ANNUAL REPORT 2016 - Ahli United€¦ · 8 9 Dr. Anwar Al Mudhaf Chairman of Ahli United Bank...

ANNUAL REPORT

2016

Bahrain - Kuwait - UAE - Oman - Egypt - Iraq - Libya - United Kingdom

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In The Name OF Allah The Most Gracious The

Most Merciful

Head Office

Mubarak Al Kabir St. - Darwazat Abdul Razak - Commercial Area No. 9 - Joint Banking Complex - East Tower

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His Highness

Sheikh Sabah Al-Ahmad Al-Jaber Al-SabahAmir of The State of Kuwait

His Highness

Sheikh Nawaf Al-Ahmad Al-Jaber Al-SabahCrown Prince of The State of Kuwait

CONTENTS

Contents Page

The Chairman's Statement 8

CEO's Statement 10

The Board of Directors 12

Fatwa & Shari'ah Supervisory Board Report 16

Fatwa & Shari'ah Supervisory Board Members 17

Executive Management 18

Financial Performance 20

Management Report & Performance Analysis 22

Executive Summary 26

Corporate Governance 31

Independent Auditor's Report 50

Consolidated Financial Statements 55

Basel III Pillar III - Disclosures 97

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Dr. Anwar Al MudhafChairman of Ahli United Bank K.S.C.P.

Esteemed shareholders,

May the peace, mercy, and blessings of Allah be upon you,

On behalf of the members of the Board of Directors and myself, I am honoured to present to you the 51st Ahli United Bank K.S.C.P. Annual Report which highlights the Bank's main achievements and financial statements gathered for the financial year ending on the 31 December 2016. Ahli United Bank's journey dates back to more than 75 years, when the Bank opened on the 28 February 1942 as a branch of the Imperial Bank and the first bank in Kuwait. This institution was the pioneer of the banking sector in Kuwait, assembling the first team of ambitious Kuwaiti bankers who promoted the development of the sector locally and in the Arabian Gulf region. Throughout many decades and under varying political, economic and social circumstances, the Bank succeeded in developing and expanding its operations under different names, until the year 1971, when it became a 100% Kuwaiti-owned establishment, "Bank of Kuwait & Middle East". In 2002 the Bank became a member of the renowned and respected Ahli United Bank Group. However further major event in the Bank's proud journey was the conversion to our revered Islamic Shari'ah as of 1 April 2010. 75 years of success, during which the Bank was able to withstand and overcome various challenges of the Kuwait market, thanks to the trust and loyalty of our many customers and staff, which have remained with us over the years. Today, and for the past few years, the region's future has been unpredictable, adversely affecting all economic sectors as well as capital markets in Kuwait and the region. Moreover, the fall in oil prices has impacted the economy and government budget. Despite all of these challenges, Ahli United Bank has relentlessly striven to seize every growth opportunity it could, building on a set of factors, including: our long and proven track record; our customers' trust, passed from one generation to another; our financial strength and our solid capital base; and the efforts of our Executive Management, guided by the directives of the Board of Directors, adopting the latest technology and the best development models in the banking sector.

FINANCIAL PERFORMANCE

In 2016, Ahli United Bank accomplished a new achievement, adding distinction to the Bank's remarkable record. We successfully issued a US$200 million Additional Tier 1 Perpetual Sukuk, listed on NASDAQ Dubai and the Irish Stock Exchange. I am delighted to confirm that following strong demand for the Sukuk from investors in the Middle East, Asia and Europe, we enjoyed an over-subscription of the issuance by more than three times. This surely mirrored the investors' trust in the Ahli United Bank and the generally positive economic climate in Kuwait.

Furthermore, the growth of the Bank's activities and its ongoing quest to acquire an increasingly larger market share has positively reflected on income. In fact, the Bank's income from its core financing activities has reached KD 133 million for the financial year ending on 31 December 2016, exceeding 2015 income of KD 121 million by 10%. This increase was the outcome of the Bank focusing on higher return sectors with a lower risk profile, managed under an active and robust risk management framework. Moreover, the Bank maintains a coverage ratio of provisions against non-performing financing of 264%, most of which have the support of premium real estate and financial guarantees. These results truly mirror the Board of Directors' concern in giving top priority to creating a solid base for additional precautionary credit provisions, although such measures affected the Bank's net profit in 2016, reducing it to KD 40.3 million as compared to KD 42.8 million in 2015 (a decline of 5.8%).

The Bank maintained a return on equity (ROE) of 11% in 2016, which ranks among the highest rates in the domestic and regional markets. The return on assets (ROA) in 2016 recording a rate of 1%. As for the earnings per share (EPS), this reached 25.9 Kuwaiti Fils per share (27.4 Kuwaiti Fils per share in 2015), which reflected the Bank's continued strong financial standing and ability to diversify and enhance its income sources.

Also in 2016, Ahli United Bank strove to decrease its credit concentration ratio avoiding relatively costly and concentrated deposits. The Bank's total assets dropped by 5% between 2015 and 2016, from KD 3.9 billion to KD 3.7 billion as a result of the regulatory changes in Finance/Deposit Ratio.

The successful issuance of the US$200 million Additional Tier 1 Perpetual Basel III compliant Sukuk has positively contributed to the consolidation of the Bank's capital base, which reached KD 446 million. Consequently, the Bank's capital adequacy ratio rose to 18.2% (as compared to 15.5% in 2015) before distribution of dividends, providing the Bank increased scope to continuing to finance our customers.

Based on all those positive results, the Board of Directors is recommending to the Bank's ordinary General Assembly a cash distribution of 12% and bonus shares of 8% of the issued and paid up capital to the shareholders (12 Kuwaiti Fils per share and 8 shares for every 100 shares respectively), which was approved by the Central Bank of Kuwait on the 9 February 2017.

CREDIT RATINGS

Ahli United Bank continues to enjoy high credit ratings given by renowned international credit rating agencies such as Fitch, Moody's and Capital Intelligence. Accordingly, the Bank maintained a credit rating of A+ on the long term and F1 on the short term with stable outlook by Fitch Ratings Agency, and a rating of A2 on local currency with stable outlook by Moody's. As for Capital Intelligence, the agency fixed the Bank's long-term credit rating of foreign currency to A+ and enhanced the short-term foreign currency rating to A2. All these ratings confirm the strong credit standing, capital quality and stability of the Bank's growth rates in the future.

SUPPORTING & DEVELOPING BANKING PRODUCTS & SERVICES

In line with the Bank's continuous quest to ensure it remains at the forefront of banking technology, Ahli United Bank developed new systems and software in 2016, including the launch of a new mobile banking application. The Bank also made many upgrades to its systems and services, including the upgrade of the Customer Service Management systems across its branches and the upgrade of the ATM and Customer Credit Card services and privileges, as well as the corporate website.

AWARDS RECEIVED BY THE BANK

As we reached our 75th year of operation, it gives me great pleasure to see the international banking community recognizing Ahli United Bank's long journey of remarkable achievements. In 2016, the Bank received many prestigious awards including but not restricted to the "Best Islamic Bank - Kuwait" Award for the fourth consecutive year from the internationally renowned "The Banker" magazine, and the "Second Safest Islamic Bank in Kuwait and the Fourth in the GCC" Award by Global Finance magazine for the second year in a row. I'm sure you agree with me that such recognition from similar prestigious entities of the international banking community which have granted these awards to the Bank for many consecutive years is the living proof of Ahli United Bank's ongoing success and a confirmation of its leading position among Islamic banks in the region.

SOCIAL RESPONSIBILITY

The Bank's social responsibility is an intrinsic part of its identity, being the oldest bank operating in Kuwait. Ahli United Bank has a long record of social contributions stretching across many decades and implemented at various times. The Bank has put together an active social plan that tackles different social causes in Kuwaiti society with the aim of constantly improving citizens' life and bringing valuable support to many social initiatives and events, whether educational, charitable or health related. It is important to mention that in 2016, the Bank paid particular attention to our special-needs children. With this in mind, Ahli United Bank invested tangible efforts towards supporting those people and facilitating their life while helping their social integration, through social and health activities.

THE HUMAN CAPITAL

Ahli United Bank's human capital is the institution's cornerstone. Accordingly, our top priority remains to maintain this capital's growth and development.

Consequently, the Bank was keen on implementing the Toumouh program, aiming at recruiting the best national talent, growing their skills, and preparing them to hold leadership positions through advanced trainings. The program also aims at providing an attractive work environment for our competent national youth.

In 2016, many training sessions took place, including leadership, anti-money laundering, risk management, and cyber crimes' fighting programs, in addition to general awareness workshops about health and safety.

THANKS & RECOGNITIONS

Finally, and on behalf of all the members of the Board of Directors, the Bank's Executive Management and myself, please allow me to express my sincere gratitude to His Highness the Amir of the State of Kuwait Sheikh Sabah Al-Ahmad Al-Jaber Al-Sabah (may God keep him safe and sound), and to His Highness the Crown Prince Sheikh Nawaf Al-Ahmad Al-Jaber Al-Sabah (may God keep him safe and sound), and to His Highness the Prime Minister Sheikh Jaber Al-Mubarak Al-Sabah (may God keep him safe and sound ), for their continuous support to Kuwait's banking sector.

I would also like to extend my thanks and appreciation to the Central Bank of Kuwait, headed by the Governor Dr. Mohamad Youssef Al Hashel, as well as to the Capital Markets Authority and all other supervisory bodies in Kuwait for their positive role in supporting Ahli United Bank. Last but not least, I would like to thank Ahli United Bank's Fatwa & Shari'ah Supervisory Board for their untiring and supportive efforts, as well as the members of the Board of Directors, the Bank's staff, and all our stakeholders for their loyalty, trust, and many contributions which have come together to achieve the growth and success of this prestigious financial establishment. May the peace and mercy of Allah be upon you.

Dr. Anwar Ali Al Mudhaf Chairman

THE CHAIRMAN'S STATEMENT (CONTINUED)THE CHAIRMAN'S STATEMENT

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Ahli United Bank, reported a further year of strong underlying growth, with net operating income of KD77.2 million. The net profit attributable to shareholders was KD 40.3 million as compared with KD 42.8 million in 2015. The Bank again had to allocate additional precautionary provisioning reflecting a continued challenging operating environment. The increase in operating income underscored the strength of the Bank's core businesses of Corporate Banking, Retail Banking, Private Banking and Wealth Management, and Treasury, coupled with an effective risk and control framework. The return on average equity (ROAE) and return on average assets (ROAA) of 11% and 1% respectively continue to be amongst the best returns in the market.

Ahli United Bank remains committed to the successful implementation of its strategic 5-year plan (2015-2019) which aims at preserving and enhancing the Bank's leading position in the Islamic Banking sector by focusing on customer satisfaction and working according to the best international standards. Our Vision is "To become" a leading innovative Islamic Bank operating with international standards, whilst placing our customers always First. This continues to be our driving force in all that we do.Despite the regional and international challenges that have reflected on our business environment in 2016, we were able to enhance the Bank's capital by issuing an US$200 million Additional Tier 1 Perpetual Sukuk which has been listed on NASDAQ Dubai and the Irish Stock Exchange in October. Demand exceeded expectations, especially from investors in the Middle East, Asia and Europe, which resulted in an over-subscription of the issuance by more than three times, confirming once more the Bank's position as a leading Islamic financial institution in Kuwait. The success of the the Sukuk issuance was cemented with a ceremonial ringing of the opening bell at Nasdaq Dubai in November, a proud moment for all involved.

Furthermore, the international credit rating agencies, Fitch, Moody's and Capital Intelligence, have continued to favourably report on the Bank's credit rating in terms of credit standing, capital quality and the stability of growth rates in the future, thus recognizing AUB's ability to maintain solid growth rates year after year. The Bank has maintained a long term A+ stable outlook from Fitch, an A2 assessment of the local currency rating with a stable outlook from Moody's, and a long-term credit rating of the Bank on foreign currency with A+ rating, and the strengthening of short-term foreign currency valuation of A2 by Capital Intelligence.

Ahli United Bank Kuwait received many prestigious awards mirroring the Bank's positive business performance, which was a clear indicator of our sound approach and constructive efforts especially as the Bank has been the consistent recipient of several of these awards for a number of years.

I am therefore pleased to confirm that in 2016, Ahli United Bank received the "Best Islamic Bank - Kuwait" Award for the fourth consecutive year from the internationally renowned The Banker magazine, which counts as one of the most prestigious annual awards for excellence in Islamic Banking. The highly acclaimed Global Finance magazine also commended the Bank in 2016, as the "Second Safest Islamic Bank in Kuwait" and "the Fourth Safest Islamic Bank in the GCC" for the second year in a row.

Ahli United Bank has always aimed to improve its performance through the adoption of cutting-edge technologies that are aligned with fast-paced technological advances, which would eventually help us provide high-quality banking services. As a proof of our successful commitment to this objective, the Bank received the Commerzbank Annual Award for Outstanding Performance in Straight-Through-Processing (STP) of Payments for the fifth year in a row. The award recognized the Bank's operational efficiency in processing financial and commercial payments in Euro. The Bank also won Citibank's coveted STP Excellence Award for the fourth year running, which recognized the Bank's excellence in SWIFT automated processing of transfers and deposits along with applying the latest groundbreaking technologies to drive STP compliant services to best international standards.

In 2016, Ahli United Bank was also the first Kuwaiti Bank to receive the Health, Safety & Environment Excellence Award from the American Society of Safety Engineers - Kuwait Chapter (ASSE). This particular award recognized the Bank's efforts in terms of employees' safety, as well as health and environmental safety, confirming our pioneering role and strategic planning in terms of Corporate Social Responsibility as well as an unconditional commitment to protecting the environment and ensuring employees' wellbeing and Kuwaiti society's welfare.

Furthermore, the Bank considered customers' needs and best interests as a top priority. All the Bank's initiatives should benefit, in one way or another, our valued customers, whose trust is an integral part in all that we do. Consequently, in 2016, our Complaints & Customer Protection Department - established in 2015 - focused on enhancing our customer service performance in compliance with best international Banking standards and practices in this field. As a result, we successfully issued our Customer Protection Manual Guidelines in November of 2016 in Kuwait, which was approved as an internal document to be adopted by all stakeholders. We have also had our (ISO 9001:2008) and ISO German Quality Certificate "TUV NORD" revalidated, which confirms our unwavering efforts towards providing the best banking services.

Our main 2016 achievement in terms of customer service was undoubtedly the enhancement of our e-channels. We launched our mobile banking application earlier in the year and introduced the new Arabic version of the Bank's official website. The Bank also upgraded its ATM system by adding new services that ensure customer convenience, including the ability to update one's mobile number via the ATM, to issue a PIN, and to renew an expired Civil ID card, among other services that empower customers and enable them to perform their banking transactions.

In terms of new customers' offers and opportunities, Ahli United Bank delivered several attractive ideas including the "Pearl Instant Discount" program that enables customers to benefit from special discounts upon using their Credit or Debit Cards at a select number of retail outlets included in the program. Ahli United Bank expanded and consolidated its geographic presence in 2016 by opening a new branch in the Boulevard Complex in Salmiya region, in addition to moving its Jahra branch to a new location to better cater to its customers' needs, including a ladies' section. The Bank has also started preparation for the opening of three new branches in Rawda, Bayan and Rumaithiya regions.

Additionally, Ahli United Bank focused in 2016 on upgrading its services to comply with the needs of its customers, among those who have special needs. Such measures are not only aligned with the Bank's ongoing quest to attract customers from all social segments, but also to align with the Bank's social strategy and the Central Bank of Kuwait's guidelines. Consequently, Ahli United Bank successfully completed the full upgrade of 7 of its branches, namely in Mishref, Qadsiya, Farwaniya, Sabah Al-Salem, Al-Ahmadi, Oyoon and Jahra in addition to upgrading large parts of its headquarters to meet the requirements of special need customers.

The Bank has also fully upgraded its online e-banking services to fit the needs of our visually impaired customers in order to facilitate their online registration and login process, as well as their ability to track their accounts and credit cards online and perform banking transactions easily and securely. Furthermore, screen readers have been made available through online channels, smart phones and the Bank's website, and the mobile phone application has been updated to include a font enlargement option to provide visually impaired customers with a better user experience.

Ahli United Bank commits to complying with best governance standards, which we consider essential to all our operations in accordance with the Islamic Shari'ah. This includes the highest standards of integrity and transparency in all our transactions as well as complying with the regulatory standards required by the Central Bank of Kuwait.

With a 75-year-old legacy and a highly respected record of accomplishments in Kuwait, we believe that the Bank's commitment and positive contributions towards Kuwaiti society are equal in importance to our commitment to banking excellence. That is exactly why we invest a great deal in our Corporate Social Responsibility program, making sure we contribute actively to the support of all social segments. Equally, it is important that we make career opportunities available to the best Kuwaiti talent. Ahli United Bank's long history and operations in this country has shown our eagerness and willingness to support and develop such talent and this is as true today as it has been throughout our existence.

With such a legacy and so many recognized achievements, I am pleased to reiterate Ahli United Bank's determination to carry on the same successful path and strive to upkeep its leading position among Islamic Banks, which we have achieved thanks to our stakeholders and customers' trust, and to the relentless efforts and commendable dedication of our employees.

I wish to express my gratitude to the Board of Directors for their unstinting support and valued guidance throughout the year and similarly to our Fatwa & Shari'ah Supervisory Board. I also wish to thank the Governor and staff of the Central Bank of Kuwait for the highly valued support and guidance given to the Bank and its management, and also to the Chairman of the Board of Commissioners and Managing Director of the Capital Markets Authority and staff for their continued support and advice.

Finally, I would like to offer my deepest thanks to all our many customers and the trust they place in us with their continued business, and to all my colleagues in Ahli United Bank, Kuwait for all they have done to ensure we have had both business growth and a sound financial result in 2016.

Richard W L Groves Chief Executive Officer

CEO'S STATEMENT (CONTINUED)CEO'S STATEMENT

Richard W L GrovesChief Executive Officer

It is a great honour for me to be the Chief Executive Officer of the Bank during the 75th anniversary of its commencement of operations in Kuwait and to lead the Executive management team. One can look back at the many accomplishments and achievements, and many milestone events over the years with great pride but, perhaps more importantly, we can look forward to a promising and dynamic future in the years to come.

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Sheikh Abdullah Jaber Al-Ahmad Al-SabahVice Chairman, Chairman of Compensation & Nominating Committee,Chairman of the Executive Committee(Non-Executive Director)

Sheikh Abdullah Jaber Al-Ahmad Al-Sabah joined the Bank's Board in March 2009. Qualifications & Experience: Sheikh Abdullah holds a Bachelor of Arts degree from Brown University, USA and Master's Degree in Business Administration from University of Colombia, NY. He has experience in the banking industry and investment sector.Current Positions: Deputy Director General for Investment-the Public Institution for Social Security (Kuwait); Vice Chairman of Bank of London & Middle East UKFormer Positions: Chairman - Kuwait Financing Services Co., Board Member - Ahli Bank of Kuwait; Vice President - Wafra Investment Advisory Group (New York - USA); Board Member - Global Investment House (Kuwait); Chairman - Housing Finance Company (Kuwait).

Mr. Jamal Shaker Al KazemiMember of Governance Committee, Member of Risk Committee(Non-Executive Director)

Mr. Jamal Shaker Al Kazemi joined the Bank's Board in May 2004. Qualifications & Experience: Mr. Al Kazemi holds a Diploma in Applied Business Sciences(Accounting). He has experience in the commercial and investment sectors.Current Positions: Director Zain (Kuwait)Former Positions: Deputy Chairman Marsa Alam Holding Company K.S.C.C. ; Deputy General Manager Kazema Engineering Projects WLL.

Dr. Anwar Ali Al MudhafChairman of the Board, Chairman of Corporate Governance Committee(Non-Executive Director)

Dr. Al Mudhaf joined the Bank's Board in March 2014.Qualifications & Experience: Dr. Al Mudhaf holds a Ph.D. in Finance from Peter F. Drucker Graduate School of Management, Claremont Graduate University, California, U.S.A. He has more than 19 years of experience in banking and finance.Current Positions: Chairman & CEO of Al-Razzi Holding Company; Chairman of Banco ABC Brasil S.A.; Chairman of Sama Educational Company; Director of the Board of Governors of the Oxford Institute for Energy Studies; Director of the Board for Arab Banking Corporation-Bahrain; Member of the Board of Directors of the Public Authority for Applied Education. Former Positions: Dr. Al Mudhaf has formerly served as a Lecturer in Corporate Finance, Investment Management and Financial Institutions at Kuwait University; Chairman of the International Bank of Asia in Hong Kong; Director of the Board of Directors of the Public Institution for Social Security (PIFSS); Advisor to the Finance and Economic Affairs Committee at Kuwait's Parliament; Member of the Economic Task Force dealing with the implications of the 2008 Global Financial Crisis on Kuwait; Vice Chairman in Al Mal Investment Company; and a Director of Al Ahli Bank in Kuwait.

THE BOARD OF DIRECTORS

Mr. Adel A. El-LabbanMember of Compensation & Nominating Committee, Member of the Executive Committee(Non-Executive Director)

Mr. Adel El-Labban joined the Bank's Board in March 2002.Qualifications & Experience: Mr. El-Labban holds a Bachelors degree in Economics (Highest Honors) from American University, Cairo and a Master's degree in Economics (Highest Honors) from the American University of Cairo. He has vast experience in commercial and investment banking with a particular focus on the GCC countries and Egypt.Current Positions:- Group Chief Executive Officer & Managing Director - Ahli United Bank BSC, Bahrain- First Deputy Chairman - Ahli Bank SAOG, Oman- Deputy Chairman - United Bank for Commerce & Investment LSC, Libya- Deputy Chairman - Commercial Bank of Iraq PSC- Deputy Chairman - Middle East Financial Investment Co. (Saudi Arabia)- Director - Ahli United Bank PLC, UK - Director - Ahli United Bank Ltd, United Arab Emirates- Director - Bahrain Association of Banks Former Positions: Chief Executive Officer and Director - United Bank of Kuwait PLC, UK; Managing Director - Commercial International Bank of Egypt; Chairman - Commercial International Investment Company, Egypt; Deputy Chairman - Ahli United Bank SAE Egypt; Vice President - Corporate Finance, Morgan Stanley, USA; Assistant Vice President - Arab Banking Corporation (Bahrain); Director Bahrain Stock Exchange, Director Kuwait & Middle East Financial Investment Co.

THE BOARD OF DIRECTORS (CONTINUED)

Mr. Keith Henry GaleChairman of Risk Committee, Member of the Executive Committee(Non-Executive Director)

Mr. Keith Gale joined the Bank's Board in March 2009.Qualification & Experience: Mr. Keith Gale holds a Bachelor's degree in Accounting & Finance from Lancaster University and is a Qualified Accountant and member of the Institute of Chartered Accountants for England and Wales. He has vast experience in the banking sector and risk management.Current Position: Deputy Group CEO - Risk, Legal and Compliance, Ahli United Bank B.S.C. - Bahrain. Director, Ahli Bank SAOG - Oman; Ahli United Bank S.A.E - Egypt; Ahli United Bank Plc, UKFormer Positions: Group Head of Risk Management, Ahli United Bank B.S.C. - Bahrain; Head of Credit and Risk at ABC International Bank PLC; Assistant Vice President, Arab Banking Corporation, B.S.C. - Bahrain.

Mr. Michael Gerald EssexMember of Compensation & Nominating Committee, Member of the Risk Committee (Independent Director)

Mr. Michael Essex joined the Bank's Board in March 2015.Qualification and Experience: Mr. Essex holds an Executive Development Program Certificate from Harvard Business School - Boston, USA, 1997; a Masters in Public Administration from Carleton University of Ottawa, Canada, 1975; and a Bachelors Degree. Economics and Political Science from University of Western Ontario - London, Canada, 1972. He has extensive experience in Asia & Pacific, Africa and MENA regions in investment, portfolio management, risk and finance in the banking, infrastructure, energy, industrial and service sectors.Other Current Positions: Board Director, and Chairman, Group Audit Committee and Group Nomination & Compensation Committee Ahli United Bank BSC Bahrain; Board Director, Chairman - Audit Committee, Compensation & Nomination Committee and Corporate Governance Committee Ahli United Bank SAE Egypt; Board Director, Chairman of Audit Committee Kuwait & Middle. East Financial Investment Company Kuwait; Member, Investment Committee, APIS Growth Fund (UK); and Board Director, Macquarie Bank SBI India Infrastructure Fund (Singapore, India). Former Positions: Director, Investment & Advisory Operations, MENA Region for International Finance Corporation (IFC); Deputy Director, IFC Global Industry & Service sector investments; Managing Director, Corporate Banking, NZI Securities, Australia; and Risk Supervisor, Asia, Bank of Nova Scotia.

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Mr. Sanjeev BaijalMember of Audit & Compliance Committee(Non-Executive Director)

Mr Sanjeev Baijal joined the Bank's Board on March 2016Qualifications & Experience: Mr. Sanjeev Baijal is a senior banking and finance professional with 33 years of international experience in the financial services and auditing industry covering areas of finance, accounting, taxation, value addition, advisory, and strategic planning and development including mergers and acquisitions. Mr. Baijal is a Chartered Global Management Accountant under Association of International Certified Professional Accountants; Member of the American Institute of Certified Public Accountants (AICPA), and Associate Member of the Institute of Chartered Accountants of India (ACA). Current Positions: Deputy Group CEO Finance & Strategic Development, Ahli United Bank B.S.C.; Chairman Al Hilal Life B.S.C.(c) & Al Hilal Takaful B.S.C.(c), Bahrain; Director, Ahli Bank S.A.O.G., Oman;Former Positions: Group Head of Finance, Ahli United Bank B.S.C., Bahrain; Financial Controller, Al-Ahli Commercial Bank, Bahrain; and has held various positions at Ernst & Young, Bahrain and Price Waterhouse in India.

THE BOARD OF DIRECTORS (CONTINUED)

Mr. Mohamed Tareq Mohamed Sadeq Mohamed AkbarChairman of Audit & Compliance Committee(Independent Director)

Mr. Mohamed Tareq Mohamed Sadeq joined the Bank's Board in March 2015. Qualification & Experience: Mr. Tareq is a Fellow Chartered Accountant from the Institute of Chartered Accountants in England and Wales. He has significant experience in the fields of financial advisory consultancy, audit services and business development.Current Positions: Managing Director, Keystone consulting, Inc. W.L.L.; Independent Director and Chairman of the Audit & Compliance Committee of Ahli United Bank Limited, Dubai; Independent Director and Member of the Audit & Compliance Committee, Ahli United Bank S.A.E., Egypt; He is also the Chairman of Ibdar Bank B.S.C.; Chairman of Audit Committees and Advisor to several Family Offices; Independent Director of Al Zayani Investments B.S.C. and Bahrain Golf Course Company B.S.C. Former Positions: ¥ Area Leadership Team Member and Head of Advisory Practice Ernst & Young Middle East and North

Africa¥ Area Leadership Team Member and Head of Accounts & Business Development Ernst & Young

Middle East & North Africa¥ Office Managing Partner of the Bahrain practice of Ernst & Young Middle & North Africa responsible

for Assurance, Advisory, Tax and Transaction service lines. Staff partner in addition to providing audit and advisory services to a cross section of industries, including banking and financial services sector, government and public sector, real estate and hospitality, retail, healthcare etc.

Mr. Abdulla AlRaeesiMember of Audit & Compliance Committee, Member of Corporate Governance Committee(Non-Executive Director)

Mr. Abdulla AlRaeesi joined the Bank's Board in March 2015Qualifications & Experience: Mr. Abdulla AlRaeesi is a senior banking professional with over 29 years of international experience in managing retail banking, operations, finance, strategic planning, conventional and Islamic banking, mergers, and acquisitions and restructuring for banking institutions in Bahrain, Kuwait, Qatar, Oman, Egypt, Libya, Iraq and UK. Mr AlRaeesi holds a MBA in Business and Management from the UK. Current Positions: Deputy Group CEO- Retail Banking of Ahli United Bank BSC; Deputy Chairman of Alhilal Life B.S.C; Deputy Chairman of Alhilal Takaful B.S.C; Chairman of Ahli United Bank Group IT Steering Committee; Member of Group Assets and Liabilities Committee, Member of Group Management Committee and Member of Group Operation Risk Committee.Former Positions: Board Director of Ahli Bank Qatar; Board Director of Ahli United Bank SAE Egypt; Board Director of International Chamber of Commerce; Board Director of Benefit Company; Chairman of Ahli Man Investment Committee; Vice Chairman of Charity Committee of Ahli United Bank; Head of Business Consulting Group of Arthur Andersen and Assistant General Manager of Commercial Bank of Qatar.

2nd Safest Islamic Bank in Kuwait and 4th in the GCCThe rankings are based on evaluations of long-term foreign currency ratings from: Fitch Ratings, Moody’s, and Standard & Poor’s.

One of theSafest Islamic Banks

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FATWA & SHARI'AH SUPERVISORY BOARD REPORT FATWA & SHARI'AH SUPERVISORY BOARD MEMBERS

Dr. Khaled Mathkour Al MathkourChairman

- Ph.D. in Shari'ah and Law at Al-Azhar University- Cairo.- Faculty member at Kuwait University, Comparative Fiqh and Shari'ah Policy at Shari'ah and

Islamic Studies College.- Head of Fatwa Committee at the Ministry of Awqafand Islamic Affairs, State of Kuwait.- Member of the Scientific Committee for the Fiqh Encyclopedia at the Ministry of Awqaf and

member of Fatwa and Supervision Panel.- Member of the Board of Directors of the International Islamic Authority for Information-

Islamic World Union.- Member of Fatwa and Shari'ah Supervision in several Islamic banks and Financial Institutions.- A founding member of the International Islamic Charity Authority headquartered in Kuwait.- Former head of the Higher Consulting Committee for the Application of Islamic Shari'ah

Principles - Amiri Diwan - State of Kuwait.

Dr. AbdulAziz Khalifa Al QassarMember and Reporter

- Ph.D. in Shari'ah at Shari'ah and Law College- Al Azhar University, Cairo.- Professor. of Comparative Fiqh at the Shari'ah and Islamic Studies College, Kuwait University- Member of Fatwa and Shari'ah Supervision in several Islamic banks and Financial Institutions

both in Kuwait and abroad.- Lecturer in Islamic Financial Transactions.- Author of many studies in research in Islamic Fiqh and Contemporary Financial transactions.- Former Assistant Dean for Scientific and Higher Studies and Research Affairs.

Dr. Essam Khalaf Al EnezieMember

- Ph.D. in Shari'ah- The Jordanian University, (Fiqh Major).- Faculty Member at Kuwait University, Comparative Fiqh Section- Shari'ah and Islamic Studies

College- Member of the Shari'ah Council at the Accounting and Audit Board for Islamic Financial

Institutions.- Member of Fatwa and Shari'ah Supervision Board in several banks and Islamic Financial

Institutions.- Author of a number of studies and research works.

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EXECUTIVE MANAGEMENT

Richard W L GrovesChief Executive OfficerMr. Richard Groves joined the Bank in April 2015 as Chief Executive Officer. Prior to joining, Mr. Groves had extensive international financial and banking experience, including senior management roles, with HSBC Group. These roles included Chief Executive Officer, HSBC Oman and Managing Director, The Saudi British Bank, in a career spanning over 30 years which also included assignments in Europe and Asia. He was also a board member of HSBC Bank Middle East Ltd and HSBC Bank Egypt SAE. Mr. Groves holds a Bachelor of Arts degree in Economic and Social History from the University of Hull, United Kingdom.

Moataz El-Rafie, CFASenior Deputy CEO- Banking Business GroupMr. Moataz El Rafie, Senior Deputy CEO Banking Group has over 35 years of banking experience. He is a Director of the United Bank for Commerce & Investment (Libya). He has assumed multiple senior positions including Chief Executive Officer of Ahli Bank, Qatar, General Manager Corporate Banking & Treasury at Boubyan Bank; and General Manager Business Development at National Bank of Kuwait. Mr. El Rafie, started his career in 1976 at the Chase National Bank of Egypt (now Commercial International Bank) in several positions covering Bank Operations and Treasury. Mr. El Rafie assumed board membership at Watani Bank of Egypt, United Bank of Credit & Investment (Libya) and Boubyan Capital. He earned his Bachelor of Science degree in Business Administration from Cairo University in 1976. He holds the professional designation of Chartered Financial Analyst, CFA.

