Annual Report For the year ended 31 December 2013
A London listed financial services group specialized in the growth markets of the GCC
European Islamic Investment Bank plc
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Introduction 2
Highlights 3
Chairman‟s Statement 4
Directors 6
Strategic Review 8
Report of the Directors 19
Corporate Governance 21
Statement of Directors‟ Responsibilities 24
Report of the Sharia‟a Supervisory Board 25
Independent Auditor‟s Report 26
The Financial Statements
Consolidated Statement of Comprehensive Income 27
Consolidated Statement of Financial Position 29
Consolidated Statement of Changes in Equity 30
Consolidated Statement of Cash Flows 31
Company Statement of Financial Position 32
Company Statement of Changes in Equity 33
Company Statement of Cash Flows 34
Notes to the Financial Statements 35
Bank Information 97
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A London listed financial services group specialized in the growth markets of the GCC European Islamic Investment Bank plc (“EIIB”) is a London listed specialist investment banking and asset management group focused on the oil rich markets of the Gulf Cooperation Council (GCC) countries. EIIB has an extensive network of business relationships throughout the GCC and wider Middle East and North Africa (MENA) region. Our skilled and experienced teams provide investment management and financing solutions to pension funds, family groups, corporations and financial and government institutions.
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2013 HIGHLIGHTS Our year at a glance
EIIB‟s new strategy and business model starts to yield positive results
Assets under management including capital seeded by the Group increased by 25% to £712m (US$ 1,176m)
(2012: £570m / US$ 922m)
New products launched in Equity, Leasing and Trade Finance
Existing equities and fixed income funds moved into UCITS
Arranged mid-market sukuk financing and awarded “Europe Deal of the Year”
Further progress in realizing value from legacy investments
Rasmala shareholding increased to 76.3%
London based institutional investors joined the shareholder register
How we performed
Total operating income of £10.2m (2012: £3.9m)
Profit before tax from continuing operations £1.5m (2012: loss £10.1m)
Profit to equity holders was £0.14m after tax expense of £0.26m and loss on discontinued operations of
£1.25m and the overall loss including Non-controlling interest in 2013 amounted to £0.03m (2012 loss
£11.02m).
Staff costs maintained at £5.78m (2012: £5.72m) and other operating expenses reduced by a further 21% to £2.9m (2012: £3.7m)
Assets under management including capital seeded by the Group increased by 25% to £712m (US$ 1,176m)
(2012: £570m / US$ 922m)
The bank maintained its strong capital adequacy, regulatory and liquidity ratios. The Regulatory Capital of the
Group at 31 December 2013 stood at £101m (£99.5m at 31 December 2012).
Net Asset Value of 6.4 pence per share (2012: 6.9 pence per share)
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CHAIRMAN‟S STATEMENT: I am pleased to report that during 2013 we made further progress in transforming EIIB into a specialist asset management and financing business and began to see the positive results of the strategy we put in place two years ago. Progress The strategy your Board set out was aimed at transforming EIIB into a market leading asset management and financing business focused on London and the GCC region. Our first tasks involved addressing the Bank's legacy investments, instituting tight cost controls and restructuring the operations of Rasmala, the leading Dubai-based investment bank that we acquired in 2012 in order to enhance our asset management capabilities. A great deal of work was needed to resolve legacy issues in an orderly manner and to maximise the synergies between EIIB and Rasmala. In 2013, there was significant progress on these fronts and this has enabled us to start a number of projects to increase the revenue potential by upgrading the existing platform and launching new products. Progress to date enabled the Bank to return a profit in 2013, while continuing to invest in the growth initiatives required to achieve our aim of growing Assets Under Management (AUMs) to US$3bn by 2016. Performance During 2013, the Bank's operating performance showed continuing signs of improvement. Despite headwinds and continued political uncertainty in some of our markets, particularly in Egypt, as highlighted in our half year results, total operating income increased to £10.2m (2012 £3.9m). Combined with tight control of costs, this increase resulted in an underlying operating profit from continued operations of £1.5m. The achievement of an operating profit in this way is the most encouraging sign to date of the potential for our plans and demonstrates that the Bank's new strategy is delivering positive results. Market developments The Gulf Cooperation Council (GCC) countries continue to benefit from high oil prices and political stability. The rapid economic development in the United Arab Emirates (UAE) and Qatar has been recognized by the global index compiler MSCI with an upgrading from Frontier Market to Emerging Market status and their inclusion in the MSCI Emerging Markets Index from May 2014. This upgrade is indicative of a new era in capital flows into the Gulf and reflects increasing confidence in regional markets. Macroeconomic markets around the world present a mixed picture. A return to growth in many developed economies, albeit underpinned in some quarters by considerable government intervention, must be seen against a slowing of growth in some emerging markets. While many stock and debt markets continue to reach new heights, concern remains over the prospect of the tapering of quantitative easing by the US Federal Reserve. Despite the wider MENA region experiencing a period of unprecedented change, we continue to believe that our regional knowledge and expertise stands us in good stead. The GCC economies are positioned at the crossroads between East and West and benefit from a growing population and the wealth derived from approximately half the world's proven oil and gas reserves and this offers outstanding opportunities. EIIB is now well positioned to benefit in these markets. EIIB is also well positioned to benefit from the continued rise in popularity of Islamic finance, particularly in London and the GCC countries.
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In 2013 the World Islamic Economic Forum (WIEF) was held in London, highlighting growing efforts to position London as a leading hub for Islamic finance and this was further reinforced by the presence of the British Prime Minister and his announcement of plans for Britain to issue its first sovereign sukuk. Islamic assets exceeded $1.8 trillion by the end of 2013 and are forecast to grow considerably faster than conventional banking over the next few years. There is now rapid growth in trade involving wealthy GCC economies and this will drive further interest from around the world in Islamic finance. Corporate governance EIIB is committed to good corporate governance and we believe high standards in this area combined with strong management will make an important contribution to EIIB‟s long-term performance. The Board has successfully managed a period of significant change and has also taken steps to increase independence by appointing John Wright and Martin Gilbert Barrow as independent non-executive directors. During the year Aabed Al Zeera and Keith McLeod left the Board. We thank them for their contributions. We will continue to strengthen the Board and intend to take further action to increase independence and effectiveness. The Board has already commenced a process of reviewing its performance, its committees‟ performance and that of individual board members to ensure the Board and its committees have the appropriate balance of skills, experience and independence. The Board has been applying the UK Corporate Governance Code in a manner that balances the need for systems and procedures with the need for flexibility and entrepreneurship that is essential in growth companies. The London Stock Exchange regards the UK Corporate Governance Code as the standard to which all public companies should aspire, and supports the use of the Quoted Companies Alliance (QCA) Guidelines by AIM companies. The Board is now evaluating whether to formally adopt the QCA Guidelines. Outlook The Board has delivered a major turnaround and we are now positioned as a specialist asset management and financing business focused on the growth markets of the GCC. The GCC region continues to show considerable buoyancy, reflecting both economic growth and confidence in the future. After two years of restructuring EIIB is now well positioned to move to the next stage in its strategy, a drive for growth. I am optimistic that we will deliver what we set out to achieve.
__________________________ Abdallah Y. Al-Mouallimi Chairman
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DIRECTORS NON-EXECUTIVE DIRECTORS H.E. Abdallah Yahya Al-Mouallimi (2), (3). Chairman of the Board and Chairman of the Board Risk Committee of EIIB, he is currently the Permanent Representative of Saudi Arabia to the United Nations. He has held various senior government and private sector positions including Ambassador to Belgium, Luxembourg and the European Union, Mayor of Jeddah, member of the Saudi Consultative Council and Director of Saudi General Organisation for Military Industries. His private-sector service includes chairing the Jeddah Chamber of Commerce, Vice-Chairman of Olayan Financing Company, Board Member of Saudi Telecom Company, Managing Director of Coca-Cola Bottling Company Saudi Arabia, Board Member of Saudi National Commercial Bank and Egypt Finance Company amongst others. He is also Co-Founder and Chairman of HBG Holdings. He has a Masters in Management from Stanford University and a Bachelor of Science in Chemical Engineering from Oregon State University.
Mohammed Al Sarhan* (1), (2). Senior Independent Director and Chairman of the Nomination and Remuneration Committee of EIIB. Until recently Vice President and Chief Operating Officer of Al Faisaliah Group, Kingdom of Saudi Arabia since 2001. Previously he was Managing Director of Al Safi Danone Co. and Vice President of Samarec. He is Vice Chairman of the National Shipping Company of Saudi Arabia; Board Member of Saudi Arabian Public Transport Company; Board Member of Al Safi Danone Co.; Board Member of Saudi Fresh Dairy Board and President of the Al Safi Club for Friends of the Environment. He holds a B.Sc (Mathematics) from Oregon State University, USA.
John Robertson Wright*
(1). Chairman of the Audit Committee and Non-Executive Director of EIIB. A career Banker with strong experience in UK and international markets including assignments in India, Sri Lanka, West Africa, Canada, Hong Kong and the United States. He was recently appointed Chairman of Butterfields Bank UK. He was formerly Chief Executive of Oman International Bank for seven years, Chief Executive of the Northern and National Irish Banks in Ireland for five years, Chief Executive of the Gulf Bank in Kuwait and finally Chief Executive of Clydesdale & Yorkshire Banks prior to retirement. He has also served as Non Executive Director of banks in Oman, London and Bermuda and as Chairman of companies in Northern Ireland and in Scotland. He is a Fellow of the Chartered Institute of Bankers in Scotland and the Chartered Institute of Bankers in Ireland.
Michael Willingham-Toxvaerd
Non-Executive Director of EIIB. In addition to this he is Managing Partner of HBG Holdings UK LLP. He also holds a number of other directorships. He has significant experience in capital market, mergers and acquisitions, founding, financing and listing companies on the London Stock Exchange. He is also experienced in private equity and holds an MBA from Cranfield University.
Martin Gilbert Barrow*, CBE
(3). Mr. Barrow has extensive knowledge of Asia, having worked in the region for 35 years with Jardine Matheson. After joining the Hong Kong operations in 1965, he served as President of the group‟s affiliate in Saudi Arabia, Managing Director of the operations in Japan and Regional Managing Director of Hong Kong and China, before being appointed to the board of Jardine Matheson Ltd in 1989. Mr. Barrow is a director of Matheson & Co Limited, Ballie Gifford Japan Trust PLC, China Britain Business Council and the Hong Kong Association. EXECUTIVE DIRECTORS Zulfi Caar Hydari (3). Chief Executive Officer of EIIB. Mr. Hydari is an activist investor experienced in special situations, PIPEs and private equity transactions. He is specialised in structuring investment capital from the GCC and implementing post acquisition value enhancement strategies in portfolio companies. Mr. Hydari is Group Chief Executive of Rasmala Holdings Limited. He is also Co-Founder of HBG Holdings, a leading special situations private equity firm. Mr. Hydari holds an MBA from Cranfield University.
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(1) Member of the Audit Committee (2) Member of the Nomination and Remuneration Committee (3) Member of the Board Risk Committee * Independent Director
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STRATEGIC REPORT FOR 2013: The Directors present the Strategic Report, Directors‟ Report and the financial statements of European Islamic Investment Bank plc (“the Group” or “EIIB”) for the year ended 31 December 2013. OVERVIEW EIIB is a London listed specialist investment banking and asset management group focused on the oil rich markets of the Gulf Cooperation Council (GCC) countries. EIIB is authorised by the Prudential Regulation Authority and the Financial Conduct Authority in the United Kingdom. EIIB‟s primary focus is to provide investment management and financing solutions to pension funds, family groups, corporations and financial and government institutions. EIIB‟s mission is to achieve excellence in the provision of investment banking and asset management products and services in accordance with the principles of Sharia‟a. The activities of the bank include: investment banking services encompassing provision of financing, debt capital markets and structured finance; investment management solutions encompassing equities, fixed income and real estate; and business advisory services. During the past year we continued to implement our strategy of developing our core asset management capabilities whilst also enhancing our specialist investment banking business and focusing on the growth markets of the GCC. RESULTS The financial statements for the reporting year ended 31 December 2013 are shown on pages 27 to 96. Results for 2013 reflect continued strengthening of our business. Total operating income increased to £10.2m (2012 £3.9m), which, combined with continued tight cost control, delivered an underlying operating profit before tax from continued operations of £1.5m. The profit to equity holders was £0.14m after tax expense of £0.26m and loss on discontinued operations of £1.25m
and the overall loss including Non-controlling interest in 2013 amounted to £0.03m (2012 loss £11.02m).
Our asset management business performed strongly. Discretionary managed assets including capital seeded by the Group increased by 25% to £712m (US$ 1,176m) (2012: £570m / US$ 922m). There were positive movements in AUM despite instability in the region, unexpected regulatory changes in Egypt and the sell-off in bond markets worldwide. Again, strong investment performance across our flagship funds and investment strategies showed the benefits of our regional expertise and detailed local insights. Investment banking also made its mark in 2013 most notably by winning the $100m sukuk al-wakala mandate for FWU Group. The bank maintained its strong capital adequacy, regulatory and liquidity ratios. The Regulatory Capital of the Group at
31 December 2013 stood at £101.0m (£99.5m at 31 December 2012).
These results met our original management forecasts and represent good performance in a second year of major change. They put us in a strong position to accelerate growth going forward. Developing an integrated team with one vision
The investment we have made in restructuring and integrating our businesses over the last two years has created a unique platform for future growth. EIIB is now positioned to capture market share and take advantage of a variety of investment opportunities in our target markets.
The extensive restructuring over the last two years led to a significant reduction in headcount across the group. In 2013 the firm was stabilized and was able to resume recruitment activity. In particular the firm has been looking to strengthen its origination, sales and distribution capabilities in order to drive future growth.
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A key element in the acquisition of Rasmala has been the building of an integrated team with a shared vision of the firm going forward – a team that is capable of delivering beyond the sum of its parts. We have created a cost conscious and service driven culture across the business and are now in a position to increasingly turn the Group‟s focus towards profitable growth. Asset management Assets Under Management (AUM) continued to grow during the year. AUM now exceeds US$1bn and we are on target to achieving our stated aim of growing AUM to US$3bn by December 2016. We are gaining market share in the UAE in terms of total assets under management and Institutional Investor magazine now includes us in the “Middle East‟s Top 20 Money Managers”. The successful integration of Rasmala within the EIIB group has delivered cost synergies and enabled us to move to the next phase of our strategy - upgrading existing products and launching new products to enhance the revenue growth potential of the platform, all from within the 2012 cost base. New funds Building on our launch of the Rasmala Global Sukuk Fund in 2012, we expanded our local market product offering with the launch of the Rasmala GCC Islamic Equity Income Fund, investing in high dividend paying equity securities listed on the GCC stock exchanges. The fund currently targets an annual distribution of over 4% and has benefitted from the buoyant performance of several GCC stock exchanges in the last year. Strategically, we also launched investment products to capture outbound investment flows from GCC investors to opportunities in other geographies. We feel that there is a market opportunity for us to cater not only to investor requirements in the MENA investment markets, but also to offer our GCC client base unique, Sharia ‟a compliant, investment products investing in international markets. To that end, we launched the Rasmala Leasing Fund and the Rasmala Trade Finance Fund. The Rasmala Leasing Fund is a Sharia‟a compliant six-year term fund, investing in lease assets in the United States and the Rasmala Trade Finance Fund is a Sharia‟a compliant open-ended fund providing investors with a low volatility money market alterative. The Fund is linked to emerging market trade transactions and aims to benefit from the rapid growth of global trade, including in the GCC. Strong performance Overall investment performance remained strong compared to both our competitors and industry-recognised benchmarks. The Arabian Markets Growth Equity Fund returned 38.0% (net of all fees and expenses) compared to the S&P Arab Composite Index return of 21.6%. This builds upon the fund's long-term track record, which stands at an annualized outperformance of 8.5% since inception in 2006. The Rasmala GCC Fixed Income Fund returned 1.2% (net of all fees and expenses) despite the global fixed income headwinds and compared to the Citigroup Corporate AAA/AA Bond Index return of 0.9%, also extending that fund‟s long-term track record of annualized outperformance of 5.8% since inception in 2009. In addition all of our mutual funds and discretionary portfolio mandates outperformed their respective benchmarks in 2013. The response from our existing client base has been encouragingly positive, many of our clients increased their assets under management with us during the year. We have also attracted new client mandates, including our first from Egypt‟s Social Insurance Fund, serving approximately 1.5 million pensioners and 3.8 million contributors, all of whom are government employees. There is clear demand for our products and we will continue to drive growth by recruiting proven talent and increasing our product range.
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Positioning for further growth In 2013, we commenced a major project to re-domicile our existing open-ended funds from the Cayman Islands to Luxembourg as UCIT IV Funds. This project involved a significant expense, borne primarily in 2013, and slowed asset gathering as our open-ended funds were closed to new subscriptions for a significant period towards the end of 2013. However, the future benefits for us, and our clients, are clear. Clients and distributors clearly value the high standard of funds managed within the UCITS regime. In addition, the regulatory approval process for distribution of funds within MENA jurisdictions, and globally, is far faster and far less burdensome, enabling us to deliver our products to distributors and clients more quickly and efficiently. Investment Banking Traditionally domestic and regional Islamic institutions have relied upon partnerships with bulge bracket firms for product structuring expertise. In contrast, EIIB established itself as a credible product manufacturer in its own right during 2013. The investment banking team executed a number of structuring and arranging mandates during the year that showcased the bank‟s skill set in debt capital markets and structured debt finance. In October 2013, we successfully acted as lead arranger and book runner for European-based multinational insurance group FWU Group on their sukuk al-wakala programme. The first tranche of US$20 million was part of a US$100m program and was rated “BBB-” by Fitch. This was a unique asset backed transaction involving a European corporate issuing rated paper via the sukuk markets. The issue was recognized as the “Europe Deal of the Year” for 2013 at the Islamic Finance News awards and helped the bank to win the award for “Best European Islamic Bank” at the Islamic Business and Finance Awards 2013. In parallel with developing cutting-edge solutions for our clients in sukuk, investment banking has been instrumental in generating value for the bank through evaluating other investment opportunities. For example, during 2013, EIIB arranged and participated in financings for the Channel Island Stock Exchange-listed investment company London Central Apartments Limited and the Kuwaiti retail distributor Yusuf A. Al-Ghanim & Sons. Trade finance was another area of focus, with investment banking working closely with asset management to structure the Rasmala Trade Finance Fund. EIIB‟s approach to investment banking aims to look beyond mere replication of conventional financing structures through the application of Sharia‟a “wrappers” and other synthetic structures, and instead focuses on first principles of Islamic finance. We see these products and services as being a growth area, particularly as capital from the GCC region flows into the London market. Exiting legacy investments We maintained strong focus on our legacy private equity investments and balance sheet exposures during 2013. We sold an Islamic debt obligation to Barclays Bank for £4.8m (US$8.1m). We completed the sale of an office building in Cairo related to our discontinued Egyptian brokerage operations for US$6.2m and settled the related financing. And we exchanged the majority of our capital in a NAVIS private equity fund (2012: £3.2m) for units in a public equities open-ended fund managed by NAVIS offering quarterly liquidity (2013: £2.4m). The lock-up on redemptions for this fund expired on 31 Dec 2013. We continue to seek an orderly exit from our remaining legacy investments and are determined to optimise the returns from our exits. Market review At the macro level, we believe that the markets of the GCC region continue to offer outstanding prospects. The GCC countries have some of the highest growth rates in the world and a combination of sovereign wealth, the need for increasing infrastructure spend, rising income, demographics and location will continue to ensure long-term growth.
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In the short term, prospects for the GCC remain healthy. The IMF predicts GDP growth of 4.4% in 2014 for the GCC overall, but more importantly higher non-oil GDP growth. This compares with their forecast of 3.7% Global GDP growth and only 2.0% G7 growth. Dubai continues to recover from the 2008 downturn and is developing into a major financial centre and cooperation between the UK and the UAE in particular continues to increase, including in areas of Islamic finance. In financial market terms, our view that during 2013 investors would increasingly seek dividend-yielding equity investment opportunities, proved correct as global interest rates began to rise from record low levels, negatively effecting fixed income, while Arab equity markets were some of the top performers globally. We believe a rebound in confidence in the GCC will maintain momentum in 2014 and continue to favour equities, however, we do not anticipate the same degree of abnormal returns as in 2013. New supply will be a feature of the equities markets in 2014 with the return of IPOs. In addition the global index compiler MSCI has upgraded the United Arab Emirates ("UAE") and Qatar to Emerging Market status from Frontier Market. Effective May 2014, the UAE and Qatar will be given a weighting of 0.4 percent and 0.45 percent respectively in the MSCI Emerging Markets Index. This upgrade marks a new era for capital flows into the Gulf and is important for developing the region as a destination for equity investment in the long term. There is continued regional demand for sukuk and credit. We expect reasonable performance assuming the global rates curve rises within current consensus expectations, as regional credit quality, and therefore spreads, continues to improve. Our strategy – going forward The strategy approved for the period 2012-2016 was to restructure EIIB by exiting higher risk, longer term, private equity investments and build more stable income streams by developing the Bank as a specialist asset management and financing business. We also established a clear goal of positioning EIIB as a catalyst for consolidation in the GCC asset management industry and to achieve a market leading position, with at least $3bn of assets under management, by 2016. We remain committed to our strategic plan as we move from restructuring to the growth phase. We will now focus on product development, distribution capabilities, further strengthening of the team and strategic or bolt-on acquisitions as appropriate.
