 99,588 35,406 86,546 288,470 703,664 1,213,674
Off-balance sheet
items
Commitments 56,565 4,098 48,923 95,664 234 205,484
Restricted investment
accounts - - - 4,162 - 4,162
30 MATURITY PROFILE (continued)
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 1,067,797 91,561 31,243 454,734 1,485,911 3,131,246
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 20,434 96,077 170,317
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 2,230,789 179,489 323,290 2,186,251 3,163,867 8,083,686
Liabilities
Client's funds 152,925 - 63,837 - - 216,762
Placements from
financial institutions 1,158,602 591,674 415,501 18,814 93,889 2,278,480
Placements from
non-financial institutions
and individuals 208,648 143,993 237,520 171,883 11,568 773,612
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 2,230,553 957,052 1,473,460 348,264 547,892 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 - - - 4,162 - 4,162
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2022 US$ 000's
31 CONCENTRATION OF ASSETS, LIABILITIES AND EQUITY OF INVESTMENT ACCOUNT HOLDERS
(a) Industry sector
Banks and
31 December 2022 financial institutions Real estate Others Total
Assets
Cash and bank balances 845,828 11,596 815 858,239
Treasury portfolio 3,134,903 73,182 1,001,935 4,210,020
Financing Assets 107,608 561,420 766,210 1,435,238
Real estate investments - 1,287,085 - 1,287,085
Proprietary investment 757,834 229,337 17,882 1,005,053
Co-investment 130,833 11,218 - 142,051
Receivables and prepayments 139,696 97,951 352,222 589,869
Property and equipment 2,189 37,165 193,382 232,736
Total assets 5,118,891 2,308,954 2,332,446 9,760,291
Liabilities
Client's funds 119,375 - 3,925 123,300
Placements from financial institutions 3,790,870 - - 3,790,870
Placements from non-financial institutions and
individuals 9,821 1,477 1,052,960 1,064,258
Customer accounts 4,138 18,735 108,361 131,234
Term financing 1,926,760 15,438 - 1,942,198
Payables and accruals 240,730 50,054 132,579 423,363
Total liabilities 6,091,694 85,704 1,297,825 7,475,223
Equity of Investment account holders 272,093 51,262 890,319 1,213,674
Off-balance sheet items
Commitments - 117,301 88,183 205,484
Restricted investment accounts - 4,162 - 4,162
Notional amount of Derivative 58,500 - - 58,500
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2022 US$ 000's
31 Concentration of assets, liabilities and equity of investment
account holders (continued)
a Industry sector (continued)
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 2,265,505 6,012 859,729 3,131,246
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 - 123,459 46,858 170,317
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 4,212,944 2,031,500 1,839,242 8,083,686
Liabilities
Client's funds 212,789 - 3,973 216,762
Placements from financial institutions 2,278,480 - - 2,278,480
Placements non-financial institutions and individuals 7,163 790 765,659 773,612
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 4,340,628 172,759 1,043,834 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 - 1,331 2,831 4,162
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2022 US$ 000's
31 Concentration of assets, liabilities and equity of investment
account holders (continued)
b Geographic region
North
31 December 2022 GCC countries MENA Asia America Others Total
Assets
Cash and bank balances 691,915 361 40 74,484 91,439 858,239
Treasury portfolio 3,318,666 135,813 - 108,785 646,756 4,210,020
Financing assets 1,379,761 39,526 - 12 15,939 1,435,238
Real estate investment 1,037,847 232,284 7,609 - 9,345 1,287,085
Proprietary investment 993,219 - - - 11,834 1,005,053
Co-investments 46,780 - 505 93,028 1,738 142,051
Receivables and prepayments 550,502 22,387 3,477 9,873 3,630 589,869
Property and equipment 224,358 - - 8,244 134 232,736
Total assets 8,243,048 430,371 11,631 294,426 780,815 9,760,291
Liabilities
Client's funds 119,375 - - - 3,925 123,300
Placements from financial, 3,790,870 - - - - 3,790,870
Placements non-financial institutions
and individuals 903,367 160,666 - 225 - 1,064,258
Customer accounts 131,019 - 215 - - 131,234
Financing liabilities 773,566 - - 447,647 720,985 1,942,198
Payables and accruals 257,100 6,010 - 141,637 18,616 423,363
Total liabilities 5,975,297 166,676 215 589,509 743,526 7,475,223
Equity of investment account holders 1,191,653 - 21,910 - 111 1,213,674
Off-balance sheet items -
Commitments 142,992 - - 62,492 - 205,484
Restricted investment accounts 4,022 - - 140 - 4,162
Notional amount of Derivative - - - 58,500 - 58,500
Concentration by location for assets is measured based on the
location of the underlying operating assets, and not based on the
location of the investment (which is generally based in tax
efficient jurisdictions).
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2022 US$ 000's
31 Concentration of assets, liabilities and equity of investment
account holders (continued)
b Geography sector (continued)
31 December 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 2,583,409 95,093 100,244 61,575 290,925 3,131,246
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 116,509 - - - 53,808 170,317
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 institutions 2,278,480 - - - - 2,278,480
Placements non-financial institutions
and individuals 688,673 84,714 - 225 - 773,612
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 4,282,248 153,518 68,081 405,124 648,250 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 1,529 - - - 2,633 4,162
Concentration by location for assets is measured based on the
location of the underlying operating assets, and not based on the
location of the investment (which is generally based in tax
efficient jurisdictions).
32 OPERATING SEGMENTS
The Group has three distinct operating segments, Real Estate
Development, Investment Banking and Commercial Banking, which are
the Group's strategic business units. The strategic business units
offer different products and services and are managed separately
because they require different strategies for management and
resource allocation within the Group. For each of the strategic
business units, the Group's Board of Directors (chief operating
decision makers) review internal management reports on a quarterly
basis.
The following summary describes the operations in each of the
Group's operating reportable segments:
-- Investment Banking: The Banking segment of the Group is
focused on private equity and asset management domains. The private
equity activities include acquisition of interests in unlisted or
listed businesses at prices lower than anticipated values. The
asset management unit is responsible for identifying and managing
investments in yielding real estate in the target markets of the
GCC. The investment banking activities focuses on providing
structuring capabilities in Islamic asset-backed and equity capital
markets, Islamic financial advisory and mid-sized mergers and
acquisition transactions.
-- Commercial Banking: These include commercial and corporate
banking, retail banking, wealth management, structured investment
products and project financing facilities of the Group's commercial
banking subsidiary.
-- Proprietary and treasury - All common costs and activities
treasury and residual investment assets, excluding those that are
carried independently by the reportable segments which are included
within the respective segment, are considered as part of the
proprietary and treasury activities of the Group.
The performance of each operating segment is measured based on
segment results and are reviewed by the management committee and
the Board of Directors on a quarterly basis. Segment results is
used to measure performance as management believes that such
information is most relevant in evaluating the results of certain
segments relative to other entities that operate within these
industries. Inter-segment pricing, if any is determined on an arm's
length basis.