Ahmed ZulficarSenior Deputy CEO - Banking Support GroupMr. Ahmed Zulficar joined the Bank as Deputy Chief Executive Officer - Risk, Finance and Operations in January 2007. He is Director of the United Bank for Commerce & Investment (Libya) and Director of the Commercial Bank of Iraq (Iraq). Prior to joining the Bank, Mr. Zulficar held various high level managerial positions in credit, marketing, risk, trade finance and operations in several banks, including Commerzbank A.G., Germany, Chase National Bank of Egypt (now Commercial International Bank), Saudi Cairo Bank (now Samba - Saudi American Bank), and National Bank of Kuwait. He holds a Bachelor of Commerce degree from Cairo University.

Jehad Soud Al-HumaidhiSenior General Manager - IT & OperationsMs. Jehad Al-Humaidhi joined the Bank in 1984 as an IT Programmer and has held several managerial positions related to operations, administration, electronic systems, data processing and system development. Since 2011, she has held the position of General Manger of IT & Operations rising to Senior General Manager in 2016. She is a member of the Board of KNET and member of the Board of Gulf Custody Company. Ms. Jehad holds a Bachelor of Science degree in Mathematics (Major) and Economics (Minor) from Kuwait University.

Hisham ZaghloulSenior General Manager - Corporate Banking and Financial Institution Mr. Hisham Zaghloul joined the Bank in 2007. He holds a Bachelor of Arts degree in Economics from Cairo University and has extensive experience in Corporate Banking, Treasury, and Trade Finance, having worked for various banks and financial institutions including BNP Paribas (Egypt), Commercial International Bank (Egypt) and United Bank for Commerce & Investment (Libya). Mr. Zaghloul is the Vice Chairman of Kuwait & Middle East Financial Investment Co. (KMEFIC), a Board Member of Commercial Bank of Iraq P.S.C. and a Board Member of Middle East Financial Investment Company (MEFIC) in Saudi Arabia.

Hossam Al-Deen GawdatGeneral Manager - TreasuryMr. Hossam Gawdat joined the Bank in 2007 as the Head of Treasury & Treasurer. Prior to joining, he headed various Treasury and Investment functions in leading banks in the Gulf region. From 1999 till 2007 he was with NBK Kuwait and from 1989 till 1999 in Riyad Bank in Saudi Arabia. He holds a Bachelor of Science degree in Economics and Political Sciences from Cairo University 1982.*He submitted his resignation from the Bank effective 17 February 2017.

Medhat TawfikGeneral Manager - Private Banking & Wealth ManagementMr. Medhat Tawfik joined the Bank in 2005 as the Assistant General Manager of Private Banking and Wealth Management. He currently holds the position of General Manager. Prior to joining the Bank, Mr. Tawfik held managerial positions in credit, accounts relationship & private banking with several other banks. Mr. Tawfik holds a Bachelor of Arts degree in Business Administration from the University of Texas and a Master's degree in Marketing/Management from Amber University, Texas.

Amgad YounesGeneral Manager - FinanceMr. Amgad Younes joined the Bank in 2014 as General Manager, Finance. Previously he served in regional commercial and Islamic Banks in senior positions for Finance, Strategy, Planning, Operations and Technology. He was awarded a Bachelor of Commerce degree in Accounting and Finance from Cairo University in 1985 and attained a post-graduate accountancy diploma from the same university before obtaining his Master's Degree in Business Administration from the American University in Dubai. He is a Certified Public Accountant and member of the American Institute of Certified Public Accountants in addition to being an International Certified Public Arab Accountant and member of Arab Institute of Certified Public Accountants. He carries certifications also in Project Management, Islamic Finance Qualification from the Chartered Institute for Securities and Investments (UK) and Certified Business Manager from the American Institute for Management.

Naqeeb Hamed AminGeneral Manager - Human ResourcesMr. Naqeeb Hamed Amin joined the Bank in 2014 as Assistant General Manager Human Resources. Prior to joining, he held senior management positions in the field of HR and Sales in various sectors such as Petrochemical, Telecom, Medical, Research and IT. He holds a Bachelor's degree in Hotel and Tourism Administration from the University of South Carolina, Columbia SC, USA.Naqeeb is a Harvard Business School Alumni.

Tanu GoelGeneral Manager - AuditMr. Tanu Goel joined the Bank in 2006 as the Head of Audit. Prior to joining the Bank, he held various managerial positions in Audit functions. He is a Certified Bank Auditor, Certified Information System Auditor and Financial Risk Manager, and holds a Bachelor of Commerce degree from the University of Mumbai, India. He also holds several certifications from the Institute of Cost and Works Accountants of India and the Institute of Chartered Accountants of India.

Shabbir ShaikhGeneral Manager - Risk ManagementMr. Shabbir Shaikh joined the Bank in 2006 as the Head of Risk Management. Prior to joining, he was Head of Risk at Ahli United Bank Group Head Office, Bahrain since January 2001. His previous experience was with Standard Chartered Bank (1996 - 2000) as Senior Credit Officer for Bahrain, Qatar, Oman and Saudi Arabia and Head of Corporate at its Bahrain and Karachi offices respectively. He also held managerial positions in the area of Treasury and Corporate Banking in American Express Bank, Societe General and Bank Al Falah in Pakistan. He holds a Bachelor and Master's degree in Business Administration from University of Karachi.

Ranjan SenGeneral Manager-Retail BankingMr. Ranjan Sen joined the Bank as General Manager Retail Banking in August 2016. Ranjan is a career banker with varied experience gained through diverse roles across more than a dozen countries and three international banks - commencing with American Express Bank, Commerzbank and extensively with HSBC. He has experience of a range of wholesale and retail banking functions, most recently in high impact consumer banking leadership roles which include Retail Banking and Wealth Management Country Manager for HSBC Egypt and Head of Sales and Distribution for HSBC across the Middle East and North Africa region (MENA), and Head of International Countries in MENA, also for HSBC. Ranjan holds a Masters in Business Administration from Delhi University.

Hatem BadrGeneral Manager - LegalMr. Hatem Badr joined the Bank in 2016 as the General Counsel & General Manager for the Legal Department. He has extensive legal experience in financial and investment organizations. He worked as the General Counsel & Vice President of Citibank covering North & West Africa (based in Cairo) and then covering the GCC region (based in Bahrain). He also was the General Counsel & Managing Director for the private equity firm of Gulf Capital in Abu Dhabi; and was the General Counsel and General Manager - Legal Department for Gulf Bank in Kuwait. He further worked with the law firm of White & Case in New York and the law firm of Baker & McKenzie in Cairo. Mr. Badr holds a Masters Degree in Banking, Corporate and Finance Law from Fordham University in New York; and a certificate of "Leadership in Corporate Counsel" from Harvard University.

Yasser ElhodhodAssistant General Manager - Regulatory ComplianceMr. Yasser Elhodhod joined the Bank in 2016 as AGM Regulatory Compliance. Prior to joining, he was Chief Inspector in the Central Bank of Kuwait until March 2016. Prior to this he was Deputy General Manager in the Supervision Sector of the Central Bank of Egypt. He holds a Bachelor of Commerce degree from Cairo University.

EXECUTIVE MANAGEMENT (CONTINUED)

20 21

FINANCIAL PERFORMANCE SUMMARY

KD Thousands Unless Otherwise Stated Dec 2016 Dec 2015 Dec 2014

Net profit 40,348 42,805 47,008

Net financing and interest income 88,402 89,082 79,518

Financing receivables and loans 2,706,054 2,680,334 2,480,431

Total assets 3,692,161 3,904,303 3,596,928

Total deposits 3,194,023 3,490,618 3,210,494

Shareholders equity 385,048 356,158 326,868

Total equity 445,688 360,835 339,320

Return On Average Assets (ROAA) 1.0% 1.2% 1.4%

Return On Average Equity (ROAE) 11.0% 12.7% 15.1%

Cost to income ratio 30.5% 29.9% 32.0%

Capital adequacy ratio 17.5% 15.2% 15.7%

Earnings per share (Fils) 25.9 27.4 30.1

Financing receivables and loansKD Million

2016

2015

2014

0

3,000

1,500

2,000

2,500

1,000

500

2,706

Total depositsKD Million

2016

2015

2014

0

3,500

3,000

1,500

2,000

2,500

1,000

500

3,194

Net financing and interest income

KD Million

2016

2015

2014

20

100

80

60

40

88

Total assetsKD Million

2016

2015

2014

3,692

0

3,000

3,500

4,000

1,500

2,000

2,500

1,000

500

22 23

OVERVIEW OF BANK STRATEGY

Since its establishment, Ahli United Bank (AUBK) has embraced a pioneering role in economic development and social advancement in the country. The Bank has achieved its success by balancing the growth with a disciplined management of costs and risks, while keeping a firm grip on both liquidity and equity values.

The Bank followed the strategic initiatives throughout the period by placing a great deal of attention on technology and more innovative electronic services for its customers. The introduction of a mobile banking application and enhanced B2B services demonstrates the Bank's commitment towards providing customers with updated and creative digital solutions.

It is paramount for any financial institution to maintain a solid capital base. To balance between the growth of business and achieving a higher return on equity , the Bank successfully issued a debut additional tier I capital Sukuk with a total value of US Dollars 200 million in October 2016. This issuance has been completed by attracting investors from Europe, Asia, GCC and the Middle East. The issue was priced fairly for both the Bank and the Sukuk investors reflecting the strong credit rating of the Bank and its stable outlook. This issuance contributed in enhancing the capital adequacy ratio and exceeds the minimum required ratio determined by the Central Bank of Kuwait (CBK) and Basel III accord. The Sukuk is listed on both Nasdaq Dubai and the Irish Stock Exchange.

The Bank continued its social responsibility activities which have been designed to suit the needs of Kuwaiti society in a long-lasting, sustainable and widespread manner.

The Bank's vision as embedded into our strategy is to become a leading Shari'ah compliant bank operating in accordance with international standards while always placing its customers FIRST.

In line with this vision, the Bank's proceeded with its plans as defined in the core strategic goals which include¥ Provide innovative Shari'ah compliant financial solutions, competitive products and quality services to its customers.¥ Maintain high standards of corporate governance and risk management and a solid capital base whilst also achieving

maximum returns for shareholders on a sustainable basis. ¥ Keeping the Bank's position among the top Islamic Banks in Kuwait by focusing on market-share, having a balanced and

diversified growth plan, in addition to the efficient use of internal and external resources.¥ Retain and develop its human resources through a meritocratic management structure with a view to becoming the employer

of choice in the financial service sector in Kuwait. The Bank has focused on effective training programs related to business areas and the development of key managerial skills for staff through effective leadership programs.

Adopting the latest technology in order to meet the needs of the Bank's customers whilst introducing process efficiencies and reducing costs.

¥ The cost to income ratio identified the Bank as one of the most efficient operating banks in Kuwait, as compared with its peers. The Bank monitored its operational efficiency indicators to ensure sustainable KPIs.

¥ The potential for maintaining high performance levels is ensured throughout a strategy of focusing on E-services and the development of unique products designed to minimize the branches' costs and enhance efficiency.

¥ Contribute to the social and economic advancement of the local communities in line with the Bank's commitment to the corporate social responsibility.

BUSINESS PROFILE

Following the conversion to Shari'ah compliant banking services, the Bank has conducted its businesses in accordance with Islamic Shari'ah provisions under the oversight of its Fatwa & Shari'ah Supervision Board. This business model has been beneficial, resulting in a growth in AUBK's businesses both in terms of deposits and net financing assets. The progress achieved since conversion has laid the foundation to target further growth within the risk appetite framework defined by the Board of Directors.

MANAGEMENT REPORT & PERFORMANCE ANALYSIS

FINANCIAL & PERFORMANCE OVERVIEW

The Bank's asset base comprises mainly of net financing constituting 73% of total assets. Cash balances, including inter-bank deposits, account for a further 19% of total assets. Available for sale investments mainly consist of short and long term investments in Sukuk representing a total of 6% of total assets. The Bank's liabilities are comprised of customer deposits (77%) and deposits from banks (22%) of the total liabilities.

The Bank achieved its operational effectiveness and efficiency owing to its focused Asset & Liability Management within its Board approved prudent risk framework.

The following table shows the balance sheet growth/profitability trends of Ahli United Bank Kuwait 2014-2016:

201420152016Main Indicators

3,5973,9043,692Total Assets (million KD)

2,4802,6802,706Total Financing (million KD)

2,4542,6612,492Total Customer Deposits (million KD)

339361446Total Equity

79.589.188.4Net Financing Income (million KD)

101.2110.9111.1Total Operating Income (million KD)

47.042.840.3Net Profit for Shareholders (million KD)

30.127.425.9Earnings Per Share (Fils)

The Bank recorded a total operating income of KD 111.1 million in 2016 compared with KD 110.9 million achieved in the previous year. The net operating profit recorded KD 77.2 million net of provisions which included exceptional precautionary provisions for the year.

The average return on equity (ROAE) and average return on assets (ROAA) were recorded at 11% and 1% in 2016 respectively which are amongst the highest rates of banks operating in Kuwait. The capital adequacy ratio (CAR) of 18.2% exceeded both the Basel III recommended capital ratio and the minimum ratio required by the Central Bank of Kuwait (13.5%). It is worth-mentioning that the CAR has been enhanced upon the successful issuance of an additional tier I Sukuk of US Dollars 200 million (KD 61 million) in October 2016 as indicated above.

For the fourth consecutive year, the Bank re-affirmed its pre-eminent position in Islamic Banking by winning the award in Kuwait of Islamic Bank of the Year 2016 from the international specialized magazine The Banker. The award confirms the Bank's ability to render distinctive banking services and products to its customers. The Bank was also awarded the Second Safest Islamic Bank in Kuwait and Fourth in the GCC for 2016 by the Global Finance Magazine based on an evaluation of long-term foreign currency ratings of the international rating agencies and the total assets of the 500 largest banks worldwide. These awards re-affirm the Bank's ability to provide outstanding services to customers and introduce innovative Islamic products into the market.

The Bank has retained it's "A" category ratings by the international rating agencies including, Fitch (credit strength on long-term and short-term A+ and F1 respectively with a stable outlook), Moody's (A2 for global local currency (GLC) deposit rating with a stable outlook) and Capital Intelligence (long and short-term foreign currency ratings of A+ and A2 respectively with a stable outlook). These ratings underscore the Bank's sound financial position and its sustainable profit generation.

MANAGEMENT REPORT & PERFORMANCE ANALYSIS (CONTINUED)

24

FUTURE OUTLOOK

The Bank will continue its strategy to meet customers' expectations and introduce innovative technological products and services. The Bank will further enhance shareholders' value and achieve competitive returns for its deposit holders and Mudaraba accounts. By assuming its social responsibility, the Bank will continue supporting society through a clearly-defined strategy for 2017, keeping its competitive position and provide end-to-end financial solutions for customers.

Looking ahead, the Bank is well equipped to face what will undoubtedly be another challenging year for the financial sector, with low oil prices and regional uncertainty. Owning a number of key competitive advantages will maintain the Bank's positive outlook being:

¥ Strong regional group presence, distinguished brand and local franchise¥ Innovative and extensive product range¥ Shari'ah compliance¥ Stable funding base and capital adequacy ¥ Quality of service and speed of response time¥ Competent, loyal and professional management¥ Focused staff training¥ Systematic approach to developing strategy¥ Strong association with the community

MANAGEMENT REPORT & PERFORMANCE ANALYSIS (CONTINUED)

Islamic Bank of the Yearfor 4 Consecutive Years

Awarded by The Banker editorial and research team,based on core financial status, market share, innovation and products initiatives.

26 27

CORPORATE BANKING

Despite the very competitive market conditions in 2016, Corporate Banking has solicited select finance deals within the Bank's conservative credit and risk policy and has maintained a high quality credit portfolio whilst ensuring diversification in targeted economic sectors. This has contributed to maintaining the Bank's strong position in the Kuwait banking sector.

Moreover, Corporate Banking has continued to offer its Shari'ah compliant mix of products and services bringing a high level of professionalism to clients being large local and foreign corporates and with an enhanced focus on multinationals and Small to Medium Sized Enterprises (SMEs). This has been achieved through sector specialized units being Contracting & Manufacturing, Food, Pharmaceutical & Energy, Trading & Services, Real Estate & Investments, and the SMEs Unit. With the intent of growing client deposits and account balances under Corporate Banking, and whilst ensuring competitiveness and a diversified depositor base, the Cash Management Unit under Corporate Banking has continued to offer its customized services to corporate clients. This has led to a substantial growth in the number of clients benefiting from the Business to Business (B2B) on-line Banking service, specializing in offering a secure overall electronic solution aimed at facilitating and streamlining banking transactions through integration between a client's Enterprise Planning System (ERP) and the Bank's system.

Moreover, Corporate Banking has succeeded in achieving its objectives in terms of maintaining a high-quality asset portfolio, providing a full-rounded product/service mix offering, growing the client base amongst varying business sectors and consequent diversification in both asset and liabilities while aiming at enhancing its market share and profitability. In this regard, Corporate Banking has continued its focus on risk-calculated growth, soliciting new clients, taking a participation in select local syndications and supporting a good number of large-scale projects floated under Kuwait's Government Development Plan. In addition, there has been a distinct emphasis on bolstering human capital through attracting young qualified national and senior bankers with a high level of Islamic banking experience.

Corporate Banking strives to continue its achievements whilst augmenting the Bank's brand equity across the State of Kuwait and the region and to contribute positively to the Banking sector and overall economy.

PRIVATE BANKING AND WEALTH MANAGEMENT

Private Banking and Wealth Management continued its exceptional level of service to its high net worth clientele. 2016 was a challenging year where the division had to adjust to the market trends and therefore relying on the acknowledged level of service was crucial in the sustainability and improvement in business performance. Furthermore, the service boosted a coverage umbrella that utilizes the Ahli United Bank Group entities network for the private banking client advantage.

The strategic alliances with several international partners and other advisors helped to improve client awareness of the international real-estate investment markets as well as opening new venues for client investment needs. A number of attractive deals were arranged for our clients centered on prime locations which satisfied their short term income generating requirementsand long term investment vision. In line with this, Private Banking launched several prestigious real-estate projects at the heart of London's most sought after locations during the year.

Moreover, 2016 witnessed important changes in the real-estate taxation regulations for UK which impacted clients’ investments, their investment strategies and inheritance tax. Therefore, Private Banking's expertise was crucial to advise valued clients on such matters. This is especially at a time of increased uncertainty in global markets and the global economy.

Internal collaboration is at the heart of the business' development initiatives. Working together with Treasury, Corporate Banking and Retail Banking to extend private banking services to these areas.

Finally, the risk assessment and investment processes were improved significantly to reflect market changes. Extensive client risk profiling and vigorous market assessments combined to form a solid investment culture, thus supporting our valued customers in the planning and growing of their wealth.

RETAIL BANKING

Retail banking made rapid strides throughout the year in improving service for customers and developing the business.

Customer access to the Bank was enhanced through a variety of channels; the Direct Sales team almost doubled in numbers and took up new locations in the branch network to better reach customers. The branch network itself was further strengthened with the opening of a new branch in the new mall, Salmiya Boulevard: and the relocation of Jahra branch to new, purpose-built premises allows for a fully segregated customer service for ladies. Work was also begun on three new branches in Rawda, Bayan

EXECUTIVE SUMMARY

and Rumaithiyya.The biggest stride in improving customer access was made in digital channels, wherein a new mobile banking application was launched and was very well received by customers, along with the launch of an Arabic website. The ATM network was upgraded with a host of new services for customer convenience, including updating of customer mobile numbers, issuance of Personal Identification Numbers (PIN), updating Civil ID expiry dates and generating telebanking PINs. There were also multiple upgrades to the call center systems to improve the customer experience.

Accessibility was a major driving force for Retail throughout the year, culminating in the Special Needs Project which entailed the modification of all bank products and services in order to ensure fair and equitable treatment for all segments of society. Towards this effort, upon the guidance of the Board and Management, seven branches were nominated to be modified for the purpose of serving Special Needs customers. The modifications done were to ensure that all customers are able to conduct transactions with the privacy, security and assurance that is hallmark for the Bank. These changes included physical modifications at the branches for improved accessibility, enhancements across all electronic channels (including voice guidance features at the ATM) for better privacy, accessibility and security; reduction of fees on some products and services; and technology upgrades to provide applications, documents and other key literature to customers in Braille, audio and video. In addition, staff training (including familiarity with Sign Language) was undertaken to ensure that special needs customers are identified, given priority and are dealt with in a manner most comfortable for them. The bank is committed to ensuring that any future products and services are made accessible to all segments of society.

Enhanced customer access was well supported by a diverse range of product development and improved marketing. The installment financing product was enhanced with additional features such as the repayment grace period, while the salary account proposition was strengthened with a number of highly competitive offers including a chance to win an entire salary back. There were also a number of joint marketing campaigns with various renowned auto dealers. Advanced analytic tools indicating cross sell opportunities were developed for customer facing staff to use, and a customer referral program was also launched.

This led to robust business growth, led by more than doubling of new to Bank salary transfers, accompanied by a surge in retail financing equally between installment financings and real estate financings. The flagship Al Hassad program continued to show encouraging growth as well, while the market share of credit cards started to increase once more.

During the year key processes were revisited and enhanced to streamline and to make banking with Ahli United Bank easier and more accessible. An Internal Control Unit was set up for incremental oversight.

COMPLAINTS & CUSTOMER PROTECTION UNIT

Complaints & Customer Protection Unit was established in 2015 to further expand and enhance the role of the existing Complaint and Quality Assurance function and to ensure full compliance with CBK's Customer Protection Manual principles. These principles are in line with the Bank's vision in terms of being customer centric and offering the very best in service quality. Throughout 2016, the Department has taken the lead in ensuring there is full compliance across the Bank with the Customer Protection principles. Some of the initiatives taken were as follows:-

• Issuance of the Bank's Customer Protection Manual guidelines in November 2016 which is to be followed by all internal stakeholders.

• Revalidation of ISO 9001:2008, the ISO German Quality Certificate "TUV NORD", which is deemed a culmination of the Quality Service Department's efforts in providing the best Banking services, thereby improving the Bank's competitive capability in the market.

• Quality Control Department intensified efforts to undertake the regular service assessments and customer surveys to identify opportunities for improvement, especially in Retail Banking.

• Complaint & Customer Protection Unit organized training courses and workshops for new staff to enhance their knowledge of customer protection, complaint handling and the awareness of employees in the necessity of offering quality service

• Assisting various Bank departments to ensure compliance with Customer Protection principles.• Resolution of Bank-wide customer complaints where proper investigation took place to identify the root causes and carry

out appropriate rectification.

An internal "thank you" campaign was also initiated to improve communications amongst staff and to emphasize a spirit of cooperation.

EXECUTIVE SUMMARY (CONTINUED)

RETAIL BANKING (CONTINUED)

28 29

TREASURY

Treasury remained proactive in successfully implementing creative strategies and fulfilling recent standardized liquidity ratio modifications for the purpose of maintaining the Bank's liquidity and managing new Basel III liquidity obligations efficiently. This activity ensured adequate funding capacity to finance the Bank's asset growth. At the same time complying with Shari'ah compliant banking regulations, while efficiently managing the Bank's cost of funds. Treasury sets market standards for monitoring and measuring foreign exchange, profit rate and liquidity risk.

Treasury has continued to achieve substantial growth in terms of profitability by investing in Shari'ah compliant High Quality Liquid Assets (HQLA) and marketable fixed-income Sukuk. This is accompanied with Treasury using liquidity efficiently, resulting in a greater contribution to the Bank's overall Net Financing Margin by investing in less risky yet high yielding investments.

Treasury, in conjunction with other business units within the Bank, successfully issued its first Tier 1 (AT1) Sukuk for USD 200 Million, which was very well received by the capital markets. The order book was oversubscribed by more than three times the notional amount of the transaction. The Bank's Sukuk is now being actively traded in the secondary markets and is listed, and has been actively traded on, the Irish Stock Exchange and NASDAQ Dubai since 26 October 2016.

Notwithstanding the challenging market conditions, Treasury has continued to focus on understanding clients' requirements and has provided financial solutions resulting in growing its client base by offering high level Shari'ah compliant products with competitive prices, resulting in achieving a stable depositor base. Moreover, clients are kept up-to-date in terms of local and international market changes. Treasury has strengthened its customer relationship activity and has expanded its customer base which has reflected significantly in increased profitability in Foreign Exchange. Additionally, Treasury takes pride in rendering exceptional services to clients providing an in-depth knowledge of Shari'ah compliant products. Treasury has also enriched relationships with both Islamic and conventional banks in the local and regional (MENA) markets. Consequently, Treasury's achievement is positively reflected in the contribution to the Bank's growth and expanding market share in 2016..

RISK MANAGEMENT

Risk is inherent in all of the Bank's activities and is managed through a process of ongoing identification, measurement and monitoring, subject to risk limits and other controls, in accordance with regulatory and Board requirements. The Bank is exposed principally to credit risk, liquidity risk, market risk and operational risk. Other risks such as reputational risk, legal risk and the various risks defined by the Basel accord are also monitored and managed.

The Risk Management Framework, Financing & Risk Management Policy and related documents, which incorporate risk mitigation, as well as the governance structure, provide comprehensive control and management of the risk/reward relationship across the entire Bank.

The Risk Management Framework clearly establishes the dynamic link between risk appetite and the return target, internal controls and capital adequacy management. The Risk Management Division (RMD) is the primary body responsible for setting the overall risk threshold.

The Board of Directors is the ultimate owner of the risk appetite within the Bank and approves all risk appetite related policies. The RMD structure has a distinct identity and independence from the business units, making it the ideal partner in achieving business objectives within the acceptable risk/reward criteria.

RMD is headed by the General Manager, who has a direct reporting line to the Board via the Board Risk Committee. RMD is comprised of the following units which address the risk exposure of the Bank:

• Credit Risk• Market Risk• Operational Risk• Credit Administration• Credit Control & MIS• Remedial accounts unit.• System Security Unit.

RMD co-ordinates and communicates with each line of business to properly manage its risks. The General Manager - RMD is a member of several management committees that have the overall responsibilities and authorities vested in them for the day-to-day risk management activities of the Bank. Such authorities are exercised within the objectives and policies approved by the Board and subject to the rules and regulations laid down by CBK.

The Bank measures risk using a variety of qualitative and quantitative methodologies based on the nature of the risks. Stress-tests and benchmarking to other industry standards are also periodically conducted. Measurement models and related assumptions are routinely subject to reviews, validation and benchmarking with the goal of ensuring that the Bank's risk estimates are reasonable, reflective of the risk of the underlying positions and comparable to best practices.


INFORMATION TECHNOLOGY

The Information Technology (IT) Division, is a core component of the Bank's operations and in enhancing the banking experience for customers. The Bank has enhanced the technology platform to continuously augment functionality in all channels in 2016, mainly through the following:

• New Shari'ah Compliant Banking Products based on customer needs were developed and implemented to complement our existing product range.

• Mobile Banking provided our customers with a whole range of banking services that they can use anywhere, anytime providing an enhanced customer experience.

• Additional functionality on the Bank's ATM network enabled customers to update their key information without having to visit the Bank. This provided customers with a secure means to maintain their telebanking PIN. In addition, we continued our progressive roll out of new ATMs across our network.

• Additional services on IVR and Call Center provided our customers with a more secure and enhanced customer experience where all their needs were met and queries answered 24x7

• Customers with Special Needs were provided with features that would enable them to use all of the Bank's products and services with ease. Some examples are:

- 7 branches were dedicated to provide a complete range of services for customers with special needs- Changes were made to ATMs by implementing Voice Guidance technology to help the visually impaired customers and

to persons on wheel chairs by lowering the ATMs- Enhancements were introduced in the Internet and Mobile Banking systems to help visually impaired clients along with

additional security features. - All Forms and Advices will be printed in Braille for the visually impaired customers

• Major System upgrades have been implemented, such as a new Retail Banking front-end system to keep the bank up-to-date with the latest technology and to strengthen delivery capabilities.

The Bank implemented several enhancements to the network at the Datacenter and branches thereby increasing the availability of Bank's services to its clients. With an emphasis on client security, several security components were upgraded. Core Banking servers were upgraded with latest technology thereby improving application speed, reliability and customer experience.

With the escalating Cyber Security breaches in recent times, affecting financial institutions and organizations across a wide range of industries leading to financial exposure, reputational damage and regulatory implications highlight the growing danger, complexity and pervasiveness of cyber-attacks. To enhance the mitigation against the potential risk and vulnerabilities to our technology environment within the Bank, a qualified external Information Security specialist was appointed to conduct a comprehensive security assessment covering all possible security parameters.

The scope of work for the comprehensive security assessment was drawn-up in a sufficiently broad manner to cover all aspects of cyber security across the Bank, and across the intra Group network. The agreed methodology enabled the external Information Security specialist to comprehensively test Ahli United Bank Kuwait's "defense in depth" security framework and challenge its controls in all areas. The Bank further strengthened its control environment.


30

HUMAN RESOURCES


During 2016 Human Resources Division enhanced its HR Systems infrastructure by implementing multiple modules of the internationally recognized - SuccessFactors system. Development and enhancement of various HR practices in the organization was a key focus for the year. Better internal customer service, faster turnaround times and paperless transactions were enabled as planned with committed teamwork and willingness for changing existing practices.

Attracting and retaining competent Kuwaiti graduates remained one of the key measures in 2016 and is in line with the Bank's strategy. Kuwaitization requirements are met meticulously. Graduate Trainees are systematically placed in various Business areas within the Bank to ensure their professional development is well taken care of, and in order to prepare them as potential Future Leaders who will assume key, senior responsibilities.

To enable the Bank to achieve its goal of sustainable, profitable growth, Human Resources Division has provided qualified and professional cadres to all business sectors of the Bank whilst conforming to its desire to be a forerunner in utilizing and increasing the national labour percentage in the Bank. As a result, Human Resources employed 98 new, well qualified Kuwaiti nationals in various Bank departments in 2016.

During the year Human Resources continued supporting staff development through training. HR's Learning & Development (L&D) provided and facilitated more than 250 training programs in accordance with the latest banking requirements benefitting more than 850 employees. The Bank was also active in the highly regarded training programs provided by the Institute of Banking Studies (IBS), especially the renowned specialized and professional certificates like Certified Credit Management (CCM) , Advanced Certified Credit Management (ACCM) and Kuwaiti Graduates Development Program (KGDP) amongst other courses. A number of local and foreign training programs were facilitated for staff to enhance their personal and professional advancement. Such programs included risk management, Islamic Banking Certification, compliance, finance, governance, International Financial Reporting Standard 9 (IFRS9), and Basel III rules. In addition, all Bank employees were provided with in-class and e-course awareness programs on regulatory requirements including Customer Protection, Combatting Money Laundering and Terrorism and the Bank's policies and procedures.

Furthermore, and stemming from the Human Resource strategy focus which aims to attract the best candidates, acquire high potential and retain achieved talented individuals, the Fast Track Talent Development Program has been launched to identify talent across the Bank to optimize talent management and enhance employee engagement. Using defined criteria supported by managerial and HR recommendations, talented staff were identified, assessed and are undergoing ambitious and competitive projects which will support their career advancement and help shape them to assume their future leadership roles.

Human Resources reaffirms that investment in people is a key component of the Bank's success and recognizes its distinct social responsibility towards refining the Kuwaiti youth skills and expertise. This helps direct them to the labour market through first-class approaches that conform to the highest international standards. Human Resources introduced summer programs and internships for students from institutions and universities. The Bank has also been active through providing social and cultural activities to its employees and these have been fully supported by senior management.

Consequently, Human Resources managed, with the dedication of experienced staff, to reconfirm its "excellent" status which made it eligible for the renewal of the quality certificate ISO 9001:2008 for 2017.

SOCIAL RESPONSIBILITY

In 2016, Ahli United Bank further honored its commitment to its social mission and humanitarian role by continuously supporting many social work initiatives and actively participating in different types of invaluable social activities.

Please refer to the separate report on the Corporate Social Responsibility published and appended with the Annual Report for further details.

CORPORATE GOVERNANCE

32 33

CORPORATE GOVERNANCE

CORPORATE GOVERNANCE FRAMEWORK

Overview

Throughout 2016, the Bank paid special attention to principles of sound corporate governance practices, in particular those laid out by the Central Bank of Kuwait, the Capital Markets Authority and Kuwait Boursa, along with best international applicable practices.