Future developments We believe that we have a solid investment banking and asset management offering in the GCC region. EIIB is now well positioned to expand market share - the outlook is positive. The Rasmala acquisition was the initial key to delivering our strategy. As we have now largely completed the restructuring and increased our strategic stake to 76.3%, we are now upgrading our communications collateral to fully reflect our offer and expect to complete this exercise by Q4 of 2014. During the year management participated in an institutional road show to give presentations to analysts, fund managers and potential investors. The road show resulted in new institutional shareholders joining the shareholder register and it is anticipated that further road shows will take place in 2014. EIIB plans to reduce its capital so as to facilitate distributions to shareholders in 2014 – subject to shareholder approval. The bank is currently constrained in its ability to make distributions due to insufficient distributable reserves and the Board will make a further announcement on proposed next steps in advance of the next Annual General Meeting.
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Acknowledgements Over the last two years we have successfully repositioned the bank, thanks to a consistent and innovative business strategy, quality execution provided by a strong Board and management team and supportive clients. We believe the transformation of EIIB is on course and look forward to reporting further progress in the future. OPERATING AND FINANCIAL REVIEW Introduction EIIB is a London listed specialist investment banking and asset management group focused on the oil rich markets of the Gulf Cooperation Council (GCC) countries. It delivers investment banking and asset management products and services across asset classes to the wholesale and institutional markets. EIIB is authorised by the Prudential Regulation Authority (PRA) (previously The Financial Services Authority (FSA)) and is listed on the AIM Market of the London Stock Exchange. The Bank's activities are also regulated by local regulators in MENA jurisdictions. The Bank's competitive position is significantly enhanced by its geographic footprint in London and the MENA region. The Directors present the Operating and Financial Review for 2013. Having followed the framework set out in the Accounting Standards Board Reporting Statement: Operating and Financial Review as a guide to best practice, the Directors believe they have discharged their responsibilities under Section 417 of the Companies Act 2006 to provide a balanced and comprehensive review of the development and performance of the business. Results Total operating income in 2013 was £10.2m (2012: £3.9m). Profit before tax from continuing operations amounted to £1.5m (2012: loss £10.1m). Capital Adequacy EIIB had total assets of £154m at 31 December 2013 (£172m at 31 December 2012). Regulatory capital resources of the Group as at 31 December 2013 was £101m (£100m at 31 December 2012) and the total risk weighted assets was £117m (£128m at 31 December 2012). The capital adequacy ratio as at 31 December 2013 stood at 86% (2012: 78%). Liquidity EIIB's balance sheet remains highly liquid. As at 31 December 2013, the net cash excess (calculated as a percentage of deposits) was +40% (31 December 2012: +49%) in the 8 days and under category, and +60% (31 December 2012: +60%) in the 1 month and under category, against minimum requirements of 0% and -5% respectively. Liquidity is managed on a day to day basis by the Head of Principal Investments & Treasury. Business strategy EIIB's business strategy is to develop as a specialist asset management and financing business, offering clients bespoke solutions and operating between London and the growth markets of the GCC. We also established a clear goal of positioning EIIB as a catalyst for consolidation in the GCC asset management industry and to achieve a market leading position, with at least $3bn of assets under management, by 2016 Islamic finance The key principles of Islamic finance are based on ethical real economy transactions, thus Islamic finance transactions avoid the following:
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Interest or the trading of intangible assets and cash flows
Uncertainty
Speculation
Unjust enrichment or unfair exploitation The Bank adheres to these principles. The Bank's Sharia'a Supervisory Board (SSB), comprising eminent Islamic scholars, is tasked with monitoring and certifying that all products and services are structured and executed to reflect these principles. People A significant differentiating factor for our business is our ability to attract talent. The post-acquisition integration of Rasmala enabled a significant rationalisation of staff subsequent to which during the period, the Group started to add to headcount, particularly in the sales function, as our strategy moved into its growth phase. During the period the Directors believe that EIIB has been able to provide a stimulating environment and competitive remuneration structures which has enabled the Bank to attract and retain staff of the highest calibre. Operational During the period the Bank has successfully restructured the operations of Rasmala and has created a more integrated and scalable infrastructure. The Bank has put in place controls, systems and processes to enable the group to operate more effectively as a whole and to protect and safeguard the Bank's assets. EIIB's Internal Audit framework, directed by the Board's Audit Committee, is responsible for working with management to identify and quantify risk, provide independent appraisals of systems of internal control, add value to business initiatives and support the maintenance of a sound control culture throughout the Bank. Key performance indicators The Bank does not consider it meaningful to disclose numerical targets and performance indicators other than those financial and Assets Under Management figures published in this report. 2013 review 2013 was a strong year for Rasmala‟s asset management business. Discretionary managed assets including capital seeded by EIIB group increased by 25% to £712m (US$ 1,176m) (2012: £570m / US$ 922m). Strong investment performance across our flagship funds and investment strategies showed the benefits of our regional expertise and detailed local insights. Assets under management including capital seeded by the Group increased by 25% to £712m (US$ 1,176m) (2012: £570m / US$ 922m) Rasmala Assets Under Management
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During 2013, we focused our efforts on innovating, expanding and upgrading our product offering; and deepening and expanding our market penetration within existing and new distribution channels and clients. Investment Performance Our investment performance was strong across all investment strategies, Funds and client portfolios. Our two flagship Funds, the Arabian Markets Growth Equity Fund and the Rasmala GCC Fixed Income Fund continue their long standing track record of investment success, outperforming industry recognized benchmarks and peer group averages. Arabian Markets Growth Equity Fund Performance Tables
1Index was MSCI Arabian Markets Index since inception until August 2010. It was then changed to
S&P Pan Arab Composite Large Mid Cap Index.
2Inception date is 30th July 2006.
Returns net of all fees and expenses
Fund Performance
2013 2012 2011
Arabian Markets Growth Equity Fund 37.95% 11.91% -2.16%
S&P Pan Arab Composite Large Mid
Cap Index1
21.62% 3.10% -13.62%
Relative Performance 16.33% 8.81% 11.46%
Cumulative Returns (%)
1Y 2Y 5Y
Since
Inception2
Arabian Markets Growth Equity Fund 37.95% 54.37% 98.54% 60.23%
S&P Pan Arab Composite Large Mid Cap Index
1
21.62% 25.39% 43.70% -13.17%
Relative Performance 16.33% 28.98% 54.84% 73.40%
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Rasmala GCC Fixed Income Fund Performance Table
Fund Performance
1Index was Citigroup Corporate AAA/AA Bond since inception until March 2011. After which, it was changed
to Citigroup MENA Broad Bond Index GCC 2Inception date is 31st March 2009
Wholesale Distribution Channels We are increasing our visibility by opening new distribution channels. We believe there is great potential in forming strategic partnerships with regional financial services providers and this has been the core focus of wholesale distribution efforts in 2013. In particular we are building relationships with entities that offer Islamic insurance and savings products (Sharia‟a Compliant Takaful and Re-Takaful) for promotion by Emirati based banks and IFAs to their core banking/wealth management customers respectively. The market for packaged insurance and saving products is growing rapidly in the Gulf, and these entities are well positioned to cooperate with Rasmala. We also worked closely with existing distributors to identify new opportunities and add additional products to their platforms. Discretionary Portfolio Mandates We increased both the number and size of our discretionary portfolio mandates (DPM) during 2013. Notably we won new mandates from government institutions in Oman that we consider to be strategic. In a clear vote of confidence in our investment performance and high levels of client servicing, existing DPM clients increased the size of their portfolios with us during the year. DPM funds provide the investment manager with the discretion to execute transactions within set parameters without referring to the account owner. New Fund Launches In 2013, we continued to execute the product expansion plan we developed and set in motion in 2012. In May 2013, we launched the Rasmala GCC Islamic Equity Income Fund with a seed capital of £6.7m (US$11m). The Fund‟s investment performance has been impressive since its launch, returning 11.97%% since its launch until the end of the year. The Fund‟s investment strategy is to offer investors semiannual distributions of equity dividends as well as the potential for capital appreciation by investing in high dividend paying equity securities listed on the GCC stock exchanges. We also launched in November, 2013, with seed capital commitment of £6.01 (US$10m), the Rasmala
2013 2012 2011
Rasmala GCC Fixed Income Fund 1.14% 14.56% 6.47%
Citigroup MENA Broad Bond Index
GCC1 0.03% 12.63% 7.49%
Relative Performance 1.11% 1.93% -1.02%
Cumulative Returns (%)
1Y 2 Y 3Y
Since
Inception2
Rasmala GCC Fixed Income Fund 1.14% 15.86% 23.36% 58.81%
Citigroup MENA Broad Bond Index GCC
1 0.03% 12.66% 21.10% 37.58%
Relative Performance 1.11% 3.20% 2.26% 21.23%
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Trade Finance, a Sharia compliant open ended Fund providing investors with a low volatility money market alterative. The Fund is targeting a return of 4% while providing investors with monthly liquidity. These product launches build upon the 2012 newly launched products. In 2012 we launched the Rasmala Global Sukuk Fund with initial seed capital of £15.5m (US$25m), and in December 2012, we launched the Rasmala Leasing Fund, a Cayman Limited Partnership established to capture investment performance in the US leasing market, with a £6.1m (US$10m) seed commitment. The Rasmala Leading Fund targets regular annual distributions of 12%, and an IRR of 7% to 8% over the full life of the Fund. The Rasmala Global Sukuk Fund includes sukuk exposures from outside the GCC namely from Islamic Asia. Strategically, these investment products allow us to capture the outbound investment flows from GCC investors to investment opportunities in other geographies. We feel that there is a market opportunity for us to not only cater to investor requirements in the MENA investment markets, but also to offer to our GCC client base unique, Sharia compliant, investment products investing in international markets. After establishing an initial track-record and portfolio for these funds in 2012 and 2013, the full marketing effort in 2013 allowed third-party money in these funds to increase. Rasmala Key Funds Equity
Arabian Markets Growth Equity Fund
Rasmala GCC Islamic Equity Income Fund
Rasmala Palestine Equity Fund Fixed Income
Rasmala GCC Fixed Income Fund
Rasmala Global Sukuk Fund Alternative
Rasmala Leasing Fund
Rasmala Trade Finance Fund Investment Banking The investment banking team is specialized in Islamic banking products and services. In October 2013, we successfully acted as lead arranger and book runner for our first sukuk following the repositioning, for European-based multinational insurance group FWU Group. The US$20 million issue was part of a US$100m program and was rated “BBB” by Fitch. We see such mid-market sukuk products and services as being a growth area particularly as capital from the GCC region flows into the London market. Summary Our asset management business remains on a clear growth path aided by additional products in the platform and additional focus on sales. Our investment performance and outstanding client servicing continues to attract AUMs from new and established direct clients and via a broadening range of distribution channels. With the launch of new Funds in 2013 and further expansion of Rasmala‟s product range planned in 2014, we are confident that our asset management business will continue to flourish. Our investment banking operation is well positioned to develop its debt capital markets and structured debt finance business.
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Legacy investments Under EIIB's original business model the Bank focused on private equity investments and with limited focus on asset management; success depended on the performance and realisation of Private Equity investments. However, despite some initial success, these investments lacked a clear sector or geographic focus where our regional expertise could add value and accordingly, under EIIB's revised strategy, the decision was made to exit these legacy investments. Legacy assets consisted of a number of private equity investments and a financing arrangement:
Arcapita
On 12 February 2013 we announced the sale of 100% of our remaining exposure in Arcapita for £5.0m (US$8.1m) in cash consideration. We held no exposure to Arcapita at year-end 2013.
Accelerator Technology Holdings
Accelerator Technology Holdings is a private equity company that invests in ventures specialising in the information and communications technology value chain in the Arab world. Our exposure to Accelerator Technology Holdings at year-end 2013 was recorded at £2.8m (2012: £2.7m).
Carian Bay
Carian Bay is a luxury residential and hospitality real estate development project based in Turkey. Our exposure to Carian Bay at year-end 2013 was recorded at £1.4m (2012 £1.7m).
DiamondCorp
DiamondCorp plc is an emerging diamond producer focused on maximising shareholder value through the development of high-margin diamond production assets. Our exposure at year-end 2013 was recorded at £2.8m (2012: £2.2m).
Rasmala Legacy PE Investments. At acquisition, Rasmala held stakes in three material private investments arising from participations in pre-IPO placements to clients prior to the global financial crisis. The material investments were equity in a Dubai based primary and secondary private schools operator, a Ras Al Khaimah based E&P company with a controlling stake in DNO International (operates in the Kurdish region of Iraq) and the equity in a Dubai based real estate developer of a single completed office/retail project in TECOM, Dubai. Our exposure at year-end 2013 was recorded at £7.7m (2012: £6.7m).
Risk factors EIIB's business model involves the taking of risk in return for reward. Our MENA regional focus offers opportunities for outstanding returns but exposes us to a number of emerging market social, political and economic risks. The Bank is exposed to market risk in relation to its assets and liabilities, credit risk from transactions with third parties, particularly money market transactions, liquidity risk from liquidity mismatches and operational risk. The effective management of risk is an essential part of our business and a key element in good corporate governance. Strong risk management is fundamental to EIIB's culture. The Bank's approach to risk is documented in various risk policies. Under these policies risk is monitored on a daily basis. Further details are reported in note 42 to the Financial Statements on pages 81 to 95. In terms of the Corporate Governance Code, the Board is responsible for risk. A Risk Appetite and Tolerance Policy sets the parameters for risk taking. Systems and controls are in place to identify, measure, monitor and manage risk. The responsibility for managing risks lies with senior management. The Risk Department facilitates this process and monitors the effectiveness of the Bank's risk management processes.
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The Board Risk Committee (BRC) has overall responsibility for ensuring the Bank's Risk Policies are implemented. Key Elements The key elements of our risk management framework are:
setting the Risk Management strategy and philosophy;
defining the business risk appetite and tolerances;
identification and quantification of risks;
evaluation of identified risks;
managing identified risks;
risk reporting to support the on-going management of risks and the effectiveness of the risk solutions; and
business continuity planning. Key risks The Bank is exposed mainly to credit risk, market risk, operational risk and liquidity risk. Further details on the Bank's approach to risk management are included in Note 42 to the Financial Statements on pages 81 to 95.
Zulfi Caar Hydari Chief Executive Officer, 2 May 2014 Registered Office: Milton Gate 60 Chiswell Street London EC1Y 4SA
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REPORT OF THE DIRECTORS OF THE GROUP
The Directors of European Islamic Investment Bank plc (registration number 5328847) have pleasure in presenting their annual report, together with the audited financial statements, for the year ended 31 December 2013. DIVIDEND The bank plans to reduce its capital and make distributions to shareholders in 2014. DIRECTORS The Directors serving at the date of this report and during the year are shown on page 6. On 22 April 2013, Martin Barrow was appointed Non-Executive Director. On 28 May 2013, Keith McLeod resigned as Executive Director. On 27 November 2013, Aabed Al Zeera‟s engagement terminated as Non Executive Director. DIRECTORS‟ INTERESTS The Directors who held office at the end of the financial year had the following beneficial interests in the ordinary shares of the Bank according to the register of Directors‟ interests. The table shows the number of shares held as a percentage of total shares in issue at that time: Name Class of share Interest at end of year Interest at start of year
Mohammed Al Sarhan Ordinary 1p 5,549,567 0.29% 5,549,567 0.31%
Abdallah Al-Mouallimi, the Chairman and Michael Willingham-Toxvaerd hold indirect beneficial interests in EIIB by virtue of their participations in HBG Group fund structures, which in turn hold 16.11% of EIIB‟s shares. None of the other Directors who held office at the end of the financial year had any other disclosable interest in the shares of the Bank. According to the register of Directors‟ interests, no rights to subscribe for shares in or debentures of the Bank were granted to any of the Directors or their immediate families, or exercised by them, during the financial year. SHARIA‟A SUPERVISORY BOARD MEMBERS The Sharia‟a Supervisory Board (SSB) members are as follows: • Dr. Abdul Sattar Abu Ghuddah – Chairman • Shaykh Nizam Yacouby – Deputy Chairman • Dr. Aznan bin Hasan* * appointed 1 January 2013 ZAKAH Zakah is an annual amount to be paid by Muslims to charity out of their savings. The Directors calculate that the Zakah contribution payable by shareholders on their share of the Bank‟s earnings is 0.165p per share or £1.65 per thousand shares held based on the net assets method as detailed in the Accounting, Auditing and Governance Standards 2004-5 of the Accounting and Auditing Organisation for Islamic Financial Institutions.
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POLITICAL CONTRIBUTIONS AND CHARITABLE DONATIONS The Bank made no political contributions or charitable donations during the year. PRINCIPAL RISKS AND UNCERTAINTIES Refer to the Strategic Report FINANCIAL INSTRUMENTS Refer to the Strategic Report EVENTS SINCE THE BALANCE SHEET DATE The Directors confirm there are no significant events arising since the balance sheet date that should be reported to shareholders other than those disclosed on page 96. GOING CONCERN In approving the financial statements the Directors have reviewed the current and potential future business activities and financial position of the Bank, including an assessment of the capital adequacy and liquidity forecasts. Based upon this they are satisfied that the Bank has adequate resources to continue in business for the foreseeable future. For this reason the Directors continue to adopt the going concern basis in preparing the financial statements. AUDITORS The Directors who held office at the date of approval of this Directors‟ report confirm that so far as they are each aware there is no relevant audit information of which the Bank‟s auditors are unaware, and each Director has taken all steps that he ought to have taken as a Director to make himself aware of any relevant audit information and to establish that the Bank‟s auditors are aware of that information.
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CORPORATE GOVERNANCE COMPLIANCE WITH THE UK CORPORATE GOVERNANCE CODE The Board considers that good corporate governance is central to achieving the Bank‟s objectives and has applied these principles in drawing up the Bank‟s risk management framework taking into consideration The UK Corporate Governance Code June 2010 published by the Financial Reporting Council (“The Code”). THE BOARD AND ITS COMMITTEES The Bank is led by a Board comprising Non-Executive and Executive Directors with significant experience in financial services and deep relationships in the MENA region. The appointment of Directors is considered by the Nomination and Remuneration Committee and then the Board. Following the provisions in the Articles of Association, all Non-Executive Directors must stand for re-election by the shareholders at the first Annual General Meeting following their appointment and must also stand for re-election by the shareholders, at least every three years. Executive Directors normally retire at age 65, as required by their service agreements. Non-Executive Directors are appointed for three-year renewable terms, which may be terminated by giving three months notice. The Board is required to meet at least four times a year; in 2013 there were six Board meetings. The Board has a programme designed to enable the Directors to review corporate strategy and the operations and results of the business and to discharge their duties within a framework of prudent and effective controls relating to the assessment and management of risk. The matters specifically referred to the Board for decision include the approval of the annual report and financial statements; the payment of dividends; the long-term objectives of the Bank; the strategies necessary to achieve these objectives; the Bank‟s budgets and plans; significant credit exposures; significant capital expenditure items; significant investments and disposals; the organisational structure of the Bank; the arrangements for ensuring that the Bank manages risk effectively; any significant change in accounting policies or practices; the appointment of the Bank‟s main professional advisers; and the appointment of senior executives within the organisation. The Board has delegated to the Committees of the Bank the power to make decisions on operational matters, including those relating to credit, liquidity, operational and market risk, within an agreed framework. All Directors have access to the services of the Company Secretary, and independent professional advice is available to the Directors at the Bank‟s expense, where they judge it necessary to discharge their duties as Directors. The Board reviews and approves its composition and charter in order to set the risk management framework of the Bank at least annually. To assist the Board in executing its functions, it reviews and approves the composition and charters of the following Board sub-committees: AUDIT COMMITTEE John Wright assumed the chairmanship of the Audit Committee on 7 September 2012. The Audit Committee comprises John Wright (Chairman) and Mohammed Al Sarhan. In discharging its duties, the committee is required to review the auditors‟ remuneration and, in discussion with them, to assess their independence and recommend their re-appointment at the Annual General Meeting. The committee also reviews the financial statements published in the name of the Board and the quality and acceptability of the related accounting policies, practices and financial reporting disclosures; the scope of work of the internal auditor, reports from the internal auditor and the adequacy of their resources; the effectiveness of the systems for internal control, risk management and compliance with financial services legislation and regulations; procedures by which staff may raise concerns in confidence; and the results of the external audit and reports from the external auditor and their findings on accounting and internal control systems.
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NOMINATION AND RENUMERATION COMMITTEE The Nomination and Remuneration Committee, which comprises Mohammed Al Sarhan (Chairman) and Abdallah Al-Mouallimi, reviews the composition of the Board, taking into account the skills, knowledge and experience of Directors and considers and makes recommendations to the Board on potential candidates for appointment as Directors. The committee also makes recommendations to the Board concerning the re-appointment of any Non-Executive Director by the Board at the conclusion of his or her specified term; the re-election of any Director by the shareholders under the retirement provisions of the Articles of Association; any matters relating to the continuation in office of a Director; and the appointment of any Director to executive or other office. The Nomination and Remuneration Committee evaluates, normally the performance of the Board and its committees and makes appropriate recommendations to the Board. This is conducted through a self-assessment process that requires each Director to assess and rate the performance of the Board and its committees. The results of the exercise are considered by the Board and appropriate steps agreed and implemented to remedy any areas of deficiency or concern. The Nomination and Remuneration Committee reviews the remuneration policy for senior management, to ensure that members of the executive are provided with appropriate incentives to encourage them to enhance the performance of the Bank and that they are rewarded for their individual contribution to the success of the organisation. It is also made aware of, and advises on, major changes to employee benefits schemes. BOARD RISK COMMITTEE The Board Risk Committee comprises Abdallah Al-Mouallimi (Chairman), Martin Barrow and Zulfi Caar Hydari. The Board Risk Committee assists the Board in fulfilling its investment risk management responsibilities; these responsibilities include determining the Bank‟s risk profile and ensuring that management remains within the Board‟s predetermined risk appetite. Meetings are held at least quarterly and include the Chief Executive Officer and senior finance and risk management by standing invitation. The terms of reference include reviewing capital adequacy, liquidity, credit risk, market risk, operational risk and approvals under the Board‟s delegated authority. EXECUTIVE MANAGEMENT COMMITTEE The Bank has an Executive Management Committee to assist the Chief Executive Officer in performing his duties. The Executive Management Committee membership comprises the Chief Executive Officer and senior management from finance, risk, treasury, principal investments, investment banking, legal, compliance and HR. Specifically, the committee considers the development and implementation of strategy, operational plans, policies and budgets; the monitoring of operating and financial performance; the assessment and control of risk; the prioritisation and allocation of resources; human resources; and the monitoring of competitive forces in each area of operation. The committee, assisted by its sub-committees (risk management, IT and asset and liability committees) also supports the Chief Executive Officer in ensuring the development, implementation and effectiveness of the Bank‟s risk management framework and the clear articulation of the Bank‟s risk policies, and in reviewing the Bank‟s aggregate risk exposures and concentrations of risk. The committee may have specific powers delegated to it by the Board from time to time and, following the exercise of these powers, it reports to the Board.