The Group classifies directly attributable revenue and cost
relating to transactions originating from respective segments as
segment revenue and segment expenses respectively. Indirect costs
is allocated based on cost drivers/factors that can be identified
with the segment and/ or the related activities. The internal
management reports are designed to reflect revenue and cost for
respective segments which are measured against the budgeted
figures. The unallocated revenues, expenses, assets and liabilities
related to entity-wide corporate activities and treasury activities
at the Group level. Segment revenue and expenses were net-off inter
segment revenue and expenses.
The Group has primary operations in Bahrain and the Group does
not have any significant independent overseas branches/divisions in
the banking business. The geographic concentration of assets and
liabilities is disclosed in note 32 (b) to the consolidated
financial statements.
32 OPERATING SEGMENTS (continued)
Information regarding the results of each reportable segment is
included below:
Investment Commercial Proprietary
banking banking and Treasury Total
31 December 2022
Segment revenue 120,503 78,972 242,195 441,670
Segment expenses (including impairment allowances) (69,675) (40,275) (234,013) (343,963)
Segment result 50,828 38,697 8,182 97,707
Segment assets 201,828 3,785,535 5,772,928 9,760,291
Segment liabilities 171,359 1,761,879 5,541,985 7,475,223
Equity of investment account holders - 1,189,016 24,658 1,213,674
Other segment information
Impairment allowance - 4,770 (1,460) 3,310
Equity accounted investees - 5,303 98,168 103,471
Commitments 55,485 142,992 7,007 205,484
Net of intercompany eliminations.
32 OPERATING SEGMENTS (continued)
Investment Commercial Proprietary
banking banking and Treasury Total
31 December 2021
Segment revenue 110,387 71,825 216,536 398,748
Segment expenses (including impairment allowances) (73,943) (43,144) (189,044) (306,131)
Segment result 36,444 28,681 27,492 92,617
Segment assets 151,814 3,095,984 4,835,888 8,083,686
Segment liabilities 70,712 1,228,774 4,257,735 5,557,221
Equity of investment account holders - 1,126,622 231,722 1,358,344
Other segment information
Impairment allowance 15,260 12,693 7,628 35,581
Equity accounted investees 18,339 44,900 5,764 69,003
Commitments - 135,342 20,086 155,428
33 FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is an amount for which an asset could be exchanged,
or a liability settled, between knowledgeable, willing parties in
an arm's length transaction. This represents the price that would
be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement
date.
Underlying the definition of fair value is a presumption that an
enterprise is a going concern without any intention or need to
liquidate, curtail materially the scale of its operations or
undertake a transaction on adverse terms.
As at 31 December 2022 and 31 December 2021, the fair value of
bank balances, placements with financial institutions, other
financial assets, investors' fund, placements from financial and
other institutions and other financial liabilities are not expected
to be materially different from their carrying values as these are
short term in nature and are re-priced frequently to market rates,
where applicable. Investment securities carried at fair value
through income statement are carried at their fair values
determined using quoted market prices and internal valuation
models.
The fair value of quoted Sukuk carried at amortised cost (net of
impairment allowances) of USD 2,240,360 thousand (31 December 2021:
USD 860,616 thousand) is USD 2,198,848 thousand as at 31 December
2022 (31 December 2021: USD 883,618 thousand). There are no
material changes in the fair values of the Sukuk's carried at
amortised cost subsequent to the reporting date until the date of
signing the condensed consolidated interim financial information
for the period ended 31 December 2022.
Fair value hierarchy
The table below analyses the financial instruments carried at
fair value, by valuation method. The different levels have been
defined as follows:
-- Level 1: quoted prices (unadjusted) in active markets for identical assets and liabilities
-- Level 2: inputs other than quoted prices included within
Level 1 that are observable for the asset or liability, either
directly (i.e.as prices) or indirectly (i.e. derived from
prices)
-- Level 3: inputs for the asset or liability that are not based
on observable market data (unobservable inputs).
33 FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
b) FAIR VALUE HIERARCHY (continued)
31 December 2022 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 9,480 - - 9,480
* equity 836,251 - 55,893 892,144
845,731 - 55,893 901,624
(ii) Treasury portfolio
Investment securities carried
at fair value through:
* income statement - 374,653 - 374,653
* equity 879,171 - - 879,171
879,171 374,653 - 1,253,824
iii) Co-investments
Investment securities carried
at fair value through equity 131,553 131,553
Investment securities carried
at fair value through income
statement 10,498 10,498
142,051 142,051
1,724,902 374,653 197,944 2,297,499
31 December 2021 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 - - - -
* equity 13 - 91,425 91,438
13 - 91,425 91,438
(iv) Treasury portfolio
Investment securities carried
at fair value through:
* income statement - 445,183 - 445,183
* equity 1,656,088 - - 1,656,088
1,656,088 445,183 - 2,101,271
iii) Co-investments
Investment securities carried
at fair value through equity - - 164,547 164,547
Investment securities carried
at fair value through income
statement - - 7,330 7,330
- - 171,877 171,877
1,656,101 445,183 263,302 2,364,586
33 FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
The table below shows the reconciliation of movements in value
of investments measured using Level 3 inputs:
2022 2021
At 1 January 263,302 390,567
Total gains / (losses) in income statement - (17,223)
Transfer from Level 2 - (155,250)
Disposals at carrying value (54,521) (27,531)
Purchases 37,561 69,129
Fair value changes during the year (48,398) 3,610
At 31 December 197,944 263,302
The potential effect of using reasonable possible alternative
assumptions for fair valuing certain equity investments classified
as level 3 are summarised below:
Valuation technique Key unobservable Fair value Reasonable Increase
used inputs at 31 December possible shift / (decrease)
2022 +/- (in average in valuation
input)
US$ '000
Market multiples
approach Price to book 5,609 +/- 5% 280 / (280)
---------------
Market multiples Enterprise value
approach to EBITDA 6,151 +/- 5% 308 / (308)
---------------
Market multiples Capitalised
approach Earnings Method 2,814 +/- 5% 141 / (141)
---------------
Comparable Companies
trading Multiple
Market multiples and Discounted
approach Cashflows 16,505 +/- 5% 825 / (825)
Discounted cash Terminal growth
flow rate 15,003 +/- 5% 750 / (750)
---------------
Discounted cash Weighted average
flow cost of capital 69,085 +/- 5% 3,454 / (3,454)
---------------
Adjusted Net Asset
Value 82,777 +/- 5% 4,139 / (4,139)
---------------
197,944
===============
34 COMMITMENTS AND CONTINGENCIES
The commitments contracted in the normal course of business of
the Group are as follows:
31 December 31 December
2022 2021
Undrawn commitments to extend finance 100,422 95,347
Financial guarantees 49,044 39,995
Capital commitments for infrastructure
development projects 55,485 16,171
Commitment to lend 533 3,915
205,484 155,428
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 2022 due to the performance of any of its
projects.
Litigations and claims
The Group has a number of claims and litigations filed against
it in connection with projects promoted by the Bank in the past and
with certain transactions. Further, claims against the Bank also
have been filed by former employees. Based on the advice of the
Bank's external legal counsel, the management is of the opinion
that the Bank has strong grounds to successfully defend itself
against these claims. Appropriate provision have been made in the
books of accounts. No further disclosures regarding contingent
liabilities arising from any such claims are being made by the Bank
as the directors of the Bank believe that such disclosures may be
prejudicial to the Bank's legal position.