Corporate Governance is about an integral relationship between shareholders, stakeholders, and Board of Directors, along with Executive Management, to achieve sustainable long term investment and growth. Corporate Governance plays a critical role in helping the business deliver its strategy and goals through setting clear objectives, proper risk management, performance monitoring and sound internal control practices and transparency.

The nine (9) pillars on which Ahli United Bank Kuwait operates its business pursuant to the Central Bank of Kuwait's instructions issued in this regard are:

¥ Board of Directors¥ Corporate Values, Conflict of Interest and Group Structure¥ Senior Executive Management¥ Risk Management & Internal Control¥ Remuneration Regulations & Policy¥ Disclosure and Transparency¥ Complex Corporate Structure¥ Protection of Shareholders Rights¥ Protection of Stakeholders Rights

General Assembly

Board of Directors

Fatwa & Shari'ah

Supervisory Board

Shari'ahSupervisory

Headof Corporate

Governance &Disclosures

Chief Executive Officer

AuditGeneral Manager

RiskManagement

General Manager

Risk CommitteeAudit & Compliance

Committee

Compensation &NominatingCommittee

ExecutiveCommittee

CorporateGovernanceCommittee

Board Secretary

Key elements of good Corporate Governance practiced at Ahli United Bank

THE BOARD OF DIRECTORS

The Board of Directors, is vested with the ultimate authority and responsibility for providing direction and guidance to the Bank in order to create and maximize sustainable value for the shareholders in full compliance with Shari'ah principles. The Board is collectively accountable to, and reports to the shareholders in respect of the overall governance, direction and control of the Bank's affairs.

The Board provides the overall strategic guidance for the Bank and effective management oversight.

Various Board committees have been formed with delegated authorities to give detailed consideration regarding key issues and to ensure compliance with regulatory bodies. The Board has also delegated the Executive Management with day-today responsibility for the management of the Bank. The scope of, and limitations to, these delegations are clearly documented and outlined. These delegations balance effective oversight with appropriate empowerment and accountability of Senior Executives.

The Board comprises of the following directors:on-Executive DirectorsChairman¥ Dr. Anwar Ali Al-MudhafVice Chairman¥ Sheikh Abdullah Jaber Al-Ahmad Al-SabahIndependent Directors¥ Michael Gerald Essex¥ Mohamed Tareq Mohamed Sadeq Mohamed AkbarNon-executive Directors¥ Jamal Shaker Al-Kazemi¥ Adel A. El-Labban¥ Keith Henry Gale¥ Abdulla Ahmed Al-Raeesi¥ Sanjeev Baijal

CORPORATE GOVERNANCE (CONTINUED)

Equity:The act of being

fair & neutral

Disclosure & Transparency:

Make information widely known

& available

Probity:Being honest

& ethical

Accountability:Taking

responsibility for decisions &

actions

34 35

CORPORATE VISION, MISSION, OBJECTIVES AND VALUES

Vision

To become a leading innovative Islamic Bank operating with international standards while placing our customers always "FIRST"

Mission

¥ To provide innovative Shari'ah-compliant financial solutions, competitive products and quality services to our customers¥ To maintain the highest standards of corporate governance, risk management and a solid capital base while achieving the

maximum returns for shareholders on a sustainable basis.¥ To retain and develop our qualified and professional employees by establishing a meritocratic management structure and be

the employer of choice¥ To provide cutting-edge technology and adopt customer centric technology¥ To contribute to the social and economic advancement of communities within which the Bank operates and fulfil the

corporate social responsibility

Corporate Core Objectives

¥ To maximize shareholder values on a sustainable basis¥ To maintain highest corporate governance and compliance standards¥ To maintain solid capital and liquidity measures¥ To entrench a disciplined risk and cost management culture¥ To develop a cross-cultural and efficient management structure¥ To optimize staff development through business driven training, talent management programs and profit sharing¥ To contribute to the social and economic advancement of communities

Core Values

¥ Integrity: we are honest with everyone ... our customers, employees, regulators, shareholders and the public.¥ Customer Centric: customer needs are always at the heart of everything we do.¥ Hospitality: we provide a warm welcome to all customers and to those we deal with¥ Transparency: we are transparent in everything we do.¥ Justice & tolerance: we accept, promote and provide only fair treatment¥ Teamwork & Synergy: working in groups will be always behind our success¥ Commitment & Excellence: we do the best and on time


BOARD OF DIRECTORS FOCUS IN 2016

BOARD EFFECTIVENESS REVIEW, EVALUATION OF DIRECTORS

The Board is committed to operating effectively. It focuses on the Bank's strategic priorities and key monitoring activities, as well as reviewing significant issues. In addition, the Board engages with senior management to discuss key elements of the business and "develops and promotes its collective vision of the Bank's objectives, its culture, its values and the behaviors it wishes to implant in conducting business.

The Bank continues to explore methods to enable continuous enhancement of the Board's effectiveness. The Compensation and Nominating Committee facilitates this process by conducting annual effectiveness reviews via questionnaires, self-evaluation or executive session discussions of which collective answers are analyzed to decide points of strength & weakness. This review assesses the performance of the Board of Directors and the Board Committees

This assessment does not only involve the Board as a whole, but also reviews the contribution of individual directors and committees through the process of self-assessment.

HIGHLIGHTS OF THE RESOLUTIONS RENDERED BY THE BOARD OF DIRECTORS FOR 2016

¥ Approved the Financial Statements¥ Approved Risk Management framework (Risk Appetite)¥ Approved Bank lines & country limits¥ Reviewed and approved The Internal Capital Adequacy Assessment Process. and Stress Testing (ICAAP)¥ Approved the successful issuance of the Additional Tier 1 Capital of USD 200 million Sukuk¥ Approved the Bank's Capital Plan¥ Reviewed Risk/Audit Reports raised by their respective committees¥ Monitored Bank's Strategy on Semi Annual basis¥ Approved 2017 estimated budget and business plans¥ Reviewed quarterly performance via reports prepared by Management¥ CEO Performance Evaluation and recommendation presented by the Nominating & Compensation Committee with regards to

the compensation & remuneration of the Bank's staff¥ Approved the appointment of General Manager Retail Banking¥ Reviewed Customer Complaints¥ Reviewed the Remuneration Policy¥ Conducted an annual review of Governance Compliance¥ Reviewed Resolutions rendered by the Shari'ah Supervisory Board


Progress & Growth

Strategy &Performance

Governance Structure& Shareholder's Value

Risk Management & Internal Controls

Board Focus

36 37

BOARD COMMITTEES

The Bank has five Board committees which assist the Directors fulfil their supervisory roles and responsibilities. The Board committees are listed below. The committees continuously update the Board on latest developments and submit periodic reports of their activities to the Board:

¥ Corporate Governance Committee ¥ Board Risk Committee ¥ Audit & Compliance Committee ¥ Compensation & Nominating Committee ¥ Executive Committee

Board of Directors / Board Committees Meetings and Attendance

Number of Meetings held in 2016

Board of Directors Meetings

Corporate Governance Committee

Board Risk Committee

Audit & Compliance Committee

Compensations & Nominating

CommitteeExecutive

Committee

Meetings held in 2016 6 2 4 6 2 3

Board of Directors Number of Meetings Attended by the Board of Directors

Anwar Ali Al-Mudhaf 5 2 - - - -

Abdullah Jaber Al-Ahmad Al-Sabah 5 - - - 2 2

Jamal Shaker Al-Kazemi 3 1 1 - - -

Adel A. El-Labban 5 - - - 2 3

Herschel E Post* 1 - - 1 - -

Sanjeev Baijal** 4 - - 4 - -

Keith Henry Gale 6 - 4 - - 3

Mohamed Tareq Mohamed Sadeq Mohamed Akbar

5 - - 6 - -

Abdulla Ahmed Al-Raeesi 6 2 - 6 - -

Michael Gerald Essex 6 - 4 5 2 -

*Herschel E Post resigned from the Board on 31/3/2016**Sanjeev Baijal joined the Board on 31/3/2016

COMMITTEES EMANATING FROM THE BOARD OF DIRECTORS

1. Corporate Governance Committee

ObjectivesThe Corporate Governance Committee's primary role is to assist the Board of Directors in fulfilling its oversight responsibilities related to good governance & practices, implementation and ongoing assessment of the framework, management of Board Committees and taking a leadership role in shaping the Bank's corporate governance policies

Committee Members:Dr. Anwar Ali Al-Mudhaf ChairmanJamal Shaker Al-Kazemi MemberAbdulla Ahmed Al-Raeesi Member


2016 highlights on committee work¥ Monitored the Bank's compliance with Corporate Governance regulatory provisions. ¥ Conducted on-going assessment of the Corporate Governance framework to ensure its effectiveness and appropriateness to

the Bank's structure.¥ Reviewed Corporate Governance/ Disclosure & Transparency policies & procedures and monitored implementation.¥ Provided special focus on investor relations issues and the Bank's corporate social responsibilities¥ Performed an annual assessment of the Terms of Reference for the Board and the Board committees and recommended

suggested changes to the Board, when needed.¥ Monitored Corporate Governance of and over subsidiaries. ¥ Noted the new instructions issued by Central Bank of Kuwait in December 2016 on introducing Shari'ah Governance

2. Board Risk Committee

ObjectivesThe Board Risk Committee (BRC) assists the Board of Directors in fulfilling its oversight responsibilities related to present and emerging risk issues, strategies, the risk appetite associated with the Bank's banking and financing activities, including the investment portfolio. BRC recommends to the Board the risk management policies, risk appetite and framework, ensures adherence to the risk appetite policy and provides oversight on major risk categories and adequacy of the provisions and reserves.

Committee Members:Keith Henry Gale ChairmanMichael Gerald Essex Member (independent)Jamal Shaker Al-Kazemi Member

2016 highlights on committee work¥ Presented periodic reports to the Board of Directors on latest developments.¥ Reviewed policies related to Risk Management for Board approval.¥ Reviewed business portfolios.¥ Reviewed Update and implementation process of IFRS 9.¥ Reviewed Regulatory Requirements and status of compliance.¥ Reviewed Board Risk Exposure Report & Risk Compliance Status.¥ Reviewed the assessment of the Bank's performance based on CAMEL B-com.¥ Reviewed all stress-test and ICAAP submissions, underlying analysis and methodologies.¥ Reviewed the resulting Liquidity Coverage Ratios and Net Stable Funding Ratios based on the Basel III requirements.¥ Reviewed and discussed the Bank's risk appetite including risk concentrations, operational risk, compliance, anti money

laundering, liquidity, disaster recovery and business continuity.¥ Had regular interaction with the risk management function and review of the risk management information.¥ Evaluated the performance of General Manager (GM) Risk Management Division (RMD) and recommended his compensation

for Board approval.¥ Reviewed the adequacy and efficiency of the Risk Management function and discussed with the GM Risk Management.¥ Reviewed all reports submitted by the Operational Risk Committee.¥ Reviewed & assessed Kuwait vs GCC Banking Sector overview & updated the Bank's Risk Appetite.¥ Reviewed the Bank's Cyber Security Assessment.¥ Reviewed outlook for 2017 and impact on various sectors of the economy.

3. Audit and Compliance Committee

ObjectivesThe Audit & Compliance Committee (ACC) carries out its functions in accordance with the authorities & responsibilities vested in it by the Board of Directors with regard to the oversight of the Bank's financial reporting, accounting principles, internal and external audit, compliance and internal control matters as well as liaison with the Bank's external auditors.

Committee Members:Mohamed Tareq Mohamed Sadeq Mohamed Akbar Chairman (independent)Sanjeev Baijal MemberMichael Gerald Essex Member (independent)Abdulla Ahmed Al-Raeesi Member


COMMITTEES EMANATING FROM THE BOARD OF DIRECTORS (CONTINUED)

1. Corporate Governance Committee (continued)

38 39

2016 highlights on Committee work¥ Approved the internal Audit risk-based Plan for 2016 and submitted relevant recommendations;¥ Reviewed and evaluated the Internal Audit reports and their efficacy;¥ Monitored the execution of corrective action plans & regulator compliance¥ Reviewed the Internal Audit, Risk Management, quarterly reports; and Shari'ah semi-annual reports¥ Evaluated the nature, framework and implementation of the compliance plan, in addition to the mechanism of monitoring

performance;¥ Reviewed reports from the anti-money laundering (AML) unit;¥ Reviewed complaints reports from the Complaints and Customer Protection Unit to ensure the effectiveness of internal

procedures in handling these complaints in line with the relevant policies and regulatory requirements;¥ Reviewed and discussed the consolidated financial statements of the Bank and submitted recommendations to the Board of

Directors for their approval¥ Met with internal and external auditors, without the presence of executive management, to discuss financial and internal

audit/compliance reports and matters of regulatory compliance¥ Reviewed all quarterly and annual financial statements and management letters;¥ Followed up adequacy of internal audit and compliance resources and commitment to ensure their success.¥ Reviewed appointment of external auditors with recommendations to the Board¥ Reviewed Subsidiary Internal Audit semi-annual reports¥ Assessed the performance of General Manager Audit & Assistant General Manager Regulatory Compliance and recommended

their compensation to the Board¥ Approved Audit plan for 2017

4. Compensation & Nominating Committee

ObjectivesThe role of the Compensation & Nominating Committee (CNC) is to assist the Board of Directors in fulfilling its oversight responsibilities related to managing the Bank's compensation arrangements including short and long term performance related remuneration and recommending for the Board's own approval the remuneration of Directors in line with Islamic Shari'ah principles and international best practice. In addition, the CNC identifies individuals qualified to become members of the Board and the Bank's Senior Management; to recommend to the Board nominees to serve on each committee of the Board and to assess the performance of the Board, its members and individual Committees.

Committee Members:Sheikh Abdullah Jaber Al-Ahmad Al-Sabah ChairmanAdel A. El-Labban MemberMichael Gerald Essex Member (independent) 2016 highlights on committee work¥ Approved the criteria for the annual assessment of the Board and its committees¥ Reviewed the analysis of the annual assessment for the Board of Directors that included individual self-assessment, Board

overall performance and Board Committees performance and presented the results for Board notification¥ Recommended to the Board the amounts for the Bank's annual Directors fees and Board Committees fees for the year 2016 ¥ Recommended to the Board of Directors the performance bonus pool accrual and related risk adjustment methodology for

creation of the proposed bonus pool¥ Reviewed the proposal from subsidiary for remunerations & compensation for the year 2016¥ Approved the appointment of General Manager of Retail Banking¥ Approved the appointment of the Chief Executive Officer for the subsidiary¥ Approved the appointment of General Manager-Legal¥ Updated the 2015-2016 Training records for the Board.¥ Approved the proposed Board training plan for 2017¥ Reviewed the Bank's Succession Plan for Executives¥ Reviewed the Compensation Policy to ensure its adequacy



3. Audit and Compliance Committee (continued) 5. Executive Committee

ObjectivesThe Executive Committee (EC) assists the Board of Directors in discharging its responsibilities in two capacities, namely: acting on behalf of the Board on matters normally reserved for the Board's own resolutions, and assuming responsibilities delegated by the Board including, but not limited to, credit, investment, liquidity, market and operational risks and excesses over limits assigned to other Committees.

Committee Members:Sheikh Abdullah Jaber Al-Ahmad Al-Sabah ChairmanAdel A. El-Labban MemberKeith Henry Gale Member

2016 highlights on committee work¥ Reviewed and approved financing transactions and investment proposals as per approved authority matrix. ¥ Reviewed the recovery strategies for problem financing and reverted assets. ¥ Evaluated and approved the proposed provisioning requirements and potential partial or full asset write-offs that are above

delegated authorities. ¥ Reviewed the quality of the overall financing/facilities portfolio of the Bank. ¥ Reviewed the decisions/minutes/reports of the following management committees:

¥ Asset and Liability Committee¥ Credit Committee¥ Credit Evaluation and Provisioning Committee¥ Management Committee¥ Real Estate Investment Committee¥ Risk Management Committee¥ Senior Credit Committee

¥ Noted the excesses approved by the Management.

BOARD OF DIRECTORS INDUCTION AND TRAINING

Aiming at developing the Board of Directors' skills and experience; specifically, in the area of corporate governance and risk management, the Board of Directors had collectively attended the following programs in 2016:

¥ "Big Data" with emphasis on how banks specifically have leveraged Big Data to change their business models. This is to provide better service and ensure their customers are always provided with resources that are beneficial and not available elsewhere. It also covers how big data commercializes and leverages value from the data.

¥ "Digital Risk and Trust in the Financial Services industry" covering cyber security by defining cyber risk appetite, focusing on current cyber risks highlighting strategies to prevent such threats.

¥ "VAT across GCC" covering the latest update in VAT in the GCC, treatment of financial services under VAT and implications of VAT for banks.

¥ "Implementation of IFRS9" focusing on the global and regional trends with regards to the adoption of IFRS9.

More courses were taken via e-learning such as Foreign Account Tax Compliance Act & Anti Money Laundering.



40 41

FATWA AND SHARI'AH SUPERVISORY BOARD

In accordance with the applicable laws, an independent Shari'ah Supervisory Board must be established in each Islamic bank to oversee the Bank's businesses. The number of members of the Shari'ah board should not be less than three appointed by the bank's general assembly. Memorandum and Articles of Association of the Bank must provide for the existence of such a board, the means of its formation, and the means of exercising of functions.

Shari'ah Board resolutions are binding upon the Bank departments, and the Bank is responsible for implementing these resolutions. The Shari'ah Board shall oversee and ensure the Management's adherence to these resolutions and shall present its report to the General Assembly, including its opinion on the Bank's business compliance to Islamic Shari'ah provisions.Fatwa & Shari'ah Board convened (six) times in 2016. Hereunder is a table of attendance of the Shari'ah Board members:

Shari'ah Board Members Number of Meetings Attended by the Member

Sheikh Dr. Khaled M. Al Mathkour 6/6

Sheikh Dr. Abdulaziz K. Al-Qassar 6/6

Sheikh Dr. Issam K. Al-Enezi 6/6

30 resolutions were issued by the Committee.

EXECUTIVE COMMITTEE

The Executive Committee is an independent body emanating from the Fatwa & Shari'ah Supervisory Board. It considers the issues referred to it by the Shariah Board, as well as endorsing issues in accordance with the authority vested in it by the Shari'ah Board.

The Executive Committee convened eight times during 2016. Hereunder is a table of attendance of the EC's members of these meetings:



Sheikh Dr. Essam K. AlEnezie 8/8

31 recommendations were issued and enforced as by Shari'ah Board.

SHARI'AH BOARD'S RAPPORTEUR

Shari'ah Board's Rapporteur is the executive member of the Fatwa & Shari'ah Supervisoay Board. He sets the Agenda of Shari'ah Board meetings, sends out the invitations to such meetings, and drafts the minutes of the Shari'ah Board meetings and forwards its resolutions to the Bank Management for execution. He also looks into issues referred to him by Shari'ah Board, in addition to endorsing issues in accordance with the authority vested in him by the Shari'ah Board and ensures their soundness and compliance with the Shari'ah Board's resolutions.

CORPORATE GOVERNANCE (CONTINUED) CORPORATE GOVERNANCE (CONTINUED)

The objective of this Committee is to supervise and follow up on the disposal of interest amounts, generated from pre-conversion or non-compliant Islamic Shari'ah transactions, and those subsequent transactions conducted erroneously. The Committee also endorses of the Executive Management's requests relevant to necessary payments based on descriptions and factual cases of human and social considerations, based on the data bases related to these issues, and present the necessary amendments thereto, and determines of the priorities of expenditure of these amounts.This Committee convened three times during 2016, and hereunder is a table of attendance of the members of the Contract to these meetings:



Sheikh Dr. Issam K. Al-Enezi 3/3

Mr. Ahmad Zulficar 3/3

Shari'ah Auditing

Shari'ah Department conducts a semi-annual audit on all the Bank departments to ensure their compliance with the Fatwa and Shari'ah Supervisory Board resolutions, and that the Bank exercises its business in accordance with the Islamic Shari'ah provisions based on the resolutions of the Shari'ah Board. The Shari'ah Department submits its reports to the Fatwa and Shari'ah Supervision Board on the findings of the audit function and recommendations of the Shari'ah Department on these findings.

Shari'ah Revision

Shari'ah Department replies to the queries raised by the Bank's different departments as well as the Bank's customers on the Shari'ah matters and explains and illustrates the resolutions of the Fatwa and Shari'ah Supervisory Board resolutions. The Shari'ah Department also reviews the policies, procedures, contracts, various forms, and checks the Bank advertisements in newspapers, as well as the various daily submissions presented from the Bank departments and approves them based on the resolutions of the Fatwa and Shari'ah Supervisory Board.

Research Training & Development

In order to materialize its role and constitute a competent administrative personnel who form a part of a robust regulatory system, Shari'ah Department takes part in the development of products and training of staff in collaboration with Human Resources Division and the various development units in the Bank.

VIOLATIONS RESULTING IN PROFITS OR EXPENSES IN BREACH OF ISLAMIC SHARI'AH PROVISIONS

No Financial violations (that means financial impacts result therefrom, either by collection of prohibited income or payment of prohibited expenses, according to the resolutions of the Fatwa and Shari'ah Supervision Board) were detected during 2016

ANNUAL ZAKAT PAID BY THE BANK

In accordance with the law No. 46 of 2006, and according to the resolution of the Ministry of Finance No. 58/2007, the Bank shall have to pay zakat tax imposed by law. In some cases, the zakat tax covers the zakat amount to be paid by the Bank shareholders as zakat for their money.

The amount of zakat tax for the fiscal year ending 31/12/2016 amounted to KD 419 thousand.

DISPOSAL OF NON-COMPLIANT SHARI'AH INCOME STEERING COMMITTEE

42 43

The annual general assembly endorses appointment/reappointment of the Shari'ah Board members and authorizes the board of directors to determine their remunerations with KD 32 thousand.

RISK GOVERNANCE AND RISK MANAGEMENT FUNCTIONS

Effective corporate governance remains central to the culture and business practices of the Bank which continuously upgrades and adopts best practices in the areas of governance, transparency, ethics, management and oversight of risk, audit and compliance.

These values are embedded across the Bank through a corporate governance policy that is relevant and proportionate to the scope and size of the businesses. The policy is built on the principles prescribed by the Basel Committee on Banking Supervision and the Guidelines of the Central Bank of Kuwait.

The Corporate Governance structure includes the Board, Board committees, management committees and various specified functions.

The corporate governance policy supports the Bank's objective of being a dynamic banking entity providing Islamic financial services of excellence, with insight and transparency in risk taking.

The Risk Management Framework is focused on integrating Enterprise-wide Risk Management fully into its operations and culture. The role of Risk Management is to support growth, whilst ensuring consistent quality of the Bank's portfolio and an appropriate return for the risks taken. The objective is to manage earnings volatility, which is achieved by setting clear risk-taking parameters and robust processes.

The Board has overall responsibility for the establishment and oversight of the Bank's risk management framework, as well as for approving the Bank's overall risk appetite, and ensuring that business is conducted within this framework. The Board is the ultimate sanctioning authority. The Corporate Governance Policy, The Disclosure and Transparency Policy and Subsidiaries' Governance Policy have all been approved by the Board.

INTERNAL CONTROL

Management assumes the task of executing the internal control rules. The Board of Directors assumes full responsibility for the adequacy of the internal control systems. The Audit and Compliance Committee oversees the Bank's internal control framework.

Risk Management, Internal Audit and the independent External Auditors all submit their evaluations to the Board of Directors.

The Board has reviewed the Internal Control systems and the Risk Management responsibilities and ensured their effectiveness within the Bank for the year 2016. In light of CBK instructions on internal audits within financial institutions, and to ensure the effectiveness and adequacy of its internal control systems, the Board has reviewed the Bank's internal control systems through an independent and certified external audit firm. The Internal Control Report (ICR) was discussed by the Board of Directors as of December 2016 and no significant control gaps were detected in the opinion concluded by the report. Accordingly, the Board of Directors certifies to the adequacy of the internal controls and supervision of the Bank.

A copy of the opinion letter regarding the ICR report is attached.

REMUNERATION OF THE FATWA AND SHARI'AH SUPERVISORY BOARD


44 45


CODE OF ETHICS AND PROFESSIONAL CONDUCT

The objective of the Bank's Code of Conduct is to guide all the Bank's Board members and employees in ethical and professional business practices in a reputable financial institution. Policies & procedures have been created internally with the intention of having a user- friendly guide for staff interactions and in the decision-making process during the Bank's day-to-day ¬¬activities. It serves as a bridge between the Bank's objectives and functioning realities, and speaks about our commitment to our Mission. The Bank is committed to fostering and maintaining a work environment that supports ethical behavior and actively encourages an open dialogue on ethics and conduct.

Failure to adhere to this Code by any employee or officer will be subject to appropriate disciplinary action.

REPORTING POLICY (WHISTLE BLOWING)

Whistle blowing policies are intended to make it easier for staff members to report irregularities in good faith and confidentiality, without having to fear adverse consequences for their action. The Bank has adopted a Whistle Blowing policy to maintain the highest possible standards of ethical and legal conduct. Staff members are encouraged to speak up if they have any genuine concerns about malpractice or unlawful conduct which they suspect is taking place within the Bank. Such misconduct may relate to financial malpractice, failure to comply with a legal or regulatory obligation, a criminal offence, behavior detrimental to the image or reputation of the Bank, the endangering of health and safety or the environment, or the deliberate concealment of any such matters ("misconduct"). The Bank will protect and support anyone raising genuine concern and will remain anonymous.The Whistle Blowing policy is in furtherance of the Bank's desire to strengthen the Bank's system of integrity and fight against corruption, fraud and related offences.

CONFLICT OF INTEREST

Conflict of Interest Policy has been prepared to ensure that the highest degree of transparency and objectivity is maintained within the Bank. Directors & Employees, their kinships and family members and the Bank itself as an entity as well as associates, should all avoid conflicts of interest over their commercial and economic transactions. The Bank's policy is to take all reasonable steps to maintain and operate effective organizational and administrative arrangements to identify and manage relevant conflicts. The Bank has in place business-specific procedures that address the identification and management of actual and potential Conflicts of Interest that may arise in the course of the Bank's business. The Bank is required to take all reasonable steps to identify and adequately manage Conflicts of Interest entailing a material risk of damage to a client's interest. This policy sets the requirement of the Bank, to have in place appropriate procedures, controls and measures in order to identify and manage any such material Conflicts of Interest.

The following are examples of conflicts of interest that Directors and employees must avoid:

¥ Receiving loans or guarantees of obligations as a result of one's position as a Director or employee of the Bank.¥ Engaging in conduct or activity that improperly interferes with the Bank's existing or prospective business relationships with a third party.¥ Engaging in a business or activity that directly or indirectly competes with the Bank's business or activities.¥ Accepting bribes, kickbacks or any other improper payments for services relating to the conduct of the business of the Bank.¥ Accepting, or having a member of a Director or employee's immediate family accept, a gift from persons or entities that deal with the Bank, in cases where the gift, considered in light of the totality of the circumstances, would reasonably be expected to influence the Director or employee's actions as a member of the Bank.

46 47


CONFIDENTIALITY

Confidentiality is among the key principles of banking business and is essential to earn the confidence of all parties dealing with banks, being depositors, borrowers, investors or otherwise. The Bank has adopted a Confidentiality Policy that shall serve as the standard reference for its Directors, officers and employees in concern of the collection, use, retention and security of non-public personal financial information of individual Bank customers and about the Bank itself. All Board members and the Bank's employees are responsible for safeguarding the confidential and proprietary information in compliance with all applicable laws and approved policies. Furthermore, the Bank's customers have access to a broad range of products and services such as basic banking products, mortgages and online banking. To deliver these products and services effectively and conveniently, it is extremely important that the Bank uses technology to manage and maintain certain customer information while ensuring that customer information is kept confidential and protected. The safeguarding of customer information is an issue that the Board of Directors takes seriously. In addition, all Bank employees upon employment have pledged themselves to a code of conduct in which one of the basic principles is to maintain the confidentiality, security and privacy of information in each client's records.

RELATED PARTIES DEALINGS

The policy of dealing with related parties has been prepared in line with the relevant laws and resolutions including CBK rules and International Financial Reporting Standards (IFRS) requirements. The related party transactions are subject to review and audit by Internal Audit and the Board of Directors.

The Bank ensures that all disclosures of the related party transactions are in line with local rules and regulations

MAJOR SHAREHOLDERS AS OF 31/12/2016

Largest Shareholders: Number of Shares Holding Percentage

Ahli United Company 1,166,449,682 67.33%

Public Institution for Social Securities 211,197,152 12.19%

COMPLAINTS AND CUSTOMER PROTECTION

Since the Complaints & Customer Protection Department was established in 2015 the main objective has been to further expand and enhance the role of the Complaint Unit to provide an environment convenient for safeguarding customer rights This has been in the framework of an improved approach to customer protection, guided by the best practices in this regard, which is in line with CBK Customer Protection principles and the Bank's vision in terms of being customer-centric, offering the best service quality.

Many initiatives took place throughout the year to ensure a complete implementation of CBK's Customer Protection Manual leading to enhanced customer satisfaction and confidence when dealing with the Bank. The initiatives include but are not limited to undertaking the regular service assessments and customer surveys to identify opportunities for improvement, sharing the result with respective Bank departments for their improvement where applicable, revalidation of (ISO 9001:2008) the ISO German Quality Certificate "TUV NORD", which is deemed a culmination of the Quality Service Department's efforts in providing the best Banking services. In addition, the unit has organized training courses and workshops for new joiners to enhance their knowledge of customer protection, complaint handling and the awareness of employees regarding the necessity of offering quality service, resolution of bank wide customer complaints with proper investigation to identify underlying causes and prevent recurrence in the future. A Bank-wide thank you campaign was also initiated to enhance communications internally and to help create a positive culture to boost staff morale, improve communication across the Bank and to lead to a positive attitude amongst employees and elevated customer experience.

STAKEHOLDERS PROTECTION

The Bank works on stakeholder interests in a logical extension based on core values, and lays the foundation for ongoing opportunities to attract investors, customers and staff. The Bank recognizes that stakeholders' rights constitute an essential part of good governance and success is the outcome of the joint efforts of many parties being a pre-requisite for long-term development and value creation.Bank aims to:¥ Protect its shareholders' rights, including minority shareholders, as well as the Bank's various stakeholders¥ Encourage the effective participation of shareholders ¥ Make timely disclosures to all stakeholders

REMUNERATION

The Bank's remuneration policies are formulated in compliance with the Central Bank of Kuwait regulations and instructions related to remuneration of employees and Directors. Performance related variable compensation aims at recognizing & rewarding staff contributions beyond their regular job requirements, particularly those contributions that increase the Bank's productivity and profitability.Rewards are Risk-based remuneration. In cases where performance related pay exceeds a certain percentage of the executive total annual salary, remuneration will be deferred and subject to a Clawback criteria where such pay can be withdrawn or reclaimed in cases such as executive decisions fail to achieve what were expected of them profitability wise.All remunerations and compensations are subject to the Compensation & Nominating Committee approval. Remuneration levels are benchmarked against comparable and relevant levels in the market, and determined by industry measurable statistics, which will attract appropriate talent to the Bank. The guiding principles of remunerations are also aligned to the Bank's short or long term financial performance, and reflective to match risks and their timelines.