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MEETINGS AND ATTENDANCE
* Remuneration Committee and Nomination Committee were merged on 12 March 2012 ** Aabed Al Zeera‟s engagement terminated on 27 November 2013 ***Keith McLeod resigned from the Board on 28 May 2013 SHAREHOLDERS The Board has appointed Mohammed Al Sarhan as the Senior Independent Director. He is available to shareholders if they have concerns which contact through the normal channels of Chairman or Chief Executive Officer has failed to resolve or for which such contact is inappropriate. The Board ensures the Directors develop an understanding of the views of major shareholders by encouraging them to meet major shareholders and attend shareholder meetings; making them aware of views and feedback received from shareholders; and providing them with analysts‟ and brokers‟ briefings on the Bank.
Main
Board Audit
Committee
Nomination and Remuneration
Committee*
Board Risk Committee
No. of meetings in year
Abdallah Yahya Al-Mouallimi 6 - 5 4
Aabed Al Zeera** 3 1 1 2
Mohammed Al Sarhan 6 4 5 -
Michael Willingham-Toxvaerd 4 - - -
John Robertson Wright 6 4 - -
Zulfi Caar Hydari 6 4 5 4
Keith McLeod*** 1 - - 1
Martin Gilbert Barrow 4 - - 2
Total number of meetings held 6 4 5 4
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STATEMENT OF DIRECTORS‟ RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT AND THE FINANCIAL STATEMENTS
The directors are responsible for preparing the Annual Report and the Group and Parent company financial statements in accordance with applicable laws and regulations. Company law requires the directors to prepare group and parent company financial statements for each financial year. As required by the AIM Rules of the London Stock Exchange they are required to prepare the Group financial statements in accordance with IFRSs as adopted by the EU and applicable law and have elected to prepare the Parent company financial statements on the same basis. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Parent company and of their profit or loss for that period. In preparing each of the Group and Parent company financial statements, the directors are required to:
select suitable accounting policies and then apply them consistently;
make judgments and estimates that are reasonable and prudent;
state whether they have been prepared in accordance with IFRSs as adopted by the EU; and
prepare the financial statements on the going concern basis unless it is inappropriate to presume that the group and the parent company will continue in business.
The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Parent company's transactions and disclose with reasonable accuracy at any time the financial position of the Parent company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.
By order of the Board,
Zulfi Caar Hydari Chief Executive Officer, 2 May 2014 Registered Office: Milton Gate 60 Chiswell Street London EC1Y 4SA
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REPORT OF THE SHARIA‟A SUPERVISORY BOARD In the name of Allah, The Beneficent, The Merciful To the Shareholders of European Islamic Investment Bank plc (“EIIB”) For the period 1 January 2013 to 31 December 2013 (the “Period”) Assalamu Alaikum Wa Rahmat Allah Wa Barakatuh
In compliance with our letters of appointment with EIIB, we are required to submit this report. We have reviewed the principles and the contracts relating to a sample of transactions conducted by EIIB during the Period. We have conducted our review to form an opinion as to whether EIIB has complied, during the Period, with Sharia‟a rules and principles and also with the specific fatwas, rulings and guidelines issued by us. EIIB‟s management is responsible for ensuring that EIIB conducts its business in accordance with Sharia‟a rules and principles. It is our responsibility to form an independent opinion, based on our review of the operations of EIIB in the Period, and to report to you. We conducted our review which included examining, on a test basis, each type of transaction, the relevant documentation and procedures adopted by EIIB for the transaction during the Period. Based on this we are of the opinion that the contracts, transactions and dealings entered into by EIIB during the Period that were reviewed are in compliance with Sharia‟a rules and principles. We beg Allah the Almighty to grant us all success and straight-forwardness. Wassalam Alaikum Wa Rahmat Allah Wa Barakatuh 24 April 2014 Signed on behalf of the Sharia‟a Supervisory Board of European Islamic Investment Bank plc. _______________________ _______________________ Dr. Abdul Sattar Abu Ghuddah Sh. Nizam Yacouby (Chairman) (Deputy Chairman)
______________________ Dr. Aznan Hasan (Member)
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INDEPENDENT AUDITOR‟S REPORT TO THE MEMBERS OF EUROPEAN ISLAMIC INVESTMENT BANK PLC
We have audited the financial statements of European Islamic Investment Bank plc for the year ended 31 December 2013 which comprise the consolidated and company statement of financial position, the consolidated statement of income, the consolidated and company statement of cash flows, the consolidated and company statement of changes in equity and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006.
This report is made solely to the company‟s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company‟s members those matters we are required to state to them in an auditor‟s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company‟s members as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of directors and auditors
As explained more fully in the statement of directors‟ responsibilities, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Financial Reporting Council‟s (FRC‟s) Ethical Standards for Auditors.
Scope of the audit of the financial statements
A description of the scope of an audit of financial statements is provided on the FRC‟s website at www.frc.org.uk/auditscopeukprivate.
Opinion on financial statements
In our opinion:
the financial statements give a true and fair view of the state of the group‟s and the parent company‟s affairs as at 31 December 2013 and of the group‟s loss for the year then ended;
the group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union;
the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and
the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.
Opinion on other matters prescribed by the Companies Act 2006
In our opinion the information given in the strategic report and directors‟ report for the financial year for which the financial statements are prepared is consistent with the financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:
adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or
the parent company financial statements are not in agreement with the accounting records and returns; or
certain disclosures of directors‟ remuneration specified by law are not made; or
we have not received all the information and explanations we require for our audit.
Neil Griggs (senior statutory auditor) For and on behalf of BDO LLP, statutory auditor United Kingdom 2 May 2014
BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127)
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CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED 31 DECEMBER 2013
2013 2012
Notes £ £
Income
Income from financing and investing activities 4 2,491,520 2,519,480
Returns to financial institutions and customers 5 (206,830) (340,632)
Net income 2,284,690 2,178,848
Net fees and commission income 6 3,154,350 2,683,401
Income on financial assets 7 1,190,493 1,636,890
Income/(loss) on private equity investments designated at fair value 2,480,687 (3,094,754)
Income on investment property designated at fair value 324,953 227,589
Other operating income 8 746,079 267,727
Total operating income 10,181,252 3,899,701
Expenses
Credit/(provision) on impairment of financing arrangements 202,831 (4,270,712)
Staff costs 9 (5,780,633) (5,718,129)
Depreciation and amortisation 23,24 (187,100) (266,742)
Other operating expenses 10 (2,921,197) (3,707,462)
Third party interest in consolidated funds (10,379) (14,170)
Operating income/(loss) before tax 11 1,484,774 (10,077,514)
Tax (charge)/credit 12 (262,624) 200,106
Income/(loss) from continued operations 1,222,150 (9,877,408)
Loss from discontinued operations 20 (1,249,584) (1,143,511)
Loss for the year (27,434) (11,020,919)
Income/(loss) attributable to:
Equity holders of the Bank 137,575 (10,086,141)
Non-controlling interest 39 (165,009) (934,778)
(27,434) (11,020,919)
Earnings per share
- basic 13 0.01p (0.57p)
- diluted 13 0.01p (0.54p)
The notes on pages 35 to 96 form an integral part of the financial statements.
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CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2013 2013 2012
Notes £ £
Loss for the year (27,434) (11,020,919)
Other comprehensive income
Net change in fair value of available-for-sale securities (383,595) 816,761
Foreign exchange loss on net investment in foreign operations (413,904) -
Tax charge 12 - (200,106)
Total comprehensive loss for the year (824,933) (10,404,264)
Total comprehensive loss attributable to:
Equity holders of the Bank (561,830) (9,469,486)
Non-controlling interest (263,103) (934,778)
(824,933) (10,404,264)
The notes on pages 35 to 96 form an integral part of the financial statements.
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CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 2013 2013 2012
Notes £ £
Assets
Cash and balances with banks 9,488,406 13,624,694
Due from financial institutions 14 40,244,300 62,547,116
Financial assets designated at fair value 15 27,266,475 24,633,472
Available-for-sale securities - sukuk 16 26,457,774 33,989,114
Financing arrangements 17 11,450,067 -
Private equity assets designated at fair value 18 15,864,665 13,315,897
Fair value of foreign exchange agreements 19 1,377,797 797,669
Assets held for sale 20 910,109 5,821,454
Investment properties 22 1,742,156 1,738,458
Goodwill 38.3 10,165,750 11,546,400
Operating lease assets held for sale 21 4,368,976 -
Property, plant and equipment 23 193,589 331,227
Intangible assets 24 13,409 27,471
Other assets 25 4,060,019 3,322,473
Total assets 153,603,492 171,695,445
Liabilities
Due to financial institutions 26 13,000,806 26,731,508
Due to customers 27 - 95,637
Fair value of foreign exchange agreements 19 2,819 39,309
Liabilities held for sale 20 848,866 3,144,191
Other liabilities 28 6,274,656 8,921,872
Third party interest in consolidated funds 6,499,725 3,831,361
Total liabilities 26,626,872 42,763,878
Shareholders' equity
Share capital 29 19,720,892 17,790,994
Share premium account 29 101,815,459 96,569,263
Capital redemption reserve 29 599,040 599,040
Treasury shares 30 (2,117,015) (2,117,015)
Special reserve 31 20,000,000 20,000,000
Fair value reserve on available-for-sale securities 219,111 602,706 Share based payment reserve - -
Foreign exchange reserve (315,810) (10,814)
Accumulated losses (16,987,349) (13,673,201)
Total equity attributable to the Bank's equity holders
122,934,328 119,760,973
Non-controlling interest 39 4,042,292 9,170,594
Total equity 126,976,620 128,931,567
Total equity and liabilities 153,603,492 171,695,445
Abdallah Y. Al-Mouallimi, Chairman Zulfi Caar Hydari, Chief Executive Officer
2 May 2014 The notes on pages 35 to 96 form an integral part of the financial statements.
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CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2013
Share
capital
Share premium account
Capital redemption
reserve Treasury
shares Special reserve
Share based
payment reserve
Fair value reserve on AFS
securities
Foreign exchange
reserve Accumulated
losses
Non controlling
interest Total equity
– Group £ £ £ £ £ £ £ £ £ £ £ Balance at 1 January 2012 17,656,585 116,219,800 599,040 (2,117,015) - 376,138 (13,949) - (4,051,196) 1,680,165 130,349,568 New shares issued 134,409 349,463 - - - - - - - - 483,872 Cost of share based payment arrangements - - - - - 87,998 - - - - 87,998 Share premium transfer - (20,000,000) - - 20,000,000 - - - - - - Transfer relating to share based payments - - - - - (464,136) - - 464,136 - - NCI arising on business acquisition - - - - - - - (10,814) - 9,946,081 9,935,267
17,790,994 96,569,263 599,040 (2,117,015) 20,000,000 - (13,949) (10,814) (3,587,060) 11,626,246 140,856,705
Net change in fair value of available-for-sale securities
816,761 - - - 816,761
Tax (200,106) - - - (200,106) Loss for the year - - ( 10,086,141) (934,778) (11,020,919) Distributions - - - (1,520,874) (1,520,874)
Total comprehensive income 616,655 - (10,086,141) (2,455,652) (11,925,138)
Balance at 31 December 2012 17,790,994 96,569,263 599,040 (2,117,015) 20,000,000 - 602,706 (10,814) (13,673,201) 9,170,594 128,931,567
Balance at 1 January 2013 17,790,994 96,569,263 599,040 (2,117,015) 20,000,000 - 602,706 (10,814) (13,673,201) 9,170,594 128,931,567 New shares issued 1,929,898 5,246,196 - - - - - - - - 7,176,094 Acquisition of NCI - - - - - - - - - (2,561,405) (2,561,405) Adjustment on premium paid over acquisition of non-controlling interest - - - - -
- - - (3,451,723) - (3,451,723)
Capital distribution by Rasmala subsidiaries - - - - - - - - - (1,086,807) (1,086,807) Reallocation of NCI (note 38.3) - - - - - - - - - (1,216,987) (1,216,987) Other - - - - - - - 10,814 - - 10,814
19,720,892 101,815,459 599,040 (2,117,015) 20,000,000 - 602,706 - (17,124,924) 4,305,395 127,801,553
Net change in fair value of available-for-sale securities
(383,595) - - - (383,595)
Foreign exchange loss on conversion of foreign operations
- (315,810) - (98,094) (413,904)
Loss for the year - - 137,575 (165,009) (27,434) Distributions - - - - -
Total comprehensive income (383,595) (315,810) 137,575 (263,103) (824,933)
Balance at 31 December 2013 19,720,892 101,815,459 599,040 (2,117,015) 20,000,000 - 219,111 (315,810) (16,987,349) 4,042,292 126,976,620
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CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2013 2013 2012
£ £
Cash flows from operating activities
Operating loss 1,484,774 (10,077,514)
Operating loss on discontinued operations (1,249,584) (1,143,511)
Adjusted for:
Net provision for impairment of financing arrangements (202,830) 4,270,712
(Gain)/loss on private equity investments designated at fair value (2,480,687) 3,094,754
Gain on investment in funds and sukuk designated at fair value (840,956) (693,042)
Depreciation and amortisation 187,100 266,742
Loss on disposal of plant & equipment 28,212 -
Fair value gain on investment property (177,000) -
Charges for share awards - 87,998
Net (increase)/decrease in operating assets:
Due from financial institutions 22,505,646 29,319,786
Quoted equity investments designated at fair value (6,466,921) -
Financing arrangements (11,450,067) -
Sukuk 9,434,349 (21,181,336)
Investment in funds designated at fair value 2,388,270 (6,487,420)
Private equity financial assets designated at fair value (68,081) (207,851)
Investment property 173,302 (1,738,458)
Other assets (6,216,839) (12,615,263)
Net increase/(decrease) in operating liabilities:
Due to financial institutions (13,730,702) 11,508,366
Due to customers (95,637) (4,364)
Other liabilities 6,005,586 5,185,607
Taxation:
Corporation tax settled - (9,011,800)
Net cash outflow from operating activities (772,065) (9,426,594)
Cash flows from investing activities
Purchase of Operating lease assets (4,368,976) -
Payment on acquisition of a subsidiary (cash consideration) (1,600,000) -
Purchase of property, plant and equipment (63,612) (469,291)
Net cash outflow from investing activities (6,032,588) (469,291)
Cash flows from financing activities
Capital from minority shareholders on acquisition - 9,946,081
Payments to minority shareholders - (1,520,874)
Net subscriptions to consolidated funds 2,668,365 3,831,362
Net cash inflow from financing activities 2,668,365 12,256,569
Net (decrease)/increase in cash and cash equivalents (4,136,288) 2,360,684
Cash and cash equivalents at the beginning of the year 13,624,694 11,264,010
Cash and cash equivalents at the end of the year 9,488,406 13,624,694
The notes on pages 35 to 96 form an integral part of the financial statements.
European Islamic Investment Bank plc
32
COMPANY STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 2013 2013 2012
Notes £ £
Assets
Cash and balances with banks 3,330,188 4,037,638
Due from financial institutions 14 38,001,173 62,547,116
Available-for-sale securities - sukuk 16 26,457,774 33,989,114 Financial assets designated at fair value 15 18,776,878 17,400,705
Financial assets held for sale 21 4,543,467 -
Financing arrangements 17 11,450,067 -
Fair value of foreign exchange agreements 19 1,377,797 797,669
Investments in subsidiaries 38 66,378,641 60,903,627
Property, plant and equipment 23 28,390 60,965
Intangible assets 24 13,409 27,471
Other assets 25 567,168 1,665,526
Total assets 170,924,952 181,429,831
Liabilities
Due to financial institutions 26 4,279,725 13,618,944
Due to customers 27 - 95,637
Due to group entities 40.3 38,231,018 42,150,959
Fair value of foreign exchange agreements 19 2,819 39,309
Other liabilities 28 2,025,339 5,753,195
Total liabilities 44,538,901 61,658,044
Shareholders' equity
Share capital 29 19,720,892 17,790,994
Share premium account 29 101,815,459 96,569,263
Capital redemption reserve 29 599,040 599,040
Treasury shares 30 (2,117,015) (2,117,015)
Special reserve 31 20,000,000 20,000,000
Fair value reserve on available-for-sale securities 219,111 602,706
Share based payment reserve - -
Accumulated losses (13,851,436) (13,673,201)
Total equity attributable to the Bank's equity holders 126,386,051 119,771,787
Total equity and liabilities 170,924,952 181,429,831
Abdallah Y. Al-Mouallimi, Chairman Zulfi Caar Hydari, Chief Executive Officer 2 May 2014 The notes on pages 35 to 96 form an integral part of the financial statements.
European Islamic Investment Bank plc
33
COMPANY STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2013
Share
capital
Share premium account
Capital redemption
reserve Treasury
shares Special
Reserve
Share based
payment reserve
Fair value reserve on AFS
securities Accumulated
losses
Total Equity –
Company
£ £ £ £ £ £ £ £ £
Balance at 1 January 2012 17,656,585 116,219,800 599,040 (2,117,015) - 376,138 (13,949) (4,051,196) 128,669,403
Cost of share based payment arrangements - - - - - 87,998 - - 87,998
New shares issued 134,409 349,463 - - - - - - 483,872
Share premium transfer - (20,000,000) - - 20,000,000 - - - -
Transfer relating to share based payments - - - - - (464,136) - 464,136 -
17,790,994 96,569,263 599,040 (2,117,015) 20,000,000 - (13,949) (3,587,060) 129,241,273
Net change in fair value of available-for-sale securities 816,761 - 816,761
Tax (200,106) - (200,106)
Loss for the year - (10,086,141) (10,086,141)
Total comprehensive income 616,655 (10,086,141) (9,469,486)
Balance at 31 December 2012 17,790,994 96,569,263 599,040 (2,117,015) 20,000,000 - 602,706 (13,673,201) 119,771,787
Balance at 1 January 2013 17,790,994 96,569,263 599,040 (2,117,015) 20,000,000 - 602,706 (13,673,201) 119,771,787
New shares issued 1,929,898 5,246,196 - - - - - - 7,176,094
19,720,892 101,815,459 599,040 (2,117,015) 20,000,000 - 602,706 (13,673,201) 126,947,881
Net change in fair value of available-for-sale securities (383,595) - (383,595)
Tax - - -
Loss for the year - (178,235) (178,235)
Total comprehensive income (383,595) (178,235) (561,830)
Balance at 31 December 2013 19,720,892 101,815,459 599,040 (2,117,015) 20,000,000 - 219,111 (13,851,436) 126,386,051
European Islamic Investment Bank plc
34
COMPANY STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2013 2013 2012
£ £
Cash flows from operating activities
Operating loss (178,235) (10,086,141) Adjusted for: Fair value (gain)/loss on subsidiary investments (875,875) 4,442,936
Net provision for impairment of financing arrangements (202,830) 4,270,712
Gain on investment in funds (661,846) (716,954) Depreciation and amortisation 48,526 72,802
Charges for share awards - 87,998
Net (increase)/decrease in operating assets:
Due from financial institutions 24,748,772 29,319,786
Quoted equity investments designated at fair value - -
Financing arrangements (11,450,067) -
Available-for-sale securities - sukuk 7,147,746 (3,928,434)
Investment in funds designated at fair value (5,257,795) (16,683,750)
Other assets 381,087 2,660,078
Net increase/(decrease) in operating liabilities:
Due to financial institutions (13,219,434) 2,276,017
Due to group entities (39,726) (5,018,342)
Due to customers (95,637) (4,364)
Other liabilities 549,753 (913,386)
Net cash inflow from operating activities 894,439 5,778,958
Cash flows from investing activities
Payment on acquisition of a subsidiary (cash consideration) (1,600,000) (10,310,275)
Repayment of a loan by subsidiary - 7,193,848
Purchase of property, plant and equipment (1,889) (5,090)
Net cash outflow from investing activities (1,601,889) (3,121,517)
Cash flows from financing activities - -
Net cash outflow from financing activities - -
Net (decrease)/increase in cash and cash equivalents (707,450) 2,657,441
Cash and cash equivalents at the beginning of the year 4,037,638 1,380,197
Cash and cash equivalents at the end of the year 3,330,188 4,037,638
The notes on pages 35 to 96Error! Bookmark not defined. form an integral part of the financial statements.