35 FINANCIAL RISK MANAGEMENT
Overview
Financial assets of the Group comprise bank balances, placements
with financial and other institutions, investment securities and
other receivable balances. Financial liabilities of the Group
comprise investors' funds, placements from financial and other
institutions, term financing and other payable balances. Accounting
policies for financial assets and liabilities are set out in note
4.
The Group has exposure to the following risks from its use of
financial instruments:
-- credit risk;
-- liquidity risk;
-- market risks; and
-- operational risk
This note presents information about the Group's exposure to
each of the above risks, the Bank's objectives, policies and
processes for measuring and managing risk, and the Group's
management of capital. The material subsidiaries consolidated in
these financial statements have independent risk management
frameworks which is monitored by the respective Board of Directors
of the subsidiaries. Accordingly, such risk management policies,
procedures and practices are not included in these consolidated
financial statements.
Risk management framework
The key element of our risk management philosophy is for the
Risk Management Department ('RMD') to provide independent
monitoring and control while working closely with the business
units which ultimately own the risks. The Head of Risk Management
reports to the Board Audit and Risk Committee.
35 FINANCIAL RISK MANAGEMENT (continued)
The Board of Directors has overall responsibility for
establishing our risk culture and ensuring that an effective risk
management framework is in place. The Board has delegated its
authority to the Board Audit and Risk Committee (ARC), which is
responsible for implementing risk management policies, guidelines
and limits and ensuring that monitoring processes are in place. The
RMD, together with the Internal Audit and Compliance Departments,
provide independent assurance that all types of risk are being
measured and managed in accordance with the policies and guidelines
set by the Board of Directors.
The RMD submits a quarterly Risk Overview Report along with a
detailed Liquidity Risk Report to the Board of Directors. The Risk
Overview Report describes the potential issues for a wide range of
risk factors and classifies the risk factors from low to high. The
Liquidity Risk Report measure the Group's liquidity risk profile
against policy guidelines and regulatory benchmarks. An additional
report is prepared by the respective investment units that give
updated status and impairment assessment of each investment, a
description of significant developments on projects or issues as
well as an update on the strategy and exit plan for each
project.
a) Credit risk
Credit risk is the risk of financial loss to the Group if a
customer or counterparty to a financial instrument fails to meet
its contractual obligations, and arises principally from the
Group's, placements with financial institutions, financing 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).
Management of investment and credit risk
The Board of Directors has delegated responsibility for the
management of credit risk to its Board Investment Committee (BIC).
This committee establishes operating guidelines and reviews and
endorses the Management Investment and Credit Committee
recommendations for investment strategies, products and services.
Its actions are in accordance with the investment policies adopted
by the Board of Directors.
The RMD is responsible for oversight of the Group's credit risk,
including:
-- Ensuring that the Group has in place investment and credit
policies, covering credit assessment, risk reporting, documentary
and legal procedures, whilst the Compliance Department is
responsible for ensuring compliance with regulatory and statutory
requirements.
-- Overseeing the establishment of the authorisation structure
for the approval and renewal of investment and credit facilities.
Authorisation limits are governed by the Board approved Delegated
Authority Limits (DAL) Matrix.
-- Reviewing and assessing credit risk. Risk Management
department assesses all investment and credit exposures in excess
of designated limits, prior to investments / facilities being
committed. Renewals and reviews of investments / facilities are
subject to the same review process.
35 FINANCIAL RISK MANAGEMENT (continued)
a) Credit risk (continued)
-- Ongoing review of credit exposures. The credit review of the
commercial banking exposure is managed and governed by the Board of
Directors of KHCB and is consistent with the practices appropriate
for retail banks. The risk assessment approach is used by the
Parent Bank in determining where impairment provisions may be
required against specific investment / credit exposures at its
board. The current risk assessment process classifies credit
exposures into two broad categories "Unimpaired" and "Impaired",
reflecting risk of default and the availability of collateral or
other credit risk mitigation. Risk is assessed on an individual
basis for each investment / receivable and is reviewed at least
once a year. The Group does not perform a collective assessment of
impairment for its credit exposures as the credit characteristics
of each exposure is considered to be different. Risk profile of
exposures are subject to regular reviews.
-- Reviewing compliance of business units with agreed exposure
limits, including those for selected industries, country risk and
product types. Providing advice, guidance and specialist skills to
business units to promote best practice throughout the Group in the
management of investment / credit risk.
The Risk Management Department works alongside the Investment
Department at all stages of the deal cycle, from pre-investment due
diligence to exit, and provides an independent review of every
transaction. A fair evaluation of investments takes place
periodically with inputs from the Investment department. Quarterly
updates of investments are presented to the Board of Directors or
their respective committees. Regular audits of business units and
Group credit processes are undertaken by Internal Audit.
35 FINANCIAL RISK MANAGEMENT (continued)
a) Credit risk (continued)
Exposures subject to credit risk
Stage Stage Stage
31 December 2022 1 2 3 Total
Balances with banks and
placements with financial
institutions
Grade 1 -6 Low-Fair Risk 1,587,198 361 - 1,587,559
- - - -
Gross carrying amount 1,587,198 361 - 1,587,559
Less expected credit losses 27 2 - 29
Net carrying amount 1,587,171 359 - 1,587,530
Financing facilities
Grade 8 -10 Impaired - - 51,756 51,756
Past due but not impaired
Grade 1-6 Low-Fair Risk 175,377 69,175 - 244,552
Grade 7 Watch list - 25,316 - 25,316
Past due comprises :
Up to 30 days 66,257 49,679 - 115,936
30-60 days 20,446 2,645 - 23,091
60-90 days 88,674 42,167 - 130,841
Neither past due nor impaired
Grade 1-6 Low-Fair Risk 658,098 12,958 - 671,056
Grade 7 Watch list 213 6,851 - 7,064
Gross carrying amount 833,688 114,300 51,756 999,744
Less expected credit losses 15,842 10,155 25,663 51,660
Net carrying amount 817,846 104,145 26,093 948,084
Assets acquired for leasing
Grade 8-10 impaired - - 17,809 17,809
Past due but not impaired
Grade 1-6 Low-Fair Risk 78,790 4,236 - 83,026
Grade 7 Watch list 194 12,003 - 12,197
Past due comprises :
Up to 30 days 39,854 738 - 40,592
30-60 days 5,206 5,785 - 10,991
60-90 days 33,926 9,716 - 43,642
Neither past due nor impaired
Grade 1-6 Low-Fair Risk 344,899 26,435 - 371,334
Grade 7 Watch list - 15,497 - 15,497
35 FINANCIAL RISK MANAGEMENT (continued)
a) Credit risk (continued)
31 December 2022 Stage Stage Stage Total
1 2 3
Gross carrying amount 423,885 58,171 17,809 499,865
Less expected credit losses 2,205 2,655 7,851 12,711
Net carrying amount 421,680 55,516 9,958 487,154
Investment in Sukuk
Grade 8 -10 Impaired - - 3,496 3,496
Grade 1-6 Low-Fair Risk 2,930,803 156,004 - 3,086,807
Gross carrying amount 2,930,803 156,004 3,496 3,090,303
Less: expected credit losses 4,940 8,796 3,496 17,232
Net carrying amount 2,925,863 147,208 - 3,073,071
Commitments and financial
guarantees
Grade 8 -10 Impaired
Grade 1-6 Low-Fair Risk 204,189 939 16 205,144
Grade 7 Watch list - 342 - 342
Gross carrying amount (note
35) 204,189 1,281 16 205,486
Less: expected credit losses - 3 - 3
Net carrying amount 204,189 1,278 16 205,483
Total net carrying amount 5,956,746 308,508 36,067 6,301,321
35 FINANCIAL RISK MANAGEMENT (continued)
a) Credit risk (continued)
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 97,592 964,132
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
35 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 3,773,881 171,079 23,016 3,967,976
Significant increase in credit risk
When determining whether the risk of default on an exposure
subject to credit risk has increased significantly since initial
recognition, the Bank considers reasonable and supportable
information that is relevant and available without undue cost or
effort. This includes both quantitative and qualitative information
and analysis, based on the Bank's historical experience and expert
credit assessment and including forward-looking information.