Ahli United Company67.33%

Public Institutionfor Social Securities

12.19%

MinorityShareholders

20.48%

Major Shareholders

48

REMUNERATION POLICY & DISCLOSURES

The Bank has categorized its staff into Senior Management, Material Risk Takers and Control functions.Board of Directors and Senior Management Remuneration.Remuneration of the Board and the related committees committed to KD 124,390 thousand collectively.Total remuneration of the top eight (8) Bank's executives, including the GM Finance, GM Internal Audit and GM Risk Management is KD 1,199,320

Disclosure of Remuneration as per Employees Categories

Personnel Categories

No. of Employees

Fixed Remunerations

(KD)

Variable Remuneration

(KD)

Total Payments

(KD)

End of Service BenefitAccrual

(KD)

Senior Management 12 1,233,612 373,180 1,606,792 115,727

Material Risk Takers 19 1,042,840 263,995 1,306,835 88,304

Financial & Control Functions

16 905,732 158,217 1,063,949 65,636


CONSOLIDATED FINANCIAL STATEMENTS

Contents Page

Independent Auditors' Report 50

Consolidated Statement of Profit or Loss 56

Consolidated Statement of Other Comprehensive Income 57

Consolidated Statement of Financial Position 58

Consolidated Statement of Changes in Equity 59

Consolidated Statement of Cash Flows 60

Notes to the Consolidated Financial Statements 61

50 51

INDEPENDENT AUDITORS' REPORT INDEPENDENT AUDITORS' REPORT (CONTINUED)

52 53

INDEPENDENT AUDITORS' REPORT (CONTINUED) INDEPENDENT AUDITORS' REPORT (CONTINUED)

54

INDEPENDENT AUDITORS' REPORT (CONTINUED)

CONSOLIDATED FINANCIAL STATEMENTS

56 57

2016 2015

Notes KD 000 KD 000

Financing income 3 132,589 120,839

Distribution to depositors 4 (44,187) (31,757)

Net financing income 88,402 89,082

Net fees and commission income 5 10,618 10,508

Foreign exchange gains 4,006 4,209

Net gain on sale of investment properties 2,949 3,831

Net gain on sale of investments 3,451 1,365

Other income 6 1,627 1,877

Total operating income 111,053 110,872

Provision and impairment losses 7 (31,679) (24,779)

Provision on asset held for sale 21 (5,813) (15,814)

Operating income after provisions and impairment losses 73,561 70,279

Staff costs (20,624) (20,359)

Depreciation (2,509) (2,391)

Other operating expenses (10,758) (10,454)

Total operating expenses (33,891) (33,204)

PROFIT FROM OPERATIONS 39,670 37,075

Taxation 8 (1,873) (2,006)

Directors’ remuneration (150) (150)

PROFIT FOR THE YEAR 37,647 34,919

Net profit for the year attributable to Bank’s equity shareholders 40,348 42,805

Net loss attributable to non-controlling interests (2,701) (7,886)

37,647 34,919

Basic and diluted earnings per share attributable to the Bank’s equity shareholders (Fils) 9 25.9 27.4

CONSOLIDATED STATEMENT OF PROFIT OR LOSSFor the year ended 31 December 2016

The attached notes 1 to 30 form part of these consolidated financial statements.

CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE INCOMEFor the year ended 31 December 2016


2016 2015

Note KD 000 KD 000

Profit for the year 37,647 34,919

Other comprehensive loss:

Other comprehensive (loss) income to be reclassified to profit or loss in subsequent periods:

Net movement in cumulative changes in fair values of investments available for sale

(4,706) (1,219)

Exchange differences on translation of foreign operations (276) 222

Net other comprehensive loss to be reclassified to profit or loss in subsequent periods

(4,982) (997)

Other comprehensive income not to be reclassified to profit or loss in subsequent periods:

Revaluation of freehold land 15 36 483

Net other comprehensive income not to be reclassified to profit or loss in subsequent periods

36 483

Other comprehensive loss for the year (4,946) (514)

Total comprehensive income attributable to Bank's equity shareholders 36,393 42,180

Total comprehensive loss attributable to non-controlling interests (3,692) (7,775)

Total comprehensive income for the year 32,701 34,405

5958

CONSOLIDATED STATEMENT OF FINANCIAL POSITIONAs at 31 December 2016

2016 2015

Notes KD 000 KD 000

ASSETS

Cash and balances with banks 10 44,144 344,455

Deposits with Central Bank of Kuwait 426,847 265,199

Deposits with other banks 227,280 376,812

Financing receivables 11 2,706,054 2,680,334

Investments available for sale 12 203,973 139,167

Investment in associate 13 10,162 -

Investment properties 14 23,055 29,572

Premises and equipment 15 31,393 30,954

Other assets 16 19,253 14,816

Assets classified as held for sale 21 - 22,994

TOTAL ASSETS 3,692,161 3,904,303

LIABILITIES AND EQUITY

LIABILITIES

Deposits from banks and other financial institutions 702,152 829,989

Deposits from customers 17 2,491,871 2,660,629

Other liabilities 18 52,450 49,351

Liabilities directly associated with assets held for sale 21 - 3,499

3,246,473 3,543,468

EQUITY

Share capital 19 173,237 157,488

Reserves 19 255,768 242,627

429,005 400,115

Treasury shares 20 (43,957) (43,957)

Attributable to Bank's equity shareholders 385,048 356,158

Perpetual Tier 1 Sukuk 22 60,640 -

Non-controlling interests - 4,677

TOTAL EQUITY 445,688 360,835

TOTAL LIABILITIES AND EQUITY 3,692,161 3,904,303


Dr. Anwar Ali Al-Mudhaf

Chairman

Richard Groves

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CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended 31 December 2016

2016 2015

Note KD 000 KD 000

OPERATING ACTIVITIES

Net profit for the year 37,647 34,919

Adjustments for:

Net gain on sale of investment properties (2,949) (3,831)

Net gain on sale of investments (3,451) (1,365)

Net loss on sale of premises and equipment - 21

Share of results from associate 13 33 (373)

Dividend income 6 (1,173) (1,115)

Net income from investment properties 6 (403) (373)

Depreciation 2,509 2,391

Provision and impairment losses 7 37,492 40,593

Operating profit before changes in operating assets and liabilities 69,705 70,867

Changes in operating assets/ liabilities:

Deposits with Central Bank of Kuwait (161,649) 40,129

Deposits with other banks (25,753) 113,955

Financing receivables (65,360) (227,081)

Other assets 7,790 1,291

Deposits from banks and other financial institutions (127,837) 73,252

Deposits from customers (168,758) 206,872

Other liabilities 1,926 (10)

Net cash (used in) from operating activities (469,936) 279,275

INVESTING ACTIVITIES

Purchase of investments available for sale (394,198) (229,250)

Sale and redemption of investments available for sale 328,693 233,143

Purchase of investment properties - (3,645)

Proceeds from sale of investment properties 8,784 11,007

(Purchase)/ Sale of premises and equipment (4,116) 5,516

Net income from investment properties 6 403 373

Dividend from associate 464 -

Dividend income received 6 1,173 1,115

Net cash (used in) from investing activities (58,797) 18,259

FINANCING ACTIVITIES

Proceeds from issue of Perpetual Tier 1 Sukuk 22 60,640 -

Perpetual Tier 1 Sukuk issuing cost (413) -

Dividend paid to shareholders 19 (7,090) (12,890)

Net cash from (used in) financing activities 53,137 (12,890)

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (475,596) 284,644

Cash and cash equivalents at 1 January 552,644 268,000

CASH AND CASH EQUIVALENTS AT 31 DECEMBER 10 77,048 552,644


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

62 63

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAs at 31 December 2016

1. INCORPORATION AND ACTIVITIES

Ahli United Bank K.S.C.P. ("the Bank") is a public shareholding company incorporated in Kuwait in 1971 and is listed on the Kuwait Stock Exchange. It is engaged in carrying out banking activities in accordance with Islamic Shari'ah and is regulated by the Central Bank of Kuwait ("CBK"). Its registered office is at Darwazat Al-Abdul Razzak, P.O. Box 71, Safat 12168, Kuwait.

The Bank commenced operations as an Islamic bank from 1 April 2010. From that date, all activities are conducted in accordance with Islamic Shari'ah, as approved by the Bank's Fatwa & Shari'ah Supervisory Board.

The Bank is a subsidiary of Ahli United Bank B.S.C., a Bahraini bank ("the Parent"), listed on the Bahrain and Kuwait Stock Exchanges.

The Bank's principal subsidiary is Kuwait and Middle East Financial Investment Company K.S.C.P. ("KMEFIC"), a company incorporated in the State of Kuwait, listed on the Kuwait Stock Exchange and engaged in investment and portfolio management activities for its own account and for clients. The Bank held 50.12% effective interest in KMEFIC as at 31 December 2016 (2015: 50.18%)

The new Companies Law No. 1 of 2016 was issued on 24 January 2016 and was published in the Official Gazette on 1 February 2016 which cancelled the Companies Law No. 25 of 2012, and its amendments. According to article No. 5, the new Law will be effective retrospectively from 26 November 2012. The new Executive Regulations of Law No. 1 of 2016 was issued on 12 July 2016 and was published in the Official Gazette on 17 July 2016 which cancelled the Executive Regulations of Law No. 25 of 2012.

The consolidated financial statements comprising the financial statements of the Bank and its subsidiary ("the Group") were authorised for issue in accordance with a resolution of the Board of Directors of the Bank on 11 January 2017 and are subject to the approval of the Ordinary General Assembly of the shareholders' of the Bank. The Ordinary General Assembly of the Shareholders has the power to amend these consolidated financial statements after issuance.

2. SUMMARY SIGNIFICANT ACCOUNTING POLICIES

2.1 Basis of preparation

The consolidated financial statements are prepared under the historical cost convention except for the re-measurement at fair value of investments available for sale, freehold land, Islamic Forward Agreements and assets classified as held for sale.

The consolidated financial statements are presented in Kuwaiti Dinars ("KD"), which is also the functional currency of the Bank, rounded to the nearest thousand except when otherwise indicated.

2.2 Statement of compliance

The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards ("IFRSs") issued by the International Accounting Standard Board ("IASB"), as adopted for use by the State of Kuwait for financial services institutions regulated by the Central Bank of Kuwait. These regulations require adoption of all IFRSs except for the International Accounting Standard (IAS) 39: Financial Instruments: Recognition and Measurement requirement for collective provision, which has been replaced by the Central Bank of Kuwait's requirement for a minimum general provision as described under the accounting policy for impairment of financial assets.

The Central Bank of Kuwait and the Bank's Fatwa & Shari'ah Supervisory Board had approved a time frame up to 28 May 2017 to convert all remaining conventional investments and products of the Group to be Shari'ah compliant.

2.3 Changes in accounting policies

The accounting policies used in the preparation of these consolidated financial statements are consistent with those used in the previous year, except for the adoption of the following new or amended IFRS applicable to the Group.

Amendments to IFRS 11 Joint Arrangements: Accounting for Acquisitions of InterestsThe amendments to IFRS 11 require that a joint operator accounting for the acquisition of an interest in a joint operation, in which the activity of the joint operation constitutes a business, must apply the relevant IFRS 3 Business Combinations principles for business combination accounting. The amendments also clarify that a previously held interest in a joint operation is not remeasured on the acquisition of an additional interest in the same joint operation if joint control is retained. In addition, a scope exclusion has been added to IFRS 11 to specify that the amendments do not apply when the parties sharing joint control, including the reporting entity, are under common control of the same ultimate controlling party.

The amendments apply to both the acquisition of the initial interest in a joint operation and the acquisition of any additional interests in the same joint operation and are applied prospectively. These amendments do not have any impact on the Group as there has been no interest acquired in a joint operation during the year.

Amendments to IAS 16 and IAS 38: Clarification of Acceptable Methods of Depreciation and AmortisationThe amendments clarify the principle in IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets that revenue reflects a pattern of economic benefits that are generated from operating a business (of which the asset is a part) rather than the economic benefits that are consumed through use of the asset. As a result, a revenue-based method cannot be used to depreciate property, plant and equipment and may only be used in very limited circumstances to amortise intangible assets. The amendments are applied prospectively and do not have any impact on the Group, given that it has not used a revenue-based method to depreciate its non-current assets.

Amendments to IAS 27: Equity Method in Separate Financial StatementsThe amendments allow entities to use the equity method to account for investments in subsidiaries, joint ventures and associates in their separate financial statements. Entities already applying IFRS and electing to change to the equity method in their separate financial statements have to apply that change retrospectively. These amendments do not have any impact on the Group's consolidated financial statements.

2.4 New and revised IASB Standards, but not yet effective

Standards issued but not yet effective up to the date of issuance of the Group's consolidated financial statements are listed below. The Group intends to adopt those standards when they become effective.

IFRS 9: Financial InstrumentsThe IASB issued IFRS 9 Financial Instruments in its final form in July 2014 and is effective for annual periods beginning on or after 1 January 2018 with permission to early adopt. IFRS 9 sets out the requirements for recognizing and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial assets, impairment of financial assets and hedge accounting. This standard replaces IAS 39 Financial Instruments: Recognition and Measurement.

a. Classification and measurement The adoption of this standard will have an effect on the classification and measurement of the Group's financial assets but is not expected to have a significant impact on the classification and measurement of financial liabilities. The classification and measurement of financial assets will depend on how these are managed (the entity's business model) and their contractual cash flow characteristics. These factors determine whether the financial assets are measured at amortised cost, fair value through other comprehensive income or fair value through statement of income.

b. Hedge accountingIFRS 9 allows entities to continue with the hedge accounting under IAS 39 even when other elements of IFRS become mandatory on 1 January 2018.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)As at 31 December 2016

2. SUMMARY SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

64 65

c. Impairment of financial assets The impairment requirements apply to financial assets measured at amortised cost, fair value through other comprehensive income, and lease receivables and certain loan commitments and financial guarantee contracts. At initial recognition, allowance is required for expected credit losses ("ECL") resulting from default events that are possible within the next 12 months ("12-month ECL"). In the event of a significant increase in credit risk, allowance is required for ECL resulting from all possible default events over the expected life of the financial instrument ("lifetime ECL").Financial assets where 12-month ECL is recognised are considered to be 'stage 1'; financial assets which are considered to have experienced a significant increase in credit risk are in 'stage 2'; and financial assets for which there is objective evidence of impairment so are considered to be in default or otherwise credit impaired are in 'stage 3'.

The assessment of whether credit risk has increased significantly since initial recognition is performed for each reporting period by considering the change in the risk of default occurring over the remaining life of the financial instrument, rather than by considering an increase in ECL.

The assessment of credit risk and the estimation of ECL are required to be unbiased and probability-weighted, and should incorporate all available information which is relevant to the assessment including information about past events, current conditions and reasonable and supportable forecasts of economic conditions at the reporting date. In addition, the estimation of ECL should take into account the time value of money. As a result, the recognition and measurement of impairment is intended to be more forward-looking than under IAS 39 and the resulting impairment charge will tend to be more volatile.

The Group is in the process of quantifying the impact of this standard on the Group's consolidated financial statements, when adopted.

IFRS 15: Revenue from Contracts with CustomersIFRS 15 was issued by IASB on 28 May 2014, effective for annual periods beginning on or after 1 January 2018. IFRS 15 supersedes IAS 11 Construction Contracts and IAS 18 Revenue along with related IFRIC 13, IFRIC 15, IFRIC 18 and SIC 31 from the effective date. This new standard removes inconsistencies and weaknesses in previous revenue recognition requirements, provides a more robust framework for addressing revenue issues and improves comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. The Group is in the process of evaluating the impact of IFRS 15 but does not expect any significant effect on adoption of this standard.

IFRS 16: LeasesIn January 2016, the IASB issued IFRS 16 'Leases' with an effective date of annual periods beginning on or after 1 January 2019. IFRS 16 results in lessees accounting for most leases within the scope of the standard in a manner similar to the way in which finance leases are currently accounted for under IAS 17 'Leases'. Lessees will recognise a 'right of use' asset and a corresponding financial liability on the balance sheet. The asset will be amortised over the length of the lease and the financial liability measured at amortised cost. Lessor accounting remains substantially the same as in IAS 17. The Group is in the process of evaluating the impact of IFRS 16 on the Group's consolidated financial statements, but does not expect any significant effect on adoption of this standard.



2.4 New and revised IASB Standards, but not yet effective (continued)

IFRS 9: Financial Instruments (continued)


2.5 Basis of consolidation

The consolidated financial statements comprise the financial statements of the Bank as at 31 December 2016 and its subsidiary. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the Group controls an investee if and only if the Group has:

¥ Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee)¥ Exposure or rights to variable returns from its involvement with the investee, and¥ The ability to use its power over the investee to affect its returns

When the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including:

¥ The contractual arrangement with the other vote holders of the investee¥ Rights arising from other contractual arrangements¥ The Group's voting rights and potential voting rights

The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to the elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated statement of profit or loss and other comprehensive income from the date the Group gains control until the date the Group ceases to control the subsidiary.

Profit or loss and each component of Other Comprehensive Income (OCI) are attributed to the equity holders of the parent of the Group and to the non-controlling interests, even if this results in the non-controlling interests having a deficit balance. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation.

A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction.

If the Group loses control over a subsidiary, it derecognizes the related assets (including goodwill), liabilities, non-controlling interest and other components of equity while any resultant gain or loss is recognised in consolidated statement of profit or loss. Any investment retained is recognised at fair value.

2.6 Financial Instruments

ClassificationAs per IAS 39, the Group classifies its financial instruments as "investments at fair value through profit or loss", "loans and receivables", "investments available for sale" or "financial liability other than at fair value through profit or loss". Management determines the appropriate classification of each instrument at the time of acquisition. (i) Investments at fair value through profit or lossThese are financial assets that are either financial assets held for trading or those designated as investments at fair value through profit or loss upon initial recognition. A financial asset is classified in this category only if they are acquired principally for the purpose of generating profit from short-term fluctuation in price or if so designated by the management in accordance with a documented risk management or investment strategy and reported to key management personnel on that basis. This includes all derivative financial instruments, other than those designated as effective hedging instruments.


66 67

(ii) Loans and receivablesLoans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Cash and balances with banks, deposits with Central Bank of Kuwait, deposits with other banks, financing receivables, and certain other assets are classified as "loans and receivables".

The Bank offers Shari'ah compliant products and services such as Murabaha, Musawamah, Wakala and Ijara.

Murabaha is the sale of commodities, real estate and certain other assets at cost plus an agreed profit mark-up whereby the seller informs the purchaser of the cost of the product purchased and the amount of profit to be recognized.

Musawamah is an agreement under which negotiations between a buyer and a seller preclude the disclosure of sellers cost.

Wakala is an agreement whereby the Group provides a sum of money to a customer under an agency arrangement, who invests it according to specific conditions in return for a fee. The agent is obliged to return the amount in case of default, negligence or violation of any terms and conditions of the Wakala.

Ijara is an agreement whereby the Bank (lessor) purchases or constructs an asset for lease according to the customer's request (lessee), based on his promise to lease the asset for a specific period and against certain rent instalments. Ijara could end by transferring the ownership of the asset to the lessee.

(iii) Investments available for sale These are financial assets either designated as "available for sale" or are not classified as fair value through profit or loss, loans and receivables, and held to maturity.

(iv) Financial liabilities other than at fair value through profit or loss Financial liabilities which are not held for trading are classified as "other than at fair value through profit or loss". Deposits from banks and other financial institutions, deposits from customers and certain other liabilities are classified as "financial liabilities other than at fair value through profit or loss".

Financial liabilities include depositors' accounts created by Murabaha, Mudaraba and Wakala contracts.

Recognition and de-recognitionA financial asset or a financial liability is recognised when the Group becomes a party to the contractual provisions of the instrument. All "regular way" purchases and sales of financial assets are recognised on the settlement date, i.e. the date that the Group receives or delivers the asset. Changes in fair value between the trade date and settlement date are recognised in the consolidated statement of profit or loss or in the consolidated statement of other comprehensive income in accordance with the policy applicable to the related instrument. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the market place. A financial asset (in whole or in part) is de-recognised either when: (i) the contractual rights to receive the cash flows from the asset have expired or (ii) the Group has retained its right to receive cash flows from the assets but has assumed an obligation to pay them in full without material delay to a third party under a "pass through" arrangement; or (iii) the Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. Where the Group has transferred its right to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Group's continuing involvement in the asset.

A financial liability is de-recognised when the obligation specified in the contract is discharged, cancelled or expired. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the de-recognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in the consolidated statement of profit or loss.


2.6 Financial instruments (continued)

Classification (continued)


MeasurementAll financial assets and liabilities are initially measured at fair value of the consideration given plus transaction costs except for financial assets classified as investments at fair value through profit or loss. Transaction costs on financial assets classified as investments at fair value through profit or loss are recognised in the consolidated statement of profit or loss.

On subsequent measurement financial assets classified as "investments at fair value through profit or loss" are measured and carried at fair value. Realised and unrealised gains/ losses arising from changes in fair value are included in the consolidated statement of profit or loss. "Loans and receivables" are carried at amortised cost using effective yield method, less any provision for impairment. Those classified as "investments available for sale" are subsequently measured at fair value until the investment is sold or otherwise disposed of, or the investment is determined to be impaired, at which time the cumulative gain or loss previously reported in other comprehensive income is included in the consolidated statement of profit or loss for the year.

"Financial liabilities other than at fair value through profit or loss" are subsequently measured at amortised cost.

Impairment of financial assetsAt each reporting date, the Group assesses whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is impaired, if and only if, there is objective evidence of impairment as a result of one or more events that have occurred after the initial recognition of the asset and that loss event has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. If such evidence exists, the asset or group of financial assets is written down to its recoverable amount. The recoverable amount of a profit-bearing instrument is estimated based on the net present value of future cash flows discounted at original profit rates, and of equity instrument is determined with reference to market rates or appropriate valuation models. For variable profit rate bearing instruments, the net present value of future cash flows is discounted at the current effective profit rate determined under the contract.

The carrying amount of the asset is reduced through the use of an allowance account and the amount of impairment loss is recognised in the consolidated statement of profit or loss.

The Group assesses whether objective evidence of impairment exists on an individual basis for each individually significant financing and collectively for others. The main criteria that the Group uses to determine that there is objective evidence of impairment includes whether any payment of principal or profit are overdue by more than 90 days or there are any known difficulties in the cash flows including the sustainability of the counterparty's business plan, credit rating downgrades, breach of original terms of the contract, its ability to improve performance once a financial difficulty has arisen, deterioration in the value of collateral, bankruptcy, other financial reorganization, and economical or legal reasons. The impairment losses are evaluated at each reporting date, unless unforeseen circumstances require more careful attention.

Financial guarantees and letter of credit are assessed and provisions are made in a similar manner as for financing receivables.

Financing receivables together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realised or has been transferred to the Group. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowance account. If a write-off is later recovered, the recovery is credited to the "Provision for impairment" in the consolidated statement of profit or loss.

For equity instruments classified as investments available for sale, impairment losses are not reversed through the consolidated statement of profit or loss; any increase in the fair value subsequent to the recognition of impairment loss, is recognised in the consolidated statement of profit or loss and other comprehensive income. For Sukuk classified as investments available for sale, if in a subsequent year, the fair value of the Sukuk increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in the consolidated statement of profit or loss; the impairment loss is reversed through the consolidated statement of profit or loss.




68 69

General provisionIn accordance with the Central Bank of Kuwait's instructions, a minimum general provision is made on all applicable credit facilities (net of certain categories of collateral) that are not provided for specifically. In March 2007, the CBK issued a circular amending the basis of making minimum general provisions on facilities changing the rate from 2% to 1% for cash facilities and 0.5% for non-cash facilities. The required rates were to be applied effective from 1 January 2007 on the net increase in facilities, net of certain categories of collateral during the reporting period.

The minimum general provision in excess of the present 1% for cash facilities and 0.5% for non-cash facilities is retained as a general provision until further directives are received from the CBK.

Fair values measurementFair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:

¥ In the principal market for the asset or liability, or¥ In the absence of a principal market, in the most advantageous market for the asset or liability

The principal or the most advantageous market must be accessible to by the Group.

The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.

A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.

The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs.

All assets and liabilities for which fair value is measured or disclosed in the consolidated financial statements are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:¥ Level 1: Quoted (unadjusted) market prices in active markets for identical assets or liabilities¥ Level 2: Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or

indirectly observable¥ Level 3: Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable

For financial instruments quoted in an active market, fair value is determined by reference to quoted market prices. Bid prices are used for assets and offer prices are used for liabilities. The fair value of investments in mutual funds, unit trusts or similar investment vehicles are based on the last published net assets value.

For unquoted financial instruments fair value is determined by reference to the market value of a similar investment, discounted cash flows, other appropriate valuation models or brokers' quotes.

For financial instruments carried at amortised cost, the fair value is estimated by discounting future cash flows at the current market rate of return for similar financial instruments.

For investments in equity instruments, where a reasonable estimate of fair value cannot be determined, the investment is carried at cost.

For assets and liabilities that are recognised in the consolidated financial statements on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.

For the purpose of fair value disclosures, the Group has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained above.






OffsettingFinancial assets and financial liabilities are only offset and the net amount reported in the consolidated statement of financial position when there is a legally enforceable right to set off the recognised amounts and the Group intends to settle on a net basis.

2.7 Islamic Forward Agreements and Hedging

Islamic Forward Agreements are initially recognised in the consolidated statement of financial position at cost (including transaction costs) and subsequently measured at their fair value.

In the ordinary course of business, the Group enters into various types of transactions that involve financial instruments represented in forward foreign exchange agreements (Waad) to mitigate foreign currency risk. A Waad is a financial transaction between two parties where payments are dependent upon movements in price of one or more underlying financial instruments, reference rate or index in accordance with Islamic Shari'ah.

The notional amount, disclosed gross, is the amount of a Waad's underlying asset/ liability and is the basis upon which changes in the value of Waads are measured.

The notional amounts indicate the volume of transactions outstanding at the year-end and are neither indicative of the market risk nor credit risk.

For the purpose of hedge accounting, hedges are classified as cash flow hedges when hedging exposure to variability in cash flows that is either attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction or the foreign currency risk in an unrecognized firm commitment.

At the inception of a hedge relationship, the Group formally designates and documents the hedge relationship to which the Group wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the effectiveness of changes in the hedging instrument's fair value in offsetting the exposure to changes in the hedged item's fair value or cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated.

For those contracts classified as cash flow hedges, the effective portion of the gain or loss on the hedging instrument is recognised directly as other comprehensive income in the cash flow hedge reserve, while any ineffective portion is recognised immediately in the consolidated statement of profit or loss.

Amounts recognised as other comprehensive income are transferred to the consolidated statement of profit or loss when the hedged transaction affects profit or loss, such as when the hedged financial income or financial expense is recognised or when a forecast sale occurs. Where the hedged item is the cost of a non-financial asset or non-financial liability, the amounts recognised as other comprehensive income are transferred to the initial carrying amount of the non-financial asset or liability. If the forecast transaction or firm commitment is no longer expected to occur, the cumulative gain or loss previously recognised in fair value reserve are transferred to the consolidated statement of profit or loss. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, any cumulative gain or loss previously recognised in other comprehensive income remains in other comprehensive income until the forecast transaction or firm commitment affects profit or loss.

2.8 Financial guarantees

In the ordinary course of business, the Group provides financial guarantees, consisting of letter of credit, guarantees and acceptances. Financial guarantees are initially recognised in the consolidated financial statements at fair value, being the premium received, in other liabilities. The premium received is amortized in the consolidated statement of profit or loss on a straight line basis over the life of the guarantee. Subsequent to initial recognition, the Group's liability under each guarantee is measured at the higher of the amortised premium received and the best estimate of net cash flow required to settle any financial obligation arising as a result of the guarantee.


70 71

2.9 Renegotiated financing receivables

Where considered appropriate, the Group seeks to restructure past due financing receivables. This may involve extending the payment arrangements and the agreement of new financing conditions including enhancing collateral position. Management continuously reviews renegotiated financing receivables, if any, to ensure that all criteria are met and that future payments are likely to occur. Once the terms have been renegotiated, the facility is neither considered past due nor impaired.

2.10 Investment in an associate

The Group's investment in its associate is accounted for using the equity method. An associate is an entity in which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control over those policies.

Under the equity method, the investment in associate is carried in the consolidated statement of financial position at cost plus post acquisition changes in the Group's share of net assets of the associate. Goodwill relating to the associate is included in the carrying amount of the investment and is neither amortised nor individually tested for impairment.

The consolidated statement of profit or loss reflects the share of the results of operations of the associate. Where there has been a change recognised directly in the other comprehensive income of the associate, the Group recognises its share of any changes and discloses this, when applicable, in the consolidated statement of other comprehensive income. Unrealised gains and losses resulting from transactions between the Group and the associate are eliminated to the extent of the interest in the associate.

The Group's share of profit attributable to equity holders of an associate is shown on the face of the consolidated statement of profit or loss.

The financial statements of the associate are prepared for the same reporting period as the Group. Where necessary, adjustments are made to bring the accounting policies in line with those of the Group.

After application of the equity method, the Group determines whether it is necessary to recognise an additional impairment loss on the Group's investment in its associate. The Group determines at each reporting date whether there is any objective evidence that the investment in the associate is impaired. If this is the case the Group calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value and recognises the amount in the consolidated statement of profit or loss.

Upon loss of significant influence over the associate, the Group measures and recognises any retained investment at its fair value. Any difference between the carrying amount of the associate upon loss of significant influence and the fair value of the retaining investment and proceeds from disposal is recognised in consolidated statement of profit or loss.

2.11 Investment properties

Land and buildings held for the purpose of capital appreciation or for long term rental yields and not occupied by the Group are classified as investment properties.

Investment properties are measured at cost less accumulated depreciation (based on an estimated useful life of forty years using the straight line method) and accumulated impairment.

Any gains or losses on the retirement or disposal of an investment property are recognised in the consolidated statement of profit or loss in the period of retirement or when sale is completed.

Fair values of investment properties are determined by appraisers having an appropriate recognised professional qualification and recent experience in the location and category of the property being valued. The fair value measurement takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.



2.12 Premises and equipment

Freehold land is initially recognised at cost and not depreciated. After initial recognition freehold land is carried at the revalued amount, which is the fair value at the date of revaluation. The revaluation is carried out periodically by professional property evaluators. The resultant revaluation surplus or deficit is recognised in the consolidated statement of profit or loss and other comprehensive income to the extent the deficit does not exceed the previously recognised surplus. The portion of the revaluation deficit that exceeds a previously recognised revaluation surplus is recognised in the consolidated statement of profit or loss. To the extent that a revaluation surplus reverses a revaluation decrease previously recognised in the consolidated statement of profit or loss, the increase is recognised in the consolidated statement of profit or loss. Upon disposal, the revaluation reserve relating to the freehold land sold is transferred to retained earnings.

Buildings, other premises and equipment are stated at cost, less accumulated depreciation and impairment losses if any. Depreciation of buildings and other premises and equipment is provided on a straight-line basis over their estimated useful lives. The estimated useful lives of the assets for the calculation of depreciation are as follows: Buildings 40 to 45 yearsOther premises and equipment 2 to 5 years When assets are sold or retired, their cost and accumulated depreciation are eliminated from the accounts and any gain or loss resulting from their disposal is recognised in the consolidated statement of profit or loss.

Expenditure incurred to replace a component of an item of premises and equipment that is accounted for separately is capitalised and the carrying amount of the component that is replaced is written off. Other subsequent expenditure is capitalised only when it increases future economic benefits of the related item of premises and equipment. All other expenditure is recognised in the consolidated statement of profit or loss as the expense is incurred.

2.13 Non-current assets held for sale

The Group classifies non-current assets and disposal groups as held for sale if their carrying amounts will be recovered principally through a sale transaction rather than through continuing use. The criteria for "held for sale" classification is regarded as met only when the sale is highly probable and the asset or disposal group is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification. When the Group is committed to a sale plan, all of the assets and liabilities of that subsidiary are classified as held for sale when the criteria described above are met, regardless of whether the Group will retain a non-controlling interest in its former subsidiary after the sale.

Non-current assets and disposal groups classified as held for sale are measured at the lower of their carrying amount and fair value less costs to sell unless the items presented in the disposal group are not part of the measurement scope as defined in IFRS 5 Non-current Assets held for Sale and Discontinued Operations.

2.14 Perpetual Tier 1 Sukuk

Perpetual Tier 1 Sukuk are recognized under equity in the consolidated balance sheet and corresponding distributable profits on those Sukuk are accounted as a debit to the retained earnings.

2.15 Impairment of non-financial assets

The Group assesses at each reporting date whether there is an indication that an asset may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the Group estimates the asset's recoverable amount. An asset's recoverable amount is the higher of an asset's or cash-generating unit's fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets and then its recoverable amount is assessed as part of the cash-generating unit to which it belongs. Where the carrying amount of an asset (or cash-generating unit) exceeds its recoverable amount, the asset (or cash-generating unit) is considered impaired and is written down to its recoverable amount.



72 73

In assessing value in use, the estimated future cash flows are discounted to their present value using a discount rate that reflects current market assessments of the time value of money and the risks specific to the asset (or cash-generating unit). In determining fair value less costs to sell, an appropriate valuation model is used. These calculations are corroborated by available fair value indicators.