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
35
1 Principal activities, definitions and authorisation of the financial statements
European Islamic Investment Bank plc („EIIB‟ or „Bank‟ or „Company‟) is a London listed specialist investment banking and asset management group focused on the oil rich markets of the Gulf Cooperation Council (GCC) countries. The Bank‟s primary focus is to provide investment management and financing solutions to pension funds, family groups, corporations and financial and government institutions. The Bank is a company incorporated in the United Kingdom which was established on 11 January 2005 and received authorisation from the FSA on 8 March 2006 to carry on activities as an investment bank. The Bank is authorised by the Prudential Regulatory Authority and the Financial Conduct Authority in the United Kingdom. The consolidated financial statements of the Bank as at and for the year ended 31 December 2013 comprise the Bank and its subsidiaries (together referred to as the „Group‟ and individually as ‟Group entities‟). The following terms are used in the financial statements: Murabaha (notes 14 and 26) is a sale of goods at a cost plus an agreed profit mark up under which a party (the seller) purchases goods at cost price from a supplier and sells the goods to another (the buyer) at a cost plus an agreed mark up. Commodity murabaha, whereby commodities are bought and sold are a common form of Islamic financing transaction. Sukuk (note 16) are certificates of equal value representing undivided shares in ownership of tangible assets, usufruct and services or (in the ownership of) the assets of particular projects or special investment activities. Sukuk are usually tradable and yield periodic profit distributions. Wakala (notes 14, 26 and 27) means agency and can be used in an arrangement whereby one party (the principal) places funds with another (the agent) for investment by the agent on the principal‟s behalf in return for an agreed fee or commission. The financial statements of European Islamic Investment Bank plc for the year ended 31 December 2013 were authorised for issue by the Board of Directors on 30 April 2014. 2 Accounting policies 2.1 Basis of preparation The financial statements have been prepared under the historical cost accounting convention except for financial assets stated at their fair value comprising available-for-sale securities, financial assets designated at fair value and fair value of foreign exchange agreements, investment properties, and assets and liabilities held for sale. As permitted by section s.408 of the Companies Act 2006 the income statement of the parent entity is not presented as part of the financial statements. The parent entity‟s loss after tax for the year ended 31 December 2013 was £178,235 (2012: loss £10,086,141). 2.2 Compliance with International Financial Reporting Standards
The consolidated financial statements and the financial statements of the Bank have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union.
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
36
2.3 New accounting policy, disclosures and changes to the accounting policies The accounting policies applied by the Group in these consolidated financial statements are the same as those applied by the Group in its financial statements as at and for the year ended 31 December 2012. 2.4 Accounting for business combinations
The Group has adopted IFRS 3, Business Combinations and IFRS 10, Consolidated Financial Statements for consolidation of Group entities.
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 acquisition date is the date on which control is transferred to the acquirer. Judgement is applied in determining the acquisition date and determining whether control is transferred from one party to another.
The Group measures goodwill as the fair value of the consideration transferred, less the net recognised amount of the identifiable assets acquired and liabilities assumed, all measured as of the acquisition date. The Group measures non-controlling interest at its proportionate share of the recognised amount at fair value of the identifiable net assets at the acquisition date. 2.5 Basis of consolidation Subsidiaries The consolidated financial statements of the Bank comprise the financial statements of the European Islamic Investment Bank plc and the entities the Bank controls. Control exists where the Bank has the power to govern the financial and operating policies of the entity so as to obtain benefits from its activities. Controlled entities are consolidated from the date on which control is transferred to the Bank and they are deconsolidated from the date the control ceases. All intra-group balances, transactions, income and expenses and profits and losses resulting from intra-group transactions are eliminated in full upon consolidation. Associates Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies. Investments that are held as part of the Group's investment portfolio are carried in the balance sheet at fair value even though the Group may have significant influence over those companies. This treatment is permitted by IAS 28 Investment in Associates, which requires private equity type investments to be excluded from its scope where those investments are designated, upon initial recognition, as at fair value through profit or loss and accounted for in accordance with IAS 39. Changes in fair value of these investments are recognised in the income statement in the period of the change. The Group has no interests in associates through which it carries on its business. Assets under management The Group manages assets held in Funds and other investment vehicles on behalf of investors. The financial statements of these entities are not included in these consolidated financial statements unless these qualify as subsidiaries or associates. Information about the Group‟s assets under management is set out in note 32.
Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealised gains arising from inter-company transactions, are eliminated in preparing these consolidated financial statements. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. 2.6 Determination and presentation of operating segments
The Group has adopted IFRS 8 Operating Segments as of 1 January 2009. This Standard requires the presentation of
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Notes to the Financial Statements At 31 December 2013
37
financial information for segments based on information that is internally presented to the decision making function for the purposes of resource allocation and performance assessment. An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses. 2.7 Presentation of financial statements The Group has applied IAS 1 Presentation of Financial Statements (2007), which became effective as of 1 January 2009. 2.8 Disclosure pertaining to fair values and liquidity risk for financial instruments The Group has applied Improving Disclosures about Financial Instruments (Amendments to IFRS 7) issued in March 2009, that require enhanced disclosures about fair value measurements and liquidity risk in respect of financial instruments. The amendments require that fair value measurement disclosures use a three-level fair value hierarchy that reflects the significance of the inputs used in measuring fair values of financial instruments. Specific disclosures are required when fair value measurements are categorised as Level 3 (significant unobservable inputs) in the fair value hierarchy. The amendments require that any significant transfers between Level 1 and Level 2 of the fair value hierarchy be disclosed separately, distinguishing between transfers into and out of each level. Furthermore, changes in valuation techniques from one period to another, including the reasons therefore, are required to be disclosed for each class of financial instruments. Disclosures in respect of fair values of assets are included in note 41. 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. Disclosures in respect of liquidity risk are included in note 42.5 2.9 New standards and interpretations effective for the year New standards and interpretations to existing standards which have been published by IASB and IFRIC which the bank has adopted this year are: IFRS 10 Consolidated Financial Statements IFRS 11 Joint Arrangements IFRS 13 Fair Value Measurement These have not had any material impact on the business during the year.
2.10 Standards and interpretations issued but not yet effective
New standards, amendments and interpretations to existing standards which have been published by IASB and IFRIC with an effective date after the date of these financial statements and, which the Bank has not early adopted, are as follows:
Standards Description Effective *
IAS 36 (Amendment) Non-Financial Assets 1 January 2014
IFRIC Levies 1 January 2014
IFRS 12 Disclosure of Interests in Other Entities 1 January 2014
IFRS 9 Financial Instruments 1 January 2017 (provisionally)
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
38
The Group anticipates that the accounting pronouncements (not yet adopted by the EU), which have not been early adopted will have no material effect on the financial statements except for IFRS 9 and 12. The Group is currently in the process of evaluating the potential effect of these standards. *for financial periods starting on or after this date 2.11 Significant accounting judgements and estimates
The preparation of these consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected. The most significant are set out below.
2.11.1 Goodwill
The carrying value of goodwill is determined in accordance with IFRS 3 Business Combinations and IAS 36 Impairment of Assets. Goodwill arises on the acquisition of subsidiaries, associates and joint ventures, and represents the excess of the fair value of the purchase consideration over the fair value of the Group‟s share of the assets acquired and the liabilities and contingent liabilities assumed on the date of the acquisition. Goodwill is reviewed annually for impairment, or more frequently when there are indications that impairment may have occurred. The test involves comparing the carrying value of goodwill with the present value of the pre-tax cash flows, discounted at a rate of interest that reflects the inherent risks, of the cash generating unit to which the goodwill relates, or the cash generating unit‟s fair value if this is higher. Please see note 2.11.4 for further details.
2.11.2 Fair value of financial instruments
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. 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), reference to the current fair value of other instruments that are substantially the same, discounted cash flow analysis and option pricing models. The chosen valuation technique makes maximum use of market inputs, relies as little as possible on estimates specific to the Group, incorporates all factors that market participants would consider in setting a price, and is consistent with accepted economic methodologies for pricing financial instruments. Inputs to valuation techniques reasonably represent market expectations and measures of the risk-return factors inherent in the financial instrument. The Group calibrates valuation techniques and tests them for validity using prices from observable current market transactions in the same instrument or based on other available observable market data. The best evidence of the fair value of a financial instrument at initial recognition is the transaction price, i.e., the fair value of the consideration given or received, unless the fair value of that instrument is evidenced by comparison with other observable current market transactions in the same instrument (i.e., without modification or repackaging) or based on a valuation technique whose variables include only data from observable markets. When transaction price provides the best evidence of fair value at initial recognition, the financial instrument is initially measured at the transaction price and any difference between this price and the value initially obtained from a valuation model is subsequently recognised in profit or loss on an appropriate basis over the life of the instrument but not later than when
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
39
the valuation is supported wholly by observable market data or the transaction is closed out. Assets and long positions are measured at a bid price; liabilities and short positions are measured at an asking price. Where the Group has positions with offsetting risks, mid-market prices are used to measure the offsetting risk positions and a bid or asking price adjustment is applied only to the net open position as appropriate. Fair values reflect the credit risk of the instrument and include adjustments to take account of the credit risk of the Group entity and the counterparty where appropriate. Fair value estimates obtained from models are adjusted for any other factors, such as liquidity risk or model uncertainties, to the extent that the Group believes a third-party market participant would take them into account in pricing a transaction. The Directors consider the fair value of the financial assets and liabilities held at amortised cost to be materially equal to the carrying value of those assets and liabilities in the balance sheet as at 31 December 2013.
2.11.3 Provisions for impairment of financial assets
At each reporting date the Group assesses whether there is objective evidence that financial assets are impaired. A financial asset or a group of financial assets is/are impaired when objective evidence demonstrates that a loss event has occurred after the initial recognition of the asset/s, and that the loss event has an impact on the future cash flows of the asset/s that can be estimated reliably. Objective evidence that financial assets are impaired can include significant financial difficulty of the borrower or issuer, default or delinquency by a borrower, restructuring of a loan or advance by the Group on terms that the Group would not otherwise consider, indications that a borrower or issuer will enter bankruptcy, the disappearance of an active market for a security, or other observable data relating to a group of assets such as adverse changes in the payment status of borrowers or issuers in the group, or economic conditions that correlate with defaults in the group. In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment. The Group considers evidence of impairment for assets carried at amortised cost at specific asset level. All individually significant assets carried at amortised cost are assessed for specific impairment. Impairment losses on assets carried at amortised cost are measured as the difference between the carrying amount of the financial asset and the present value of estimated future cash flows discounted at the asset's original effective profit rate. Impairment losses are recognised in profit or loss and reflected in an allowance account. Profit on impaired assets continues to be recognised through the unwinding of the discount. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss. Impairment losses on available-for-sale investment securities are recognised by transferring the cumulative loss that has been recognised in other comprehensive income to profit or loss as a reclassification adjustment. The cumulative loss that is reclassified from other comprehensive income to profit or loss is the difference between the acquisition cost, net of any principal repayment and amortisation, and the current fair value, less any impairment loss previously recognised in profit or loss. Changes in impairment provisions attributable to time value are reflected as a component of profit income. If, in a subsequent period, the fair value of an impaired available-for-sale debt security increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed, with the amount of the reversal recognised in profit or loss. However, any subsequent recovery in the fair value of an impaired available-for-sale equity security is recognised in other comprehensive income. The Group writes off certain investment securities when they are determined to be uncollectible.
2.11.4 Impairment of other non-financial assets
The carrying amounts of the Group's non-financial assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset's recoverable amount is estimated. For goodwill and intangible assets that have indefinite useful lives or that are not yet available for use, the recoverable amount is estimated each year at the same time. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
40
costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the "cash-generating unit" or "CGU"). Subject to an operating segment ceiling test, for the purposes of goodwill impairment testing, CGUs to which goodwill has been allocated are aggregated so the the level at which impairment is tested reflects the lowest level at which goodwill is monitored for internal reporting purposes. Goodwill acquired in a business combination is allocated to groups of CGUs that are expected to benefit from the synergies of the combination. The Group's corporate assets do not generate separate cash inflows. If there is an indication that a corporate asset may be impaired, then the recoverable amount is determined for the CGU to which the corporate asset belongs. An impairment loss is recognised if the carrying amount of an asset or a CGU exceeds its recoverable amount. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis. An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.
2.11.5 Income tax
The Group is subject to direct and indirect taxation in a number of jurisdictions in which it operates. Some transactions and calculations for which a tax charge or asset is computed have an inherent uncertainty given the judgements involved. The Group objectively estimates these amounts and any difference in the final determination will impact the period in which such determination is made. 2.12 Other significant accounting policies
2.12.1 Foreign currency
The financial statements are presented in Sterling, which is the Bank‟s functional and presentation currency. Transactions in foreign currencies are initially recorded at the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated into the functional currency at the rate of exchange ruling at the balance sheet date. Non-monetary assets and liabilities are translated into Sterling at the effective historical rate used on the date of initial recognition. All differences are taken to the income statement.
2.12.2 Revenue recognition
(a) Net Margin Sukuk, murabaha and wakala income and expense
Sukuk, murabaha and wakala are Islamic financing transactions. Sukuk are certificates of equal value representing undivided shares in ownership of tangible assets, usufruct and services or (in the ownership of) the assets of particular projects or special investment activities. Murabaha is a contract for sale or purchase of goods where there is an agreed mark-up and deferred settlement. Wakala derives income and expense in the form of agency fee or commission. Income and expense for these arrangements are recognised on an effective yield basis over the periods of the contracts. The calculation of income and expense include any fees and incremental costs that are directly attributable to the financial instrument and are an integral part of the purchase or sale.
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Notes to the Financial Statements At 31 December 2013
41
(b) Net fees and commission income (i) Investment management fees, performance fees, brokerage fees, placement fees and other advisory fees are recognised on accrual basis, when the related services are performed and when it is probable that the economic benefit will flow to the Bank (ii) Fees and commissions which are not recognised on an effective yield basis over the life of the financial instrument to which they relate, such as fees for negotiating transactions for third parties and underwriting fees and commission, are recognised in revenue when it is probable that the economic benefit will flow to the Bank. This will normally be from the point at which the act to which the fees and commissions relate has been completed.
(c) Net fees and commission income Trading income Trading income consists of realised profits and losses on sukuk and equity available-for-sale securities.
Dividend income Dividend income is recognised when the right to receive income is established. Dividends are reflected as a component of net investment income, net income on other financial instruments at fair value or other operating income, based on the underlying classification of the equity instrument
2.12.3 Cash and cash equivalents
The captions Cash and cash equivalents and Cash and balances with banks represent cash and current account balances with banks and clearing exchanges.
2.12.4 Financial instruments
(a) Recognition of financial instruments Financial instruments are recognised in the balance sheet on the trade date, that is, the date on which the Bank commits to buy or sell the financial instrument. All financial instruments are recognised initially at fair value. In the case of financial instruments not recognised at fair value through the income statement, that value will include direct costs of acquisition or issue. For financial instruments carried at fair value through the income statement, transaction costs are expensed immediately. (b) Due from financial institutions, Financing arrangements, Due to financial institutions, Due to group
entities and Due to customers Financial assets included within Due from financial institutions and Financing arrangements, as well as financial liabilities included within Due to financial institutions, Due to group entities and Due to customers comprise non-derivative financial assets with fixed or determinable repayments that are not quoted in an active market. They are not entered into with the intention of immediate or short-term resale and are not designed as „available-for-sale securities‟ or „financial assets designated at fair value‟. Financial assets included under these captions are initially recognised at fair value plus any directly related transaction costs. They are subsequently measured at amortised cost less any impairment losses. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees and costs that are an integral part of the effective rate of return. The amortisation is included in Income from financing and investing activities and Returns to financial institutions and customers in the income statement. At each reporting date the Bank reviews the carrying values of its financial assets; a financial asset is considered to be impaired if there is objective evidence of events since initial recognition of the asset that will adversely affect the amount or timing of future cash flows from the asset. The amount of the impairment loss will be the difference between the carrying value of the financial asset and the present value of the estimated future cash flows. The amount of the impairment loss will be recognised in the income statement, and the carrying value of the financial asset will be written down and the impairment loss allowance will be recognised in a reserve for that purpose. Where subsequent events indicate that the impairment loss allowance is not required, or not required in full, the loss allowance made will be reversed.
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
42
(c) Available-for-sale securities Available-for-sale („AFS‟) securities are investments that are designated as available-for-sale or are not classified as another category of financial assets. These include sukuk and quoted equity. AFS securities are recognised at cost at the point of acquisition or at fair value which is considered cost for assets transferred from other IAS 39 classifications. Cost on acquisition is considered as the fair value of the investment including any acquisition charges. AFS securities are then carried in the balance sheet at fair value. Income accruals on AFS securities are recognised in the income statement. Changes in the fair value are recognised directly in equity in the Fair value reserve in the accounting period in which they arise. Where the value of a security is considered to be impaired, the losses are recognised in the income statement; otherwise, the gains and losses previously recognised in equity are recognised through the income statement when the investment matures or is sold; these are included under Trading income. Fair value gains and losses are recognised in equity net of any tax effect. (d) Financial assets designated at fair value Quoted equity investments, investment in funds and private equity investments that are managed and evaluated on a fair value basis in accordance with an agreed investment strategy and reported to key personnel on that basis are classified under this category. These assets are recognised initially at fair value and subsequent gains and losses arising from changes in the fair value are recognised directly in the income statement. Financial assets classified in this category are designated by management on initial recognition given that the financial assets are managed and their performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy. (e) Foreign exchange commitments The valuation of forward foreign exchange commitments held at fair value through the income statement is recognised in the balance sheet under Fair value of foreign exchange agreements on either the asset or liability side of the balance sheet dependent on whether the valuation is positive or negative respectively. Revaluation gains and losses are included in the income statement under Foreign exchange gains and losses.
2.12.5 Investments in subsidiaries in Parent‟s books
The Bank‟s investments in subsidiaries are designated for recognition and measurement in the financial statements as „fair value through income statement‟. Accordingly these assets are fair valued using suitable valuation techniques and the gain or loss is included in the income statement of the parent entity.
2.12.6 Investment property
Investment properties are held either to earn rental income, for capital appreciation or for both. Investment properties are measured at fair value with any change therein recognised in the consolidated statement of income. Fair value measurement The determination of fair values of investment properties are based on valuation by an independent professional valuer. The fair value of investment reflects the current prices for similar property in the same location and condition. When the use of a property changes such that it is reclassified as property and equipment, its fair value at the date of reclassification becomes its cost for subsequent accounting.
2.12.7 Property, plant and equipment
Plant and equipment is stated at cost less accumulated depreciation and impairment losses if any. Depreciation is provided on a straight line basis over estimated useful lives as follows: Leasehold improvements 5 years Motor vehicles 4 years Fixtures, fittings and office equipment 3 - 5 years
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
43
Computer hardware 3 years Buildings 40 years
2.12.8 Intangible assets
Intangible assets consist of computer licences and software development costs including capitalised staff costs. Intangible assets are stated at cost less accumulated amortisation and impairment losses if any. Amortisation is provided on a straight line basis over a current estimated useful life of five years.
2.12.9 Operating leases
Operating lease rentals are charged to the income statement on a straight line basis over the period of the lease.
2.12.10 Pension cost
The Bank operates a defined contribution pension scheme for all staff. The cost of the scheme is equal to the contributions payable to the scheme for the accounting period and is recognised within Staff costs in the income statement. The Bank has no further obligation once the contributions have been paid.
2.12.11 Share-based payments
EIIB engaged in equity settled share based transactions in respect of services received from certain of its employees. The fair value of the services received is measured by reference to the fair value of the shares or the share options granted on the date of the grant. The cost of the employee services received in respect of the shares or share options granted is recognised in the income statement with the corresponding credit to the „share based payment reserve‟ over the period that the services are received, which is the vesting period. Employee share incentive plan 2010 (2010 ESIP) The value of options granted under this scheme were determined using option pricing models, which takes into account the exercise price of the option, the current share price, the risk free rate of return, the expected volatility of the share price over the life of the option and other relevant factors.
2.12.12 Taxation
Tax on the profit or loss for the year comprises current and deferred tax. Tax is recognised in the income statement except to the extent that it relates to items recognised directly in shareholders‟ equity, in which case it is recognised in shareholders‟ equity. (a) Current tax Current tax is provided on taxable profits at the current rate. (b) Deferred tax Deferred tax is recognised on temporary differences between the carrying amount of assets and liabilities in the balance sheet and the amount attributed to such assets and liabilities for tax purposes. Deferred tax liabilities are recognised for all taxable temporary differences and deferred tax assets are recognised to the extent it is probable that future taxable profits will be available against which deductible temporary differences can be utilised. 2.13 Assets and liabilities held for sale Assets and liabilities held for sale comprises assets and liabilities that are classified as held-for-sale or the distribution of such is highly probable such that they will be recovered primarily through sale or distribution rather than through continuing use. Immediately before classification as held-for-sale or held-for-distribution, the assets, or components of a disposal group, are re-measured in accordance with the Group‟s other accounting policies. Thereafter, generally the assets are measured at the lower of their carrying amount and fair value less costs to sell. Any impairment loss on a disposal
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
44
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 financial assets, employee benefits assets or investment property, which continue to be measured in accordance with the Group‟s other accounting policies. Impairment losses on re-measurement are recognised in profit or loss. Gains are not recognised in excess of any cumulative impairment loss. Once classified as held-for-sale or held-for-distribution, intangible assets, and property and equipment are no longer amortised or depreciated, and any equity-accounted investee is no longer equity accounted.
2.14 Going concern In approving the financial statements the Directors have reviewed the current and potential future business activities and financial position of the Group, including an assessment of the capital adequacy and liquidity forecasts. EIIB had total assets of £154m at 31 December 2013 (£172m at 31 December 2012). Regulatory capital resources of the Group as at 31 December 2013 was £101m (£100m at 31 December 2012) and the total risk weighted assets was £117m (£128m at 31 December 2012). The capital adequacy ratio as at 31 December 2013 stood at 86% (2012: 78%). The balance sheet of EIIB remains highly liquid. As at 31 December 2013, the net cash excess (calculated as a percentage of deposits) is +40% (31 December 2012: +49%) in the 8 days and under category, and +60% (31 December 2012: +60%) in the 1 month and under category, against minimum requirements of 0% and -5% respectively. Based upon the above, the Directors are satisfied that the Group has adequate resources to continue in business for the foreseeable future. For this reason the Directors continue to adopt the going concern basis in preparing the financial statements.