In determining whether credit risk has increased significantly
since initial recognition, the following criteria are
considered:
-- Downgrade in risk rating according to the approved ECL policy;
-- Facilities restructured during previous twelve months;
-- Qualitative indicators; and
-- Facilities overdue by 30 days as at the reporting date
subject to rebuttal in deserving circumstances.
Credit risk grades
The Group allocates each exposure to credit risk grade based on
a variety of data that is determined to be predictive of the risk
of default and applying experienced credit judgement. Credit risk
grades are defined using qualitative and quantitative factors that
are indicative of risk of default. These factors vary depending on
the nature of the exposure and the type of borrower.
Credit risk grades are defined and calibrated such that the risk
of default occurring increases exponentially as the credit risk
deteriorates so, for example, the difference in risk of default
between credit risk grades 1 and 2 is smaller than the difference
between credit risk grades 2 and 3.
Each exposure is allocated to a credit risk grade at initial
recognition based on available information about the borrower.
Exposures are subject to ongoing monitoring, which may result in an
exposure being moved to a different credit risk grade. Exposers are
rated 1 to 10 with 1 to being good and 7 being watch list and 8, 9
and 10 default grades. The monitoring typically involves use of the
following data.
35 FINANCIAL RISK MANAGEMENT (continued)
Corporate exposures
-- Information obtained during periodic review of customer
files- e.g. audited financial statements, management accounts,
budgets and projections. Examples of areas of particular focus are:
gross profit margins, financial leverage ratios, debt service
coverage, compliance with covenants, quality of management, senior
management changes
-- Data from credit reference agencies. press articles, changes in external credit ratings
-- Quoted bond and credit default swap (CDS) prices for the borrower where available
-- Actual and expected significant changes in the political,
regulatory and technological environment of the borrower or in its
business activities
Retail exposures
-- Internally collected data on customer behaviour -e.g. utilisation of credit card facilities
-- Affordability metrics
-- External data from credit reference agencies including industry-standard credit scores
All exposures
-- Payment record this includes overdue status as well as a
range of variables about payment ratios
-- Utilisation of the granted limit
-- Requests for and granting of forbearance
-- Existing and forecast changes in business, financial and economic conditions
Generating the term structure of PD
Credit risk grades are a primary input into the determination of
the term structure of PD for exposures. The Group collects
performance and default information about its credit risk exposures
analyzed by jurisdiction or region and by type of product and
borrower as well as by credit risk grading.
The Group employs statistical models to analyze the data
collected and generate estimates of the remaining lifetime PD of
exposures and how these are expected to change as a result of the
passage of time.
This analysis includes the identification and calibration of
relationships between changes in default rates and changes in key
macro-economic factors as well as in-depth analysis of the impact
of certain other factors (e.g. forbearance experience) on the risk
of default. For most exposures, key macro-economic indicators
include: GDP growth, benchmark profit rates and oil price. For
exposures to specific industries and/or regions. The analysis may
extend to relevant commodity and/or real estate prices.
Based on advice from the Group Market Risk Committee and
economic experts and consideration of a variety of external actual
and forecast information, the Group formulates a 'base case' view
of the future direction of relevant economic variables as well as a
representative range of other possible forecast scenarios (see
discussion below on incorporation of forward-looking information).
The Group then uses these forecasts to adjust its estimates of
PDs.
35 FINANCIAL RISK MANAGEMENT (continued)
Determining whether credit risk has increased significantly.
The criteria for determining whether credit risk has increased
significantly vary by portfolio and include quantitative changes in
PDs and qualitative factors, including a backstop based on
delinquency. Using its expert credit judgement and, where possible,
relevant historical experience, the Group may determine that an
exposure has undergone a significant increase in credit risk based
on particular qualitative indicators that it considers are
indicative of such and whose effect may not otherwise be fully
reflected in its quantitative analysis on a timely basis.
Qualitative indicators, including different criteria used for
different portfolios credit cards, commercial real estate etc.
As a backstop, the Group considers that a significant increase
in credit risk occurs no later than when an asset is more than 30
days past due. Days past due are determined by counting the number
of days since the earliest elapsed due date in respect of which
full payment has not been received. Due dates are determined
without considering any grace period that might be available to the
borrower. For the purpose of calculating ECL for the year ended 31
December 2021, the Bank has applied the backstop of 74 days as
against 30 days, in line with the CBB concessionary measures .
The Group monitors the effectiveness of the criteria used to
identify significant increases in credit risk by regular reviews to
confirm that:
-- the criteria are capable of identifying significant increases
in credit risk before an exposure is in default;
-- the criteria do not align with the point in time when an
asset becomes 30 days past due; and
-- there is no unwarranted volatility in loss allowance from transfers between 12-month PD (stage 1) and lifetime PD (stage 2).
Definition of default
The Group considers an exposure subject to credit risk to be in
default when:
-- the borrower is unlikely to pay its credit obligations to the
Group in full, without recourse by the Group to actions such as
realising security (if any is held);
-- the borrower is more than 90 days past due on any material obligation to the Group; or
-- It is becoming probable that the borrower will restructure
the asset as a result of bankruptcy due to the borrower's inability
to pay its credit obligation .
In assessing whether the borrower is in default, the Group
considers qualitative and quantitative indicators. The definition
of default aligns with that applied by the Group for regulatory
capital purposes.
Incorporation of forward-looking information
The Group incorporates forward-looking information into both its
assessment of whether the credit risk of an instrument has
increased significantly since its initial recognition and its
measurement of ECL. Based on advice from the Group Market Risk
Committee and economic experts and consideration of a variety of
external actual and forecast information. The Group formulates a
'base case' view of the future direction of relevant economic
variables as well as a representative range of other possible
forecast scenarios. This process involves developing two or more
additional economic scenarios and considering the relative
probabilities of each outcome.
35 FINANCIAL RISK MANAGEMENT (continued)
External information includes economic data and forecasts
published by governmental bodies and monetary authorities in the
countries where the Group operates, supranational organisations
such as the OECD and the International Monetary Fund, and selected
private-sector and academic forecasters.