2.16 End of service indemnity

Provision is made for employees' end of service indemnity in accordance with the local laws based on employees' salaries and accumulated periods of service or on the basis of employment contracts, where such contracts provide extra benefits. The provision, which is unfunded, is determined as the liability that would arise as a result of involuntary termination of staff at the reporting date.

2.17 Treasury shares

Treasury shares consist of the Bank's own issued shares that have been reacquired by the Group and not yet reissued or cancelled. The treasury shares are accounted for using the cost method. Under this method, the weighted average cost of the shares reacquired is charged to a contra account in equity. When the treasury shares are reissued, gains are credited to a separate account in equity, (the "Treasury Shares Reserve"), which is not distributable. Any realised losses are charged to the same account to the extent of the credit balance on that account. Any excess losses are charged to retained earnings then to the general reserve and statutory reserve. Gains realised subsequently on the sale of treasury shares are first used to offset any previously recorded losses in the order of reserves, treasury shares reserve account and retained earnings. No cash dividends are paid on these shares. The issue of stock dividend shares increases the number of treasury shares proportionately and reduces the average cost per share without affecting the total cost of treasury shares.

2.18 Cash and cash equivalents

Cash and cash equivalents include cash and balances with Central Bank of Kuwait, deposits with banks with original maturity not exceeding seven days.

2.19 Revenue recognition

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised.

(i) Financing incomeFor all financial instruments measured at amortised cost, profit bearing financial assets classified as available for-sale, financing income is recorded using the effective profit rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset. The calculation takes into account all contractual terms of the financial instrument (for example, prepayment options) and includes any fees or incremental costs that are directly attributable to the instrument and are an integral part of the effective profit rate, but not future credit losses.

Once a financial instrument categorised as "loans and receivables" is written down to its estimated recoverable amount, related income is thereafter recognised on the unimpaired portion based on the original effective profit rate that was used to discount the future cash flows for the purpose of measuring the recoverable amount.


2.15 Impairment of non-financial assets (continued)


(ii) Fee and commission incomeThe Group earns fee and commission income from a diverse range of services it provides to its customers.

Fee income can be divided into the following two categories:

¥ Fee income earned from services that are provided over a certain period of time are accrued over that period.¥ Fee income arising from negotiating or participating in the negotiation of a transaction for a third party, are recognised on

completion of the underlying transaction. Fees or components of fees that are linked to a certain performance are recognised after fulfilling the corresponding criteria.

(iii) Dividend income is recognised when right to receive payment is established.

(iv) Rental income is recognised on an accrual basis.

2.20 Taxation

National Labour Support Tax (NLST)The Bank calculates NLST in accordance with Law No. 19 of 2000 and the Ministry of Finance Resolutions No. 24 of 2006 at 2.5% of taxable profit for the year. As per law, cash dividends from listed companies which are subjected to NLST have been deducted from the profit for the year.

Kuwait Foundation for the Advancement of Sciences (KFAS)The Bank calculates the contribution to KFAS at 1% of profit for the year, in accordance with the modified calculation based on the Foundation's Board of Directors resolution, which states that the Board of Directors' remuneration and transfer to statutory reserve should be excluded from profit for the year when determining the contribution.

ZakatContribution to Zakat is calculated at 1% of the profit of the Bank in accordance with Law No. 46 of 2006 and the Ministry of Finance resolution No. 58/2007 effective from 10 December 2007.

2.21 Provisions

Provisions are recognised when, as a result of past events, it is probable that an outflow of economic resources will be required to settle a present, legal or constructive obligation and the amount can be reliably estimated.

2.22 Foreign currency

Foreign currency transactions are recorded at the rate of exchange prevailing at the date of transactions. Monetary assets and liabilities denominated in foreign currencies outstanding at the year-end are translated into Kuwaiti Dinars at the rates of exchange prevailing at reporting date. Any resultant gains or losses are taken to the consolidated statement of profit or loss.

Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Translation differences on non-monetary investments at fair value through profit or loss are reported as part of the fair value gain or loss in the consolidated statement of profit or loss, whilst those for "available for sale" non-monetary assets are included in the consolidated statement of other comprehensive income, unless it is part of an effective hedging strategy, using exchange rates when the fair value was determined.

Translation differences arising on net investments in foreign operations are taken to the consolidated statement of other comprehensive income.

2.23 Segment information

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker.


2.19 Revenue recognition (continued)


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2.24 Contingencies

Contingent assets are not recognised in the consolidated financial statements, but are disclosed when an inflow of economic benefit is probable.

Contingent liabilities are not recognised in the consolidated financial statements, but are disclosed unless the possibility of an outflow of resources embodying economic benefit is remote. Provisions for contingent liabilities are recognized when the outflow of resources is probable.

2.25 Fiduciary assets

Assets held in trust or in a fiduciary capacity are not treated as assets of the Group and accordingly are not included in these consolidated financial statements.

2.26 Significant accounting judgement, estimates and assumptions

The preparation of consolidated financial statements requires management to make judgements and estimates that affect the reported amounts of financial assets and liabilities and disclosure of contingent liabilities. These judgements and estimates also affect the revenues and expenses and the resultant provisions as well as the fair value changes reported in other comprehensive income.

Judgements are made in the classification of financial instruments based on management's intention at acquisition, i.e. whether it should be classified as financial assets at fair value through profit or loss or available for sale. In making these judgements, the Group considers the primary purpose for which it is acquired and how it intends to manage and report its performance.

Such judgements also determine whether the financial instruments are subsequently measured at amortised cost or at fair value and if the changes in fair value of instruments are reported in the consolidated statement of profit or loss or directly in equity. Judgements are also made in determination of the objective evidence that a financial asset is impaired. The Group treats investments available for sale as impaired when there has been a significant or prolonged decline in the fair value below its cost or where other objective evidence of impairment exists. The determination of what is "significant" or "prolonged" requires considerable judgement and involves evaluating factors including industry and market conditions, future cash flows and discount factors.

When the fair values of financial assets and financial liabilities recorded in the statement of financial position cannot be measured based on quoted prices in active markets, their fair value is measured using valuation techniques including the income models. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgement is required in establishing fair values. Judgements include considerations of inputs such as liquidity risk, credit risk and volatility. Any changes in these estimates as well as the use of different, but equally reasonable estimates may have an impact on their carrying amounts.

In accordance with the accounting principles contained in the International Financial Reporting Standards, management is required to make estimates and assumptions that may affect the carrying values of financing receivables, unquoted equity instruments classified as investments available for sale and intangible assets.

Estimates are made regarding the amount and timing of future cash flows when measuring the level of provisions required for non-performing financing receivables as well as for impairment provisions for investments available for sale and assets held for sale. Estimates are also made in determining the useful lives of buildings and other premises and equipment and fair values of financial assets and derivatives that are not quoted in an active market.

Such estimates are necessarily based on assumptions about several factors involving varying degrees of uncertainty and actual results may differ resulting in future changes in such provisions.

The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Group to reduce any differences between loss estimates and actual loss experience.

Any changes in these estimates and assumptions as well as the use of different, but equally reasonable estimates and assumptions may have an impact on the carrying amounts of financing receivables, unquoted instruments classified as investments available for sale and intangible assets for the year.




3. FINANCING INCOME

Financing income includes interest income amounting to KD 143 thousand (2015 : KD 323 thousand) received from non-converted loans and advances granted before conversion to an Islamic Bank, which represents 0.1% (2015 : 0.3%) of the total financing income. Treatment of interest income is subject to resolutions of the Bank's Fatwa & Shari'ah Supervisory Board.

4. DISTRIBUTION TO DEPOSITORS

The Board of Directors of the Bank determines and distributes the depositors' share of profit based on the Bank's results at the end of each quarter.

5. NET FEES AND COMMISSION INCOME2016 2015

KD 000 KD 000

Investment management fees 1,879 1,823

Credit related fees and commission 9,450 9,271

Brokerage fees 824 961

Total fees and commission income 12,153 12,055

Fees and commission expense (1,535) (1,547)

Net fees and commission income 10,618 10,508

6. OTHER INCOME2016 2015

KD 000 KD 000

Dividend income 1,173 1,115

Net income from investment properties 403 373

Share of results from associate (33) 373

Other income 84 16

1,627 1,877

7. PROVISION AND IMPAIRMENT LOSSES2016 2015

KD 000 KD 000

Financing receivables (Note 11) 33,993 25,185

Recoveries from written off financing receivables (4,348) (2,343)

Non-cash credit facilities (Note 11) (134) 318

Investments available for sale 269 1,593

Investment properties (Note 14) 519 (157)

Others 1,380 183

31,679 24,779

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8. TAXATION2016 2015

KD 000 KD 000

Contribution to Kuwait Foundation for the Advancement of Sciences (KFAS) 385 412

National Labour Support Tax (NLST) 1,069 1,145

Zakat 419 449

1,873 2,006

9. BASIC AND DILUTED EARNINGS PER SHARE2016 2015

Profit for the year attributable to the Bank's equity shareholders (KD 000)

40,348 42,805

Weighted average number of shares outstanding during the year 1,559,731,902 1,559,731,902

Basic and diluted earnings per share attributable to the Bank's equity shareholders (Fils)

25.9 27.4

The weighted average number of shares outstanding during the year is calculated after adjusting for treasury shares as follows:

2016 2015

Weighted average number of the Bank's issued and paid up shares 1,732,368,522 1,732,368,522

Less: Weighted average number of treasury shares (172,636,620) (172,636,620)

1,559,731,902 1,559,731,902

As there are no dilutive instruments outstanding, basic and diluted earnings per share are identical.

10. CASH AND CASH EQUIVALENTS

Cash and cash equivalents included in the consolidated statement of cash flows consists of the following:

2016 2015

KD 000 KD 000

Cash and balances with banks 44,144 344,455

Deposits with Central banks and other banks with an original maturity ofseven days or less

32,904 208,189

77,048 552,644


11. FINANCING RECEIVABLES

Financing receivables comprise Islamic Shari'ah compliant facilities extended to the customers of the Bank in the form of financing contracts. Wherever necessary, financing receivables are secured by acceptable forms of collateral to mitigate the related credit risk.

Financing receivables include loans and advances carried forward from prior periods before conversion to an Islamic Bank amounting to KD 964 thousand (2015: KD 2,008 thousand) which represents 0.04% (2015: 0.1%) of net financing receivables. The Bank is in the process of converting these facilities to comply with Islamic Shari'ah.

The movement in provision for impairment of financing receivables by class of financial assets is as follows:

Retail financing

KD 000

Commercial financing

KD 000Total

KD 000

At 1 January 2016 9,598 87,279 96,877

Charge for the year (Note 7) 4,281 29,712 33,993

Amounts written off (3,137) (6,840) (9,977)

At 31 December 2016 10,742 110,151 120,893

Retail financing

KD 000

Commercial financing

KD 000Total

KD 000

At 1 January 2015 10,486 78,952 89,438

Charge for the year (Note 7) 2,846 22,339 25,185

Amounts written off (3,734) (10,500) (14,234)

Transferred to assets classified as "held for sale" - (3,512) (3,512)

At 31 December 2015 9,598 87,279 96,877

As at 31 December 2016, non-performing financing receivables on which income has been suspended from recognition amounted to KD 70,369 thousand (2015: KD 67,993 thousand).

The available specific provision on cash facilities is KD 3,615 thousand (2015: KD 10,456 thousand).

The provision recovery for the year on non-cash facilities is KD 134 thousand (2015: provision charge of KD 318 thousand). The available provision on non-cash facilities of KD 5,923 thousand (2015: KD 6,058 thousand) is included in other liabilities (Note 18).

The policy of the Group for calculation of the impairment provision for financing receivables complies in all material respects with the provision requirements of Central Bank of Kuwait. According to the Central Bank of Kuwait instructions, a minimum general provision of 1% for cash facilities and 0.5% for non-cash facilities has been made on all applicable credit facilities (net of certain categories of collateral), that are not provided for specifically.

78 79

12. INVESTMENTS AVAILABLE FOR SALE

2016 2015

KD 000 KD 000

Sukuk 192,719 121,809

Equity securities and funds

- Quoted 3,926 4,572

- Unquoted 7,328 12,786

203,973 139,167

Investments available for sale include unquoted equity instruments carried at cost of KD 140 thousand (2015: KD 140 thousand).

13. INVESTMENT IN AN ASSOCIATE

During the year, investment in an associate held through subsidiary which was included in assets classified as held for sale as at 31 December 2015, was reclassified to Investment in an associate on purchase and transfer of the associate from the subsidiary to the Bank during the current year.

The share in assets, liabilities and results of the associate for the year ended is as follows:

2016 2015

KD 000 KD 000

Share of associate's statement of financial position:

Current assets 2,970 2,982

Non-current assets 7,587 7,946

Current liabilities (312) (403)

Non-current liabilities (83) (66)

Net assets 10,162 10,459

Share of associate's results:

Operating income 447 667

(Loss)/Profit for the year (33) 373



14. INVESTMENT PROPERTIES

These represent properties acquired by the Group and is recognized at cost. Investment properties were revalued by independent valuers using market comparable approach that reflects recent transaction prices for similar properties and is therefore classified under level 2 of the fair value hierarchy. In estimating the fair value of investment properties, the highest and best use of the properties is their current use. There has been no change to the valuation technique during the year. The fair value of the investment properties at the reporting date is KD 24,089 thousand (2015: KD 33,069 thousand).

Movement for the year is as follows:

2016 2015

KD 000 KD 000

At 1 January 29,572 32,842

Additions - 3,205

Disposals (5,835) (6,474)

(Charge) reversal of impairment (519) 157

Depreciation charged for the year (163) (158)

At 31 December 23,055 29,572

15. PREMISES AND EQUIPMENT

Premises and equipment include a revaluation increase of KD 36 thousand (2015: increase of KD 483 thousand) in the value of freehold land based on valuations determined by independent valuation experts. Freehold land was revalued by independent valuers using significant valuation inputs based on observable market data and is classified under level 2 of the fair value hierarchy.

16. OTHER ASSETS

2016 2015

KD 000 KD 000

Financing profit receivable 8,958 8,982

Positive fair value of Islamic Forward Agreements (Note 25) 123 591

Others 10,172 5,243

19,253 14,816

80 81

17. DEPOSITS FROM CUSTOMERS

Depositors' accounts are deposits received from customers under current account, saving investment accounts, and fixed term investments accounts. The depositors' accounts of the Bank comprise the following:

(i) Non-investment deposits in the form of current accounts. These deposits are not entitled to any profits nor do they bear any risk of loss as the Bank guarantees to pay the related balances on demand. Accordingly, these deposits are considered Qard Hassan from depositors to the Bank under Islamic Shari'ah. Investing such Qard Hassan is made at the discretion of the Board of Directors of the Bank, the results of which are attributable to the equity shareholders of the Bank.

(ii) Investment deposit accounts include savings accounts, fixed term deposit accounts, and open term deposit accounts.

The fair values of deposits from customers do not differ significantly from their carrying values.

Saving Investment AccountsThese are open-term deposits and the client is entitled to withdraw the balances of these accounts or portions thereof at any time.

Fixed-Term Deposit Investment AccountsThese are fixed-term deposits based on the deposit contract executed between the Bank and the depositor. These deposits mature monthly, quarterly, semi-annually, or annually.

Open-Term Deposit Investment AccountsThese are open-term deposits and are treated as annual deposits renewed automatically for a similar period, unless the depositor notifies the Bank in writing of his/her desire not to renew the deposit.

Funds utilized in investments for each investment deposit are computed using ratios identified in the contracts for opening of these accounts with clients. The Bank guarantees to pay the remaining un-invested portion of these investment deposits. Accordingly, this portion is considered Qard Hassan from depositors to the Bank, on the grounds of Islamic Shari'ah.

18. OTHER LIABILITIES2016 2015

KD 000 KD 000

Depositors' profit share payable 14,614 9,605

Provision for staff indemnity and passage 3,491 3,196

Provision for non-cash credit facilities (Note 11) 5,923 6,058

Negative fair value of Islamic Forward Agreements (Note 25) 168 520

Account payables, accruals and others 28,254 29,972

52,450 49,351

19. EQUITY

(i) The authorised share capital as at 31 December 2016 comprises of 2,500,000,000 ordinary shares (31 December 2015: 1,574,880,475 shares) of 100 Fils each and the issued and fully paid share capital as at 31 December 2016 comprises of 1,732,368,522 ordinary shares (31 December 2015: 1,574,880,475 shares) of 100 Fils each.

(ii) The Board of Directors of the Bank has proposed cash dividend of 12% amounting to 12 Fils per share (2015: 5 Fils) and bonus shares of 8% (2015: 10%). The proposed dividends are subject to the approval of the shareholders at the Bank's Annual General Assembly. The shareholders' Annual General Assembly held on 31 March 2016 approved the distribution of cash dividend of 5 Fils per share (2014: 10 Fils) to the Bank's equity shareholders registered in the Bank's records as of the date of Annual General Assembly Meeting and issuance of bonus shares of 10% (2014:10%) to the Bank's equity shareholders on record at the date of regulatory approval.


(iii) The Bank is required by the Companies' Law and the Bank's Articles of Association to transfer 10% of the profit for the year attributable to the Bank's equity shareholders before KFAS, NLST, Zakat and Directors' remuneration to the statutory reserve. The Bank may resolve to discontinue such annual transfers when the statutory reserve equals 50% of the paid up share capital. The Bank has transferred KD 4,237 thousand (2015: KD 4,496 thousand) to statutory reserve. Distribution of the statutory reserve is limited to the amount required to enable the payment of a dividend of up to 5% of share capital in years when retained earnings are not sufficient for the payment of such dividend.

(iv) The Articles of Association of the Bank requires that an amount of not less than 10% of the profit for the year attributable to the Bank's equity shareholders before KFAS, NLST, Zakat and Directors' remuneration should be transferred annually to a general reserve account. The Board of Directors have resolved to discontinue such transfer from the year ended 31 December 2007 onwards, which was approved by the shareholders at the Bank's Annual General Assembly on 6 March 2008. General reserve is available to be distributed to shareholders at the discretion of the general assembly in ways that may be deemed beneficial to the bank.

(v) The balances of share premium and treasury shares reserve are not available for distribution. The balance in the property revaluation reserve is not available for distribution unless the relevant assets are de-recognised.

The cost of the Bank's own shares purchased, including directly attributable costs, is recognised in equity. In accordance with the instructions of the Central Bank of Kuwait and Annual General Assembly the Bank may purchase treasury shares up to 10% of its paid up share capital.

20. TREASURY SHARES

There was no purchase or sale of treasury shares during the current year.

2016 2015

Number of treasury shares 172,636,620 156,942,382

Treasury shares as a percentage of total shares issued 9.97% 9.97%

Cost of treasury shares (KD 000) 43,957 43,957

Market value of treasury shares (KD 000) 69,918 81,610

Amount equivalent to cost of treasury shares has been retained out of reserves as non-distributable throughout the holding period of the treasury shares.

21. ASSET HELD FOR SALE

The Board of Directors had approved sale of its entire equity interest in a non-converted asset and recorded this as held for sale per IFRS 5 during 2015.

During the year, KD 10.5 million of investment was reclassified to Investment in an associate as per Note 13. The remaining carrying value of assets held for sale which are not Shari'ah compliant was fully provided for in accordance with CBK instruction.

22. PERPETUAL TIER 1 SUKUK

In October 2016, the Bank through a Shari'ah compliant Sukuk arrangement issued Tier 1 Sukuk amounting to USD 200 million. Tier 1 Sukuk is a perpetual security in respect of which there is no fixed redemption date and constitutes direct, unsecured, deeply subordinated obligations (senior only to share capital) of the Bank subject to the terms and conditions of the Mudaraba Agreement. The Tier I Sukuk is listed on the Irish Stock Exchange and NASDAQ Dubai and callable by the Bank after five-year period ending October 2021 (the "First Call Date") or any profit payment date thereafter subject to certain redemption conditions including prior CBK approval.

19. EQUITY (CONTINUED)


82 83

The net proceeds of Tier 1 Sukuk are invested by way of Mudaraba with the Bank (as Mudareb) on an unrestricted basis, by the Bank in its general business activities carried out through the general Mudaraba pool. Tier I Sukuk bears profit rate of 5.5% per annum to be paid semi-annually in arrears until the First Call Date subject to terms of the issue. After that, the expected profit rate will be reset based on the prevailing 5 years US Mid Swap Rate plus initial margin of 4.226% per annum.

At the issuer's sole discretion, it may elect not to make any Mudaraba distributions expected and in such event, the Mudaraba profit will not be accumulated and the event is not considered an event of default.

23. TRANSACTIONS WITH RELATED PARTIES

The Group enters into transactions with the parent, associate, major shareholders, directors and key management, close members of their families and entities controlled, jointly controlled or significantly influenced by such parties in the ordinary course of business. The terms of these transactions are approved by the Group's management.

The year-end balances and transactions included in the consolidated financial statements are as follows:

Parent Others Total

KD 000 KD 000 KD 000

As at 31 December 2016

Financing receivables - 12,346 12,346

Credit cards - 40 40

Deposits with other banks 86,227 6,294 92,521

Deposits from banks and financial institutions 46,236 480,094 526,330

Deposits from customers - 1,437 1,437

Commitments and contingent liabilities 17,385 8,025 25,410

Islamic Forward Agreements 8,367 - 8,367

As at 31 December 2015

Financing receivables - 7,563 7,563

Credit cards - 52 52

Deposits with other banks 90,165 18,546 108,711

Deposits from banks and financial institutions 54,917 322,024 376,941

Deposits from customers - 1,284 1,284

Commitments and contingent liabilities 36,832 6,499 43,331

Islamic Forward Agreements 14,156 - 14,156

Transactions

For the year ended 31 December 2016

Financing income 738 407 1,145

Distribution to depositors 378 8,125 8,503

For the year ended 31 December 2015

Financing income 301 224 525

Distribution to depositors 116 4,888 5,004

22. PERPETUAL TIER 1 SUKUK (CONTINUED)



2016 2015

KD 000 KD 000

Directors:

Board of Directors' remuneration 150 150

Key management compensation:

Salaries and other short term benefits 2,027 2,191

Post-employment benefits 116 248

2,293 2,589

Board of Directors' remuneration is subject to approval of shareholders in the Annual General Assembly.

During the current year, the Bank has acquired 30% equity interest in MEFIC for a purchase consideration of KD 10,616 thousand from its subsidiary (Note 13). The Bank has sold unquoted shares classified as Investments available for sale to a related party and recorded gain of KD 3,139 thousand.

24. COMMITMENTS AND CONTINGENT LIABILITIES

a) Credit- related commitments

Credit-related commitments include commitments to extend credit, standby letters of credit, guarantees and acceptances, which are designed to meet the requirements of the Group's customers.

Letters of credit (including standby letters of credit), guarantees and acceptances commit the Group to make payments on behalf of customers upon failure of the customers to perform under the terms of the contract.

Commitment to extend credit represents contractual commitments to financing and revolving credits. Commitments generally have fixed expiration dates, or other termination clauses. Since commitments may expire without being drawn upon, the total contract amounts do not necessarily represent future cash requirements. The Group has the following credit related commitments:

2016 2015

KD 000 KD 000

Acceptances 30,272 19,276

Letters of credit 68,452 91,806

Guarantees 435,614 388,919

534,338 500,001

Irrevocable credit commitments to extend credit at the reporting date amounted to KD 24,077 thousand (2015: KD 8,237 thousand)

b) Capital commitment

The capital commitment for purchase of assets as at 31 December 2016 is KD 1,631 thousand (2015: KD 1,497 thousand).

23. TRANSACTIONS WITH RELATED PARTIES (CONTINUED)

84 85


25. ISLAMIC FORWARD AGREEMENT

In the ordinary course of business, the Bank enters into various types of transactions that involve financial instruments represented in forward foreign exchange agreements (Waad) to mitigate foreign currency risk. A Waad is a financial transaction between two parties where payments are dependent upon movements in price of one or more underlying financial instruments, reference rate or index in accordance with Islamic Shari'ah.

The notional amount, disclosed gross, is the amount of a Waad's underlying asset/ liability and is the basis upon which changes in the value of Waads are measured.

The notional amounts indicate the volume of transactions outstanding at the year-end and are neither indicative of the market risk nor credit risk.

The table below shows the fair value and notional amounts of the Waad transactions:

Assets(Positive)

KD 000

Liabilities(Negative)

KD 000

Less than 1 month

KD 000

1 to 3 monthsKD 000

3 to 12 monthsKD 000

TotalKD 000

2016 123 168 4,235 6,406 1,704 12,345

2015 591 520 13,294 55,886 2,337 71,517

Most of the Group's Islamic Forward Agreements relate to deals with customers, which are normally matched by entering into reciprocal deals with counterparties.

26. FAIR VALUES MEASUREMENT

The following table provides the fair value measurement hierarchy of the Group's financial instruments:

Fair value measurement hierarchy for assets and liabilities as at 31 December 2016 is as follows:

2016Level: 1KD 000

Level: 2KD 000

Level: 3KD 000

Total KD 000

Assets measured at fair value

Financial assets

Investments available for sale 193,464 6,077 4,292 203,833

Islamic Forward Agreements

Waad - 123 - 123

193,464 6,200 4,292 203,956

Liability measured at fair value


Waad - 168 - 168

- 168 - 168

2015Level: 1KD 000

Level: 2KD 000

Level: 3KD 000

Total KD 000

Assets measured at fair value

Financial assets



Waad - 591 - 591

118,934 11,701 8,983 139,618

Liability measured at fair value


Waad - 520 - 520

- 520 - 520

Investments classified under level 1 are valued based on the quoted bid price. Equity securities and funds classified under level 2 are valued based on market multiples and declared NAV's. Equity securities and funds classified under level 3 are valued based on discounted cash flows and dividend discount models. The movement in level 3 is mainly on account of disposal of financial assets during the year. The significant inputs for valuation of equity securities classified under level 3 are annual growth rate of cash flows and discount rates and for funds it is the illiquidity discount. Lower growth rate and higher discount rate, illiquidity discount will result in a lower fair value. The impact on the consolidated statement of financial position or the consolidated statement of shareholders' equity would be immaterial if the relevant risk variables used to fair value the unquoted securities were altered by 5 per cent. There was no material changes in the valuation techniques used for the purpose of measuring fair value of investment securities as compared to the previous year.

Other financial assets and liabilities are carried at amortized cost and the carrying values are not materially different from their fair values as most of these assets and liabilities are of short term maturities or are repriced immediately based on market movement in interest rates. Fair values of remaining financial assets and liabilities carried at amortised cost are estimated mainly using based on discounted cash flows, with most significant inputs being the discount rate that reflects the credit risk of counterparties.

26. FAIR VALUES MEASUREMENT (CONTINUED)


86 87

27. MATURITY ANALYSIS OF ASSETS AND LIABILITIES

The table below summarises the maturity profile of the Group's assets and liabilities analysed according to remaining contractual maturity:

2016Up to

3 monthsKD 000


Over1 year

KD 000Total

KD 000ASSETSCash and balances with banks 44,144 - - 44,144Deposits with Central Bank of Kuwait 169,788 257,059 - 426,847Deposits with other banks 227,280 - - 227,280Financing receivables 1,435,961 717,539 552,554 2,706,054Investments available for sale 90,410 16,094 97,469 203,973Investment properties - - 23,055 23,055Investment in associate - - 10,162 10,162Premises and equipment - - 31,393 31,393Other assets and intangibles 17,775 1,470 8 19,253Total assets 1,985,358 992,162 714,641 3,692,161

LIABILITIESDeposits from banks and other financial Institutions 311,878 349,999 40,275 702,152Deposits from customers 2,034,724 443,124 14,023 2,491,871Other liabilities 38,761 10,506 3,183 52,450Total liabilities 2,385,363 803,629 57,481 3,246,473Net liquidity gap (400,005) 188,533 657,160 445,688

2015Up to

3 monthsKD 000


Over1 year

KD 000Total

KD 000

ASSETS

Cash and balances with banks 344,455 - - 344,455

Deposits with Central Bank of Kuwait 150,406 114,793 - 265,199

Deposits with other banks 376,812 - - 376,812

Financing receivables 1,460,320 627,310 592,704 2,680,334


Investment properties - - 29,572 29,572

Investment in associate - - 30,954 30,954

Premises and equipment 13,248 1,556 12 14,816

Other assets and intangibles - 22,994 - 22,994

Total assets 2,415,802 773,820 714,681 3,904,303

LIABILITIES

Deposits from banks and other financial institutions 633,862 170,814 25,313 829,989

Deposits from customers 2,142,583 500,555 17,491 2,660,629

Other liabilities 40,024 7,394 1,933 49,351

Liabilities directly associated with assets held for sale

- 3,499 - 3,499

Total liabilities 2,816,469 682,262 44,737 3,543,468

Net liquidity gap (400,667) 91,558 669,944 360,835


28. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

Strategy in using financial instruments

As an Islamic commercial bank, the Bank's activities are principally related to the sourcing of funds through Shari'ah compliant financial instruments, within the guidelines prescribed by the Central Bank of Kuwait (CBK) and deploying these funds in Shari'ah compliant financing and investment activities, to earn a profit. The profit is shared between the shareholders and profit sharing deposit account holders, as per the Bank's policies approved by the Board of Directors and Fatwa & Shari'ah Supervisory Board. The funds raised vary in maturity between short and long term and are mainly in Kuwaiti Dinars, apart from major foreign currencies and GCC currencies. While deploying the funds, the Bank focuses on the safety of the funds and maintaining sufficient liquidity to meet all claims that may fall due. Safety of shareholder and depositor funds is further enhanced by diversification of financing activities across economic and geographic sectors, and types of financed parties.

RISK MANAGEMENT

The use of financial instruments also brings with it associated inherent risks. The Group recognises the relationship between returns and risks associated with the use of financial instruments and the management of risks forms an integral part of the Group's strategic objectives.

The strategy of the Group is to maintain a strong risk management culture and manage the risk/reward relationship within and across each of the Group's major risk-based lines of business. The Group continuously reviews its risk management policies and practices to ensure that it is not subject to large asset valuation and earnings volatility.

Group's objectives, policies and process for managing its risk are explained in detail in the Pillar 3 disclosures of the Annual Report. The following sections describe the several risks inherent in the banking process, their nature, techniques used to minimise the risks, their significance and impact on profit and loss and equity due to future expected changes in market conditions.

A. CREDIT RISK

Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. The Group attempts to control risk by monitoring credit exposures, limiting transactions with reputable counterparties, and continually assessing the creditworthiness of counterparties.

Concentration of credit risk arises when a number of counterparties are engaged in similar business activities or activities in the same geographic region or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions.

Concentration of credit risk indicates the relative sensitivity of the Group's performance to developments, affecting a particular industry or geographic location.

The Group seeks to manage its credit risk exposure through diversification of financing activities to avoid undue concentrations of risks with individuals or groups of customers in specific locations or businesses. It also obtains collateral, when appropriate. The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. Guidelines are implemented regarding the acceptability of types of collateral and valuation parameters.

The main types of collateral obtained include charges over bank deposits and balances, listed securities acceptable to the Group, real estate, plant and equipment, inventory and trade receivables.

Management monitors the market value of collateral on a daily basis for quoted shares and periodically for others, requests additional collateral in accordance with the underlying agreement, and monitors the market value of collateral obtained during its review of the adequacy of the allowance for impairment losses.

The table below shows the maximum exposure net of provision to credit risk for the components of the statement of financial position and off-balance sheet items without taking account of any collateral and other credit enhancements.


88 89

Maximumexposure 2016

KD 000

Maximumexposure 2015

KD 000

Credit risk exposures relating to consolidated statement of financial position items:

Balances with banks 27,127 328,339

Deposits with the Central Bank of Kuwait 426,847 265,199


Financing receivables 2,706,054 2,680,334

Investments available for sale 192,719 121,809

Other assets 18,178 13,620

Assets classified as held for sale - 2,937

3,598,205 3,789,050

Credit risk exposures relating to off-balance sheet items: (Note 24a)

Acceptances, letters of credit, and guarantees 534,338 500,001

Irrevocable credit commitments 24,077 8,237

558,415 508,238

The gross maximum credit exposure to a single client or counterparty as at 31 December 2016 was KD 57,622 thousand (2015: KD 45,559 thousand) and credit exposure net of eligible collateral to the same counterparty was Nil (2015: Nil).

28. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED)

RISK MANAGEMENT (continued)

A. CREDIT RISK (continued)


Geographical and industry-wise concentration of assets and off balance sheet items are as follows:

2016Assets

representing credit risk

KD 000

Contingencies & commitments

representing credit risk

KD 000

Geographic region:

Kuwait 3,194,597 440,044

Other GCC 282,584 83,129

Europe 16,355 26,238

North America 11,678 1,478

Other countries 92,991 7,526

3,598,205 558,415

Industry sector:

Trading and manufacturing 499,356 183,671

Banks and financial institutions 901,281 104,795

Construction and real estate 1,252,699 181,272

Other 944,869 88,677

3,598,205 558,415

2015

Geographic region:

Kuwait 3,149,594 389,335

Other GCC 288,612 86,840

Europe 46,158 17,926

North America 233,719 1,314

Other countries 70,967 12,823

3,789,050 508,238

Industry sector:

Trading and manufacturing 522,821 185,603

Banks and financial institutions 1,156,529 109,456

Construction and real estate 1,331,914 148,440

Other 777,786 64,739

3,789,050 508,238

Credit quality of the financial assets is managed by the Group with a combination of external and internal ratings mechanisms. It is the Group's policy to maintain accurate and consistent risk ratings across the credit portfolio. This facilitates management to focus on the applicable risks and the comparison of credit exposures across all lines of business, geographic regions and products. The rating system is supported by a variety of financial analytics, combined with processed market information to provide the main inputs for the measurement of counterparty risk. All internal risk ratings are tailored to the various categories and are derived in accordance with the Group's rating policy.





90 91

The credit quality of class of assets with underlying credit risks are as follows:

Neither past due nor impaired (KD 000)

2016High

grade Standard

gradeClosely

monitored Total

Balances with banks 27,127 - - 27,127

Deposits with Central Bank of Kuwait 426,847 - - 426,847



Investments available for sale 192,719 - - 192,719

Other assets 18,178 - - 18,178

3,305,502 127,258 83,202 3,515,962

2015

Balances with banks 328,339 - - 328,339

Deposits with Central Bank of Kuwait 265,199 - - 265,199



Investments available for sale 121,809 - - 121,809

Other assets 13,620 - - 13,620

Assets classified as held for sale - 2,937 - 2,937

3,518,396 123,104 66,280 3,707,780

Financial assets by class that are past due but not impaired:

2016Past due

up to 60 daysKD 000

Past due61 to 90 days

KD 000Total

KD 000

Financing receivables

-Retail financing 11,702 3,381 15,083

-Commercial financing 405 - 405

12,107 3,381 15,488

Fair value of collateral 6,186

2015


-Retail financing 19,625 2,736 22,361

-Commercial financing 1,372 - 1,372

20,997 2,736 23,733

Fair value of collateral 5,794





Financial assets by class that are impaired:

2016Gross

exposureKD 000

Impairmentprovision

KD 000

Fair value of collateral

KD 000


-Retail financing 5,084 1,501 -

-Commercial financing 65,285 2,114 116,502

70,369 3,615 116,502

2015


-Retail financing 5,413 1,905 -

-Commercial financing 62,580 8,551 109,215

67,993 10,456 109,215

The factors the Group considered in determining impairment are disclosed in Note 2 - Significant Accounting Policies.

B. LIQUIDITY RISK Liquidity risk is the risk that the Group will be unable to meet its net funding requirements. Liquidity risk can also be caused by market disruptions or credit downgrades which may cause certain sources of funding to dry up immediately. To guard against this risk, management has diversified funding sources and assets are managed with liquidity in mind, maintaining an adequate balance of cash, cash equivalents, and readily marketable securities.

Analysis of financial liabilities by remaining contractual maturitiesThe table below summarises the maturity profile of the Group's financial liabilities based on contractual undiscounted repayment obligations including profit share. Repayments which are subject to notice are treated as if notice were to be given immediately. However, the Group expects that many customers will not request repayment earlier than the contractual date and the table also does not reflect the expected cash flows indicated by the Group's deposit retention history.

Less than 1 month

KD 000

1 to 3monthsKD 000

3 to 12monthsKD 000

1 to 5 years

KD 000

Over5 yearsKD 000

TotalKD 000

2016

Deposits from banks and other financial institutions 233,546 78,619 354,674 41,565 - 708,404

Deposits from customers 1,260,832 776,131 447,006 14,117 - 2,498,086

Other liabilities 30,497 1,974 10,506 9,473 - 52,450

1,524,875 856,724 812,186 65,155 3,258,940





92 93

Less than 1 month

KD 000

1 to 3monthsKD 000

3 to 12monthsKD 000

1 to 5 years

KD 000

Over5 yearsKD 000

TotalKD 000

2015

Deposits from banks and other financial institutions 521,290 112,899 172,199 25,922 - 832,310

Deposits from customers 1,207,010 938,135 504,562 17,640 - 2,667,347

Other liabilities 25,342 14,682 7,394 1,933 - 49,351

Liabilities directly associated with assets held for sale - - 3,499 - - 3,499

1,753,642 1,065,716 687,654 45,495 - 3,552,507

The table below shows the contractual expiry by maturity of the Group's credit related contingent liabilities and commitments as disclosed in Note 24:

Less than 1 month

KD 000

1 to 3monthsKD 000

3 to 12monthsKD 000

1 to 5 years

KD 000

Over5 yearsKD 000

TotalKD 000

2016

Credit related contingent liabilities 19,285 68,252 266,631 161,614 18,556 534,338

Irrevocable credit commitments - - - - 24,077 24,077

19,285 68,252 266,631 161,614 42,633 558,415

2015

Credit related contingent liabilities 20,752 65,448 210,422 196,979 6,400 500,001

Irrevocable credit commitments - - - 37 8,200 8,237

20,752 65,448 210,422 197,016 14,600 508,238

C. MARKET RISK

The Group defines market risk as the uncertainty in future earnings on the Group's on and off balance sheet positions resulting from changes in market variables such as interest rate risk, currency risk and equity price risk.

C.1- INTEREST RATE RISKInterest rate risk arises from the possibility that changes in interest rates will affect the value of the underlying financial instruments. The Group is not exposed to interest rate risk since in accordance with Islamic Shari'ah the Bank does not charge interest except on non-converted loans and advances. The sensitivity of net interest income for one year on these loans is not considered to be significant.

Changes in interest rates may, however affect the fair value of financial assets available for sale. Change in the interest rates by 25 basis point, with all other variables held constant will affect the equity by KD 695 thousand (2015: KD 301 thousand).



B. LIQUIDITY RISK (continued)


C.2- CURRENCY RISKCurrency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in foreign exchange rates. Positions are monitored on a daily basis and hedging strategies are used to ensure positions are maintained within established limits.

The Group had the following net exposures denominated in foreign currencies.

The effect on profit before tax, as a result of change in currency rate, with all other variables held constant is shown below:

Effect on profit before tax

CurrencyChange in

currency rate in %2016

KD 0002015

KD 000

US Dollars +5% 41 2

Sensitivity to currency rate movements will be on a symmetric basis, as financial instruments giving rise to non-symmetric movements are not significant. There is no significant impact on the equity.

C.3- EQUITY PRICE RISKEquity price risk is the risk that the fair values of equity investments decrease as a result of the changes in the level of equity indices and the value of the individual stocks. The non-trading equity price risk exposure arises from the Group's investment portfolio.

The effect on equity as a result of a change in the fair value of the equity instruments at 31 December due to a reasonable possible change in the equity indices, with all other variables held as constant is as follows:

Effect on profit before tax

Market indicesChange in

equity price %2016

KD 0002015

KD 000

Kuwait Index +5% 122 375

Sensitivity to equity price movements will be on a symmetric basis, as financial instruments giving rise to non-symmetric movements are not significant.

C.4- PREPAYMENT RISKPrepayment risk is the risk that the Group will incur a financial loss because its customers and counterparties repay or request repayment earlier than expected, such as fixed rate mortgages when profit rates fall. Due to the contractual terms of its Islamic products, the Bank is not significantly exposed to prepayment risk.

D. OPERATIONAL RISK

The Group has a set of policies and procedures approved by the Board of Directors and are applied to identify, assess and supervise operational risk in addition to other types of risk relating to the banking and financial activities of the Group. Operational risk is managed by the Risk Management Division. This Division ensures compliance with policies and procedures to identify, assess, supervise and monitor operational risk as part of overall Global Risk Management.

The Group manages operational risks in line with the Central Bank of Kuwait instructions dated 14 November 1996 regarding general guidelines for Internal Control systems and directives issued on 13 October 2003 regarding "Sound Practices for the Management and Control of Operational Risks".



C. MARKET RISK (continued)


94 95

29. SEGMENT REPORTING

The Group's operating segments are determined based on the reports reviewed by the Chief Operating decision maker that are used for strategic decisions. These segments are strategic business units having similar economic characteristics that offer different products and services. These operating segments are monitored separately by the Group for the purpose of making decisions about resource allocation and performance assessment.

These operating segments meet the criteria for reportable segments and are as follows:

¥ Retail and Commercial Banking - comprising a full range of banking operations covering credit and deposit services provided to customers and correspondent banking. The Bank uses a common marketing and distribution strategy for its commercial banking operations.

¥ Treasury and Investment Management - comprising clearing, money market, foreign exchange, Sukuk, other treasury and miscellaneous operations, proprietary investment, securities trading activities and fiduciary fund management activities.

Segment results include revenue and expenses directly attributable to a segment and an allocation of cost of funds to segments based on the daily weighted average balance of segment assets.

The Group measures the performance of operating segments through measure of segment profit or loss net of taxes in management and reporting systems.

Segment assets and liabilities comprise those operating assets and liabilities that are directly attributable to the segment.

Retail and CommercialBanking

Treasury and Investment Management Total

2016 KD 000

2015KD 000

2016 KD 000

2015KD 000

2016 KD 000

2015KD 000

Net financing income 68,093 71,238 20,309 17,844 88,402 89,082

Fees, commissions and others 11,123 10,838 11,528 10,952 22,651 21,790

Total operating income 79,216 82,076 31,837 28,796 111,053 110,872

Provision and impairment Losses and provision on asset held for sale (29,884) (21,595) (7,608) (18,998) (37,492) (40,593)

Operating expenses and Taxation (30,861) (30,314) (5,053) (5,046) (35,914) (35,360)

Segment result 18,471 30,167 19,176 4,752 37,647 34,919

Add: Non-controlling interest 2,701 7,886

Net profit for the period attributable to the Bank's equity shareholders 40,348 42,805

Retail and CommercialBanking

Treasury and Investment

Management Others Total

2016 KD 000

2015KD 000

2016 KD 000

2015KD 000

2016 KD 000

2015KD 000

2016 KD 000

2015KD 000

Segment assets 2,995,298 2,990,296 646,217 845,243 50,646 68,764 3,692,161 3,904,303

Segment liabilities 2,172,427 2,195,277 1,021,596 1,295,341 52,450 52,850 3,246,473 3,543,468

The Group primarily operates in Kuwait.


30. CAPITAL MANAGEMENT

The primary objectives of the Group's capital management are to ensure that the Group complies with externally imposed capital requirements and that the Group maintains strong and healthy capital ratios in order to support its business and to maximize shareholders' value.

The Group actively manages its capital base in order to cover risks inherent in the business. The adequacy of the Group's capital is monitored using, among other measures, the rules and ratios established by the Basel Committee on Banking Supervision (BIS rules/ratios) and adopted by the Central Bank of Kuwait in supervising the Group.

The Group's regulatory capital and capital adequacy ratios (Basel III) for the year ended 31 December 2016 are calculated in accordance with CBK circular number 2/RB, RBA/336/2014 dated 24 June 2014 are shown below:

2016 2015

KD 000 KD 000

Risk weighted assets 2,613,799 2,495,987

Total capital required 352,863 311,998

Capital available

Tier 1 capital 445,052 357,304

Tier 2 capital 31,416 29,906

Total capital 476,468 387,210

Tier 1 capital adequacy ratio 17.03% 14.32%

Total capital adequacy ratio 18.23% 15.51%

The Group's financial leverage ratio for the year ended 31 December 2016 is calculated in accordance with CBK circular number 2/IBS/ 343/2014 dated 21 October 2014 is shown below:

2016 2015

KD 000 KD 000

Tier 1 capital 445,052 357,304

Total exposure 5,117,616 5,115,461

Financial leverage ratio 8.70% 6.98%


BASEL III - PILLAR III DISCLOSURES

31 December 2016

In accordance with Central Bank of Kuwait ("CBK") Rules and Regulations concerning Capital Adequacy Standard (Basel III) vide circular reference 2/RB,RBA/A336/2014 dated 24 June 2014

98 99

BASEL III - PILLAR III DISCLOSURES

INFORMATION ON SUBSIDIARIES AND SIGNIFICANT INVESTMENTS

The public disclosures under this section have been prepared in accordance with the Central Bank of Kuwait ("CBK") Rules and Regulations concerning Capital Adequacy Standard (Basel III) vide circular reference 2/RB, RBA/A336/2014 dated 24 June 2014, which apply to Ahli United Bank, Kuwait ("the Bank" or "AUBK"). The disclosures under this section consist of disclosures of the Bank and its subsidiary (together known as "the Group").

The Bank's principal subsidiary is Kuwait and Middle East Financial Investment Company K.S.C.P. ("the Subsidiary"), a company incorporated in the State of Kuwait and engaged in investment management activities and regulated by the CBK and the Capital Market Authority ("CMA"). The Bank held 50.12% effective interest in KMEFIC at 31 December 2016 (2015: 50.18%). The Bank owns 30% (31 December 2015: 30% owned by KMEFIC) equity interest in Middle East Financial Investment Company, an unquoted company incorporated in the Kingdom of Saudi Arabia engaged in investment activities.

The Board of Directors of the Bank in December 2015 approved to sell its entire equity interest in a non-converted asset and recorded this as assets held for sale as per IFRS 5.

Investments by the Bank in the Group are in accordance with the CBK instruction No.2/BSA/143/2003 on Organization of Local Bank's Investment Policy and subsequent amendments/ updates.

INFORMATION RELATED TO THE CAPITAL STRUCTURE OF THE LICENSED BANK

The Group's capital comprises Tier (1) capital which demonstrates the Group's strength and includes share capital, reserves, non-controlling interest, minus the treasury shares, dividends declared, goodwill, intangible assets and investments, additional tier (1) capital includes additional paid in capital and non-controlling interest and tier (2) consists of non-controlling interest and general provision up to 1.25% of the total credit risk weighted assets according to CBK rules and regulations.

The authorized, issued and fully paid share capital as at 31 December 2016 comprises 1,870,958,005 (Post dividend) (31 December 2015: 1,732,368,523 (Post dividend)) ordinary shares of 100 Fils each (31 December 2015: 100 Fils each). In accordance with the CBK instruction vide circular 2/IBS/101/2003 and subsequent amendments/ updates, the Group may purchase treasury shares up to 10% of the issued shares. No cash dividend is paid on treasury shares held by the Group.

During October 2016, the Group issued USD 200 million (31 December 2016: KD 60.64 million) Perpetual Non-Cumulative Non-Convertible Additional Tier 1 Regulation S Mudaraba Sukuk (AT1 Sukuk) which has been classified as additional tier (1) capital in accordance with CBK's Basel III regulations.

The Group does not have structured or complex capital instruments which are prohibited by Islamic Shari'ah principles.

INFORMATION RELATED TO THE CAPITAL STRUCTURE OF THE LICENSED BANK (CONTINUED)

BASEL III - PILLAR III DISCLOSURES (CONTINUED)

Table 1 - Capital Structure

Details 2016KD 000

2015KD 000

Common Equity Tier 1

Paid up share capital 187,096 173,237

Property revaluation reserve 10,050 10,014

Cumulative changes in fair value reserve 3,924 7,792

Profit equalization reserve 2,313 2,313

Statutory Reserve 74,199 69,962

General Reserve 22,660 22,660

Treasury share reserves 974 974

Other disclosed reserve 12,913 13,036

Retained earnings 95,523 93,037

Less:

Treasury shares (43,957) (43,957)

Total Common Equity Tier 1 365,695 349,068

Additional Tier 1

Perpetual Tier 1 Sukuk 60,640 -

Eligible non-controlling interest in consolidated subsidiaries - 1,146

Total Additional Tier 1 60,640 1,146

Total Core Capital 426,335 350,214

Tier 2 capital

Eligible non-controlling interest in consolidated subsidiaries - 228

General provision (up to 1.25%) 31,416 29,678

Total Tier 2 capital 31,416 29,906

Total Eligible Capital 457,751 380,120

100 101


Table 2 - Reconciliation between the statement of financial position and the regulatory capital elements - December 2016

Step 1

Details

2016KD 000

Statement Of Financial Position As Per Published

Financial Statement

Under Regulatory Scope Of

Consolidation

Asset




Financing receivables 2,706,054 2,823,341*


Investment in associate 10,162 10,162

Investment properties 23,055 23,055

Premises and equipment 31,393 31,393

Other assets and intangibles 19,253 19,253

Total assets 3,692,161 3,809,448

Liabilities

Deposits from banks and other financial institutions 702,152 -**

Deposits from customers 2,491,871 -**

Other liabilities 52,450 -**

Total liabilities 3,246,473 -

Equity

Share capital 173,237 187,096

Reserves 255,768 222,556***


Attributable to the Bank's equity shareholders 385,048 365,695

Perpetual Tier 1 Sukuk 60,640 60,640

Total equity 445,688 426,335

* Difference is due to inclusion of general provision which was deducted for the accounting consolidation.** Liabilities are not considered in the capital adequacy computations under Basel III Pillar I.*** Difference is due to accrual for the profit distribution on the AT1 Sukuk.


Step 2

Details

2016KD 000


Financial Statement


ConsolidationReference

Asset

Cash and balances with banks

- Cash items 17,060 17,060 -

- Bank balances with CBK 14,632 14,632 -

- Bank balances at other banks 12,452 12,452 -

Deposits with Central Bank of Kuwait 426,847 426,847 -

Deposits with other banks 227,280 227,280 -

Financing receivables 2,706,054 2,823,341 -

Investments available for sale 203,973 203,973 -

Investment in associate 10,162 10,162 -

Investment properties 23,055 23,055 -

Premises and equipment 31,393 31,393 -

Other assets and intangibles 19,253 19,253 -

Total assets 3,692,161 3,809,448 -

Liabilities

Deposits from banks and other financial institutions 702,152 - -

Deposits from customers 2,491,871 - -

Other liabilities 52,450 - -

Total liabilities 3,246,473 - -



102 103


Details

2016KD 000


Financial Statement



Equity

Share capital 173,237 187,096 (a)

Treasury shares (43,957) (43,957) (b)

Reserves

- Statutory reserve 74,199 74,199 (c)

- Voluntary reserve 22,660 22,660 (d)

- Cumulative changes in fair value 3,924 3,924 (e)

- Property revaluation reserve 10,050 10,050 (f)

- Treasury share reserve 974 974 (g)

- Other disclosed reserves 12,913 12,913 (h)

- Profit equalisation reserve - 2,313 (i)

- Retained earnings 131,048 95,523* (j)

Attributable to the Bank's equity shareholders 385,048 365,695 -

Perpetual Tier 1 Sukuk (AT1 Sukuk) 60,640 60,640 (k)

Total equity 445,688 426,335 -

* Profit equalization reserve reclassified from "Retained earnings" and shown separately. Additional difference is due to accrual for the profit distribution on the AT1 Sukuk. Moreover, proposed dividends and bonus shares deducted from the "Retained earnings" and proposed bonus shares added to "Common Equity Tier (1)".


Step 2 (continued)


Step 3

Details

2016KD 000

Component Of Regulatory Capital Reported By The

Bank

Source Based On Reference

Of The Balance Sheet Under The Regulatory Scope Of Consolidation

From Step 2

Share capital 187,096 (a)

Retained earnings 95,523 (j)

Property revaluation surplus 10,050 (f)

Cumulative changes in fair value 3,924 (e)

Profit equalisation reserve 2,313 (i)

Statutory reserve 74,199 (c)

Voluntary reserve 22,660 (d)

Treasury share reserve 974 (g)

Other disclosed reserves 12,913 (h)

Common Equity Tier (1) capital before regulatory adjustments 409,652 -

Treasury shares (43,957) (b)

Common Equity Tier (1) capital 365,695 -

Additional Tier 1 capital (AT1 Sukuk) 60,640 (k)

Total Tier 1 Capital 426,335 -


104 105



Table 3 - Reconciliation between the statement of financial position and the regulatory capital elements - December 2015

Step 1

Details

2015KD 000


Financial Statement


Consolidation

Asset




Financing receivables 2,680,334 2,766,757*


Investment properties 29,572 29,572

Premises and equipment 30,954 30,954

Other assets and intangibles 14,816 37,810**

Assets classified as held for sale 22,994 -**

Total assets 3,904,303 3,990,726

Liabilities

Deposits from banks and other financial institutions 829,989 -***

Deposits from customers 2,660,629 -***

Other liabilities 49,351 -***

Liabilities directly associated with assets held for sale 3,499 -***

Total liabilities 3,543,468 -***

Equity

Share capital 157,488 173,237*****

Reserves 242,627 219,788*****


Attributable to the Bank's equity shareholders 356,158 349,068

Non-controlling interests 4,677 1,374****

Total equity 360,835 350,442

* Difference is due to inclusion of general provision which was deducted for the accounting consolidation.** Differences are due to inclusion of "Assets held for sale" in other exposures under regulatory reporting which was separately disclosed in the "Statement of financial position".*** Liabilities are not considered in the capital adequacy computations under Basel III Pillar I.**** Difference is due to calculation of minority interest as per the Basel III guidelines.***** Difference is due to proposed dividends and bonus shares.



Step 2

Details

2015KD 000


Financial Statement



Asset

Cash and balances with banks

- Cash items 16,183 16,183 -

- Bank balances with CBK 47,511 47,511 -

- Bank balances at other banks 280,761 280,761 -

Deposits with Central Bank of Kuwait 265,199 265,199 -

Deposits with other banks 376,812 376,812 -

Financing receivables 2,680,334 2,766,757 -

Investments available for sale 139,167 139,167 -

Investment properties 29,572 29,572 -

Premises and equipment 30,954 30,954 -

Other assets and intangibles 14,816 37,810 -

Assets classified as held for sale 22,994 - -

Total assets 3,904,303 3,990,726 -

Liabilities

Deposits from banks and other financial institutions 829,989 - -

Deposits from customers 2,660,629 - -

Other liabilities 49,351 - -

Liabilities directly associated with assets held for sale 3,499 - -

Total liabilities 3,543,468 - -

106 107



Step 2 (continued)

Details

2015KD 000


Financial Statement



Equity

Share capital 157,488 173,237* (a)

Treasury shares (43,957) (43,957) (b)

Reserves

- Statutory reserve 69,962 69,962 (c)

- Voluntary reserve 22,660 22,660 (d)

- Cumulative changes in fair value 7,792 7,792 (e)

- Property revaluation surplus 10,014 10,014 (f)

- Treasury share reserve 974 974 (g)

- Other disclosed reserves 13,036 13,036 (h)

- Profit equalisation reserve - 2,313* (i)

- Retained earnings 118,189 93,037* (j)

Attributable to Bank's equity shareholders 356,158 349,068 -

Non-controlling interests

- Common Equity Tier (1) 4,677 - (k)

- Additional Tier (1) - 1,146 (l)

- Tier (2) - 228 (m)

Total equity 360,835 350,442 -

* Profit equalization reserve reclassified from "Retained earnings" and shown separately. Moreover, proposed dividends and bonus shares deducted from the "Retained earnings" and proposed bonus shares added to "Common Equity Tier (1)".



Step 3

Details

2015KD 000

Component Of Regulatory Capital Reported By The

Bank

Source Based On Reference

Of The Balance Sheet Under The Regulatory Scope Of Consolidation

From Step 2

Share capital 173,237 (a)

Retained earnings 93,037 (j)

Property revaluation surplus 10,014 (f)

Cumulative changes in fair value 7,792 (e)

Profit equalisation reserve 2,313 (i)

Statutory reserve 69,962 (c)

Voluntary reserve 22,660 (d)

Treasury share reserve 974 (g)

Other disclosed reserves 13,036 (h)

Common Equity Tier (1) capital before regulatory adjustments 393,025

Treasury shares (43,957) (b)

Common Equity Tier (1) capital 349,068

Non-controlling interests

- Additional Tier (1) 1,146 (l)

- Tier (2) 228 (m)

Total 350,442 -

108 109



Table 4 - Main features of regulatory capital instruments

Share Capital AT1 Sukuk

Issuer Ahli United Bank K.S.C.P.

Ahli United Sukuk Limited, an exempted company registered in the Cayman Islands with incorporation number 313772 with its registered office at MaplesFS Limited, PO Box 1093, Queensgate House, Grand Cayman, KY1-1102, Cayman Islands.

Unique identifier (e.g. CUSIP, ISIN or Bloomberg identifier for private placement)

ALMUTAHED XS1508651665 / 150865166

Governing laws of the instrument

Law No. 32 of 1968, as amended, concerning currency, the Central Bank of Kuwait and the organisation of the banking business and Companies Law No. 1 of 2016.

English Law

Type of Capital (CET1, AT1 or T2) CET1 AT1

Eligible at solo/group/ group and solo Group Group & solo

Instrument type Equity instrument Deeply subordinated Mudaraba Sukuk

Amount recognised in regulatory capital

KD 187,096 thousands (Post dividends) (2015: KD 173,237 thousand (Post dividend))

KD 60,640 thousand (USD 200,000 thousand)

Par value of instrument 100 Fils each USD 1,000

Accounting classification Equity (CET1) Equity (AT1)

Original date of issuance Various 25 October 2016

Perpetual or dated Perpetual Perpetual

Issuer call subject to prior supervisory approval

Not applicable Yes

Optional call date and redemption amount

Not applicable25 October 2021 at par value of the instruments

Subsequent call dates, if applicable Not applicable25 April and 25 October every year, commencing 25 October 2021

Fixed or floating dividend/coupon FloatingFixed (Subject to profit-rate reset after every 5 years)

Profit rate Not applicable 5.5% per annum

Existence of a dividend stopper Not applicable Yes

Fully discretionary, partially discretionary or mandatory

Fully discretionary Fully discretionary

Noncumulative or cumulative Noncumulative Noncumulative

Convertible or non-convertible Non-convertible Non-convertible

Write-down feature Not applicable Yes, in case of non-viability loss event



Table 4 - Main features of regulatory capital instruments (continued)

Share Capital AT1 Sukuk

If write-down, write-down trigger Not applicable

A non-viability event means that the CBK has informed Ahli United Bank Kuwait in writing that it has determined that a trigger event has occurred. A trigger event would have occurred if any of the following events occur:¥ Ahli United Bank Kuwait is instructed

by the CBK to write-off or convert the AT1 Sukuk on the grounds on non-viability; or

¥ An immediate injection of capital is required, by way of an emergency intervention, without which Ahli United Bank Kuwait would become non-viable

If write-down, full or partial Not applicable Full or partial (On pro rata basis)

If write-down, permanent or temporary

Not applicable Permanent

Position in subordination hierarchy in liquidation (specify instrument type immediately senior to instrument)

Equity InstrumentDeeply subordinated, senior only to ordinary shares

Non-compliant transitioned features None None

110 111


INFORMATION ON LICENSED BANK'S CAPITAL ADEQUACY

The process of assessing the capital requirements of the Group commences with the compilation of the annual business plan by individual business units which are then consolidated into the annual budget plan of the Group. The annual budget plan provides an estimate of the overall growth in assets, its impact on capital and targeted profitability which helps the Group in capital management.

Annual dividend payout, is prudently determined and proposed by the Board of Directors ("the Board"), endeavoring to meet shareholder expectations while ensuring adequate retention of capital to support budgeted growth.

The Bank seeks to maintain sufficient capital to meet its current and projected business requirements commensurate with Board approved business plans/strategic initiatives by developing/ maintaining an optimal Tier I / Tier II capital mix while having sufficient cushion over and above the mandatory regulatory minimum capital requirements set by the Central Bank of Kuwait for its operations. As per Group standards, the Bank is required to maintain at least 0.5% cushion over the regulatory minimum at all points in time.

The Group assesses the adequacy of its capital to support its current and future activities on an ongoing basis. Risk weighted assets and capital are monitored periodically to assess the quantum of capital available to support assets growth and optimally deploy capital to achieve targeted returns.

The Group regularly monitors its credit and market risks exposures, limits transactions with specific counterparties, and continually assesses the creditworthiness of counterparties to avoid any unexpected capital charge.

The Bank has been given the credit rating of 'A2' and 'A+' by Moody's and Fitch respectively. Given the favorable ratings, the Bank is confident of meeting any additional capital requirements including resorting to eligible Shari'ah compliant instruments at competitive pricing to support any need for regulatory capital requirement and maintaining it at optimal levels.

Currently the Group's measurement of capital requirement is based on the CBK guidelines on capital adequacy. However the Group ultimately aims to achieve a convergence of the regulatory capital with economic capital as it adopts advanced risk measurements for performance evaluation and capital adequacy.

At 31st of December 2016, the total Capital Adequacy Ratio 17.51% (Post dividend) (31 December 2015: 15.23% (Post dividend)) compared to the ratio required by regulatory authorities of 13.5% (31 December 2015: 12.5%) and Tier (1) Capital 16.31% (Post dividend) (31 December 2015: 14.03% (Post dividend)) and CET1 Capital 13.99% (Post dividend) (31 December 2015: 13.99% (Post dividend)).

¥ The percentage of the total Capital Adequacy Ratio is derived from dividing the Eligible Capital (CET (1) + AT (1) + Tier (2)) by the total risk weighted exposure (credit risk weighted exposure + market risk weighted exposure + operational risk weighted exposure)

¥ The percentage of the Tier (1) Capital is derived from dividing the core capital (CET (1) + AT 1) by the total risk weighted exposure (credit risk weighted exposure + market risk weighted exposure + operational risk weighted exposure)

¥ The percentage of the CET1 Capital is derived from dividing the common equity capital (CET1) by the total risk weighted exposure (credit risk weighted exposure + market risk weighted exposure + operational risk weighted exposure)

The Group ensures the fulfillment of Central Bank of Kuwait requirements in relation to capital adequacy through monitoring the internal limits which are supported by a special capital planning mechanism.


INFORMATION ON LICENSED BANK'S CAPITAL ADEQUACY (CONTINUED)

Table 5 - Capital requirement for Credit, Market and Operational Risks

Standard Portfolio

2016KD 000

2015KD 000

Risk Weighted Assets

Minimum Capital

Requirement

Risk Weighted Assets

Minimum Capital

Requirement

Claims on banks 82,536 10,981 158,870 19,477

Claims on corporate 1,614,055 213,735 1,496,376 183,120

Claims on regulatory retail 369,234 48,760 329,343 40,193

Past due exposures 30,209 3,988 23,859 2,912

Goods & commodity other than real estate 9 1 514 63

Investments in real estate and real estate inventory

46,110 6,088 59,144 7,217

Share & commercial real estate financing 235,848 31,143 207,059 25,272

Securitized Sukuk 97,296 12,846 64,394 7,858

Other exposures 88,934 11,746 87,345 10,663

Total credit risk weighted assets 2,564,231 339,288 2,426,904 296,775

Credit risk weighted assets adjustments (94,572) (12,767) (65,829) (8,229)

Net credit risk weighted exposure 2,469,659 - 2,361,075 -

Minimum capital requirement for credit risk - 326,521 - 288,546

Minimum market risk capital charge 1,136 153 1,493 187

Minimum operational risk capital charge 193,989 26,189 186,120 23,265

Total - 352,863 - 311,998

INFORMATION RELATED TO A LICENSED BANK'S INTERNAL CAPITAL ADEQUACY ASSESSMENT PROCESS (ICAAP)

The Board and Senior Management take active interest in the overall capital adequacy assessment process. The Bank takes reasonable care in organizing and controlling its affairs responsibly and effectively. This is supported by adopting risk management systems in line with industry best practices and maintaining adequate financial resources.