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
45
3 Segmental information
The Bank focuses on MENA markets and for 2013 centred on the following three core businesses:
(a) Investment Banking – encompassing provision of financing, debt capital market, structured debt finance, investing in funds and Islamic products.
(b) Asset Management – investment management solutions encompassing equities, fixed income and real estate; and business advisory services.
(c) Private Equity – includes a diversified portfolio of legacy assets
These core business lines were the Group‟s strategic business units („SBU‟). Each SBU offers different products and services, and was managed separately based on the Group‟s management and internal reporting structure. SBU activities are monitored by the Bank‟s management committees and the Board which is provided with internal management reports on a monthly basis. Information regarding the results of each reportable segment is included below. Performance is measured based on segment profit before tax and is reviewed by Group executive management and the board of directors. Segment results include items directly attributable to a segment as well as those that can be allocated on a reasonable basis.
2013 Banking Asset
Management
Private Equity
Discontinued
Operations Total
£ £ £ £ £
Revenue from external customers 4,339,650 3,377,531 147,651 - 7,864,832
Returns to external customers (206,829) - - - (206,829)
Fair value (loss)/gain on investments (134,740) - 2,657,989 - 2,523,249
Operating income 3,998,081 3,377,531 2,805,640 - 10,181,252
Loss after tax from continuing activities 70,605 (774,356) 1,925,901 - 1,222,150
Loss from discontinued operations - - - (1,249,584) (1,249,584) Other comprehensive income after tax (383,594) (413,905) - - (797,499)
Total comprehensive income (312,989) (1,188,261) 1,925,901 (1,249,584) (824,933)
Depreciation and amortisation (38,820) (110,859) (37,421) - (187,100)
Segment assets 124,824,018 10,262,544 17,606,821 910,109 153,603,492
Segment liabilities 14,902,087 4,032,556 6,843,363 848,866 26,626,872
Capital expenditure Plant and equipment 38,167 25,445 - - 63,612
Intangible assets - - - - -
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
46
2012 Banking Asset
Management
Private Equity
Discontinued
Operations Total
£ £ £ £ £
Revenue from external customers 3,924,012 2,490,092 1,427,940 - 7,842,044
Returns to external customers (340,632) - - - (340,632)
Fair value gain on investments 693,043 - (4,294,754) - (3,601,711)
Operating income 4,276,423 2,490,092 (2,866,814) - 3,899,701
Loss after tax from continuing activities (3,349,826) (2,285,448) (4,242,134) - (9,877,408)
Loss from discontinued operations - - - (1,143,511) (1,143,511) Other comprehensive income after tax 616,655 - - - 616,655
Total comprehensive income (2,733,171) (2,285,448) (4,242,134) (1,143,511) (10,404,264)
Depreciation and amortisation (66,791) (168,104) (31,847) - (266,742)
Segment assets 142,178,706 10,379,388 13,315,897 5,821,454 171,695,445
Segment liabilities 34,969,202 4,650,485 - 3,144,191 42,763,878
Capital expenditure Plant and equipment 609,678 - - - 609,678
Intangible assets - - - - -
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
47
4 Income from financing and investing activities
2013 2012
Group £ £
Due from financial institutions - murabaha and wakala 251,385 457,275
Financing arrangements - murabaha 258,261 82,156
Available-for-sale investments - sukuk 1,137,504 1,529,422
Sukuk designated at fair value 844,370 394,967
Other income - 55,660
2,491,520 2,519,480
5 Returns to financial institutions and customers
2013 2012
Group £ £
Due to financial institutions – murabaha, wakala and other (206,830) (307,537)
Due to customers - murabaha and wakala - (33,095)
(206,830) (340,632)
6 Net fees and commission income
2013 2012
Group £ £
Investment banking fees 263,704 -
Asset management fees (net) 2,603,211 1,592,828
- Management fees 3,038,296 1,910,731
- Performance fees 714,048 175,000
- Introducers fees (1,149,133) (492,903)
Brokerage fees 287,435 343,857
Research income - 494,759
Other income - 251,957
3,154,350 2,683,401
7 Income on financial assets
2013 2012
Group £ £
Realised income/(losses) on investment in equity, sukuk and funds 225,949 1,069,535
Unrealised income/(losses) on investment in equity, sukuk and funds 840,955 567,355
Dividends 123,589 -
1,190,493 1,636,890
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
48
8 Other operating income
2013 2012
Group £ £
Net gains/(loss) on foreign currency differences 274,444 (89,260) - Net (losses)/gains on translation of balances denominated in foreign
currency (342,174) (1,660,417) - Net gains/(losses) on translation of forward foreign exchange
agreements 616,618 1,571,157
Other 471,635 356,987
746,079 267,727
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
49
9 Staff costs, Directors‟ emoluments, number of employees and share based payments
Group 2013 2012
£ £
Staff costs
Directors‟ salaries, fees and other 933,565 514,946
Directors‟ pension contributions 10,500 25,200
Share based payments to Directors (2010 ESIP) - 30,386
Staff salaries 3,999,405 3,980,456
Bonus 406,644 142,204
Staff pension contributions 57,153 85,606
Share based payments to staff (2010 ESIP) - 57,614
Social security costs 194,959 234,502
Sharia‟a Supervisory Board (SSB) fees 47,400 65,500
Recruitment costs 67,251 185,662
Staff redundancy cost - 67,861
Other staff costs / adjustments 63,756 328,192
5,780,633 5,718,129
Total of Directors' emoluments 944,065 572,733
Amounts in respect of highest paid Director
Emoluments 409,544 210,000
Benefits-in-kind 14,323 2,201
Pension contribution - 25,200
423,867 237,401
Number of employees at year end excluding staff on notice 71 84
Average number of employees 72 126
Bank 2013 2012
£ £
Staff costs
Directors‟ salaries, fees and other 605,580 447,633
Directors‟ pension contributions 10,500 25,200
Share based payments to Directors (2010 ESIP) - 30,386
Staff salaries 933,002 1,297,394
Staff pension contributions 57,153 85,606
Share based payments to staff (2010 ESIP) - 57,614
Social security costs 182,251 221,855
Sharia‟a Supervisory Board (SSB) fees 47,400 65,500
Recruitment costs 61,805 173,529
Staff redundancy cost - 67,861
Other staff costs/adjustment (86,079) 71,764
1,811,612 2,544,342
Number of employees at year end excluding staff on notice 13 14
Average number of employees 14 17
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
50
9.1 Share based payments
Employee share incentive plan 2010 (2010 ESIP) The 2010 ESIP introduced in April 2010 expired in November 2012 without vesting. This was the result of the EIIB share price not meeting the main vesting condition, the price of 4.5p, on any of the three vesting dates (30 November 2010, 30 November 2011 and 30 November 2012). The total number of shares included in the plan was 33.7 million. (see note 30 for details). Shares are held in an independent trust.
10 Other operating expenses
2013 2012
Group £ £
Legal and professional fees 826,419 1,001,450
Rent and other occupancy costs 934,282 856,414
Communications and IT costs 269,024 526,622
Advertising and market development 35,150 21,376
Travel 79,002 305,947
Consultancy 149,223 634,191
Board and SSB related expenses 84,449 112,779
Other operating charges 543,648 248,683
2,921,197 3,707,462
2013 2012
Bank £ £
Legal and professional fees 463,949 764,203
Rent and other occupancy costs 418,110 415,650
Communications and IT costs 200,040 235,553
Advertising and market development 24,258 2,512
Travel 79,002 174,896
Consultancy 149,223 487,601
Board and SSB related expenses 84,449 112,779
Other operating charges 7,804 (94,154)
Charges by Group companies 628,122 -
2,054,957 2,099,040
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
51
11 Operating loss before tax
This is stated after charging:
2013 2012
£ £
Audit of group financial statements pursuant to legislation - Fees payable to the Group‟s auditor for the audit of the
Group‟s annual accounts 90,000 119,000
- Audit fees related to the prior period - -
Other fees payable to Group auditor:
- Other services pursuant to legislation (FCA CASS audit) 2,500 7,000
- Agreed upon procedures - 20,000
Fees payable to associates of the Group auditor for other services: - The audit of the Group‟s subsidiaries and branches pursuant
to legislation - 70,000
Fees payable to auditors of the subsidiary entities : - The audits of the subsidiaries and branches pursuant to
legislation 79,061 -
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
52
12 Taxation
2013 2012
£ £
Tax on profit on ordinary activities charged in the income statement
Current tax charge/(credit) for the period 262,624 (200,106)
Adjustments to prior period tax - -
Tax charge/(credit) in the income statement 262,624 (200,106)
Reconciliation of the total tax charge
Operating income/(loss) before tax 1,484,775 (10,077,514)
UK corporation tax at the standard rate (24% and 23%) 345,210 (2,468,991)
Expenses not deductible for tax purposes 85,863 141,575 Fair value movements on non-UK investments and other non-taxable amounts (443,917) 837,273
Different taxation rate in foreign jurisdictions - -
Taxable other comprehensive income (89,186) -
Other adjustments - -
Deferred tax not recognised in Income statement ** 364,654 1,290,037
Tax charge/(credit) 262,624 (200,106)
Current tax liability
Opening balance - (9,011,800)
Current tax charge on ordinary activities 262,624 -
Current tax settlements - 9,011,800
Current tax payable 262,624 -
**Deferred tax assets of £8.1m (2012: £9.1m) on tax losses carried forward of £40.6m (2012: £39.5m) are not recognised in these financial statements given the current level of uncertainty surrounding the Bank‟s future taxable profits. Deferred tax assets on the UK tax losses are computed at 20%. Factors that may affect future current and total tax charge The main rate of UK corporation tax fell from 24% to 23% with effect from 1 April 2013. Further reductions in the rate from 23% to 21%, to take effect from 1 April 2014 and from 21% to 20%, to take effect from 1 April 2015, was substantively enacted on 2 July 2013 and it is this rate (20%) that has been applied in calculating the Group‟s unrecognised deferred tax assets as at 31 December 2013.
It has not been possible to fully quantify the effect of these further rate reductions because of the uncertainty over the timing of suitable future profits against which the company‟s losses may be offset. It is expected, however, that these changes will reduce both any future current tax charge and the Group's unrecognised deferred tax assets.
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
53
13 Earnings per share (“EPS”)
Basic earnings per share is calculated by dividing the gain or loss for the year by the weighted average number of ordinary shares outstanding during the year. The agreement to issue further shares as part of the consideration for the Rasmala acquisition as described in note 38.1 has resulted in dilution of shares during 2012. These shares were settled in 2013. Income or loss after tax and discontinued operations attributed to the equity holders of the Bank is used as the numerator for computing the EPS.
2013 2012
„000 „000
Weighted average number of shares for Basic EPS 1,750,648 1,722,622
Weighted average number of shares for Diluted EPS 1,750,648 1,814,468
14 Due from financial institutions
2013 2012
Group £ £
Murabaha placements 32,101,034 67,542,173
Wakala placements 5,900,139 8,801,156
Other 2,243,127 -
Impairment provision - (13,796,213)
40,244,300 62,547,116
2013 2012
Bank £ £
Murabaha placements 32,101,034 67,542,173
Wakala placements 5,900,139 8,801,156
Impairment provision - (13,796,213)
38,001,173 62,547,116
The impairment provision as at 31 December 2012 relates to a term financing facility that was due to mature in March 2012. This entity filed for “Chapter 11” bankruptcy protection. During 2013 EIIB disposed of this legacy exposure for a cash consideration of £5m (US$8m).
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
54
15 Financial assets designated at fair value
Group 2013 2012
£ £
Navis Islamic Investment Fund 2,425,984 3,266,047
Fixed Income Funds 16,506,958 19,526,291
Equity funds 8,333,533 1,841,134
27,266,475 24,633,472
Bank 2013 2012
£ £
Rasmala Global Sukuk Fund 12,233,761 16,271,038
Rasmala Leasing Fund - 1,129,667
Rasmala GCC Islamic Equity Income Fund 6,543,117 -
18,776,878 17,400,705
The Group‟s fund portfolio represents its investment in various open-ended and closed-ended schemes specialising in Asian, MENA and USA based public and private equities and fixed income products. The main objectives of all these funds are medium to long-term capital appreciation and periodic income generation. These include high quality stocks, sukuk and other fixed income products. All investments are prudently diversified by issuer, sector, geography and duration. The Bank disposed its interest in Rasmala Leasing Fund (“RLF”) on 31 April 2014. RLF is classified as an entity held for sale in 2013 (note 21). The fixed income fund figure for 2012 includes an amount which had previously being incorrectly classified as available for sale securities. Fair value movement had been accounted for as fair value through profit and loss, so there is no impact on consolidated income statement.
16 Available-for-sale securities - Sukuk
Group & Bank 2013 2012
£ £
Sovereign and central bank exposures 7,368,997 11,505,358
Financial institutions 16,128,642 14,546,925
Corporate and other counterparties 2,960,135 7,936,831
26,457,774 33,989,114
17 Financing arrangements
Group & Bank 2013 2012
£ £
Sovereign and central bank exposures 3,025,627 -
Corporate and other counterparties 8,424,440 -
11,450,067 -
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
55
The above financing arrangements are designed based on Murabaha, Wakala and Syndicated Ijarah structures. An exposure of £5.4m of the above is collateralized with a first charge on a property portfolio valued at £10.9m.
18 Private equity financial assets designated at fair value
2013 2012
Group £ £
Opening book value 13,315,897 16,202,800
Additions (due to acquisition of subsidiary) - 5,969,496
Exchange gain/(loss) 68,081 (762,922)
Fair value gain /(loss) during the year 2,480,687 (3,094,754)
Redemptions - (1,200,000)
Transfers to Investment in Funds - (3,798,723)
Closing book value 15,864,665 13,315,897
These investments are measured at fair value having been designated at „fair value through profit and loss‟ at inception.
19 Fair value of foreign exchange agreements
Group and Bank
Foreign exchange commitments used for Notional
matching currency exposures Assets Liabilities amount
£ £ £
2013
Maturing in 0-3 months 1,377,797 2,819 80,046,579
Maturing in 3-6 months - - -
1,377,797 2,819 80,046,579
2012
Maturing in 0-3 months 672,627 39,309 65,502,340
Maturing in 3-6 months 125,042 - 12,498,247
797,669 39,309 78,000,587
20 Discontinued operation and assets and liabilities held for sale
On 05 May 2012, the brokerage license of Rasmala Egypt Securities (“RES”) was suspended by Egyptian Financial Supervisory Authority and the management of the Group has decided to dispose-off all assets and liabilities of RES. Therefore these assets and liabilities have been classified as held for sale and have been valued at the lower of cost and fair value less cost to sell. At 31 December 2013, net assets of RES amounts to £ 0.7m (2012: £2.0m). Net loss from RES for the year ended 31 December 2013 amounts to £ 0.9m (2012: £0.7m). On 1 December 2012, the Board of Directors of Rasmala Investment Saudi (“RIS”) resolved to liquidate RIS; therefore, all the asset and liabilities of RIS have been classified by Group management as held for sale and have been valued at
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
56
lower of cost and fair value less cost to sell. Rasmala Group owns 80.41% shares in RIS and it was established on 7 April 2007 and commenced its operations on 17 September 2008. At 31 December 2013, net assets of RIS amounts to £0.5m (2012: £6.5m). Net loss from RIS for the year ended 31 December 2013 amounts to £ 0.3m (2012: £0.4m). In 2011, Rasmala Group management decided to liquidate Delta Rasmala Investment (“DRI”) and classified all the assets and liabilities as held for sale and valued at lower of cost or fair value less cost to sell. The net liability of DRI at 31 December 2013 amounted to £0.3m (2012: £0.4m). Net loss from DRI for the year ended 31 December 2013 amounts to £0.03m (2012: £0.02m). All gains or losses arising from the above entities from the day their operations were discontinued have been classified as discontinued operations. The net assets above reflect the standalone amounts of the company before the exclusion of cash and balances with banks and intercompany balances.
20.1 Loss after tax from discontinued operations
2013 2012
Group £ £
Revenue 95,414 731,006
Expenses (1,344,998) (1,970,995)
Net loss (1,249,584) (1,239,989)
Tax - 96,478
Total (1,249,584) (1,143,511)
A net loss is generated by discontinued activities in the year as a result of ongoing costs associated with the liquidation and closure of these entities.
20.2 Assets held for sale
2013 2012
Group £ £
Property, plant and equipment 438,716 1,282,042
Investment property - 3,888,180
Financial assets available for sale 124,051 144,720
Other assets 347,342 506,512
Total 910,109 5,821,454
20.3 Liabilities held for sale
2013 2012
Group £ £
Payables 6,051 2,183,120
Accruals and other liabilities 842,815 961,071
Total 848,866 3,144,191
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
57
21 Lease assets held for sale
Lease assets represents the operating lease asset portfolio held at Bank‟s subsidiary, Rasmala Leasing Fund, a US based leasing vehicle. The Bank disposed of its interest in Rasmala Leasing Fund on 31 March 2014 for £ 5.5m. The carrying value of Bank‟s holding on the date of disposal was £5.3m (including additional investment of £0.7m made in March 2014).
Bank 2013 2012
£ £
Rasmala Leasing Fund 4,543,467 -
4,543,467 -
Group 2013 2012
£ £
Lease assets 4,368,976 -
4,368,976 -
Lease assets at 31 December 2013 consisted a diversified portfolio of agricultural, material handling, transportation, food processing, rail and construction equipment.
22 Investment properties
2013 2012
Group £ £
Opening book value 1,738,458 -
Value at the date of acquisition of subsidiary - 6,658,030
Additions during the year 494,387 -
Disposals during the year (778,191) -
Transferred to property and equipment - (502,180)
Transferred to assets held for sale - (3,888,185)
Change in fair value 324,952 (227,589)
Exchange loss (37,450) (301,618)
Closing book value 1,742,156 1,738,458
The investment properties include 7 units (2012: 14) of one floor in I-rise Tower (Dubai, UAE) covering the total area of 9,935 square feet (2012: 16,613 square feet). These units are stated at fair value, which has been determined based on a valuation performed by an independent firm of professional valuers.
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
58
23 Property, plant and equipment
Group
Land and Buildings
Motor Vehicles
Leasehold Improvements
Fixtures, Fittings
and office equipment
Computer Hardware
Total
£ £
£ £
£
£
Cost At 1 January 2013 55,660
107,596
1,403,721
908,196
1,065,302
3,540,475
Additions/Transfers -
42,964
13,313
616
6,719
63,612 Disposals
(73,825)
(241,445)
(317,462)
(4,236)
(636,968)
At 31 December 2013 55,660
76,735
1,175,589
591,350
1,067,785
2,967,119
Depreciation At 1 January 2013 -
94,499
1,307,832
816,971
989,946
3,209,248
Charge for the year 2,421
12,708
67,169
40,711
50,029
173,038 Disposals -
(73,221)
(232,368)
(300,747)
(2,420)
(608,756)
At 31 December 2013 2,421
33,986
1,142,633
556,935
1,037,555
2,773,530
Net Book Value At 31 December 2013 53,239
42,749
32,956
34,415
30,230
193,589
Group
Land and Buildings
Motor Vehicles
Leasehold Improvements
Fixtures, Fittings
and office equipment
Computer Hardware
Total
£ £
£ £
£
£
Cost At 1 January 2012 -
-
-
167,300
213,635
380,935
Assets acquired on acquisition of subsidiary 1,625,282
329,633
1,575,188
1,022,914
1,217,106
5,770,123
Additions/Transfers 580,723
6,170
5,410
9,889
7,486
609,678 Disposals (642,568)
(91,530)
(61,846)
(24,737)
(19,173)
(839,854)
Reclassification to assets held for sale (1,507,777)
(136,677)
(115,031)
(267,170)
(353,752)
(2,380,407)
At 31 December 2012 55,660
107,596
1,403,721
908,196
1,065,302
3,540,475
Depreciation At 1 January 2012 -
-
-
123,788
157,936
281,724
Charge for the year Assets acquired on
acquisition of subsidiary 252,945
273,354
1,363,059
775,534
1,051,362
3,716,254
-Continued operations -
11,008
85,160
46,906
94,200
237,274
-Discontinued operations 52,568
11,133
12,370
29,065
34,634
139,770
Additions/Transfers 106,992
-
(12,369)
(618)
(3,092)
90,913 Disposals -
(85,346)
(35,870)
(24,119)
(12,987)
(158,322)
Reclassification to assets held for sale (412,505)
(115,650)
(104,518)
(133,585)
(332,107)
(1,098,365)
At 31 December 2012 -
94,499
1,307,832
816,971
989,946
3,209,248
Net Book Value At 31 December 2012 55,660
13,097
95,889
91,225
75,356
331,227
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
59
Bank
Fixtures, Fittings and
office equipment
Computer Hardware
Total
£
£
£
Cost
At 1 January 2013
169,209
216,814
386,023
Additions
616
1,273
1,889
Disposals
-
-
-
At 31 December 2013
169,825
218,087
387,912
Depreciation
At 1 January 2013
136,003
189,055
325,058
Charge for the year
10,455
24,009
34,464
Disposals
-
-
-
At 31 December 2013
146,458
213,064
359,522
Net Book Value
At 31 December 2013
23,367
5,023
28,390
Bank
Fixtures, Fittings and
office equipment
Computer Hardware
Total
£
£
£
Cost
At 1 January 2012
167,301
213,634
380,935
Additions
1,908
3,180
5,088
Disposals
-
-
-
At 31 December 2012
169,209
216,814
386,023
Depreciation
At 1 January 2012
123,787
157,937
281,724
Charge for the year
12,216
31,118
43,334
Disposals
-
-
-
At 31 December 2012
136,003
189,055
325,058
Net Book Value
At 31 December 2012
33,206
27,759
60,965
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
60
24 Intangible assets
Group and Bank 2013 2012
£ £
Cost
At 1 January 1,492,765 1,492,765
Additions - -
At 31 December 1,492,765 1,492,765
Amortisation
At 1 January 1,465,294 1,435,826
Charge for the year 14,062 29,468
At 31 December 1,479,356 1,465,294
Net Book Value
At 31 December 13,409 27,471
Intangible assets consist of the costs of computer licences and software development including capitalised staff costs.