The base case represents a most-likely outcome and is aligned
with information used by the Group for other purposes such as
strategic planning and budgeting. The other scenarios represent
more optimistic and more pessimistic outcomes. Periodically, the
Group carries out stress testing of more extreme shocks to
calibrate its determination of these other representative
scenarios.
The Group has identified and documented key drivers of credit
risk and credit losses for each portfolio of financial instruments
and, using an analysis of historical data, has estimated
relationships between macro-economic variables and credit risk and
credit losses. The economic scenarios used as at 31 December 2022
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.
35 FINANCIAL RISK MANAGEMENT (continued)
Measurement of ECLs
ECLs are a probability-weighted estimate of credit losses.
Credit losses are measured as the present value of all cash
shortfalls (i.e. the difference between the cash flows due to the
entity in accordance with the contract and the cash flows that the
Group expects to receive). ECLs are discounted at the effective
profit rate of the exposure subject to credit risk.
The key inputs into the measurement of ECL are the term
structure of the following variables :
-- probability of default (PD);
-- loss given default (LGD); and
-- exposure at default (EAD).
These parameters are generally derived from internally developed
statistical models and other historical data. They are adjusted to
reflect forward-looking information as described above.
PD estimates are estimates at a certain date, which are
calculated based on statistical rating models, and assessed using
rating tools tailored to the various categories of counterparties
and exposures. These statistical models are based on internally
compiled data comprising both quantitative and qualitative factors
. Where it is available, market data may also be used to derive the
PD for large corporate counterparties. If a counterparty or
exposure migrates between rating classes, then this will lead to a
change in the estimate of the associated PD.
LGD is the magnitude of the likely loss if there is a default.
The Group estimates LGD parameters based on the history of recovery
rates of claims against defaulted counterparties. The LGD models
consider the structure, collateral, seniority of the claim,
counterparty industry and recovery costs of any collateral that is
integral to the financial asset. For financing 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.
35 FINANCIAL RISK MANAGEMENT (continued)
2022 12month Lifetime Lifetime Total 2021
ECL (Stage1) ECL not ECL Credit
credit impaired impaired
(Stage2) (Stage3)
Balance at 1 January 27,656 10,632 63,297 101,585
Transfer to 12-month
ECL 3,128 (2,056) (1,072) -
Transfer to lifetime
ECL non-credit-impaired 6,417 1,738 (8,155) -
Transfer to lifetime
ECL credit-impaired (149) (34) 183 -
Write-off - - (14,012) (14,012)
Charge for the period (3,809) 10,505 (3,386) 3,310
Balance at 31 December 33,243 20,785 36,855 90,883
Break down of ECL by category of assets in the consolidated
statement of financial position and off-balance sheet
commitments:
2022 11 month Lifetime Lifetime Total 2021
ECL (Stage ECL not ECL credit
1) credit impaired impaired
(Stage 2) (Stage 3)
Balances with banks 11 2 13
Treasury portfolio 5,482 8,796 2,684 16,962
Financing assets 18,130 11,911 34,332 64,373
Other financial receivables 9,240 76 - 9,316
Investment securities 42 - - 42
Financing commitments
and financial guarantees 338 - (161) 177
Balance at 31 December
2022 33,243 20,785 36,855 90,883
2021 12month Lifetime Lifetime Total 2021
ECL (Stage1) ECL not ECL Credit
credit impaired impaired
(Stage2) (Stage3)
Balance
at
1
January 22,344 6,271 42,200 70,815
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 27,656 10,632 63,297 101,585
35 FINANCIAL RISK MANAGEMENT (continued)
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 305 - 15,329 15,634
Financing commitments
and financial guarantees 209 - 18 227
Balance at 31 December 27,656 10,632 63,297 101,585
Break down of ECL by category of assets in the consolidated
statement of financial position and off-balance sheet
commitments:
Renegotiated facilities
During the year, facilities of US$ 6,788 thousand (2021: US$
50,942 thousand) were renegotiated, out of which US$ 2,440 thousand
(2021: US$ 47,936 thousand) are classified as neither past due nor
impaired as of 31 December 2022. 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 US$ 387,623 thousand (2021: US$
108,488 thousand) only instalments of US$ 61,623 thousand (2021:
US$ 48,560 thousand) are past due as at 31 December 2022.
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 US$
14,012 thousand (2021: US$ 12 thousand) which were fully impaired.
The Group has recovered US$ 4,796 thousand from a financing
facility written off in previous years (2021: US$ 1,918
thousand).
35 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 2022 31 December 2021
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 47,292 50,594 97,886 47,584 34,241 81,825
Other 5,987 5,987 3,249 - 3,249
Against past
due but not
impaired
Property 81,939 37,589 119,528 65,342 65,605 130,947
Other 1,053 1,053 1,756 - 1,756
Against neither
past due nor
impaired
Property 1,038,080 804,483 1,842,563 393,867 304,204 698,071
Other 117,048 117,048 48,475 - 48,475
Total 1,291,399 892,666 2,184,065 560,273 404,050 964,323
The average collateral coverage ratio on secured facilities is
149.71% as at 31 December 2022
(31 December 2021: 148.99%).
Concentration risk
The geographical and industry wise distribution of assets and
liabilities are set out in
notes 31 (a) and (b).
Concentration risk arises when a number of counterparties are
engaged in similar economic activities or activities in the same
geographic region or have similar economic features that would
cause their ability to meet contractual obligations to be similarly
affected by changes in economic, political or other conditions. The
Group seeks to manage its concentration risk by establishing and
constantly monitoring geographic and industry wise concentration
limits.
35 FINANCIAL RISK MANAGEMENT (continued)
An analysis of concentrations of credit risk of financing assets
of the Group's business at the reporting date is shown below:
Concentration 31 December 2022 31 December 2021
by
Sector Financing Assets Total Financing Assets Total
assets acquired assets acquired
for leasing for leasing
Banking and finance 9,247 9,247 12,156 - 12,156
Real estate 292,944 415,849 708,793 235,845 340,058 575,903
Construction 138,886 - 138,886 143,714 - 143,714
Trading 133,706 - 133,706 136,464 - 136,464
Manufacturing 144,143 - 144,143 35,923 - 35,923
Others 229,158 71,305 300,463 342,672 64,170 406,842
Total carrying
amount 948,084 487,154 1,435,238 906,774 404,228 1,311,002
b) Liquidity risk
Liquidity risk is defined as the risk that an entity will
encounter difficulty in meeting obligations associated with
financial liabilities that are settled by delivering cash or
another financial asset.
Management of liquidity risk
The Group's approach to managing liquidity is to ensure, as far
as possible, that it will always have sufficient liquidity to meet
its liabilities when due, under both normal and stressed
conditions, without incurring unacceptable losses or risking damage
to the Group's reputation.
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%.
Treasury receives information from other business units
regarding the liquidity profile of their financial assets and
liabilities and details of other projected cash flows arising from
projected future business. Treasury then aims to maintain a
portfolio of short-term liquid assets, largely made up of
short-term placements with financial and other institutions and
other inter-bank facilities, to ensure that sufficient liquidity is
maintained within the Group as a whole.
35 FINANCIAL RISK MANAGEMENT (continued)
The liquidity requirements of business units are met through
treasury to cover any short-term fluctuations and longer-term
funding to address any structural liquidity requirements.