Internal Capital Adequacy Assessment Process (ICAAP) provides the foundation as to how the Bank internally assesses the additional capital requirements of the Bank. It is intended to:¥ Determine the level of capital required to support the risk profile of the Bank over and above the minimum capital adequacy

required by the Central Bank of Kuwait;¥ Assess and quantifies the additional risks under Pillar 2 and correspondingly required capital to cover those risks¥ Stresses Bank's exposure to risk areas under Pillar 1 (Minimum Capital Requirements) and those under Pillar 2 (Supervisory

Review Process);¥ Assess available risk mitigation techniques and their impact on gross exposures;¥ Help in capital and liquidity planning to support current and future capital and funding requirements vis-à-vis business growth

targets;¥ Provide robust management information system regarding coverage, scenarios and key assumptions used, segregation of

roles, independent review, reporting the outcome and periodicity of such reporting; and¥ Provide a guidance in the business decision-making process vis-à-vis capital adequacy requirements and its impact.

112 113


INFORMATION RELATED TO A LICENSED BANK'S INTERNAL CAPITAL ADEQUACY ASSESSMENT PROCESS (ICAAP) (CONTINUED)

The Bank's ICAAP comprises a comprehensive analysis of the Bank's key risks. Below are the key risks that form part of the Bank's ICAAP under Pillar 1 and Pillar 2:

Risks covered under Pillar 1 (impact on profit & loss)¥ Credit risk¥ Operational risk¥ Market risk

Risks covered under pillar 1 (impact on equity)¥ Investment risk

Risks covered under pillar 2 (impact on risk-weighted assets)¥ Credit concentration risk

- Group exposure- Sectorial exposure

¥ Underestimation of credit risk¥ Residual Credit Risk due to standardized approach¥ Fraud risk¥ Profit rate risk ¥ Liquidity risk¥ Residual market risk¥ Legal risk¥ Regulatory & Shari'ah non-compliance risk¥ Reputational risk¥ Strategic risk

The stress testing under the Bank's ICAAP Policy is to determine the Bank's financial position from plausible to severe scenarios. Stress testing also provides an indication of the appropriate level of capital necessary to ensure the economic viability of the Bank in the face of deteriorating business conditions. ICAAP is an ongoing process and reviewed by management on a semiannual basis.

Stress Testing

Stress testing and scenario analysis are essential tools that the Bank employs for its capital management and planning as well as risk management process.

Stress testing is an evaluation of the Bank's financial position under multiple scenarios that try to capture potentially adverse conditions. It covers a wide range of risks and business areas as an Enterprise-wide risk assessment, quantification, impact analysis and decision making accordingly. Consequently it alerts the Bank's management to adverse unexpected outcomes related to a variety of risks and provides an indication of how much capital might be needed to absorb losses, should economic shocks occur.


INFORMATION RELATED TO A LICENSED BANK'S INTERNAL CAPITAL ADEQUACY ASSESSMENT PROCESS (ICAAP) (CONTINUED)

Stress Testing (continued)

In consultation with the Board of Directors and Senior Management, the process takes into account the following major considerations, which are then communicated across all the business units. These include the following:

¥ Risks that the Bank is and may be exposed to as well as assessment of adequacy of compensating control processes.¥ Assessment of business conditions prevailing in the markets.¥ Assessment of the legal and regulatory environments pertaining to the business activities and sources of financing.¥ Short-term and medium-term business plans and strategies to achieve such plans.¥ Assessment of the level of capital required to protect the Bank against anticipated as well as unanticipated business risks.¥ Sources of capital.¥ Profit distribution.¥ Supplementary funding.

While stress tests provide an indication of the appropriate level of capital necessary to endure deteriorating economic conditions, the Bank alternatively employs other actions in order to help mitigate increasing levels of risk. In this connection, stress testing is a supplementary tool to other risk management approaches and measures.

INFORMATION RELATED TO A LICENSED BANK'S RISK MANAGEMENT

The Bank maintains a strong risk management culture and manages the risk / reward relationship within and across each of the major risk-based lines of business. The Bank continuously reviews its risk management policies and practices to ensure that it is not subject to large asset valuation and earnings volatility. Stress testing is also conducted on a periodical basis to sensitize the secured exposures with Real Estate and Shares, along with a comprehensive sensitization of the portfolio in relation to stress scenarios. The Board, senior management, risk officers, and line managers contribute to effective bank wide risk management. The Board defines its expectations, and through its oversight determines its accomplishment. The Board also has ultimate responsibility for risk management as they set the tone and other components of an enterprise-wide risk management framework. Risk officers have the responsibility for monitoring progress and for assisting line managers in reporting relevant risk information. The line managers are directly responsible for all business booked in their respective domains. The effective relationship between these parties significantly contributes to the improvement in the Bank risk management practices as this leads to the timely identification of risk and facilitation of appropriate response.

The Risk Management Division (RMD) structure has a distinct identity and independence from business units. RMD is headed by General Manager Risk Management reporting to the Board's Risk Committee. The division is comprised of the following units to address the pertinent risk exposure of the Bank:- Credit risk- Market and liquidity risk- Operational risk- Risk management- Credit control- Remedial accounts unit- System security unit- Credit administration unit

RMD's main responsibilities are to:1. Ensures implementation of risk framework, risk strategy 2. Development and updating of risk management policies and procedures 3. Setting up the Bank's risk appetite which is to be duly approved by the Board4. Implementation of risk management tools to identify, assess, monitor, control and mitigate risks5. Managing risks by identification, assessment, monitoring and control 6. Providing periodic reports to the Board and the Board approved committees to assist in taking informed decisions7. Building a risk awareness culture in the Bank by providing regular training and other awareness campaigns

114 115

INFORMATION RELATED TO A LICENSED BANK'S RISK MANAGEMENT (CONTINUED)

The following committees have the overall responsibility and authorities vested in them for the day-to-day risk management activities of the Bank. Authorities vested in the committees are exercised within the objectives and policies approved by the Board, and subject to the rules and regulations laid down by the CBK.

1. Board Risk Committee (BRC) assists the Board of Directors of the Bank in fulfilling its oversight responsibilities related to present and emerging risk issues, strategies and appetite associated with the Bank's banking and credit activities including the investment portfolio. BRC recommends to the Board the risk management policies and framework, ensures adherence to the risk appetite policy and provides oversight on major risk categories

2. Executive Committee (EC) assists the Board in discharging its responsibilities in two capacities, deputizing between Board meetings on matters normally reserved to the Board's own decision and discharging responsibilities delegated by the Board including credit, investment, liquidity and market risks, in excess of limits assigned to other committees

3. Shari'ah Supervisory Board (SSB), whose members are assigned by the General Assembly, supervises and controls the validity of the Group's activities to ensure that they comply with principles and rulings of the Islamic Shari'ah, and provides its recommendations. It has the right to submit written objections to the Board of Directors with respect to any of the Group's activities which it considers non-compliant with any of the principles and rulings of the Islamic Shari'ah

4. Senior Credit Committee (SCC) approves financing proposals with limits in excess of those assigned to the Credit Committee (CC) and within the parameters that have been set by the Board. In addition, SCC reviews and approves country, bank and investment exposures within the prescribed limits. Whenever necessary, SCC makes the appropriate recommendations to the EC and the Board on related matters

5. Credit Committee (CC) reviews and approves financing proposals within parameters that have been set by the Board. It also assists the SCC, EC and BRC in managing the Bank's exposure to credit risk

6. Credit Evaluation and Provisioning Committee (CEPC) evaluates the overall quality of investment and finance portfolio, ensures that irregular investment and finance transactions are classified based on the CBK guidelines, ensures adequate provisions are taken and assists the CC, SCC, EC, BRC and the Board in managing the Bank's exposure to credit risk

7. Assets and Liabilities Committee (ALCO) meets periodically to review and approve strategies relating to the management of assets and liabilities including liquidity, profit rate, foreign exchange, cost of funds, cost allocation, deposit pricing matrix and strategic trading positions

8. The Risk Management Committee (RMC) meets at least once in a calendar quarter to monitor and ensures risk management framework, policies and procedures are applied across all divisions of the Bank. RMC assists the BRC and the Board in fulfilling its oversight responsibilities related to risk management practices, implementation and on-going assessment of the risk framework. Moreover, it also provides update to the Board committees and a leadership role in shaping the Bank's risk management policies

The Risk Management function of the subsidiary is managed by its independent Board of Directors and Senior Management. The Bank's nominee directors on the Board of Directors of the subsidiary through its oversight manage and monitor the risk management activities of the subsidiary.

The following sections below, detail the risks inherent in the activities undertaken by the Bank, their nature and approach adopted towards management/ mitigation of these risks.

Strategic Risk

The Bank defines strategic risk as the current or prospective impact on the Bank's earnings, capital, and risks arising from changes in environment in which the Bank operates, from adverse strategic decisions, improper implementation of decision or lack of responsiveness to industry strength, economic direction or technological changes. In this regard the Bank has put in place strategic risk framework to identify, measure, monitor and report strategic risk exposures. For the purposes of strategic risk the sources of risks are from ¥ Inadequate strategic governance framework;¥ Inadequate identification of factors that impact the strategy and/or business plans;¥ Insufficient planning and resource allocation process;¥ Failure in execution of plans, projects and initiatives; and¥ Issues related to environment dynamics - internal and external including products, services and practices of the Bank.

Strategic risk will be primarily assessed in terms of the controls available to mitigate such risks and the Bank's ability to successfully implement its goals under its long term strategic plan.



Financing Risk

Financing risk is the risk that one party to a financial instrument will fail to discharge an obligation on time and in full as contracted and cause the other party to incur a financial loss. Financing risk includes the major risks mentioned below:

Direct Financing RiskThe risk that actual customer obligations will not be repaid on time. Direct financing risk occurs in various Islamic products offered by the Bank, both secured and unsecured. It exists for the entire life of the transaction.

Contingent Financing RiskThe risk that potential contingent obligations will become actual obligations and will not be repaid on time. Contingent financing risk occurs in products offered by the Bank ranging from letters of credit and guarantees to unused financing commitments. It exists for the entire life of the transaction.

Issuer Spread RiskThe risk that the market value of a security or other financing instrument may change when the perceived or actual financing standing of the issuer changes thereby exposing the Bank to a financial loss. It is interrelated to price risk.

Pre-Settlement RiskThe risk that a counter-party with which the Bank trades may default on a contractual obligation before settlement of the contract.

Settlement RiskThe risk occurs when the counter-party fails to settle the transaction on settlement date.

The Bank's Financing Policy aims to promote a strong financing risk management architecture that includes financing policies, procedures and processes. The policy defines the areas and scope of financing activities undertaken by the Bank and its main goal is not simply to avoid losses, but to ensure achievement of targeted financial results with a high degree of reliability in an efficient manner. The Bank's financing risk management focuses on the dynamic and interactive relationship between three financing extension processes.

Portfolio Strategy and PlanningThe portfolio strategy and planning phase defines desired financial results (in each Business Unit and for the Bank) and the credit standards required to achieve them. Business strategies integrate risks and meet defined hurdles for risk-adjusted return on capital. Facility structure translates this risk-conscious business strategy into terms and conditions that mitigate risk. Portfolio management establishes composition targets, monitors the results of these diverse business strategies on a continual basis, and allows the Bank to manage concentrations that can result from seemingly unrelated activities. Specifically, portfolio management involves setting concentration limits by standard dimensions so that no one category of assets or dimension of risk can materially harm the overall performance of the Bank.

Risk Management and Senior Management, on a monthly basis review portfolio concentrations in terms of geographical concentrations, individual economic sectors and credit risk rating to ensure that there are no undue concentrations in one sector or risk rating, and that the limits are within those set out by the Bank. These reports are submitted to the Board on a quarterly basis.

The Approving bodies (EC, SCC and CC) approve bank-wide portfolio credit concentration limits to corporate or individual counterparties based on the Bank's overall risk capacity, capital considerations, and assessment of the internal and external environments. The Bank's credit exposure to individuals or group of counterparties is in accordance with the CBK instructions BS/101/1995 on Maximum Credit Concentration Limits and subsequent amendments/ updates.

The process of periodic review and approval of country and bank limits is done within the Bank. The approved limits are then segregated sector wise, which cover Commercial Banking, Treasury and Investments.


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A summary of bank wide risk exposure incorporating all the above concentration limits plus discussion on past due, non performing financing (NPFs), collateral concentration, funding profile, capital adequacy and other risk management initiatives are reviewed by the Senior Management and Risk Management on monthly basis and reported to the Board on quarterly basis.

Financing Origination and MaintenanceIn the Financing Origination and Maintenance phase, each Business Unit solicits, evaluates and manages credit according to the strategies and portfolio parameters established in the portfolio strategy and planning phase. Transactions are generated within well-defined target market criteria, product structure and are approved on a risk-adjusted basis through the use of risk rating models.

The Bank uses a Credit Risk Rating ("CRR") model using Moody's system to assess the credit worthiness of borrowers. The Financing risk measurement methodology is geared towards measuring financing risk for the Corporate and Private Banking portfolios on a scale of 1 to 10 which meets the requirements of Bank for International Settlements (BIS). Risk ratings 1 to 6 for performing assets; and risk rating 7 to watch list accounts while ratings from 8 to 10 for classified accounts.

Financing maintenance involves processes to control documentation and disbursement, monitor timely repayment, value collateral and review the status of exposures. Within this phase, origination and underwriting for distribution to investors takes place. All financing proposals are reviewed independently by Credit Risk before proposals are sent for approval. A Post Fact Approval Unit independently reviews financing approvals to ensure that the approvals are consistent with policy and that all covenants of the approvals are met prior to disbursement of proceeds and throughout the tenure of the financing facilities.

Financing maintenance also includes early problem identification and remedial management of troubled exposures. The Special Asset Management Unit established within Risk Management Division provides a more focused attention to irregular and delinquent accounts. The primary objective of the unit is to develop effective strategies in order to either rehabilitate or restructure impaired financing.

The Bank constantly reviews the entire financing portfolio and conducts stress tests in order to provide senior management with clear indication of the composition, maximum exposure at risk, overall financing quality as well as identifying potential signs of weaknesses. As a result, the Bank is able to take timely and appropriate courses of action.

For secured financing exposure, the collateral valuation is updated in robust manner. Quoted securities are independently valued on a daily basis while the most recent independent valuation for other securities, including real estate, is obtained. Whenever a gap in minimum-security coverage is identified, the concerned counterparty is asked to provide collateral top-up and/or reduce the outstanding exposure to comply with the minimum-security requirement. For unsecured exposure, selected counterparties are requested to provide acceptable collateral. While structuring financing facilities, the Bank ensures that financing exposure will be repaid from clearly identifiable and unencumbered sources of repayment.

Performance Assessment and ReportingThe performance assessment and reporting phase allows both the Senior Management and Business Units to monitor results and improve performance continually. Both portfolio and process trends are monitored in order to make appropriate and timely adjustments to business strategies, portfolio parameters, and financing policies and credit origination and maintenance practices. This phase of the credit process draws on information within the Bank and external benchmarks to help evaluate performance.

Credit performance is assessed through analysis of:1. Portfolio concentrations by obligor, industry, risk rating, tenor, product, collateral and other dimensions2. Credit quality indicators3. Exceptions to risk appetite policy4. Other policy exceptions

The Bank has adopted an internal Account Profitability Model (APM) to determine the profitability of Corporate and Private Banking accounts. The methodology is based on the Risk-Adjusted Return on Capital (RAROC).

In addition, periodic review of both portfolio and process are performed by the Business Units as well as by Risk Management and Audit Division. In accordance with the instructions of the CBK dated 18 December 1996, setting out the rules and regulations regarding the classification of financing facilities, the Bank has a Credit Classification and Evaluation Committee which is composed of senior management. The Committee studies and evaluates existing financing facilities of each customer of the Bank, and identifies any abnormal situations and difficulties associated with a customer's position which might cause the debt to be classified as irregular and to determine an appropriate provisioning level.


Financing Risk (continued)

Portfolio Strategy and Planning (continued)


Market Risk

The Bank defines "Market risk" as the uncertainty in future earnings, of the Bank's on and off balance sheet positions, resulting from changes in market conditions i.e. changes in prices of assets, currency rates and profit rates. Market risk pertains to the profit, equity, foreign exchange and commodity risks in the Bank's trading and banking books.

Market Risk Management addresses the following areas: ¥ Quantitative parameters that define the acceptable level of market risk;¥ Authorized instruments and hedging policies for managing risk exposures; and¥ Exposure limits.

Risk Exposure ReportingRisk Management Division submits on a monthly basis the risk exposure report to senior management.

Periodic Stress TestingRisk Management Division, on a regular basis, prepares the stress test report covering profit rate risk in the banking book and liquidity risk. This exercise is conducted in order to assess the Bank's exposure to certain stress scenarios.

The Market Risk Management policy covers the following broad areas:Profit rate risk management in the banking book;

The Bank assesses its profit rate risk from an earnings perspective in the balance sheet through gapping analysis based on the re-pricing mismatches of assets and liabilities. Given the Islamic nature of the Bank's assets and liabilities and the fact that many of its assets are re-priced on roll-over date basis, there is generally no significant exposure to profit rate risk in the banking book.

Profit rate risk or price risk due to profit rates arises when fixed-income investments are present valued against changing profit rates or yield curves and varying issuer credit spreads. The Bank faces this risk if profit rates or issuer spreads increase - resulting in a negative valuation impact on fixed-income investments i.e. Sukuks.

Foreign exchange risk management in the banking book;Foreign exchange risk in the banking book arises from a currency mismatch between the Bank's assets and liabilities. The Bank views itself as a Kuwaiti entity with Kuwaiti Dinars as its functional currency. Conventional methods such as limiting the net open positions, are used to manage any significant risk in other currencies. Assets carried at fair values that are not denominated in the Bank's functional currency are hedged using non-derivative Islamic financial liabilities for foreign currency risk, such as borrowing foreign currency to fund respective foreign currency assets.

Risk Management Division monitors the various foreign exchange limits (overnight, forward gap, stop loss, etc.) on a daily basis and the report summarizing all these are presented to ALCO on a regular basis.

Equity risk management in the trading book and banking book;Equity price risk arises from the changes in fair values of equity investments. Values of individual securities can fluctuate in response to a variety of factors, other than movements in the profit or exchange rates. The equity price risk could be due to entity or issuer specific issues or it could be due to general systemic reasons. For example market valuations of equity securities may respond to factors such as operating results of the company, rights issues, key corporate decisions, changes in credit ratings of the securities and other market changes. Additionally, the equity prices could also be affected due to the market reasons which are not related to the company itself, e.g. tightening of monetary policy, budget deficit, economic downturn and overall dimmed consumer sentiment.

The Bank does not have any exposure in equities in trading book. Equity risk in the banking book could be mitigated through diversification of investments in terms of risk sector, geography, equity issuer, beta and other market dynamics.


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Liquidity Risk

The Bank defines liquidity risk as its ability to meet all present and future financial obligations in a timely manner and without undue effort and cost. Liquidity risk also entails that the Bank is able to liquidate its unencumbered assets with a minimal additional liquidity asset cost.

The following key factors are taken into consideration while assessing and managing the liquidity risk of the Bank:¥ The Bank keeps a well-diversified base for funding sources comprising a portfolio of retail customers, large corporate and

institutions, small and medium enterprises, high net worth individuals without significant correlation or concentrations thereby diversifying the funding base and mitigating concentration risks.

¥ The past behavioral pattern analysis of Bank's main liabilities, management expects large portion of our customers' deposits to be rolled over at contractual maturity.

¥ As per Central Bank of Kuwait rules and regulations the Bank keeps at least 18% of its deposits in qualifying liquid assets.¥ Commitments for financing are approved after taking into account the Bank's overall liquidity position.¥ The Bank calculates its high quality liquid assets against net cash outflows in 30-days as part of CBK's Basel III Liquidity

Coverage Ratio (LCR). LCR is prepared on daily basis and submitted to CBK on monthly basis after being reviewed by both of the Bank's external auditors.

¥ The Bank calculates Basel III Net Stable Funding Ratio (NSFR) to determine as how the Bank's balance sheet is positioned with respect to its long-term or stable required funding against stable available funding. NSFR is prepared on daily basis and submitted to CBK on monthly basis after being reviewed by both of the Bank's external auditors.

In application of the general guidelines highlighted above, the Bank maintains, reviews and reports the following:

A liquidity gapping report is likewise prepared following the CBK guidelines which show periodic and cumulative net outflows between asset and liability run-off profiled in terms of their contractual maturities.

A monthly liquidity stress test report is submitted to senior management. This report summarizes the 8-week liquidity forecast taking into account the behavioral adjustments, duly approved by ALCO, and presents different scenarios for efficient management of liquidity risk.

In order to supplement the existing liquidity risk monitoring reports, a set of liquidity ratios including Financing to Deposit Ratio (FDR), are monitored on a regular basis to manage liquidity funding profile of the Bank.

A liquidity contingency plan to address systemic and localized liquidity emergencies is reviewed periodically to ensure that it is kept up to date and in line with the business continuity plan.




Liquidity Risk (continued)


Table 6 - Maturity analysis of liabilities

2016KD 000

Standard PortfolioUp to 3 Months

3 to 12 Months

Over 1 Year Total

Deposits from banks and other financial institutions

311,878 349,999 40,275 702,152

Deposits from customers 2,034,724 443,124 14,023 2,491,871


Total 2,385,363 803,629 57,481 3,246,473

2015KD 000

Standard PortfolioUp to 3 Months

3 to 12 Months

Over 1 Year Total

Deposits from banks and financial institutions 633,862 170,814 25,313 829,989

Deposit from customers 2,142,583 500,555 17,491 2,660,629


Liabilities directly associated with assets held for sale

- 3,499 - 3,499

Total 2,816,469 682,262 44,737 3,543,468

Operational Risk

The Bank has adopted the Basel's definition of Operational Risk which states that any risk arising from inadequate or failed internal processes, people or systems or from external events. The definition includes legal risk but excludes reputation and strategic risk.

Moreover, being an Islamic Bank, the Bank has been through an enterprise wide assessment of potential risks, has devised robust control processes, updated policy and procedures documents and educated staff on Islamic products, processes and systems. These are complemented by the Shari'ah Board to ensure that the Bank's activities comply with the principles and rulings of the Islamic Shari'ah.

The Operational Risk management framework provides the Bank with the foundation for a comprehensive and an effective operational risk management program with the following major objectives:¥ Operational Risk Policies and procedures - the Bank has operational risk policies and procedures which are being updated on

a periodic basis.¥ Operational Risk Management - the Bank has outlined the process of identifying, assessing, monitoring and mitigating

operational risks by implementing various operational risk tools such as operational risk self-assessment, key risk indicators, operational risk approval process.

¥ Loss Recording Policy - The Bank has the process of recording all actual losses and near miss events as per the Basel accord.¥ Reporting - Operational Risk Management submits reports to Board sanctioned committees and Senior Management

highlighting their analysis, thus enabling these committees and Senior Management to take risk based business decisions.¥ New Products/ Process/ System Changes - All the new products, processes, and any significant change in the existing process

and change in system will be reviewed by Operational Risk.

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¥ Business Continuity Management - Business Continuity Plans have been designed, developed and implemented for all business units to recover all critical business functions at the time of disaster scenarios. Business Impact Analysis has also been done on an yearly basis to identify all the critical processes, systems, department dependencies and critical resources to recover the processes.

¥ Risk Awareness - The Bank is committed to train its employees on Operational Risk Management to ensure all employees are able to understand and identify operational risk in their respective business areas.

¥ Outsourcing - An integral part of Operational Risk Management is associated with oversight of outsourcing of services. Operational Risk Management and concerned business units evaluate all the risks associated with such outsourcing and ensure proper risk mitigation.

The Bank defines "contingency planning", Disaster Recovery Plan (DRP) and Business Continuity Plan (BCP) as the process of identifying critical information systems and business functions and developing plans to enable those systems and functions to be resumed in the event of a disruption with minimal disruption.

Business Impact Analysis (BIA) is being performed to assess the critical functions in the Bank and plans are being developed accordingly to ensure we recover all such identified critical processes at the time of disaster.

The Bank performs regular testing to ensure that contingency plans are effective. During the testing process, management verifies that the business unit plans complement the information systems plans that are in effect for mainframe functions.

The Bank has enhanced its Business Continuity Management by implementing an Active/ Active environment to ensure Recovery Time Objective is minimal since all the Bank's systems will be automatically default to the secondary data center and vice-versa in case of any disaster.

The Technical DRP is the foundation on which the remaining three factors have been built up e.g. the business continuity plan or recovery process is developed, reviewed and updated based on the progress in the technical disaster recovery front. In case of disaster at Head Office, all the data is replicated at DR site on real-time basis.

The Bank has been conducting semi-annually tests which includes, but not limited to: 1. Full BCP test where Head Office, including data center, is not available and all systems and processes are recovered from the

BCP Site.2. System/ applications testing - one or more application are not available from the primary data center and are recovered from

the Site 2 (DR Site)3. Floor Testing - one or more floors got disconnected from primary data center and all applications are recovered from Site 2

data center.

Results of the all the tests are presented to RMC and BRC.

BCP procedures are updated regularly in line with any technical changes implemented by IT. The exercise also requires the end users to accomplish a "business impact analysis" to assess and support business continuity in the end-users' respective areas.

The above operational risk initiatives comply in all material respects with the CBK instructions dated 14 November 1996 regarding general guidelines for Internal Control systems and directives issued on 13 October 2003 regarding "Sound Practices for the Management and Control of Operational Risks".

Moreover, the Bank has conducted fire drills. The results of these tests were satisfactory.

Additionally, fire drills are conducted semi-annually to ensure readiness in case of actual fire. Floor wardens are identified from all departments and trained to assist staff in evacuation.


Operational Risk (continued)


Reputational Risk

Reputational risk is the potential that negative publicity regarding an institution's business practices, whether true or not, could cause a decline in the customer base, costly litigation, or revenue reductions. The extent of reputational loss is normally measured by comparing the decline in a firm's market value.

The safeguarding of the Bank's reputation is of paramount importance to its continued operations and is the responsibility of every member of staff. Board, the RMC, and Senior Management ensure that a full appraisal of any reputational implications is made before strategic decisions are taken.

The standards and policies, which are integral to the Bank's system of Internal Control, are communicated through policies and manuals and appropriate staff training.

The Bank's management anticipates and responds appropriately and promptly to changes of a market/regulatory nature that impacts the Bank's reputation. This fosters a sound culture that is well adopted throughout the Bank and has proven very effective over time.

In addition, the Bank has a very effective Internal Control environment and management of customer complaints, whether these are raised to the Bank's staff or escalated to the regulators.

Data Security Management

Data Security is a fundamental element in the Bank's overall Position and well-being; breaches in security often pose an immediate threat. Lapses in data security could result in breaches of privacy, theft or corruption of information, contamination of programs and theft of resources or assets. An unsecured network may allow access to sensitive information (e.g., personnel, financings, payroll records, customer information). In order to safeguard the Bank from the various security threats a robust information security program has been established. A few of the core elements are discussed below:¥ The Bank has deployed a well-defined information security framework (Policies, Procedures, Processes, Guidelines), which forms the

basis for protecting critical information. The policy is circulated to employees, third party vendors, partners and others to demonstrate that the Bank takes the security of data seriously. The Bank's main statement of policy is to implement a secure information system by identifying the responsibilities at every level of information handling i.e. from data ownership (encoding) to data access. The comprehensive Information security framework and policy covers not only the technical aspects of security, but also defines how Bank employees should treat sensitive information, this is to ensure:

- Data confidentiality - Availability of resources- Data integrity

¥ Well defined baselines are in place to handle core infrastructure including but not limited to firewalls, intrusion detection and prevention, network devices, databases servers. These baselines identify the minimal configurations required to ensure security.

¥ To ensure the integrity of critical systems the Bank maintains change management procedures in addition to audit logs.¥ Configuration assessment, periodic vulnerability assessment and penetration testing (internally and externally) on infrastructure

components are carried out to ensure that the Bank maintains a good security posture.¥ The Bank analyzes network traffic to important critical servers and network devices on daily basis and proactively blocks any

suspicious activity to ensure that any unseen security risks are controlled.¥ The Bank also provides security guidelines on banking projects to establish an equitable and standard approach.¥ Periodic audits are conducted to ensure compliance with the information security framework set by the Bank.¥ In the area of Payment Cards security, the Bank attained PCI-DSS certification and is recertified annually.¥ The Bank achieved ISO27001:2013 certification and is recertified annually.¥ Periodic security awareness for the new joiners and current staff.¥ A comprehensive cyber security assessment was carried out in 2016 by a third party service provider to assess the Bank's security

controls (Internal/ external penetration and vulnerability assessment, security configuration review, network architecture review). The service provider also carried out a phishing campaign to assess the awareness level of the staff.

¥ The Bank is subscribed with a pronounced anti-phishing company to take down any phishing sites in timely manner.¥ The Bank acquired a state of the art Advance Threat Detection (ATD) protection appliances to protect us from zero-day attacks (new

malwares).¥ The Bank acquired a comprehensive Data Loss Prevention (DLP) solution to restrict unauthorized data leakage.¥ Enhanced our Swift systems security framework by introducing modern security controls (after the recent swift incidents in 2016).¥ Mobile Device Management (MDM) solution will be implemented in Q1 2017.



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Legal and Compliance

Legal risks represent the possibility of incurring a monetary loss as a result of an inability to enforce contracts/ agreements signed by the Bank due to faulty documentation or improper drafting. As a general rule, the Bank ensures that counterparties and customers have legal and necessary authorities to engage in contracts and transactions with the Bank and that obligations arising from these transactions are enforceable.

Legal Division ensures that the Bank is compliant with all legislation applicable to the Bank's business activities. Meanwhile, the Compliance Unit ensures that the Bank is compliant with all the requirements of CBK and any other regulatory entity, to which the Bank is held responsible to directly communicate or report. Part of the Compliance Unit's main responsibilities is to comply with the CBK's instruction regarding combating money laundering and terrorist financing. Policy and procedures manual are updated on regular basis and regulatory reporting is conducted and delivered within the appropriate time frames.

The Bank, whenever required, follows international standards and adopts best market practices when it comes to risk management activities. RMD remains aware of developments both within the organization as well as in the marketplace to ensure that the Bank may quickly adapt its risk management policies for any significant changes. The risk control programs are periodically benchmarked against regulatory standards and industry best practices.

Whilst the Bank adheres to the regulatory standards and best market practices, it also recognizes the fact that the myriad of risks, affecting different parts of the Bank's risk-taking activities is continuously evolving. The biggest challenge, therefore, is keeping the information updated and relevant to facilitate better understanding of risk and effective response. To this end, RMD periodically performs a re-evaluation of significant risk management policies and procedures and develops action plans to correct any weaknesses. This also ensures that the Bank moves further along the continuum in terms of sophistication and analytical tools with respect to each of the risk dimensions.

INFORMATION RELATED TO A LICENSED BANK'S COUNTERPARTY CREDIT RISK

The Bank faces Counterparty Credit Risk ("CCR") or two-way risk in terms of FX Waad Contracts, where the mark-to-market could be on either side.

In order to cover CCR, the Bank has setup FX limits for clients as well as banks. Setting up limits is based on usual limit setting process of financial review, past history, transaction requirements and other credit worthiness criteria.

The Bank actively monitors all those FX Waad contracts based on valuation on forward points by performing daily mark-to-market and uses Credit Value Adjustment (CVA) based on standardized approach as per CBK guidelines to account for potential counterparty credit deterioration. The Bank has setup thresholds where counterparty negative mark-to-market is compared with FX limit as well as transactional FX amount.

A daily monitoring of the Bank's exposure to counterparties against approved limits and tenor is presented to senior management. The Bank periodically reviews the latest available quantitative and qualitative information on the counterparties and based on the findings, limits and tenor are adjusted accordingly.

Waad transactions are reported gross and there are no netting arrangements or collaterals. The table below shows the fair value and notional amount of the Waad transactions:

Table 7 - Waad Transactions

Standard Portfolio

2016KD 000

2015KD 000

Assets(Positive)


Notional Amount

Assets(Positive)


Notional Amount

Waad Contracts 123 168 12,345 591 520 71,517



INFORMATION RELATED TO A LICENSED BANK'S INVESTMENT & FINANCE EXPOSURES

Credit Risk Management

The objective of Credit Risk Management is to establish and maintain a performing financing portfolio that minimizes the incidence of customer default. The process of risk management begins with the relationship manager who is responsible to assess the markets in which the customer operates and evaluate their credit requests before recommending the same to the respective approving authorities. The Board of Directors determines the authorities for various approving levels including Executive Committee, Senior Credit Committee and Credit Committee. In AUBK, credit decisions are taken, based on an overall assessment of the customer's profile primarily relating to its ability to service the due obligations. Collateral is taken as security to mitigate loss in the event of a default by the customer.