25 Other assets
2013 2012
£ £
Group
Accrued income receivable
2,296,665
499,702
Sundry debtors 1,479,657 1,085,498
Escrow deposit - 986,868
Prepayments 283,697 750,405
4,060,019 3,322,473
2013 2012
£ £
Bank
Accrued income receivable 359,207 306,086
Sundry debtors 156,025 223,404
Escrow deposit - 986,868
Prepayments 51,936 90,520
Related party receivable - RHL - 58,648
567,168 1,665,526
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
61
26 Due to financial institutions
2013 2012
£ £
Group
Commodity murabahas 1,000,000 10,276,720
Wakala acceptances 3,279,725 3,342,224
Term facility of subsidiary 6,843,363 10,491,118
Facilities payable on demand of subsidiary 1,877,718 2,621,446
13,000,806 26,731,508
2013 2012
£ £
Bank
Commodity murabahas 1,000,000 10,276,720
Wakala acceptances 3,279,725 3,342,224
4,279,725 13,618,944
Term facilities of subsidiary (a) Commercial Bank of Dubai - £24.7m facility
Rasmala had obtained a revolving term facility from Commercial Bank of Dubai (“CBD”), amounting to £24.7m, for the purpose of acquiring companies and developing projects. £16.7m of this facility was drawn down by year end 2011 and £6.2m was repaid in January 2012 with the funds made available by EIIB on acquisition of Rasmala. The following were the principal terms of the facility:
a variable interest rate cost based on 3-month LIBOR + 3.5% with a minimum interest cost of 4.5%;
the debt to equity ratio for acquisition of companies or projects to be 75:25 ;
the loan was to be repaid in semi-annual instalments over four years commencing 2 years after each drawdown date; and
loan repayments had been deferred until December 2011, at which time the remaining semi-annual instalments for why each drawdown should have resumed.
On 26 January 2012, Rasmala repaid £6.2m to CBD and renegotiated the terms of the rest of the outstanding facility of £10.5m. The significant changes made during the renegotiation were as follows:
a revised variable cost of 6-month LIBOR, without minimum; and
repayment commenced from June 2013 (six semi-annual instalments of £1.7m each until December 2015) (b) First Gulf Bank - £3.3m During 2012, the loan from First Gulf Bank (“FGB”) was cleared through a repayment of £2.9m and a loan waiver amounting to £0.3m.
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
62
27 Due to customers
2013 2012
£ £
Group and Bank
Wakala acceptances - 95,637
- 95,637
28 Other liabilities
2013 2012
Group £ £
Accrued expenses
4,745,675
4,462,869
Accrued returns payable 50,977 32,923
Deferred income - 25,441
Social security and PAYE payable 62,341 43,564
Deferred consideration in respect of Rasmala acquisition (note 38.1) - 2,917,593
Tax payable by a subsidiary 262,624 -
Sundry creditors 1,153,039 1,439,482
6,274,656 8,921,872
Bank
Accrued expenses
1,558,959
1,911,151
Accrued returns payable 50,977 32,923
Deferred income - 25,441
Social security and PAYE payable 62,341 43,564
Deferred consideration in respect of Rasmala acquisition (note 38.1) - 2,917,593
Sundry creditors 353,062 822,523
2,025,339 5,753,195
29 Share capital, share premium and capital redemption reserve
Authorised £
5,000,000,000 ordinary shares of £0.01 each 50,000,000
Allotted, called up and fully paid
Number Share Capital
redemption Share
of shares capital reserve premium
£ £ £
At 31 December 2013 1,972,089,151 19,720,892 599,040 101,815,459
At 31 December 2012 1,779,099,413 17,790,994 599,040 96,569,263
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
63
Events of 2013 During 2013, EIIB issued 40,681,003 (represents 2.12% of the current total shares) ordinary shares of 1 pence each at a premium price of 3.6p as per its agreement (note 38.1) as part and final settlement of the consideration due in connection with the strategic investment by the Company in Rasmala. These shares were issued in two intervals, 13,440,860 and 27,240,143 and were admitted to AIM on 1 May 2013 and 25 July 2013 respectively. A further share issue of 152,308,735 (represents 7.92% of the current total shares) ordinary shares was made in December 2013 (note 38.2) in exchange of Rasmala shares of 42,307,982. These were admitted to trading on AIM on 30 December 2013. Following this issuance, the new total number of shares in the capital of EIIB has increased to 1,972,089,151 ordinary shares. The number of shares with voting rights is 1,922,332,657 and the balance represents Treasury shares. Events of 2012 During 2012, EIIB issued 13,440,860 ordinary shares of 1 pence each at a premium price of 3.6p as per its agreement (note 38.1) as part settlement of the consideration due in connection with the strategic investment by the Company in Rasmala. These were admitted to trading on AIM during September 2012. Following this issuance, the total number of shares in the capital of EIIB with voting rights increased to 1,779,099,413 ordinary shares in 2012.
Following an application by EIIB, the Court of the Chancery Division approved a £20m transfer from share premium to a non-capital reserve during July 2012 (note 31)
30 Treasury shares
The EIIB General Employee Benefit Trust (the „GEBT‟) purchased £2.1m worth of shares (50m shares) during 2010 at an average price of 4.25p in order to facilitate the establishment of the 2010 employee share incentive plan (the „2010 ESIP‟). The total value of these shares is presented, at cost, in equity within a treasury shares reserve in accordance with IAS32. Part of the above shares (34m shares) was allocated to the 2010 ESIP Trust to facilitate the scheme (see note 9.1 for details). The 2010 ESIP expired in November 2012 without vesting. These shares are currently held in the Trust created to facilitate the 2010 ESIP.
31 Special reserve
Following an application by EIIB, the Court of the Chancery Division approved a £20m transfer from share premium to a non-capital reserve during July 2012. The capital reduction and tender offer were approved by shareholders by special resolution at a General Meeting held on 25 June 2012.
32 Assets under management
Total AUM of external clients as at 31 December 2013 is £686m (2012: £549m). These funds are invested without recourse to the Group. Assets under management including capital seeded by the Group amounted to £712m (2012: £570m) as at 31 December 2013. On the date of acquisition of Rasmala by EIIB the AUM totalled £391m. The funds invested by the Group as at 31 December 2013 stood at £27m (2012: £21m) of which funds with a net asset value of £39m (2012: £17m) are consolidated in these Group financial statements.
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
64
33 Maturity analysis of assets and liabilities
The tables below show an analysis of assets and liabilities analysed between those expected to be recovered or settled within or after more than twelve months of the balance sheet date. 2013 Less than 12 More than 12
Group months months Total
Assets £ £ £
Cash and balances with banks 9,488,406 - 9,488,406
Due from financial institutions 40,244,300 - 40,244,300
Financial assets designated at fair value 27,266,475 - 27,266,475
Available-for-sale securities - Sukuk 5,199,925 21,257,849 26,457,774
Financing arrangements 3,024,442 8,425,625 11,450,067 Private equity assets designated at fair value - 15,864,665 15,864,665
Fair value of foreign exchange agreements 1,377,797 - 1,377,797
Assets held for sale 910,109 - 910,109
Investment properties - 1,742,156 1,742,156
Goodwill - 10,165,750 10,165,750
Operating lease assets - 4,368,976 4,368,976
Plant and equipment - 193,589 193,589
Intangible assets - 13,409 13,409
Other assets 3,248,015 812,004 4,060,019
Total assets 90,759,469 62,844,023 153,603,492
Liabilities
Due to financial institutions 9,600,806 3,400,000 13,000,806
Fair value of foreign exchange agreements 2,819 - 2,819
Liabilities held for sale 848,866 - 848,866 Other liabilities 5,019,725 1,254,931 6,274,656 Third party interest in consolidated funds - 6,499,725 6,499,725
Total liabilities 15,472,216 11,154,656 26,626,872
2012 Less than 12 More than 12
Group months Months Total
Assets £ £ £
Cash and balances with banks 13,624,694 - 13,624,694
Due from financial institutions 62,547,116 - 62,547,116
Available-for-sale securities - Sukuk 3,076,764 48,365,358 51,442,122
Investment in funds designated at fair value 3,914,419 3,266,045 7,180,464 Private equity financial assets designated at fair value 7,365,398 5,950,499 13,315,897
Goodwill - 11,546,400 11,546,400
Fair value of foreign exchange agreements 797,669 - 797,669
Assets held for sale 5,821,454 - 5,821,454
Investment properties 1,738,458 - 1,738,458
Plant and equipment 15,925 315,302 331,227
Intangible assets - 27,471 27,471
Other assets 2,279,965 1,042,508 3,322,473
Total assets 101,181,862 70,513,583 171,695,445
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
65
Liabilities
Due to financial institutions 19,738,089 6,993,419 26,731,508
Due to customers 95,637 - 95,637
Fair value of foreign exchange agreements 39,309 - 39,309
Other liabilities 7,381,235 1,540,637 8,921,872 Liabilities held for sale 3,144,191 - 3,144,191 Third party interest in consolidated funds - 3,831,361 3,831,361
Total liabilities 30,398,461 12,365,417 42,763,878
2013 Less than 12 More than 12
Bank months months Total
£ £ £
Assets
Cash and balances with banks 3,330,188 - 3,330,188
Due from financial institutions 38,001,173 - 38,001,173
Available-for-sale securities - sukuk 5,199,925 21,257,849 26,457,774
Financials assets designated at fair value - 18,776,878 18,776,878
Financial assets held for sale 4,543,467 - 4,543,467
Financing arrangements 3,024,442 8,425,625 11,450,067
Investments in subsidiaries 48,453,815 17,924,826 66,378,641
Fair value of foreign exchange agreements 1,377,797 - 1,377,797
Plant and equipment - 28,390 28,390
Intangible assets - 13,409 13,409
Other assets 453,734 113,433 567,168
Total assets 104,384,541 66,540,410 170,924,952
Liabilities
Due to financial institutions 4,279,725 - 4,279,725
Due to group entities 38,231,018 - 38,231,018
Fair value of foreign exchange agreements 2,819 - 2,819
Other liabilities 1,620,272 405,067 2,025,339
Total liabilities 44,133,834 405,067 44,538,901
2012 Less than 12 More than 12
Bank months months Total
£ £ £
Assets
Cash and balances with banks 4,037,638 - 4,037,638
Due from financial institutions 62,547,116 - 62,547,116
Available-for-sale securities - sukuk 3,076,779 30,912,335 33,989,114
Investment in funds - 17,400,705 17,400,705
Investments in subsidiaries - 60,903,627 60,903,627
Fair value of foreign exchange agreements 797,669 - 797,669
Plant and equipment - 60,965 60,965
Intangible assets - 27,471 27,471
Other assets 1,665,526 - 1,665,526
Total assets 72,124,728 109,305,103 181,429,831
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
66
Liabilities
Due to financial institutions 13,618,944 - 13,618,944
Due to customers 95,637 - 95,637
Due to group entities 42,150,959 - 42,150,959
Fair value of foreign exchange agreements 39,309 - 39,309
Other liabilities 5,753,195 - 5,753,195
Total liabilities 61,658,044 - 61,658,044
34 Pension commitments
The Bank provides a defined contribution scheme for all staff. The assets of the scheme are held separately from those of the Bank in independently administered funds. Total costs of 2013 and 2012 are fully settled.
35 Commitments under operating leases
There is a commitment at the year-end under an operating lease for the Bank‟s main premises at Milton Gate, 60 Chiswell Street, London EC1Y 4SA for a seven-year period from 21 December 2010 to 20 December 2017, at an annual rent and service charge of £279,150 net of VAT (includes a sixteen-month rent free period). Rasmala has lease commitments in Dubai, Egypt and Oman expiring in March 2017, June 2015 and February 2015 respectively. These cost the Group £551,482, £62,893 and £22,656 annually. Future rentals are as follows:
2013 2012
£ £
Group
Within one year 1,293,227 809,114
One to five years 3,416,729 1,262,643
More than five years - -
4,709,956 2,071,757
2013 2012
£ £
Bank
Within one year 198,958 279,150
One to five years 908,628 1,108,950
More than five years - -
1,107,586 1,388,100
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
67
36 Contingent liabilities and commitments
No contingent liabilities or contractually obligatory commitments are outstanding as at the balance sheet date and up to the date that these financial statements were approved, other than the operating lease obligations disclosed in note 35 and items listed below.
a) As at 31 December 2013 the Bank had undrawn funding commitments of £1.3m (2012: Nil) to the Rasmala Leasing Fund. Upon the sale of EIIB‟s investment in Rasmala Leasing Fund on 31 March 2014, EIIB‟s commitment to fund Rasmala Leasing Fund has increased to its full commitment of £6.1m as at the date of this report.
b) Rasmala has a contingent liability in the form of financial guarantees which are issued to the UAE markets for
£3.3m (31 December 2012: £3.4m) against fixed deposits under lien of £1.2m (31 December 2012: £1.3m).
c) Rasmala‟s outstanding £6.8m loan from Commercial Bank of Dubai is agreed to be repaid in semi-annual instalments of £1.7m each, up to December 2015.
37 Assets and liabilities in foreign currency
The Bank manages its exposure to foreign exchange rate fluctuations by matching assets with liabilities in the same currency as far as possible, with similar maturities and the use of appropriate off-balance sheet instruments.
Group 2013 2012
£ £
Denominated in sterling 49,558,702 62,179,330
Denominated in currencies other than sterling 104,044,791 109,516,115
Total assets 153,603,493 171,695,445
Denominated in sterling 3,079,750 6,929,414
Denominated in currencies other than sterling 23,547,123 35,834,464
Total liabilities 26,626,873 42,763,878
Bank 2013 2012
£ £
Denominated in sterling 46,770,632 60,210,642
Denominated in currencies other than sterling 124,154,320 121,219,189
Total assets 170,924,952 181,429,831
Denominated in sterling 3,079,750 6,902,444
Denominated in currencies other than sterling 41,459,151 54,755,600
Total liabilities 44,538,901 61,658,044
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
68
38 Subsidiaries
The Bank‟s subsidiaries as at 31 December 2013 are as follows: Country Subsidiaries Principal activity % held of registration
Rasmala Holdings Limited Investment banking and Asset Management 76.30 UAE EIIB InvestCo SPC Investment holding 100.00 Bahrain EIIB ServiceCo WLL General partner for diamond mining investment 100.00 Bahrain EIIB ServiceCo 1 WLL Inactive 100.00 Bahrain EIIB ServiceCo 2 WLL Inactive 100.00 Bahrain EIIB ServiceCo 3 WLL General Partner for oil and gas investment 100.00 Bahrain EIIB ServiceCo 4 WLL Inactive 100.00 Bahrain Rasmala Global Sukuk Fund Investing in sukuk 70.64 Luxembourg Rasmala GCC Islamic Equity Income Fund Investing in equity 82.28 Luxembourg Rasmala Leasing Fund Investing in leased assets 100.00 Cayman Islands All of the above subsidiaries and sub-subsidiaries of the Group are consolidated.
Investments in subsidiaries
Bank 2013 2012
£ £
At 1 January 60,903,627 62,203,675
Additions 5,711,577 13,854,425
Repayment - (7,193,848)
Fair value gain/(loss) during the year 875,875 (4,442,936)
Exchange (loss)/gain (1,112,438) (3,517,689)
At 31 December 66,378,641 60,903,627
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
69
38.1 Acquisition of a controlling stake in Rasmala Holdings Limited (“Rasmala”)
Rasmala is the Holding Company of a financial services group operating in the Middle East, specialising in asset management. Rasmala Investment Bank Limited was one of the first regional investment banks to be licensed by the Dubai Financial Services Authority. On the 5th January 2012, EIIB acquired a majority (67%) of management shares (the "Management Shares") in Rasmala. Rasmala Holding Limited‟s constitution provides that the holders of the Management Shares have the right to appoint the majority of directors to the board of Rasmala. These management shares provide the basis for control, however EIIB‟s percentage holding for consolidation of Rasmala is dependent on its ordinary share holding as detailed in the paragraph below (31 Dec 2013: 76.3% and 31 Dec 2012: 56.8%). The consideration payable £3.6m (US$5.5m) in respect of the management shares is to be satisfied over a period of up to two years by the issue of new ordinary shares of EIIB ("EIIB Shares") of 1 pence each issued at a price of 3.6 pence per share. EIIB issued 13,440,860 (note 29) and 40,681,003 (note 29) ordinary shares (total value £2.0m) respectively in 2012 and 2013 and made cash settlement of £1.6m to settle the total liability (£3.6m). These shares were admitted to trading on AIM during September 2012 and April and July 2013 (note 29). This represents 2.82% of total EIIB shares. EIIB also extended a convertible financing facility of £10.4m (US$16m) to Rasmala, with a maturity of 12 months from 5 January 2012. The financing facility was convertible into newly issued ordinary shares in Rasmala Holdings Limited ("Rasmala Shares"). EIIB converted this financing facility into 123 million Rasmala Shares, representing 56.8%, during June 2012. EIIB further acquired 6.9m of ordinary shares in Rasmala from a single corporate shareholder. The agreement between EIIB and the company provides that during the two year period from 5th January 2012 EIIB has the option to sell all of the holding acquired under this agreement to the company, for the original consideration, if the loan notes are redeemed or an offer has been made by EIIB to acquire the entire shareholding of Rasmala. If the option is not exercised, during the two year period, EIIB will transfer these shares back to the company at the expiry of the two year period at the same price. This arrangement is not considered to be „sale‟ of shares in accordance with IAS 39.AG 50 as the seller continues to hold the risks and rewards of the ordinary shares for the two year period. The acquisition of these shares was therefore ignored in arriving at the total purchase consideration. These shares were transferred back to the company upon the full settlement of the £3.6m consideration payable. The total Comprehensive income and loss for the periods in the consolidated statement of comprehensive income since the acquisition date contributed by Rasmala amounted to a loss of £0.4m in 2013 and a loss of £1.6m in 2012.
38.2 Additional acquisition of Rasmala Non-Controlling Interest
On 23 December 2013 EIIB acquired a further 42,307,982 of Rasmala shares for a consideration of 152,308,735 EIIB ordinary shares (note 29). The value of these shares was assessed by the management at £5,711,578 which represents a price of 3.75p per share. With this further acquisition EIIB currently holds 165,479,652 of Rasmala‟s total ordinary shares that represents 76.3% of its total shares. The carrying values of the controlling and non-controlling interests are adjusted to reflect the change in interests in the subsidiary. The resulting £3,451,723 difference between the value of consideration paid, of £5,711,578 and the value of consideration received from Non-controlling Interest, of £2,259,854 is recognised directly in equity and attributed to the owners of the Bank. No adjustment is made to the goodwill and no loss is recognised in the consolidated income statement.
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
70
38.3 Goodwill
2013 2012
Group £ £
Opening book value 11,546,400 -
Goodwill created on acquisition of Rasmala Holdings Limited - 12,144,212
Reallocation of NCI (note 39) (1,216,987) -
Foreign exchange loss (163,663) (597,812)
Closing book value 10,165,750 11,546,400
Goodwill created on the Rasmala acquisition is principally attributable to the value expected to be derived from the acquired group through future growth, additional business from new clients and the operational synergies and savings derived therefrom. During the year it was identified that Rasmala‟s non-controlling interest computation was overstated due to error in a pre-acquisition period. This was adjusted in the current year financial statements of the Group. The resulting adjustment has reduced the Goodwill and the corresponding non-controlling interest by £ 1.2m. The 2012 consolidated statement of financial position, consolidated statement of changes in equity, Investment in subsidiary, goodwill and other respective notes in these financials statement are restated to reflect this change.
38.4 Goodwill recognised on acquisition
The following table summarises the consideration paid on the acquisition of Rasmala and the value of the recognised assets acquired and liabilities assumed at the acquisition date as well as the acquisition date non-controlling interest in Rasmala.
Consideration at 5 January 2012
2012
£
Cash
10,310,268
Equity instruments
3,544,157
Total consideration
13,854,425
Acquisition related costs
426,331
Recognised fair value amounts of identifiable assets acquired and liabilities assumed at 5 January 2012
Cash and balances with banks
26,249,315
Investments in funds designated at fair value
4,193,060
Private equity financial assets designated at fair value
5,982,537
Investment properties
6,623,063
Property, plant and equipment
2,140,026
Other assets
2,555,015
Due to financial institutions
(24,120,889)
Other liabilities
(11,504,822)
Total identifiable net assets
12,117,305
Non-controlling interest
(10,407,092)
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
71
Identifiable net assets acquired by EIIB
1,710,213
Goodwill
12,144,212
Under IFRS 3, a measurement period of up to one year can be utilised to assess the valuation of net assets acquired as a result of the acquisition. There has been no reassessment of the net assets during this period.