The daily liquidity position is monitored, and regular liquidity
stress testing is conducted under a variety of scenarios covering
both normal and more severe market conditions. All liquidity
policies and procedures are subject to review and approval by the
Board of Directors. Daily reports cover the liquidity position of
the Bank and is circulated to Management Committee (MANCOM).
Moreover, quarterly reports are submitted to the Board of Directors
on the liquidity position by RMD.
The table below shows the undiscounted cash flows on the Group's
financial liabilities, including issued financial guarantee
contracts, and unrecognised financing commitments on the basis of
their earliest possible contractual maturity. For issued financial
guarantee contracts, the maximum amount of the guarantee is
allocated to the earliest period in which the guarantee could be
called. The Group's expected cash flows on these instruments vary
significantly from this analysis. Refer note 31 for the expected
maturity profile of assets and liabilities.
35 FINANCIAL RISK MANAGEMENT (continued)
Gross undiscounted cash flows
6 months
31 December 2022 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 87,488 - 35,812 - - 123,300 123,300
Placements from
financial institutions 2,361,964 516,253 639,419 210,554 62,680 3,790,870 3,790,870
Placements from
non-financial institutions
and individuals 159,739 121,865 251,034 423,025 108,595 1,064,258 1,064,258
Current accounts 5,497 16,623 - 54,557 54,557 131,234 131,234
Term financing 519,046 192,074 276,200 649,172 305,706 1,942,198 1,942,198
Payables and accruals 227,764 116,763 36,390 42,446 - 423,363 423,363
Total liabilities 3,361,498 963,578 1,238,855 1,379,754 531,538 7,475,223 7,475,223
Equity of investment
account holders 843,389 35,406 86,546 288,470 703,664 1,957,475 1,213,674
Commitment and
contingencies 56,679 4,098 48,923 95,664 234 205,598 205,484
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 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 institutions 1,158,602 591,674 415,501 18,814 93,889 2,278,480 2,278,480
Placements non-financial
institutions and
individuals 208,648 143,993 237,520 171,883 11,568 773,612 773,612
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 2,230,550 957,052 1,473,460 348,267 547,892 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
35 FINANCIAL RISK MANAGEMENT (continued)
Measures of liquidity
Liquidity is managed at an entity level and is not a Group wide
measure. The Bank follows certain internal measures of liquidity.
These metrics are intended to better reflect the liquidity position
from a cash flow perspective and provide a target for the Group.
These are liquidity coverage ratio, net stable funding ratio and
stock of liquid assets.
For this purpose, the liquidity coverage ratio is based on an
internally defined management criteria which identifies the amount
of liquid assets (including inter- bank placements) the Bank holds
that can be used to offset the net cash outflows for 30, 60 and 90
days time horizon. The net stable funding ratio measures the amount
of long-term, stable sources of funding employed by an institution
relative to the liquidity profiles of the assets funded and the
potential for contingent calls on funding liquidity arising from
off-balance sheet commitments and obligations.
Details of the ratio of liquid assets to total assets at the
reporting date and during the year were as follows:
Liquid asset / Total
asset
2022 2021
At 31 December 51.93% 47.16%
Average for the year 48.04% 43.14%
Maximum for the year 51.93% 47.16%
Minimum for the year 45.65% 40.14%
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 2022, the Bank had LCR ratio of 134%
Average balance
31 December 31 December
2022 2021
Stock of HQLA 272,429 292,998
Net cashflows 213,055 148,599
LCR % 134% 221%
Minimum required by CBB 100% 80%
35 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 2022, the Bank had NSFR ratio of 111%.
No. Item No Specified Less than More than Over Total
Maturity 6 months 6 months one year weighted
and less value
than one
year
Available Stable Funding (ASF):
1 Capital:
2 Regulatory Capital 1,004,974 - - 53,171 1,058,145
Other Capital
3 Instruments - - - - -
Retail deposits
and deposits
from small business
4 customers:
5 Stable deposits - 158,056 15,076 26,054 190,530
6 Less stable deposits - 1,684,867 423,803 328,355 2,226,158
7 Wholesale funding:
8 Operational deposits - - - - -
Other Wholesale
9 funding - 3,548,055 931,464 1,303,542 2,656,368
10 Other liabilities:
NSFR Shari'a-compliant
hedging contract
11 liabilities - - -
All other liabilities
not included
in the above
12 categories - 311,371 - 43,201 43,201
13 Total ASF
Required Stable Funding (RSF):
Total NSFR high-quality
liquid assets
14 (HQLA) 1,761,766 87,048
Depsoits held
at other financial
institutions
for opetational
15 purposes
Performing financing
16 and sukuk/ securities: 1,576,916 790,425 908,398
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 - - 94,704 1,050,345 940,145
36 FINANCIAL RISK MANAGEMENT (continued)
No. Item No Specified Less than More than Over Total
Maturity 6 months 6 months one year weighted
and less value
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: - 294,926 102,548 279,352 380,316
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 - 945,435 388,631 426,531 1,093,564
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 2,090,285 - - - 2,090,285
30 OBS items - - - 43,344
31 Total RSF 2,817,278 585,882 2,546,653 5,543,102
32 NSFR(%) 111%
35 FINANCIAL RISK MANAGEMENT (continued)
As at 31 December 2021
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
35 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%
35 FINANCIAL RISK MANAGEMENT (continued)
c) Market risks
Market risk is the risk that changes in market prices, such as
profit rate, equity prices, foreign exchange rates and credit
spreads (not relating to changes in the obligor's / issuer's credit
standing) will affect the Group's income, future cash flows or the
value of its holdings of financial instruments. The objective of
market risk management is to manage and control market risk
exposures within acceptable parameters, while optimising the return
on risk.
Management of market risks
As a matter of general policy, the Group shall not assume
trading positions on its assets and liabilities, and hence the
entire balance sheet is a non-trading portfolio. All foreign
exchange risk within the Group is transferred to Treasury. The
Group seeks to manage currency risk by continually monitoring
exchange rates. Profit rate risk is managed principally through
monitoring profit rate gaps and by having pre-approved limits for
repricing bands. Overall authority for market risk is vested in the
Board Audit and Risk Committee ('BARC'). RMD is responsible for the
development of detailed risk management policies (subject to review
and approval of the BARC).
Exposure to profit rate risk
The principal risk to which non-trading portfolios are exposed
is the risk of loss from fluctuations in the future cash flows or
fair values of financial instrument because of a change in market
profit rates. Majority of the Group's profit based asset and
liabilities are short term in nature, except for certain long term
liabilities which have been utilised to fund the Group's strategic
investments in its associates.