38.5 Impairment testing of goodwill
Testing goodwill for impairment involves a significant amount of estimation. This includes the identification of independent cash generating units and the allocation of goodwill to these units based on which units are expected to benefit from the acquisition. The allocation is reviewed following business reorganisation. Cashflow projections necessarily take into account changes in the market in which a business operates including the level of growth, competitive activity and the impacts of regulatory change. Determining both the expected pre-tax cashflows and the risk adjusted interest rate appropriate to the operating unit require the exercise of judgement. The estimation of pre-tax cashflows is sensitive to the periods for which detailed forecasts are available and to assumptions regarding the long term sustainable cashflows. No impairment charges were recognised during the year. Key assumptions The key assumptions used for impairment testing of goodwill created on the acquisition of Rasmala are stated below.
Rasmala Group together with its subsidiaries was considered to be one cash generating unit („CGU‟)
The recoverable amount of the CGU has been determined using cashflow predictions based on financial budgets approved by management and covering a five-year period, with a terminal growth rate of 2.5% applied thereafter
The forecast cashflows have been discounted at a pre-tax rate of 10.9% Based on these assumptions, the recoverable amount exceeded the carrying amount. Management believes that any reasonably possible change in the key assumptions above would not cause the recoverable amount of the Goodwill to the fall below the balance sheet carrying value.
39 Non-controlling interest
2013 2012
Group £ £
Opening book value 9,170,594 1,680,165
Acquisition of non-controlling interest of Rasmala by EIIB (note 38.2) (2,259,854) -
NCI arising on business acquisition - 9,946,081
Loss for the year (165,009) (934,778)
Other comprehensive loss for the year (98,094) -
Distributions (1,086,807) (1,520,874)
Reallocation of NCI (note 38.3) (1,216,987) -
Foreign exchange loss (301,551) -
Closing book value 4,042,292 9,170,594
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
72
40 Related party disclosures
40.1 Compensation of key management personnel
2013 2012
£ £
Short-term employee benefits 898,565 514,946
Compensation for loss of office 35,000 -
Post-employment pension costs 10,500 25,200
Share-based expenses and other - 32,587
944,065 572,733
Executive
Salary Benefits
in kind
Pension contributio
ns
Compensation
for loss of office
Total 2013
Total 2012
£ £ £ £ £ £
Zulfi Caar Hydari 409,544 14,323 - - 423,867 130,338
Keith McLeod 192,500 1,436 10,500 35,000 239,436 267,787
602,044 15,759 10,500 35,000 663,303 398,125
Non-executive
Fixed fees Attendance
fees Total 2013
Total 2012
£ £ £ £
Abdallah Y Al-Mouallimi 34,826 10,000 44,826 27,405
Aabed Al Zeera 25,667 6,000 31,667 33,000
Michael Willingham-Toxvaerd 40,000 4,000 44,000 37,000
Mohammed Al Sarhan 88,766 11,000 99,766 33,500
John Wright 29,167 9,000 38,167 25,703
Martin Barrow 17,336 5,000 22,336 -
Shabir Randeree (resigned) - - - 18,000
235,762 45,000 280,762 174,608
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
73
40.2 Other Directors‟ interests
The Bank enters into transactions, arrangements and agreements involving Directors and their related concerns in the ordinary course of business. Management believes that all such business is conducted on an arms-length basis.
(a) HBG Group owns 16.11% of EIIB ordinary shares, and a number of its partners and connected parties hold
key managerial positions and directorships at the EIIB Group.
Abdallah Al-Mouallimi – Chairman of EIIB
Zulfi Caar Hydari – CEO of EIIB and Group CEO of Rasmala group
Michael Willingham-Toxvaerd – Non-Executive Director of EIIB
Imtiaz Hydari – Chairman of Rasmala EIIB settled £442,062 of HBG consultancy charges during 2013. This amount was accrued in the 2012 financial statements. Mr. Imtiaz Hydari drew £208,705 from the Group during 2013 (2012: nil) for the services he rendered as the Chairman of Rasmala. Other payments made to HBG group by Rasmala during 2013 are £51,523 (2012: nil)
(b) An impairment provision created in 2011 by Rasmala of £3.8m, relating to a receivable from iHilal Baghlaf Development Company, a related party, which represents accrued management fees in connection with a real estate project based in Dubai, was written-off during 2012.
40.3 Intra Group transactions
(a) The Bank has accepted Wakala deposits from EIIB InvestCo, EIIB ServiceCo 3 WLL and Rasmala Investment
Saudi during the year on an arms-length basis. Deposits outstanding as at 31 December 2013 amount to £38.2m (2012: £42.2m). As at 31 Dec 2013, the outstanding Wakala deposits from these three entities stood at £36.9m (2012: £37.6m) and £0.7m (2012: £0.7m) respectively. The respective profit accruals on these were £159k (2012: £121k) and £1k (2012: £1k).
(b) The following intercompany transactions between EIIB and Rasmala took place during the year:
2013 2012
Charged by Rasmala £ £
Fee for managing EIIB's sukuk portfolio and funds 168,910 83,551
Advisory services 498,275 204,830
Investment banking fee charges 90,769 -
Salary recharges 77,140 -
Other recharges 75,127 -
Total 910,221 288,381
(c) The following intercompany charges were made by Rasmala from the three funds of EIIB (that are
consolidated to the Group financial statements):
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
74
2013 2012
Charged by Rasmala £ £
Management fees 181,614 90,624
Total 181,614 90,624
(d) The following intercompany payments were made by the three EIIB funds (that are consolidated to the Group financial statements) to EIIB:
2013 2012
Paid to EIIB £ £
Fees 119,498 58,648
Total 119,498 58,648
40.4 Transaction with non-controlling interests
On 23 December 2013 EIIB acquired a further 42,307,982 of Rasmala shares for a consideration of 152,308,735 EIIB ordinary shares. The value of these shares was assessed by the management at £5,711,578 which represents a price of 3.75p per share (note 38.2). None of the parties listed in note 40.1 and 40.2 receive EIIB shares on this transaction. Rasmala shareholders agreed that the shares would be issued to their pooled investment vehicles, Fortek Investments Ltd and Vallford Limited. These SPVs comprised individuals who are employees of Rasmala.
40.5 Other related party transactions
EIIB‟s acquisition of Rasmala‟s 67% of management shares at a consideration of £3.6m (US$5.5m) was fully settled by the end of 2013. EIIB issued 54,121,863 new ordinary shares of EIIB ("EIIB Shares") of 1 pence each issued at a price of 3.6 pence per share and made cash settlement of £1.6m to settle the total liability (note 38.1). Management considers all above transactions with related parties have been conducted on an arm‟s-length basis.
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
75
41 Valuation of assets measured at fair value
The Group's accounting policy on fair value measurements is discussed in note 2.11.2 . The Group measures fair values using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements:
Level 1: Quoted market price (unadjusted) in an active market for an identical instrument
Level 2: Valuation techniques based on observable inputs, either directly (i.e. as prices) or indirectly (i.e. derived from prices)
This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques where all significant inputs are directly or indirectly observable from market data.
Level 3: Valuation techniques using significant unobservable inputs
This category includes all instruments where the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument's valuation. This category includes instruments that are valued based on quoted prices for similar instruments where significant unobservable adjustments or assumptions are required to reflect differences between the instruments.
Fair values of financial assets and financial liabilities that are traded in active markets are based on quoted market prices or dealer price quotations. For all other financial instruments the Group determines fair values using valuation techniques. Valuation techniques include net present value and discounted cash flow models, comparison to similar instruments for which market observable prices exist and other valuation models. Assumptions and inputs used in valuation techniques include risk-free and benchmark rate of returns, credit spreads and other premia used in estimating discount rates, bond and equity prices, foreign currency exchange rates and net asset valuations. The objective of valuation techniques is to arrive at a fair value determination that reflects the price of the financial instrument at the reporting date that would have been determined by market participants acting at arm's length. The Group has an established control framework with respect to the measurement of fair values. This framework includes independent price verification and reporting by the Group‟s Risk department to the Chief Executive Officer, and the Group‟s Risk and Audit committees. The Risk department has overall responsibility for independently verifying the transactions, assets and all significant fair value measurements. The table below analyses financial instruments measured at fair value at the end of the reporting period, by the level in the fair value hierarchy into which the fair value measurement is categorised.
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
76
Group
Bank
The above table does not include financial instruments within the „Assets held for sale‟ and „Liabilities held for sale‟ categories.
Group
Bank
The above table does not include financial instruments within the „Assets held for sale‟ and „Liabilities held for sale‟ categories.
At 31 December 2013 Level 1 Level 2 Level 3 Total
Assets £ £ £ £
Financial assets designated at fair value 6,466,921 20,799,553 - 27,266,475
Available-for-sale securities – sukuk - 22,431,090 4,026,684 26,457,774
Private equity financial assets designated at fair value - 2,788,071 13,076,594 15,864,665
Fair value of foreign exchange arrangements - 1,377,797 - 1,377,797
6,466,921 47,396,511 17,103,278 70,966,711
Liabilities
Fair value of foreign exchange arrangements - 2,819 - 2,819
- 2,819 - 2,819
At 31 December 2013 Level 1 Level 2 Level 3 Total
Assets £ £ £ £
Available-for-sale securities – sukuk - 22,431,090 4,026,684 26,457,774
Investments in funds designated at fair value - 18,776,878 4,543,467 23,320,345
Investments in subsidiaries - - 66,378,641 66,378,641
Fair value of foreign exchange arrangements - 1,377,797 - 1,377,797
- 42,585,765 74,948,792 117,534,557
Liabilities
Fair value of foreign exchange arrangements - 2,819 - 2,819
- 2,819 - 2,819
At 31 December 2012 Level 1 Level 2 Level 3 Total
Assets £ £ £ £
Sukuk - 50,046,990 1,395,132 51,442,122
Investments in funds designated at fair value - 3,914,418 3,266,046 7,180,464
Private equity financial assets designated at fair value - 2,802,781 10,513,116 13,315,897
Fair value of foreign exchange arrangements - 797,669 - 797,669
- 57,561,858 15,174,294 72,736,152
Liabilities
Fair value of foreign exchange arrangements - 39,309 - 39,309
- 39,309 - 39,309
At 31 December 2012 Level 1 Level 2 Level 3 Total
Assets £ £ £ £
Available-for-sale securities – sukuk - 32,593,982 1,395,132 33,989,114
Investments in funds designated at fair value - 16,271,038 1,129,667 17,400,705
Investments in subsidiaries - - 60,903,627 60,903,627
Fair value of foreign exchange arrangements - 797,669 - 797,669
- 49,662,689 63,428,426 113,091,115
Liabilities
Fair value of foreign exchange arrangements - 39,309 - 39,309
- 39,309 - 39,309
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
77
The following table reconciles the opening balances to the closing balances for fair value measurements in Level 3 of the fair value hierarchy.
Group 2013
Available-for-sale securities –
sukuk
Investments in funds designated
at fair value
Private equity financial assets
designated at fair value
Total
Balance at 1 January 1,395,132 3,266,046 10,513,116 15,174,294
Transfer (3,266,046) 1,026,092 (2,239,954)
Purchases/Additions 3,025,627 - - 3,025,627
Disposal/Redemptions (378,203) - - (378,203)
Total gains or losses: 14,183 - 1,923,073 1,937,256
- in income statement - - 1,923,073 1,923,073 - in other comprehensive
income 14,183 - - 14,183
Settlements and other movements (30,055) - (385,687) (415,742)
Balance at 31 December 4,026,684 - 13,076,594 17,103,278
Bank 2013
Available-for-sale securities –
sukuk
Investments in funds designated
at fair value
Investments in Subsidiaries Total
Balance at 1 January 1,395,132 1,129,667 60,903,627 63,428,426
Purchases/Additions 3,025,627 3,570,240 5,711,577 12,307,444
Disposals/Redemptions (378,203) - - (378,203)
Total gains or losses: 14,183 - 875,875 890,058
- in income statement - - 875,875 875,875 - in other comprehensive
income 14,183 - - 14,183
Settlements and other movements (30,055) (156,440) (1,112,438) (1,298,933)
Balance at 31 December 4,026,684 4,543,467 66,378,641 74,948,792
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
78
Group 2012
Available-for-sale securities –
sukuk
Investments in funds designated
at fair value
Private equity financial assets
designated at fair value
Total
Balance at 1 January 1,846,214 - 16,202,800 18,049,014
Transfer - 3,798,723 (3,798,723) -
Purchases/Additions - - 3,620,683 3,620,683
Total gains or losses: (56,174) (57,461) (5,511,644) (5,625,279)
- in income statement (78,744) (57,461) (5,511,644) (5,647,849) - in other comprehensive
income 22,570 - - 22,570
Settlements and other movements (394,908) (475,216) - (870,124)
Balance at 31 December 1,395,132 3,266,046 10,513,116 15,174,294
Bank 2012
Available-for-sale securities –
sukuk
Investments in funds designated
at fair value
Investments in Subsidiaries Total
Balance at 1 January 1,846,214 - 62,203,675 64,049,889
Purchases/Additions - 1,236,897 13,854,425 15,091,322
Total gains or losses: (56,174) (107,230) (7,960,626) (8,124,030)
- in income statement (78,744) (107,230) (7,960,626) (8,146,600) - in other comprehensive
income 22,570 - - 22,570
Settlements and other movements (394,908) - (7,193,847) (7,588,755)
Balance at 31 December 1,395,132 1,129,667 60,903,627 63,428,426
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
79
Although the Group believes that its estimates of fair value are appropriate, the use of different methodologies or assumptions could lead to different measures of fair value. For fair value measurements in Level 3, changing one or more of the assumptions used, to reasonably possible alternative assumptions would have the following effects:
Effect on profit or loss
Effect on comprehensive
income
Group Favourable (Unfavourable) Favourable (Unfavourable)
31 December 2013 £ £ £ £
Available-for-sale securities – sukuk * - - 201,334 (201,334) Private equity financial assets designated at fair value **
1,307,659 (1,307,659) - -
1,307,659 (1,307,659) 201,334 (201,334)
Effect on profit or loss
Effect on comprehensive
income
Bank Favourable (Unfavourable) Favourable (Unfavourable)
31 December 2013 £ £ £ £
Available-for-sale securities – sukuk * - - 201,334 (201,334) Investments in funds designated at fair value * 227,173 (227,173) - -
Investments in subsidiaries *** 1,327,573 (1,327,573) - -
1,554,746 (1,554,746) 201,334 (201,334)
Appropriate change for each asset measurement based on * applicable % change to the market price (5%) ** applicable % change to the market price (10%) *** 2% change in book value
Effect on profit or loss
Effect on comprehensive
income
Group Favourable (Unfavourable) Favourable (Unfavourable)
31 December 2012 £ £ £ £
Available-for-sale securities – sukuk * - - 72,474 (72,474) Investments in funds designated at fair value * 163,302 (163,302) - - Private equity financial assets designated at fair value **
1,051,312 (1,051,312) - -
1,214,614 (1,214,614) 72,474 (72,474)
Effect on profit or loss
Effect on comprehensive
income
Bank Favourable (Unfavourable) Favourable (Unfavourable)
31 December 2012 £ £ £ £
Available-for-sale securities – sukuk * - - 72,474 (72,474) Investments in funds designated at fair value * 56,483 (56,483) - -
Investments in subsidiaries *** 1,218,073 (1,218,073) - -
1,274,556 (1,274,556) 72,474 (72,474)
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
80
Appropriate change for each asset measurement based on * applicable % change to the market price (5%) ** applicable % change to the market price (10%) *** 2% change in book value
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
81
42 Risk management
42.1 Introduction
The Board of Directors have set an overall risk framework in line with risk appetite, documented within a set of risk management policies which are approved by the Board or mandated risk committees. Ultimate responsibility for risk resides with the Board of Directors. The Bank is exposed mainly to credit risk, market risk, operational risk and liquidity risk.
(1) Structure
The Board of Directors is ultimately accountable for risk within the Bank and for ensuring a strong control environment. The Board has mandated a number of committees tasked with managing and monitoring risks within the Bank. (a) Board of Directors The Board of Directors has overall responsibility for risk management and for approving the risk appetite, tolerances, strategies and principles. (b) Board Risk Committee (“BRC”) The BRC is a sub-committee of the Board of Directors which assists the Board in fulfilling its risk management responsibilities from day to day. The committee‟s responsibilities include advising on risk strategy, providing oversight and challenge supporting a risk culture, reviewing and approving risk policies and assessing, reviewing, and approving all exposures that are within its delegated authority. (c) Risk Management Committee (“RMC”) The RMC assists the Executive Management Committee and the Board of Directors in managing and controlling risk in all areas of the Bank, through proactive identification, measurement, evaluation, control, monitoring, and reporting of:
Credit risk
Market risk
Operational risk including other residual risks
Liquidity risk
(d) Asset and Liability Committee (“ALCO”) The ALCO is constituted to assist the Executive Management Committee and the Board in proactively managing the capital, liquidity, assets and liabilities of the Bank. It is also mandated to manage the risk-reward relationship that exists between solvency, liquidity and profit rate risk. (e) Internal Audit Internal Audit‟s primary role is to provide assurance to the Audit Committee and the Board that the risk management, internal control, corporate governance and other key business processes and controls, as appropriate, are operating effectively and meeting the ongoing and changing needs of the Bank. This includes providing management with independent appraisals of systems of internal control and supporting development of a sound control culture throughout the Bank.
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
82
(2) Measurement and reporting The risks within the Bank are assessed using quantitative and qualitative methodologies. Losses are calculated using assumptions based on consideration of the economic environment in which the Bank operates, stress scenarios and conditions in the Islamic banking market. Risk is managed by a set of comprehensive limits, triggers and processes. These reflect the business strategy, risk appetite and market environment in which the Bank operates and its overall risk capacity in relation to capital and regulatory requirements set by the UK Regulatory Authorities. Information is compiled by the Risk department from all business areas and is then presented to the Executive Management Committee and Board on a monthly basis. The Risk Report includes detailed reporting of credit exposures by internal ratings, geographical regions, industry sectors, asset maturities, liquidity, and market risk exposures for profit rates, foreign exchange, money and capital market instruments and the results of the stress tests. Daily reports on credit exposures and market risks are compiled and distributed by the Risk department to senior management. (3) Risk mitigation Risk mitigants are used where possible. However the Bank cannot use conventional derivative products to mitigate risk. Consequently as part of its overall risk management framework the Bank utilises Sharia‟a compliant products to hedge currency risk and profit rate risk. (4) Concentration risk Concentration risk arises when a number of counterparties are engaged in similar business activities, or activities in the same geographic regions, or have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by a change in economic, political or other conditions. In order to avoid excessive concentration risk the Bank has specific guidelines and limits in place to restrict large exposure to Group, Obligor, Country and Industry sector exposures. (5) Basel 3 A number of regulatory changes were introduced during 2013 as EU Regulations and Directives. The phasing in period is from 2014 until 2019. The changes are designed to:
Improve the quantity and quality of capital resources;
Limit leverage;
Improve liquidity management. Although certain of the Basel III definitions and requirements have not yet been finalised and implemented, the provisional capital and liquidity requirements are being monitored. The Bank is of the opinion that it will be Basel III compliant without the need for additional capital and liquidity resources.
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
83
42.2 Credit risk
Credit risk is the risk that the Bank‟s customers, clients or counterparties will not be able or willing to repay capital and/or profit or otherwise be unable to meet their contractual obligations under credit facilities or in respect of other agreements. The Bank has a standard credit approval process for all customers, clients and counterparties and all are assigned an internal risk rating. Exposures are subject to regular review. All exposures are allocated to a country within a pre-approved country limit.
(1) Exposure
Exposures by asset class were: 2013
2013
2012
2012
Group
Bank
Group
Bank
£
£
£
£
Assets carried at amortised cost
Cash and balances with banks 9,488,406
3,330,188
13,624,694
4,037,638 Due from financial institutions 40,244,300
38,001,173
62,547,116
62,547,116
- Wakala 5,900,139
5,900,139
8,801,156
8,801,156 - Murabaha 32,101,034
32,101,034
53,745,960
53,745,960
- Other 2,243,127
-
-
-
Financing arrangements 11,450,067
11,450,067
-
-
Assets carried at fair value Available for sale securities - sukuk 26,457,774
26,457,774
51,442,122
33,989,114
Assets held for sale
Assets held for sale 910,109
-
5,821,454
-
Lease assets held for sale 4,368,976
4,543,467 Fair value through income statement
Investment in funds designated at fair value 27,266,475
18,776,878
7,180,464
17,400,705 Private equity financial assets designated at
fair value 15,864,665
-
13,315,897
- Fair value of foreign exchange agreements 1,377,797
1,377,797
797,669
797,669
Investments in subsidiaries -
66,378,641
-
60,903,627 Investment properties
Investment properties 1,742,156
-
1,738,458
-
Total credit exposure 139,170,725
170,315,985
156,467,874
179,675,869
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
84
(2) Geographical regions
Exposures by geographical region were: 2013 2013 2012 2012 Group Bank Group Bank £ £ £ £
GCC countries 67,849,155 120,298,652 88,199,852 131,044,266
Bahrain 7,382,235 51,496,830 23,603,187 67,794,091
UAE 44,440,717 63,504,866 47,736,895 53,743,444
Kuwait 110,671 - - -
Saudi Arabia 8,589,770 - 4,957,760 2,229,506
Qatar 7,325,762 5,296,956 11,902,010 7,277,225
Middle East (Other) 7,424,707 3,024,443 2,989,980 -
Europe 31,092,892 31,092,890 28,057,758 28,019,026
USA 21,531,818 15,900,000 17,029,666 15,900,000
Turkey 2,807,599 - 4,742,334 3,092,242
Asia 3,626,467 - 5,990,584 1,620,335
Australasia 288,180 - 288,183 -
Africa 4,549,907 - 9,169,517 -
Total credit exposure 139,170,725 170,315,985 156,467,874 179,675,869
(3) Industry Sector
Exposures by industry sector were: 2013
2013 2012 2012
Group
Bank Group Bank
£ £ £ £
Financial services 73,786,507 55,812,173 99,206,084 81,929,348
GCC banks 25,341,579 16,294,089 43,918,412 33,930,109
Europe/Other banks 48,444,928 39,518,084 55,287,672 47,999,239
Manufacturing & engineering 6,568,394 1,328,250 8,662,846 3,619,531
Government 11,158,646 7,368,997 18,658,028 13,125,692
Real estate 12,601,017 7,031,900 6,738,511 2,696,966
Other financial 21,306,396 92,724,596 16,432,044 78,304,332
Oil & gas 139,661 - 139,661 -
Mining 2,788,070 - 2,230,456 -
Food 299,156 - 299,156 -
Healthcare 92,029 - 92,029 -
Telecommunication - - 474,038 -
Agricultural 220,523 - 220,523 -
Information & Communication technology 2,763,348 - 2,739,175 -
Media & entertainment - - - -
Other 7,446,978 6,050,069 575,323 -
Total credit exposure 139,170,725 170,315,985 156,467,874 179,675,869
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
85
(4) Credit quality
The credit quality of financial assets is managed by the Bank using internal credit ratings which are mapped to external credit rating agencies‟ ratings including Fitch, Moody‟s and Standard & Poor‟s. The table below shows the credit quality of the portfolio based on the Bank‟s internal credit rating.
Investment Grade
Non-Investment
Grade
Total
£
£
£
2013 Group
Cash and balances with banks 9,480,513
7,893 9,488,406
Due from Financial Institutions 36,084,743
4,159,557 40,244,300
Investment in equity, funds and sukuk designated at fair value 18,486,651
8,779,824 27,266,475
Available for sale securities -sukuk 20,522,266
5,935,508 26,457,774
Financing arrangements 6,050,067
5,400,000 11,450,067
Private equity financial assets designated at fair value 1,187,613
14,677,052 15,864,665
Fair value of foreign exchange agreements 1,305,900
71,897 1,377,797
Assets held for sale -
910,109 910,109
Investment properties -
1,742,156 1,742,156
Leased assets held for sale -
4,368,976 4,368,976
Total credit exposure 93,117,753
46,052,972
139,170,725
2013 Bank
Cash and balances with banks 3,322,294
7,894 3,330,188
Due from Financial Institutions 35,001,173
3,000,000 38,001,173
Available for sale securities - sukuk 20,522,266
5,935,508 26,457,774
Financial assets designated at fair value -
18,776,878 18,776,878
Financial assets held for sale -
4,543,467 4,543,467
Financing arrangements 6,050,067
5,400,000 11,450,067
Fair value of foreign exchange agreements 1,305,900
71,897 1,377,797
Investment in subsidiaries -
66,378,641 66,378,641
Total credit exposure 66,201,700
104,114,285
170,315,985
2012 Group
Cash and balances with banks 12,343,466
1,281,228 13,624,694
Due from Financial Institutions 39,103,704
23,443,412 62,547,116
Available for sale securities - sukuk 44,380,327
7,061,795 51,442,122
Investments in funds designated at fair value 3,266,047
3,914,417 7,180,464
Private equity financial assets designated at fair value -
13,315,897 13,315,897
Assets held for sale -
5,821,454 5,821,454
Investment properties -
1,738,458 1,738,458
Fair value of foreign exchange agreements 797,081
588 797,669
Total credit exposure 99,890,625
56,577,249
156,467,874
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
86
2012 Bank
Cash and balances with banks 4,031,065
6,573 4,037,638
Due from Financial Institutions 39,103,704
23,443,412 62,547,116
Available for sale securities - sukuk 31,611,119
2,377,995 33,989,114
Investments in funds designated at fair value -
17,400,705 17,400,705
Investment in subsidiaries -
60,903,627 60,903,627
Fair value of foreign exchange agreements 797,081
588 797,669
Total credit exposure 75,542,969
104,132,900
179,675,869
(5) Aged analysis of impaired financial assets No specific impairment provisions were made during 2013 (2012: £ 4.3m) or held at the year-end.
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
87
42.3 Market risk
The Bank had no trading portfolio during 2013 (2012: Nil). The commentary below relates to banking book positions.
42.3.1 Profit Rate Risk
Profit rate risk is the risk of loss arising from changes in profit rates. The Bank manages profit rate risk by using maturity buckets to calculate the net profit rate gap whilst considering floating, fixed and non-sensitive rates of return.
2013
Profit Rate profile (£000) Rate profile band
Group 0-1 2-3 4-6 7-12 1-5 Over 5
Assets Total month months months months years years
Fixed Rate Items 88,570 32,365 8,000 - 19,522 8,434 20,249
Variable Rate Items 1,845 - - - 844 1,001 -
Non rate Sensitive 48,756 19,830 1,407 - 5,543 8,723 13,253
Total Assets 139,171 52,195 9,407 - 25,909 18,158 33,502
Liabilities
Fixed Rate Items 4,280 4,026 - - 254 - -
Variable Rate Items 8,721 5,223 - 1,749 1,749 - -
Non rate Sensitive - - - - - - -
Total Liabilities 13,001 9,249 - 1,749 2,003 - -
Net Gap 42,946 9,407 (1,749) 23,906 18,158 33,502
Cumulative Gap 42,946 52,353 50,604 74,510 92,668 126,170
2013
Profit Rate profile (£000) Rate profile band
Bank 0-1 2-3 4-6 7-12 1-5 Over 5
Assets Total month months months months years Years
Fixed Rate Items 74,064 33,026 8,000 - 4,356 28,682 -
Variable Rate Items 1,845 - - - 844 1,001 -
Non rate Sensitive 94,407 4,708 - - 48,454 - 41,245
Total Assets 170,316 37,734 8,000 - 53,654 29,683 41,245
Liabilities
Fixed Rate Items 42,511 14,742 15,888 9,676 2,205 - -
Variable Rate Items - - - - - - -
Non rate Sensitive - - - - - - -
Total Liabilities 42,511 14,742 15,888 9,676 2,205 - -
Net Gap 22,992 (7,888) (9,676) 51,449 29,683 37,691
Cumulative Gap 22,992 15,104 5,428 56,877 86,560 124,251
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
88
2012
Profit Rate profile (£000) Rate profile band
Group 0-1 2-3 4-6 7-12 1-5 Over 5
Assets Total month months months months years years
Fixed Rate Items 109,248 45,154 10,115 4,801 3,092 37,622 8,464
Variable Rate Items 4,741 - 2,462 - - 2,279 -
Non rate Sensitive 42,479 16,668 1,355 125 15,114 - 9,217
Total Assets 156,468 61,822 13,932 4,926 18,206 39,901 17,681
Liabilities
Fixed Rate Items 13,715 13,465 - - 250 - -
Variable Rate Items 13,112 2,621 - 1,749 1,749 6,993 -
Non rate Sensitive - - - - - - -
Total Liabilities 26,827 16,086 - 1,749 1,999 6,993 -
Net Gap 45,736 13,932 3,177 16,207 32,908 17,681
Cumulative Gap 45,736 59,668 62,845 79,052 111,960 129,641
2012
Profit Rate profile (£000) Rate profile band
Bank 0-1 2-3 4-6 7-12 1-5 Over 5
Assets Total month months months months years years
Fixed Rate Items 91,795 45,154 10,115 4,801 3,092 26,458 2,175
Variable Rate Items 4,742 - 2,463 - - 2,279 -
Non rate Sensitive 83,139 4,417 293 125 - - 78,304
Total Assets 179,676 49,571 12,871 4,926 3,092 28,737 80,479
Liabilities
Fixed Rate Items 55,866 22,433 10,862 14,750 7,821 - -
Variable Rate Items - - - - - - -
Non rate Sensitive - - - - - - -
Total Liabilities 55,866 22,433 10,862 14,750 7,821 - -
Net Gap 27,138 2,009 (9,824) (4,729) 28,737 80,479
Cumulative Gap 27,138 29,147 19,323 14,594 43,331 123,810
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
89
Sensitivity to income Profit rate risk is managed within profit rate gap limits on a daily basis. The sensitivity of the Income Statement to various profit rate scenarios is considered on a daily basis. An analysis of sensitivity to an increase or decrease in market profit rates, assuming no asymmetrical movement in yield curves and a constant financial position, is as follows at the financial year end; 2013 Group
Change in rates (Basis points)
-100 bp -50 bp -25 bp +25 bp +50 bp +100bp
Effect on income statement £ 000
-181 -171 -101 +101 +203 +405
Bank
Change in rates (Basis points)
-100 bp -50 bp -25 bp +25 bp +50 bp +100bp
Effect on income statement £ 000
-104 -95 -22 +22 +44 +88
2012 Group
Change in rates (Basis points)
-100 bp -50 bp -25 bp +25 bp +50 bp +100bp
Effect on income statement £ 000
-325 -205 -102 +103 +205 +411
Bank
Change in rates (Basis points)
-100 bp -50 bp -25 bp +25 bp +50 bp +100bp
Effect on income statement £ 000
-137 -59 -30 +30 +60 +120
Sensitivity to fair value of instruments While the Bank does not hold or trade in profit rate products, the fair value of financial instruments held will be affected by current market forces including profit rates. The table below sets out the sensitivity to changes in fair values of related instruments assuming all other factors remain constant. 2013 Group and Bank
2012 Group and Bank
Change in rates (Basis points)
-100 bp -50 bp -25 bp +25 bp +50 bp +100bp
Effect on fair value (equity) £ 000
+1,098 +549 +275 -275 -549 -1,098
Change in rates (Basis points)
-100 bp -50 bp -25 bp +25 bp +50 bp +100bp
Effect on fair value (equity) £ 000
+1,429 +714 +357 -357 -714 -1,429
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
90
42.3.2 Currency Risk
Currency risk is the risk of loss arising from changes in foreign exchange rates. The Board has set limits on open currency positions and these positions are monitored daily to ensure positions are maintained within the established limits. The Bank does not take significant currency positions as all positions other than the reporting currency are substantially covered. Small residual currency exposures remain which are well within the Board approved limits. 2013 Group
Bank
2012 Group
Bank
42.3.3 Equities Risk
Equities risk is the risk of loss arising from changes in equity prices. No direct equity exposures were held as at 31 December 2013 (2012: none). Investments are made in equity funds from time to time. Exposure comprises indirect exposure to a portfolio of equities held by a fund which is separately managed and administered.
42.3.4 Commodities Risk
Commodities risk is the risk of loss arising from changes in commodity prices. No commodities were held during 2013 (2012: none). Investments are made in trade finance funds from time to time. Exposure to a trade finance fund may include indirect exposure to commodities held by a fund which is separately managed and administered.
Change in currency rates (%)
-10% -5% -2% +2% +5% +10%
Effect on income statement £ 000
-359 -180 -72 +72 +180 +359
Change in currency rates (%)
-10% -5% -2% +2% +5% +10%
Effect on income statement £ 000
-91 -45 -18 +18 +45 +91
Change in currency rates (%)
-10% -5% -2% +2% +5% +10%
Effect on income statement £ 000
-456 -228 -91 +91 +228 +456
Change in currency rates (%)
-10% -5% -2% +2% +5% +10%
Effect on income statement £ 000
-1,154 -577 -231 +231 +577 +1,154
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
91
42.4 Operational risk
Operational risk is the risk of loss arising from inadequate or failed systems, human error and fraud, processes and external events. Operational risks can result in damage to reputation, have legal or regulatory implications or lead to financial loss. The Bank has implemented a control framework to mitigate these risks. Controls include effective segregation of duties, access, authorisation and reconciliation procedures, staff education and assessment processes, including the use of internal audit. Risk registers and matrices have been developed for each department which form part of a quality self-assessment process.
42.5 Liquidity risk
Liquidity risk is the risk that the Bank will be unable to meet its payment obligations when they fall due. To limit this risk the Bank manages the maturities of its assets and liabilities and its cash flows on a daily basis and maintains a portfolio of short-term bank deposits. Liquidity risk management is the responsibility of ALCO. An Internal Liquidity Adequacy Assessment (ILAA) is performed on an annual basis or more frequently in the event of material changes. A liquidity buffer is maintained and monitored on a daily basis.
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
92
42.5.1 Liquidity profile
Liquidity is managed based on contractual cash flows. The Group and Bank had the following liquidity profiles which include forward foreign exchange commitments: (Foreign currency amounts in sterling equivalents)
2013
Cash flow band Liquidity profile
(£000)
0-1
2-3
4-6
7-12
1-5
Over 5
Group Total
month
months
months
months
years
years
GBP
Assets 133,048
66,442
40,210
18,208
-
8,188
-
Liabilities 87,954
35,262
34,194
18,244
254
-
-
Net 45,094
31,180
6,016
(36)
(254)
8,188
-
USD
Assets 71,355
7,966
-
-
21,660
13,627
28,102
Liabilities 22,242
8,250
712
1,749
1,749
9,782
-
Net 49,113
(284)
(712)
(1,749)
19,911
3,845
28,102
Euro
Assets 111
111
-
-
-
-
-
Liabilities -
-
-
-
-
-
-
Net 111
111
-
-
-
-
-
GCC currencies
Assets 15,499
11,829
36
-
1,892
1,742
-
Liabilities -
-
-
-
-
-
-
Net 15,499
11,829
36
-
1,892
1,742
-
Other currencies
Assets 3,209
-
852
-
2,357
-
-
Liabilities 849
-
-
-
849
-
-
Net 2,360
-
852
-
1,508
-
-
Total
Assets 223,222
86,348
41,098
18,208
25,909
18,157
33,502
Liabilities 111,045
43,512
34,906
19,993
2,852
9,782
-
Net 112,177
42,836
6,192
(1,785)
23,057
8,375
33,502
2012
Cash flow band Liquidity profile
(£000)
0-1
2-3
4-6
7-12
1-5
Over 5
Group Total
month
months
months
months
years
Years
GBP
Assets 139,092
81,445
42,794
12,623
2,230
-
-
Liabilities 84,164
33,247
38,298
12,369
250
-
-
Net 54,928
48,198
4,496
254
1,980
-
-
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
93
USD Assets 79,337
7,568
3,077
4,801
7,482
39,017
17,392
Liabilities 32,527
14,994
494
1,749
2,924
11,706
660
Net 46,810
(7,426)
2,583
3,052
4,558
27,311
16,732
Euro Assets 32
32
-
-
-
-
-
Liabilities -
-
-
-
-
-
-
Net 32
32
-
-
-
-
-
GCC currencies Assets 8,691
5,277
19
-
2,511
884
-
Liabilities 281
-
-
-
281
-
-
Net 8,410
5,277
19
-
2,230
884
-
Other currencies Assets 7,314
-
1,043
-
5,983
-
288
Liabilities 3,026
-
149
-
2,877
-
-
Net 4,288
-
894
-
3,106
-
288
Total Assets 234,466
94,322
46,933
17,424
18,206
39,901
17,680
Liabilities 119,998
48,241
38,941
14,118
6,332
11,706
660
Net 114,468
46,081
7,992
3,306
11,874
28,195
17,020
2013
Cash flow band Liquidity profile
(£000)
0-1
2-3
4-6
7-12
1-5
Over 5
Bank Total
month
months
months
months
years
Years
GBP Assets 130,214
66,915
39,691
18,208
-
5,400
-
Liabilities 87,649
35,262
33,889
18,244
254
-
-
Net 42,565
31,653
5,802
(36)
(254)
5,400
-
USD Assets 71,670
1,786
-
-
4,356
24,283
41,245
Liabilities 40,648
13,133
15,888
9,676
1,951
-
-
Net 31,022
(11,347)
(15,888)
(9,676)
2,405
24,283
41,245
Euro Assets 94
94
-
-
-
-
-
Liabilities -
-
-
-
-
-
-
Net 94
94
-
-
-
-
-
GCC currencies Assets 52,389
3,091
-
-
49,298
-
-
Liabilities 659
659
-
-
-
-
-
Net 51,730
2,432
-
-
49,298
-
-
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
94
Total Assets 254,367
71,886
39,691
18,208
53,654
29,683
41,245
Liabilities 128,956
49,054
49,777
27,920
2,205
-
-
Net 125,411
22,832
(10,086)
(9,712)
51,449
29,683
41,245
2012
Cash flow band
Liquidity profile (£000)
0-1
2-3
4-6
7-12
1-5
Over 5
Bank Total
month
months
months
months
years
Years
GBP Assets 136,821
81,404
42,794
12,623
-
-
-
Liabilities 84,137
33,247
38,271
12,369
250
-
-
Net 52,684
48,157
4,523
254
(250)
-
-
USD Assets 71,541
555
3,077
4,801
3,092
27,853
32,163
Liabilities 50,874
17,487
11,066
14,750
7,571
-
-
Net 20,667
(16,932)
(7,989)
(9,949)
(4,479)
27,853
32,163
Euro Assets 16
16
-
-
-
-
-
Liabilities -
-
-
-
-
-
-
Net 16
16
-
-
-
-
-
GCC currencies Assets 49,298
97
-
-
-
884
48,317
Liabilities 3,882
3,882
-
-
-
-
-
Net 45,416
(3,785)
-
-
-
884
48,317
Total Assets 257,676
82,072
45,871
17,424
3,092
28,737
80,480
Liabilities 138,893
54,616
49,337
27,119
7,821
-
-
Net 118,783
27,456
(3,466)
(9,695)
(4,729)
28,737
80,480
As at 31 December 2013 and at 31 December 2012, the Bank had no contingent liabilities. As at 31 December 2013 the Bank had undrawn funding commitments of £1.3m (2012: Nil) (note 36).
42.5.2 Liquidity ratios (unaudited)
The Bank manages its liquidity within the prudential limits of 0% for 8 days and under and -5% for 1 month and under. The ratios at the year-end were: 8 days and under 1 month and under 31 December 2013 +40% +60% 31 December 2012 +49% +60%
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
95
42.6 Capital management and risk (unaudited)
The Group‟s lead regulator, the Prudential Regulatory Authority (“PRA”) (previously the Financial Services Authority (“FSA”)) sets and monitors capital requirements for the Group. The Group complies with the regulatory framework in respect of regulatory capital. To calculate capital requirements the Group uses the “standardised approach” for credit risk, the “standardised approach” for market risk and the “basic indicator approach” for operational risk. The Group‟s capital comprises ordinary share capital, share premium, capital redemption reserve, special reserve, accumulated losses and fair value reserve subject to other regulatory adjustments. All banking operations are categorised as „Banking book‟ business and accordingly the risk-weighted assets are calculated to reflect the varying levels of risks attached to assets. The Group‟s primary objective and policy is to maintain a strong capital base so as to maintain investor, depositor and market confidence. The Group has complied with all regulatory capital requirements throughout the year.
£000
£000
2013
2012
Group
Regulatory Capital 100,965 99,538
Total Risk Weighted Assets 116,895 128,429
Credit Risk 86,134 84,066
Market Risk 12,400 18,475
Operational Risk 18,361 25,888
Capital Adequacy Ratio 86%
78%
£000
£000
2013
2012
Bank
Regulatory Capital 36,687 41,457
Total Risk Weighted Assets 68,576 83,874
Credit Risk 38,257 54,061
Market Risk 15,450 18,525
Operational Risk 14,869 11,288
Capital Adequacy Ratio 53%
49% The current level of capital is considered to be adequate to support future growth. . Capital and risk-reward management are the responsibility of ALCO, which monitors capital and risk limits for the various areas of the Bank‟s business. Currently capital is not a constraint on growth.
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
96
The PRA‟s approach to regulatory capital maintenance requirements is primarily based on monitoring the relationship of the minimum Regulatory Capital Requirement to available capital resources. The PRA also requires each bank to assess its own capital requirements in excess of the minimum Capital Requirement in terms of the Internal Capital Adequacy Assessment Process (ICAAP). The ICAAP process is reviewed by the PRA which issues Individual Capital Guideline for each bank.
43 Post balance sheet events
The Directors confirm that there are no significant events arising since the balance sheet date that should be reported to shareholders other than the following. (a) Disposal of the Bank‟s exposure to the Rasmala Leasing Fund on 31 March 2014 for £ 5.5m. The carrying value of
Bank‟s holding on the date of disposal was £ 5.3m (including addition investment of £0.7m made in March 2014).
(b) Subsequent liquidation of the following subsidiaries I. EIIB InvestCo SPC (Bahrain) II. EIIB ServiceCo WLL (Bahrain)
III. EIIB ServiceCo 1 WLL (Bahrain) IV. EIIB ServiceCo 2 WLL (Bahrain) V. EIIB ServiceCo 3 WLL (Bahrain) VI. EIIB ServiceCo 4 WLL (Bahrain)
(c) Subsequent incorporation of the following subsidiaries
I. EIIB InvestCo Ltd (Cayman) II. Rasmala Trade Finance Fund (Cayman)
European Islamic Investment Bank plc
Notes to the Financial Statements At 31 December 2013
97
Registered No. 5328847
Bank information Directors Abdallah Al-Mouallimi Chairman Mohammed Al Sarhan Senior Independent Director Michael Willingham-Toxvaerd John Wright Martin Gilbert Barrow Zulfi Caar Hydari Chief Executive Officer Secretary Al-Harith Sinclair Registered office Registrars Milton Gate Capita Registrars Limited 60 Chiswell Street The Registry London EC1Y 4SA 34 Beckenham Road Beckenham Auditors Kent BR3 4TU BDO LLP 55 Baker Street Nominated broker and advisor London W1U 7EU Westhouse Securities Ltd Arbuthnot House Correspondent bankers 20 Ropemaker Street Standard Chartered Bank London EC2Y 9AR 1 Basinghall Avenue London EC2V 5DD Solicitors Berwin Leighton Paisner LLP Adelaide House London Bridge London EC4R 9HA