35 FINANCIAL RISK MANAGEMENT (continued)
A summary of the Group's profit rate gap position on non-trading
portfolios is as follows:
Up to 3 to 6 months 1 to Over
31 December 2022 3 months 6 months to 1 year 3 years 3 years Total
Assets
Treasury portfolio 1,291,520 249,557 447,769 417,228 1,803,946 4,210,020
Financing assets 156,765 56,091 164,272 291,676 766,434 1,435,238
Total assets 1,448,285 305,648 612,041 708,904 2,570,380 5,645,258
Liabilities
Client's fund 87,488 - 35,812 - - 123,300
Placements from
financial institutions 2,361,964 516,253 639,419 210,554 62,680 3,790,870
Placements from
non-financial institutions
and individuals 159,739 121,865 251,034 423,025 108,595 1,064,258
Term financing 519,046 192,074 276,200 649,172 305,706 1,942,198
Total liabilities 3,128,237 830,192 1,202,465 1,282,751 476,981 6,920,626
Equity of investment
account holders 99,588 35,406 86,546 288,470 703,664 1,213,674
Profit rate sensitivity
gap (1,779,540) (559,950) (676,970) (862,317) 1,389,735 (2,489,042)
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 1,067,800 91,561 31,243 454,734 1,485,908 3,131,246
Financing assets 308,832 64,197 95,926 418,316 423,731 1,311,002
Total assets 1,376,632 155,758 127,169 873,050 1,909,639 4,442,248
Liabilities
Client's fund 152,925 - 63,837 - - 216,762
Placements from
financial institutions 1,158,602 591,674 415,501 18,814 93,889 2,278,480
Placements non-financial
institutions and
individuals 208,648 143,993 237,520 171,883 11,568 773,612
Term financing 578,012 185,494 512,475 84,031 390,655 1,750,667
Total liabilities 2,098,187 921,161 1,229,333 274,728 496,112 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 (958,836) (1,034,700) (1,479,206) 362,725 1,174,400 (1,935,617)
The management of profit rate risk against profit rate gap
limits is supplemented by monitoring the sensitivity of the Group's
financial assets and liabilities to various standard and
non-standard profit rate scenarios. Standard scenarios that are
considered include a 100 basis point (bp) parallel fall or rise in
all yield curves worldwide. An analysis of the Group's sensitivity
to an increase or decrease in market profit rates (assuming no
asymmetrical movement in yield curves and a constant statement of
financial position) is as follows:
35 FINANCIAL RISK MANAGEMENT (continued)
100 bps parallel increase / (decrease) 2022 2021
At 31 December +/- 24,890 +/- 19,769
Average for the year +/- 20,580 +/- 18,108
Maximum for the year +/- 24,890 +/- 19,879
Minimum for the year +/- 16,532 +/- 16,082
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:
2022 2021
Placements with financial institutions 3.46% 3.18%
Financing assets 6.89% 6.09%
Debt type investments Sukuk 6.18% 6.38%
Placements from financial institutions,
other entities and individuals 4.53% 4.76%
Term financing 2.49% 2.55%
Equity of investment account holders 3.75% 2.56%
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:
2022 2021
US$ '000 US$ '000
Equivalent Equivalent
Sterling Pounds 5,720 1,895
Euro 9,569 (2,619)
Australian Dollars 11,963 13,528
Kuwaiti Dinar 7,922 39,793
Other GCC Currencies (*) (3,510,244) (1,376,341)
(*) These currencies are pegged to the US Dollar.
The management of foreign exchange risk against net exposure
limits is supplemented by monitoring the sensitivity of the Group's
financial assets and liabilities to various foreign exchange
scenarios. Standard scenarios that are considered include a 5% plus
/ minus increase in exchange rates, other than GCC pegged
currencies. An analysis of the Group's sensitivity to an increase
or decrease in foreign exchange rates (assuming all other
variables, primarily profit rates, remain constant) is as
follows:
35 FINANCIAL RISK MANAGEMENT (continued)
2022 2021
US$ '000 US$ '000
Equivalent Equivalent
Sterling Pounds +/- 286 +/- 95
Euros +/- 478 +/- 131
Australian dollar +/-598 +/- 676
Kuwaiti dinar +/-396 +/- 1,990
Structural positions of foreign operation
Moroccan Dirham - +/- 7,891
Tunisian Dinar - +/- 15,238
Indian rupee - +/- 13,635
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 2022, the Group did not have any significant issues
relating to operational risks.
36 CAPITAL MANAGEMENT
The Group's regulator Central Bank of Bahrain (CBB) sets and
monitors capital requirements for the Group as a whole. In
implementing current capital requirements CBB requires the Group to
maintain a prescribed ratio of total capital to total risk-weighted
assets. The total regulatory capital base is net of prudential
deductions for large exposures based on specific limits agreed with
the regulator. Banking operations are categorised as either trading
book or banking book, and risk-weighted assets are determined
according to specified requirements that seek to reflect the
varying levels of risk attached to assets and off-balance sheet
exposures. The Group does not have a trading book.
The Group aims to maintain strong capital base so as to maintain
investor, creditor and market confidence and to sustain the future
development of the business.
The CBB sets and monitors capital requirements for the Bank as a
whole. In implementing current capital requirements CBB requires
the Bank to maintain a prescribed ratio of total capital to total
risk-weighted assets. Capital adequacy regulations of CBB is based
on the principles of Basel III and the IFSB guidelines.
The Bank's regulatory capital is analysed into two tiers:
Tier 1 capital: includes CET1 and AT1.
CET1 comprise of ordinary share capital that meet the
classification as common shares for regulatory purposes, disclosed
reserves including share premium, general reserves, legal /
statutory reserve, common shares issued by consolidated banking
subsidiaries of the Bank and held by third parties, retained
earnings after regulatory adjustments relating to goodwill and
items that are included in equity which are treated differently for
capital adequacy purposes.
AT1 comprise of instruments that meet the criteria for inclusion
in AT1, instruments issued by consolidated banking subsidiaries of
the Bank held by third parties which meet the criteria of AT1, and
regulatory adjustments applied in calculation of AT1.
Tier 2 capital
This includes instruments issued by the Bank that meet the
criteria for inclusion in Tier 2 capital, stock surplus resulting
from issue of Tier 2 capital, instruments issued by consolidated
banking subsidiaries of the Bank held by third parties that meet
the criteria for inclusion in Tier 2, general provisions held
against unidentified losses on financing and qualify for inclusion
within Tier 2, asset revaluation reserve from revaluation of fixed
assets and instruments purposes and regulatory adjustments applied
in the calculation of Tier 2 capital
The regulatory adjustments are subject to limits prescribed by
the CBB requirements, these deductions would be effective in a
phased manner through transitional arrangements from 2015 to 2018.
The regulations prescribe higher risk weights for certain exposures
that exceeds materiality thresholds. These regulatory adjustments
required for certain items such as goodwill on mortgage service
right, deferred tax assets, cash flow hedge reserve, gain on sale
of related securitization transactions, defined benefit pension
fund assets and liabilities, investment in own shares and
reciprocal cross holdings in the capital of Banking and financial
entities, investment in the capital of Banking and financial
entities that are outside the scope of regulatory consolidation and
where the Bank does not own more than 10% of issued common shares
capital of the entity and significant investments in the capital of
banking and financial entities that are outside the scope of
regulatory consolidation.
Banking operations are categorised as either trading book or
banking book, and risk-weighted assets are determined according to
specified requirements that seek to reflect the varying levels of
risk attached to assets and off-balance sheet exposures.
36 CAPITAL MANAGEMENT (continued)
To combined the effect of COVID-19, the CBB has allowed the
aggregate of modification loss and incremental ECL provision for
stage 1 and stage 2 for the period from March to December 2020 to
be added back to Tier 1 capital for the two years ending 31
December 2020 and 31 December 2021 and to deduct this amount
proportionately from Tier 1 capital on an annual basis for three
years ended 31 December 2022, and ending 31 December 2023 and 31
December 2024.
The Bank's regulatory capital position was as follows:
31 December 31 December
2022 2021
CET 1 Capital before regulatory adjustments 1,020,249 1,063,515
Less: regulatory adjustments - -
CET 1 Capital after regulatory adjustments 1,020,249 1,063,515
T 2 Capital adjustments 52,628 53,374
Regulatory Capital 1,072,877 1,116,889
Risk weighted exposure:
Credit Risk Weighted Assets 6,799,081 7,574,496
Market Risk Weighted Assets 54,624 38,325
Operational Risk Weighted Assets 431,784 655,034
Total Regulatory Risk Weighted Assets 7,285,489 8,267,855
Investment risk reserve (30% only) 2 2
Profit equalization reserve (30% only) 3 3
Total Adjusted Risk Weighted Exposures 7,285,484 8,267,850
Capital Adequacy Ratio 14.73% 13.51%
Tier 1 Capital Adequacy Ratio 14.00% 12.86%
Minimum required by CBB 12.50% 12.50%
The allocation of capital between specific operations and
activities is primarily driven by regulatory requirements. The
Group's capital management policy seeks to maximise return on risk
adjusted capital while satisfying all the regulatory requirements.
The Group's policy on capital allocation is subject to regular
review by the Board of Directors. The Group has complied with the
externally imposed capital requirements set by the regulator for
its consolidated capital adequacy ratio throughout the year.
37 DECONSOLIDATION OF SUBSIDIARIES.
During the period, GFH Group has carried out a group
restructuring program (the 'program') which involves the spinning
off of its infrastructure and real estate assets under a new entity
"Infracorp" ("the Company"), which wase capitalized with US$1.1
billion in infrastructure and development assets. Infracorp will
specialise in investments focusing on accelerating growth and
development of sustainable infrastructure assets and environments
across the Gulf and global markets.
Under this program certain real estate and infrastructure assets
were transferred from the Group, to Infracorp for an in-kind
consideration financed by US$ 200 million of equity shares and US$
900 million of Hybrid Sukuk (perpetual equity) issued by
Infracorp.
The transfer of these assets were affected in the quarter ended
31 March 2022. Subsequent to the transfer of these assets Group
sold 60% of its equity in Infracorp to third party investors,
resulting in loss of controlling stake and this resulted in
Infracorp no longer being a subsidiary of Group as at
31 December 2022 and has been accounted for as an equity
accounted investee. The results of operation of Infracorp till the
date of its disposal are consolidated in these condensed interim
consolidated financial statements. The impact of the disposal of
Infracorp is presented below:
37 DECONSOLIDATION OF SUBSIDIARIES (continued)
31 December
2022
ASSETS
Cash and bank balances 80,119
Treasury portfolio 50,912
Financing assets 38,100
Real estate investment 847,221
Proprietary investment 67,861
Co-Investments 120,735
Receivables & prepayments 87,645
Property and equipment 81,201
Total 1,373,794
LIABILITIES
Term financing 24,467
Payables and accruals 107,610
Total 132,499
Non-controlling interest 141,717
Net assets transferred 1,100,000
Consideration on the date of transfer:
Equity in Infracorp 200,000
Hybrid perpetual sukuk 900,000
1,100,000
31 December
2022
(reviewed)
Net profit included in the current period condensed
consolidated income statement ** (438)
** Net profits includes cumulative profit from all the assets
and subsidiaries transferred as part of the consolidation of
subsidiaries
Discontinuing operations :
The assets of the business forming part of Infracorp were not
necessarily operated as stand-alone segment and largely reflect
land bank and infrastructure development projects of the Group that
were carved-out under a new business model. Hence, the net assets
transferred to infracorp were not classified as discontinued
operations other than as disclosed below in relation to its
industrial operations.
37 DECONSOLIDATION OF SUBSIDIARIES (continued)
A. Results of discontinued operation
31 December 31 December
2022 2021
3 months 12 months
Revenue 5,391 5,226
Expenses 5,347 5,305
-------------
Net profit 44 (79)
B. Cash flows used in discontinued operation
31 December 31 December
2022 2021
3 months 12 months
Net cash flow from operating activities 182 (863)
Net cash flow used in investing activities (317) (1)
Net cash flow from financing activities 3 266
-------------
Net cash flows used in discontinued
operation (132) (598)
38 ACQUISITION OF SUBSIDARIES
During the year, the Group acquired controlling stake in the
following subsidiaries
% stake Place of Nature of activities
acquired incorporation
SQ Topco II LLC 51% United States Property asset
management Company
Big Sky Asset Management LLC 51% United States Real estate investment
manager
Al Areen Hotels W.L.L. 100% Kingdom Hospitality Management
of Bahrain
Consideration transferred and non-controlling interests
The consideration transferred for the acquisition was in the
form of cash and in-kind for the services rendered by the Group.
The consideration transferred is generally measured at fair value
and the stake held by shareholders other than the Group in the
subsidiaries is recognised in the consolidated financial statements
under "Non-controlling interests" based on the proportionate share
of non-controlling shareholders' in the recognised amounts of the
investee's net assets or fair value at the date of acquisition of
the investee on a transaction by transaction basis based on the
accounting policy choice of the Group. Where consideration includes
contingent consideration payable in future based on performance and
service obligations of continuing employees, these are accounted
under IFRS 2 - Share based payments.
Identifiable assets acquired and liabilities assumed
Entity acquired was considered as a business. The fair value of
assets, liabilities, equity interests have been reported on a
provisional basis. If new information, obtained within one year
from the acquisition date about facts and circumstances that
existed at the acquisition date, identifies adjustments to the
above amounts, or any additional provisions that existed at the
acquisition date, then the acquisition accounting will be revised.
Revisions to provisional acquisition accounting are required to be
done on a retrospective basis.
38 ACQUISITION OF SUBSIDARIES (Continued)
The reported amounts below represent the adjusted acquisition
carrying values of the acquired entities at the date of acquisition
reported on a provisional basis as permitted by accounting
standards.
Total
Intangible asset 8,350
Tangible assets 153,519
Receivables 2,006
Cash and bank balances 2,093
Total assets 165,968
Accruals and other liabilities 30,942
Total liabilities 30,942
Total net identifiable assets and liabilities
(A) 135,026
Total
Consideration 134,205
Non-controlling interests recognised 821
Total consideration (B) 135,026
Goodwill / Bargain purchase (B-A) -
For the purpose of consolidated statement of cash flows, net
cash acquired on business combination is given below:
Total
Cash and bank balances acquired as part of business combination 2,006
Less: consideration (134,205)
Net cash flows from acquisition of subsidiaries (132,199)
The Group has also acquired assets under management of US$
1,315,915 thousand along with the above acquisition. Income for the
first nine months assuming the transaction was done at the
beginning of the year would have been US$ 1,200 thousand.
39 COMPARATIVES
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.
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