All the applications including consumer financing, are reviewed independently in the business before being submitted to the risk management department for assessment and recommendation. The Credit Committee deliberates on the recommendation of risk management department and takes appropriate decision. All applications which are beyond the scope of approving authority assigned to the Credit Committee are elevated to the next approving level.

Finance facilities with overdue amounts of 90 days or less are identified as past due. In line with regulatory guidelines, facilities with overdue amounts of more than 90 days are classified as either sub-standard, doubtful or bad depending on the number of days which the amounts are overdue.

The provision for impairment of credit facilities covers losses where there is objective evidence that losses may be present in components of the finance facilities portfolio at the balance sheet date. These have been estimated based on historical patterns of losses in each component, the credit ratings allotted to the borrowers and reflecting the current economic climate in which the borrowers operate. Besides, as per the CBK's requirements, a minimum general provision of 1% for cash facilities and 0.5% for non-cash facilities is made on all asset based and proxy based facilities not subject to specific provision.

The Bank uses Moody's Risk Rating calculator to assign an internal risk rating to corporate customers. The internal ratings are mapped to the ratings of ECAI as below:

Risk Rating RR 1 RR 2 RR 3 RR 4 RR 5 RR 6 RR 7 RR 8 RR 9 RR 10

Moody's AaaAa

(1-3)A

(1-3)Baa (1-3)

Ba (1-3)

B (1-3)

Caa (1-3)

Ca C D

S&P AAAAA

(+/-)A

(+/-)BBB (+/-)

BB (+/-)

B (+/-)

CCC (+/-)

CC C D

Where available, the Bank uses External Credit Assessment Institutions (ECAI) ratings for categorizing riskiness of credit assets.

ECAI's have been used for the following standard portfolios

Standard Portfolio ECAI

Claims on bank Fitch, Moody's and Standard & Poor's


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Table 8 - Gross Credit Risk exposures before CRM

2016 - KD 000

Year End Balances Monthly Average Balances

Self-Financed URIA Total Self-

Financed URIA Total

Claims on cash Items 16,309 751 17,060 15,378 708 16,086Claims on sovereigns 422,174 19,435 441,609 472,589 21,756 494,345Claims on PSE 49,949 2,299 52,248 24,472 1,127 25,599Claims on banks 278,207 12,808 291,015 444,885 20,481 465,366Claims on corporate 2,094,215 96,410 2,190,625 2,116,733 97,446 2,214,179Claims on regulatory retail 378,784 17,438 396,222 363,706 16,744 380,450Past due exposures 76,294 3,512 79,806 73,198 3,370 76,568Inventory & commodity other than real estate

5 - 5 313 14 327

Investment in real estate and real estate inventory

22,040 1,015 23,055 23,032 1,060 24,092

Share & commercial real estate financing

316,073 14,550 330,623 358,428 16,501 374,929

Securitized Sukuk 184,238 8,482 192,720 138,692 6,385 145,077

Other exposures 70,445 3,243 73,688 81,913 3,771 85,684

Total 3,908,733 179,943 4,088,676 4,113,339 189,363 4,302,702

Average balances are calculated by averaging month-end balances of capital adequacy returns which is the most frequent reporting interval for management reporting purpose.

2015 - KD 000

Year End Balances Monthly Average Balances

Self-Financed URIA Total Self-

Financed URIA Total

Claims on cash Items 15,414 769 16,183 13,846 691 14,537Claims on sovereigns 297,541 14,843 312,384 369,768 18,446 388,214Claims on banks 677,613 33,802 711,415 554,792 27,676 582,468Claims on corporate 2,050,809 102,304 2,153,113 1,904,449 95,003 1,999,452Claims on regulatory retail 344,688 17,195 361,883 337,400 16,831 354,231Past due exposures 67,237 3,354 70,591 75,274 3,755 79,029Inventory & commodity other than real estate

261 13 274 750 37 787

Investment in real estate and real estate inventory

28,167 1,405 29,572 31,332 1,563 32,895


352,508 17,585 370,093 391,205 19,515 410,720

Securitized Sukuk 116,021 5,788 121,809 115,613 5,767 121,380Other exposures 83,195 4,150 87,345 78,965 3,939 82,904

Total 4,033,454 201,208 4,234,662 3,873,394 193,223 4,066,617

Average balances are calculated by averaging month-end balances of capital adequacy returns which is the most frequent reporting interval for management reporting purpose.

INFORMATION RELATED TO A LICENSED BANK'S INVESTMENT & FINANCE EXPOSURES (CONTINUED)

Credit Risk Management (continued)


Table 9 - Geographic Distribution of Exposures

2016 - KD 000

Standard Portfolio Kuwait Other Middle East Europe USA &

CanadaOther

countries Total

Cash items 17,060 - - - - 17,060

Claims on sovereigns 441,609 - - - - 441,609

Claims on PSE 52,248 52,248

Claims on banks 107,357 159,654 18,525 3,287 2,192 291,015

Claims on corporate 2,123,472 53,111 4,415 - 9,627 2,190,625

Claims on regulatory retail 396,222 - - - - 396,222

Past due exposures 58,099 21,707 - - - 79,806

Inventory & commodity other than real estate

5 - - - - 5


19,466 3,589 - - - 23,055


330,623 - - - - 330,623

Securitized Sukuk 94,546 - 6,217 - 91,957 192,720

Other exposures 61,771 11,608 309 - - 73,688

Total 3,702,478 249,669 29,466 3,287 103,776 4,088,676

2015 - KD 000

Standard Portfolio Kuwait Other Middle East Europe USA &

CanadaOther

countries Total

Cash items 16,183 - - - - 16,183

Claims on sovereigns 312,384 - - - - 312,384

Claims on banks 218,892 216,764 46,107 226,752 2,900 711,415

Claims on corporate 2,085,480 56,751 8,638 - 2,244 2,153,113

Claims on regulatory retail 361,883 - - - - 361,883

Past due exposures 51,474 19,117 - - - 70,591


274 - - - - 274


25,958 3,614 - - - 29,572


370,093 - - - - 370,093

Securitized Sukuk - 47,504 - 7,565 66,740 121,809

Other exposures 85,896 1,113 336 - - 87,345

Total 3,528,517 344,863 55,081 234,317 71,884 4,234,662

The exposures are allocated under each geographic unit based on the residence/ domicile of the obligor.




126 127

Table 10 - Distribution of Gross Exposures by Industry

2016 KD 000

Standard Portfolio Funded Unfunded Total

Trading & manufacturing 519,131 92,649 611,780

Banks & financial institutions 929,750 52,276 982,026

Construction & real estate 1,346,022 87,338 1,433,360

Others 1,014,547 46,963 1,061,510

Total 3,809,450 279,226 4,088,676

2015 KD 000

Standard Portfolio Funded Unfunded Total

Trading & manufacturing 539,032 84,763 623,795

Banks & financial institutions 1,204,282 54,593 1,258,875

Construction & real estate 1,414,469 69,960 1,484,429

Others 832,944 34,619 867,563

Total 3,990,727 243,935 4,234,662




Table 11 - Distribution of Gross Exposures by Residual Contractual Maturity

2016 - KD 000

Standard Portfolio Up to 1 Month

1 to 3 Months

3 to 12 Months Over 1 Year Total

Cash items 17,060 - - - 17,060

Claims on sovereigns 65,954 118,596 163,147 93,912 441,609

Claims on PSE 12,270 30,171 - 9,807 52,248

Claims on banks 143,394 102,793 35,420 9,408 291,015

Claims on corporate 545,492 766,730 634,850 243,553 2,190,625

Claims on regulatory retail 6,874 2,233 5,896 381,219 396,222

Past due exposures 79,806 - - - 79,806


5 - - - 5


- - - 23,055 23,055

Share & commercial real estate financing 84,131 68,756 152,909 24,827 330,623

Securitized Sukuk 73,767 15,119 15,315 88,519 192,720

Other exposures 2,686 9,155 7,790 54,057 73,688

Total 1,031,439 1,113,553 1,015,327 928,357 4,088,676

2015 - KD 000

Standard Portfolio Up to 1 Month

1 to 3 Months

3 to 12 Months Over 1 Year Total

Cash items 16,183 - - - 16,183

Claims on sovereigns 87,350 110,243 114,791 - 312,384

Claims on banks 588,606 73,849 38,980 9,980 711,415

Claims on corporate 623,342 681,498 536,481 311,792 2,153,113

Claims on regulatory retail 16,648 2,087 5,486 337,662 361,883

Past due exposures 70,591 - - - 70,591


274 - - - 274


- - - 29,572 29,572

Share & commercial real estate financing 65,248 108,039 144,315 52,491 370,093

Securitized Sukuk 33,368 33,372 7,167 47,902 121,809

Other exposures 14,745 551 24,501 47,548 87,345

Total 1,516,355 1,009,639 871,721 836,947 4,234,662




128 129

Table 12 - Impaired Financings and Provisions

2016 - KD 000

Standard Portfolio Impaired Financing

Past Due Financing

Specific Provisions

* Charge/ (Reversal)

For The Period

Write Off General Provisions

Trading & manufacturing 22,791 - 752 (1,481) 5,017 21,512

Banks & financial institutions 1,324 - - 1,227 1,227 2,865

Construction & real estate 37,455 3,207 1,198 181 - 46,108

Others 8,799 12,281 1,665 3,209 3,733 46,793

Total 70,369 15,488 3,615 3,136 9,977 117,278

2015 - KD 000

Standard Portfolio Impaired Financing

Past Due Financing

Specific Provisions

* Charge For The Period

Write Off General Provisions

Trading & manufacturing 29,205 295 7,250 6,524 690 16,895

Banks & financial institutions 1,385 - - (496) 146 2,596

Construction & real estate 28,939 14,104 1,017 (411) 793 41,441

Others 8,464 9,334 2,189 7,218 12,605 25,489

Total 67,993 23,733 10,456 12,835 14,234 86,421

The impaired financing and specific provision includes KD 21,750 thousand (31 December 2015: KD 21,566 thousand) and KD 43 thousand (31 December 2015: KD 2,449 thousand) respectively which relates to a party in United Arab Emirates. There are no other impaired or past due financings outside Kuwait.

* Charge for specific provision

As at 31 December 2016, the Bank carries a total provision of KD 120,893 thousand (31 December 2015: KD 96,877 thousand) including the above mentioned specific provision and general provision of minimum 1% on all claims on corporate and regulatory retail exposure (net of certain categories of collateral), that are not provided for specifically in line with CBK instructions. Profit amounting to KD 8,487 (31 December 2015: KD 6,172) has been suspended on the above mentioned impaired financing.

Table 13 - Movement in Specific Provision

Standard Portfolio2016 - KD 000 2015 - KD 000

Specific Provision Specific Provision

At 1 January 10,456 13,362

Charge for the year 3,136 14,837

Amounts written off (9,977) (14,234)

Transferred to assets classified as held for sale - (3,509)

At 31 December 3,615 10,456




Irregular and past due financing facilitiesIrregular Credit facilities (Impaired) are classified upon meeting conditions of irregularity defined by CBK and consist of the following categories:

Watch list Category requiring specific provisions:Includes regular clients but upon management's discretion, provisions have been taken to confront any possible future deterioration, in addition to credit facilities that are overdue for 90 days or less (inclusive). The specific provision percentage is determined based on each case and after a thorough study by the management and after deducting deferred, suspended profit and eligible collateral.

Sub-standard:If facilities are irregular for a period of 91-180 days (inclusive), a provision rate of minimum 20% shall be applied on the total of the facilities net of deferred and suspended profit and eligible collateral.

Doubtful Debts:If debts are irregular for a period of 181-365 days (inclusive), a provision rate of minimum 50% shall be applied on the total of the facilities net of deferred and suspended profit and eligible collateral.

Bad Debts:If debts are irregular for more than 365 days, a provision rate of 100% shall be applied on the total of the facilities net of deferred and suspended profit and eligible collateral.

Table 14 - Ageing of Past Due Exposure

Details

2016 KD 000

2015 KD 000

Past Due Exposure Past Due Exposure

Past due but not impaired

90 days or less 15,488 23,733

Past due and impaired

91-180 days 2,598 11,842

181-365 days 2,529 33,864

More than 365 days 65,242 22,287

At 31 December 85,857 91,726




130 131

Renegotiated financing:The Bank has not renegotiated any financial asset of major exposures that would otherwise be past due or impaired.

Table 15 - Exposure Post Risk Mitigation and Credit Conversion

Standard Portfolio

2016KD 000

2015KD 000

Rated Unrated Total Rated Unrated Total

Claims on banks 82,536 - 82,536 158,751 119 158,870

Claims on corporate - 1,614,055 1,614,055 - 1,496,376 1,496,376

Regulatory retail exposures - 369,234 369,234 - 329,343 329,343

Past due exposures - 30,209 30,209 - 23,859 23,859


- 9 9 - 514 514


- 46,110 46,110 - 59,144 59,144


- 235,848 235,848 - 207,059 207,059

Securitized Sukuk 97,296 - 97,296 64,394 - 64,394

Other exposures - 88,934 88,934 - 87,345 87,345

Total 179,832 2,384,399 2,564,231 223,145 2,203,759 2,426,904

Information Related to Financing Risk Mitigation

Collateral is obtained from client's pursuant to the Bank's appraisal of the financial position, solvency, reputation and past experience of the client and the Bank's estimation of the degree of financing risks. Adequate collateral coverage ratios are maintained by the Bank in line with CBK guidelines and Bank policies. In the event of a decline in value of collateral, additional coverage is sought by the Bank. A significant portion of the Bank's financing portfolio is adequately covered either by tangible collateral that adhere to the Islamic Shari'ah principles or assignment of revenues and third party receivables or other kind of support such as personal/corporate guarantees.

In order to mitigate the financing risk the Bank is exposed to, it accepts collateral in the form of cash (e.g., fixed deposits, deposit certificates and/or other savings instruments); shares/ portfolio of shares traded on recognized exchanges and are compliant with the Islamic Shari'ah principles and unconditional Stand-by letters of credit or bank guarantees by financial institutions having pre-approved limits covering principal amount plus profit.

In addition to the above, the Bank accepts lien on sponsored funds, mortgages on real estate properties and chattel, legal assignment of contracting works or supply contracts as well as legal assignment of rentals or leases.

With respect to counter-party guarantors, the Bank considers only those that fall within the acceptable criteria.

Where applicable, on and off-balance sheet netting are used to the extent allowed as per the provisions of the contracted documentation, legal right to set-off and there being no maturity mismatches.

The Bank has a system of periodic collateral valuation, monitoring, and follow-up for inadequate coverage.




This ensures that the Bank has an effective collateral management process, wherein:

1. The collateral are appraised periodically, following the CBK guidelines as the minimum time interval, e.g. real estate properties are appraised at least annually while shares/ portfolio of shares traded on recognized stock exchanges are monitored daily.

2. The minimum Financing to Value (FTV) of 60% is required upon granting share/real estate financing bearing in mind, that FTV for individual obligor maybe lower than that set parameters depending on the financing circumstances, structure of facility, and creditworthiness of the obligor.

3. the Bank executes documentation with borrowers empowering the Bank, the right to liquidate or take legal possession of the collateral, and

4. The obligor and the value of the collateral do not have a material positive correlation.

Financing exposure is reviewed monthly to ensure that there is no undue concentration. In the event that there is heavy concentration towards specific economic sector or counter-party, the Bank takes corrective actions including but not limited to sell down the related assets and/ or requires the client to put up sufficient liquid security.

Table 16 - Eligible Financial Collateral and Guarantees

Standard Portfolio

2016KD 000

2015KD 000

Gross Exposure

Eligible collaterals

Eligible Guarantees

Gross Exposure

Eligible collaterals

Eligible Guarantees

Claims on banks 291,015 23,373 - 711,415 23,178 -

Claims on corporate 2,190,624 576,569 - 2,153,112 656,737 -

Regulatory retail exposures 396,222 22,117 - 361,883 28,340 -

Past due exposures 79,807 21,417 - 70,591 24,358 -

Real Estate & shares trading 330,623 173,391 - 370,093 232,054 -

Total 3,288,291 816,867 - 3,667,094 964,667 -

Information Related to Market Risk Banking Book Currency and Commodity Positions and Trading Book Equity and Fixed-Income PositionsThe Bank currently follows the standardized approach in determining capital requirement for market risk on the trading book.

All banking book currency and commodity net open positions are considered for market risk capital charges. While equity risk and profit rate risk (Benchmark risk on account of fixed-income positions) is calculated on positions which are for the sole purposes of trading or booked as Held For Trading (HFT).

As the Bank does not involve in any trading in equity or fixed-income instruments, the market risk capital requirements are restricted to only banking book currency and commodity positions. The capital charges are calculated as per CBK criteria in accordance with Basel III guidelines.

Table 17 - Capital Requirement for Components of Market Risk

Standard Portfolio2016

KD 0002015

KD 000

Commodity risk 1 75

Equity position risk - -

Foreign exchange risk 152 112

Total 153 187




132 133

Information Related to Operational RiskOperational risk is defined by Bank as the risk of direct and indirect loss resulting from inadequate or failed internal processes, people or systems or from external events. The operational risk capital charge is calculated using the Basic Indicator Approach. As required under this approach, the Bank has computed its capital as a percentage of the positive average annual gross income of the previous three years. Gross income for this purpose is defined as net profit income plus net non-profit income. The Basel III accord requires banks to hold capital against operational risk. The accord offers a continuum of approaches from the simplest Basic Indicator Approach to the more advanced measurement approaches. The Bank has adopted the Basic Indicator Approach which is in line with CBK requirements.

Risk management is the essence of operational risk where different tools are applied for identification, assessment, monitoring, control and mitigate risks.

Risk identification is vital to the development of viable operational risk monitoring and control systems. Risk identification considers internal factors such as the Bank's structure, the nature of its activities, the quality of its human resources, organizational changes and employee turnover. It also examines external factors such as changes in the industry, major political and economic changes, and technological advances.

Following tools are implemented for managing risks

¥ Level 1 - Operational Risk Self-Assessment (ORSA) - it is a tool used to identify all inherent risks in the process along with its probability and impact to measure the risk value. We also assess the controls associated to that event and assess its effectiveness using historical data to arrive at residual risk/ risk severity.

- All the risks identified are classified as per BASEL event categories and this is an ongoing exercise where all departments are updating the ORSA as and when the risk or potential risk is being identified.

- Business Risk Officer and Division Head sign off on the ORSA after every calendar year and all risks are being presented to the Risk Management Committee.

¥ Level 2 - Key Risk Indicators (KRI) is the process of collecting and reporting on a selective set of quantitative measures that correlate with the likelihood of potential failures in a process. These indicators are not readily combined into a single aggregate, rather, they are useful on a comparative basis across similar processes and over time. They allow effective benchmarking of processes.

All KRIs are tracked on monthly basis and analysis is performed to see the risk trend whether the trend is increasing, decreasing or stable and accordingly mitigating actions are being taken to proactively mitigate the risk.

¥ Level 3 - Loss Data Collection. The Bank's collection of historical operational risk losses as well as "near misses" is an ongoing exercise.

Incident Management form is available for all staff in the Bank to report all actual or near miss events. In addition, every division submits the Operational Risk Disclosure certificate to certify that all incidents and loss events are reported to risk management as and when the same are detected.

¥ Level 4 - Operational Risk System - the Bank is in the process of implementing an Operational Risk system which will enable the capture and assessment of all risks based on impact and probability and provide risk severity levels. In addition it will also capture all Key Risk Indicators and perform trend analysis to assist in proactively mitigating those risks. Moreover, It will produce various reports/ dashboard for the Board and the Board approved committees.

Currently the system is under configurations and testing stage and will be implemented during 2017.

Operational risk weighted exposures calculated during the year 2016 amounted to KD 193,989 thousand (31 December 2015: KD 186,120 thousand) as per the Basic Indicator Approach. The amount calculated for operational risk weighted exposures is adequate to cover any projected risks to maintain a reasonable profit ratio for shareholders and investment account owners. The minimum required capital for operational risk exposures amounts to KD 26,188 thousand (31 December 2015: KD 23,265 thousand).







Table 18 - Capital Requirement for Operational Risk

Year2016

KD 0002015

KD 000

Net income from financing activities 30,723 25,672

Net income from investing activities 1,837 1,528

Fees and service income 2,666 2,484

Deduction:

Investment Account Holders' Share of Income (9,038) (6,419)

Total 26,188 23,265

Information Related to Investment SecuritiesInvestments in the banking book are made in Shari'ah compliant instruments and are classified at the time of acquisition into those acquired for capital gains and strategic investments. The Bank also has in its books, non-Shari'ah compliant investments that existed prior to conversion and which are carried over after conversion to an Islamic Bank. The Bank is in the process to liquidate these non-Shari'ah compliant investments from its books. Investments acquired with a view of generating income and profits from capital appreciation are reviewed periodically and disposed off at opportune instances.

The Bank reviews its strategic investment portfolio based on the industry, market and economic developments and then either liquidates or further consolidates holdings in these investments. Strategic investment represents the investment in other entities with long term objective in line with the overall Bank's strategy, rather than short term profit making.

In accordance with International Financial Reporting Standards, investment in Sukuks and equity positions in the banking book are classified as available for sale securities. Sukuks may also be classified as Held To Maturity (HTM). AFS investments are fair valued periodically and revaluation gains/ losses are accounted as cumulative changes in fair value in equity. For investments quoted in organized financial markets, fair value is determined by reference to quoted bid prices. Fair values of unquoted investments are determined by reference to the market value of a similar investment, on the expected discounted cash flows, or other appropriate valuation models. The significant assumptions used for valuation of unquoted equity securities include annual growth rate of cash flows and discount rates and illiquidity premium. Lower growth rate and higher discount rate, illiquidity discount will result in a lower fair value.

Equity investments whose fair value cannot be estimated accurately are carried at cost less impairment if any.

Table 19 - Investment Securities in Banking Book

Investment Type

2016KD 000

2015KD 000

Carrying Value Capital Charge Carrying Value Capital Charge

Publicly traded 193,464 26,028 118,934 14,819

Privately held 10,509 2,016 20,233 3,560

Total 203,973 28,044 139,167 18,379

134 135

Table 20 - Classification of Investment Available for Sale by Industry

Industry sector

2016KD 000

2015KD 000

Carrying ValueMinimum Capital

RequirementsCarrying Value

Minimum Capital Requirements

Banks and financial institutions 157,279 21,233 116,738 15,082

Services 28,419 3,821 6,781 827

Real estate 1,762 192 2,763 307

Others 16,513 2,798 12,885 2,163

Total 203,973 28,044 139,167 18,379

Publicly traded investments represent quoted securities traded on local and international stock exchanges. Privately held investments represent investments in unquoted securities and venture funds. The total value of investments in the banking book in the statement of financial position is KD 203,973 thousand (31 December 2015: KD 139,167 thousand ). Cumulative realized gain from sale of available for sale securities is KD 3,451 thousand (31 December 2015: KD 1,365 thousand). The total unrealized gain recognized in the equity is KD 3,924 thousand (31 December 2015: KD 7,792 thousand).

INVESTMENT ACCOUNTS

The Bank receives deposits from customers as part of several unrestricted investment accounts. These deposits are fixed-term, open-term, or renewable automatically with different investment rates.

These funds are used by the Bank in all finance activities that will achieve a targeted return. Investment returns are distributed among the Bank as a Mudarib and investment account holders on proportionate basis for each type of these accounts and the elapsed period of these funds.

The Bank also receives deposits from customers that are restricted. The Bank is investing these deposits as an investment agent (Wakeel).

Customers' deposits are received and invested according to certain regulations that are mentioned in the procedures manual and instructions guide to ascertain that these funds, whether they were in Kuwaiti Dinar or foreign currency, are invested according to Islamic Shari'ah principles.

Following are the Investment percentages for major Mudaraba based deposits used for the profit distribution:

Table 21 - Deposit Accounts Investment Percentage

Deposit CategoryInvestment Percentage Investment Percentage

2016 2015

Savings 60.00% 60.00%

1 Month 60.00% 60.00%

3 Months 60-62% 60-62%

6 Months 65.00% 65.00%

9 Months 70.00% 70.00%

1 Year 70-90% 70-90%




Table 22 - Classification of Deposit Accounts

Deposit categories

2016KD 000

2015KD 000

Profit Equalization

Reserve

Investment Risk Reserve

Profit Equalization

Reserve


Unrestricted 1,840 2,278 2,372 2,278

Restricted - - - -

Total 1,840 2,278 2,372 2,278

Table 23 - Deposit Accounts Ratios

Deposit Categories

2016KD 000

2015KD 000

Profit Rate Reserve To Profit-Sharing Deposits


To Profit-Sharing Deposits

Profit Distributed To Profit-Sharing Deposits

Profit Rate Reserve To Profit-Sharing Deposits


To Profit-Sharing Deposits

Profit Distributed To Profit-Sharing Deposits

Unrestricted 0.73% 0.91% 1.36% 0.83% 0.79% 1.26%

Restricted - - - - - -

SHARI'AH GOVERNANCE

Shari'ah Governance is a main pillar in any Islamic financial institution. The strengths of the Shari'ah Control Unit in any bank provides assurance on the solidity of its operations and accuracy of its businesses and income in compliance with Shari'ah rules and regulations. It will further protect the Bank from accepting expenses or incomes which do not comply with Islamic principles and places the transparency as main principle of the business values. During December 2016, CBK issued circular 2/RBA/369/2016 regarding Shari'ah governance which should be complied by 1 January 2018. The Bank is currently in the process of analyzing the gaps and implementation requirements.

Shari'ah Control Structure

Fatwa & Shari'ah Supervisory Board (Shari'ah Board)The Shari'ah Board is formed in Islamic Banks in Kuwait consisting of at least three members appointed by the AGM in compliance with the Memorandum and Articles of Association (AOA) and the Law number 30/2003. The AOA provides the terms of reference and responsibilities of the Shari'ah Board. The resolutions of the Shari'ah Board are enforceable and due for execution as specified and determined. The Shari'ah Department & Shari'ah Board are responsible to ensure compliance and report the results of the annual review to the AGM.

Shari'ah Executive CommitteeIt is an Executive Committee delegated by the Shari'ah Board responsible to study and review the matters referred to the committee by the Bank management or the Shari'ah Board.

INVESTMENT ACCOUNTS (CONTINUED)


136 137

Secretary of the Shari'ah BoardAttending the meetings and responsible for Shari'ah Board & Shari'ah Executive Committee meetings, prepares the agendas, minutes of meetings, circulates the resolutions and studies/ reviews all matters delegated or referred to him by the Shari'ah Board and Executive Committee. He has further to monitor the execution of the Shari'ah resolutions.

The Supervisory Authority on Revenues Received from Non-Shari'ah Compliant Sources or ActivitiesRevenues generated from non-Shari'ah compliant sources either pre-conversion to Islamic Bank or having resulted from some unintentional defective transactions contradicted with the Shari'ah guidelines are maintained under a restricted account. This account is monitored and controlled by the Supervisory Authority and no withdrawals are allowed prior to obtaining a permit from the authority according to the rules and laws determined by the Shari'ah Board.

Shari'ah Compliance Department

Shari'ah Audit Shari'ah Audit department carries out periodical audits on all departments of the Bank to ensure compliance with the resolutions of the Shari'ah Board. All findings are discussed with the concerned department and subsequently escalated to the Shari'ah Board.

Shari'ah Advisory & Training Part of the Shari'ah Compliance Department duties is to act as advisor on all inquiries or matters referred to the department for review, e.g. contracts, engagements, letters, policies, procedures and newspapers advertisements. The department, in coordination with Human Resources, arranges all the required training and career development plans for the Shari'ah related skills for employees at all levels. The Secretary of the Shari'ah Board is responsible to schedule and arrange all Shari'ah meetings, circulate the resolutions and follow up with management on all Shari'ah related matters to ensure that Shari'ah resolutions are properly maintained and communicated.

Shari'ah Violations

Violating the Shari'ah guidelines may result in turning the underlined revenue or expense to be non-Shari'ah compliant. The financial consequence of this violation is reported to the Shari'ah Board after discussing it with concerned department and all proceeds are transferred accordingly to the restricted account designed for that purpose which is used for charitable contributions upon proper approvals.

During 2016, no violation was observed at the Bank that may have a financial impact on the results of the Bank and its operations.

Violating the Shari'ah guidelines in other cases may not result in gaining any income or incurring expenses or does not have material financial impact on the Bank. In such circumstances, the Shari'ah Departments directs the concerned department to take the corrective action and monitors the compliance subsequently.

Zakat

In accordance with the Law No. 46 of 2006 and as per the resolution of the Ministry of Finance No. 58/2007, the Bank pays the Zakat. Occasionally, the Zakat covers the Zakat amount to be paid by the Bank's shareholders. However, The Bank is not responsible for paying Zakat on behalf of shareholders other than Tax Zakat. Any inquiries on Zakat are adequately addressed by the Shari'ah Department.

The amount of the Zakat for the financial year ended 31 December 2016 amounted to KD 419 thousand (31 December 2015: KD 449 thousand).

Remunerations of the Fatwa & Shari'ah Supervisory Board Members

The AGM endorses the appointment/ reappointment of the Shari'ah Board members and authorizes the Board of Directors to determine & pay the related remuneration. During the year, remuneration paid/ will be paid to the members of Shari'ah Board amounts to approximately KD 35 thousand (31 December 2015: KD 32 thousand).

SHARI'AH GOVERNANCE (CONTINUED)

Shari'ah Control Structure (continued)


RemunerationThe Bank has set up policies over remuneration practices and guides its remuneration based on performance and risk. For this purpose the Bank has set up a Compensation & Nominating Committee ("CNC") to independently assess and monitor remuneration systems.

CNC consists of three non-executive board members. CNC met 2 times during the year 2015. During the year, remuneration paid/ will be paid to the members of CNC amounts to KD 6,000 (31 December 2015: KD 6,000) approximately which is subject to approval of the Board of Directors.

The remuneration policy provides the basis of determining remuneration to the Group's employees, including material risk-takers based on their responsibilities and authority levels. Senior executives and material risk-takers comprise those whose activities have a significant impact on the Bank's risk profile and their divisional financial matrix (KPIs), which is cascaded from the annual business targets, expanded to incorporate risk measures (KRIs). These risk measures and weights shall be defined by respective business functions in concurrence with Risk Management. Remuneration is determined based on this policy guidelines including performance rewards and these policy guidelines are applicable to the Group. The material risk takers includes CEO and the business line executives of Corporate Banking, Retail Banking, Private Banking, Treasury and Direct Investments.

Remuneration includes a fixed component that rewards the capacity to hold a position in a satisfactory manner through the employee displaying the required skills and variable components that aim to reward collective and individual performance, depending on the smart objectives defined at the beginning of the period and conditional to meeting said objectives, according to the performance standards and risk parameters defined by the Bank.

In addition, for senior executives and key risk-takers, remuneration is aligned with prudent risk taking and quantitative and human judgement measures included for risk adjustment. Risk adjustment accounts for all type of risks including intangibles such as reputation risk, liquidity risk and cost of capital. Back testing and stress testing is required to test performance alignment of remuneration with risk.

The remuneration processes are designed to reward based on evaluation of performance and advice of external consultants are sought whenever required. Specific employee roles and responsibility related to performance metrics are designed in the form of Key Performance Indicators Matrices (KPIs) to continuously evaluate performance of executives and staff employees. Performances are evaluated based on smart objectives and their achievement measured on a transparent basis that are applied for determining rewards. The CNC regularly reviews the remuneration policy and updates as required.

The Bank takes into account the risk taken by business executives in determining remuneration where the future risks and crystallization of such risks are considered. In cases where the performance-related pay exceeds 60% of the senior executive's total annual salary, then the performance bonus portion above 60% is deferred for the subsequent 3 years subject to claw back rules in case of negative performance.

The Bank has put in place ex-ante operating profits, net profit, NPLs and ex-post matrices, like trends in NPLs, peer comparison in key matrix, etc., that are used to determine rewards taking long term view including deferred payment of such rewards.

The performance of the Bank's employees are measured through a performance management system with measurable metrics for performance rewards. Rewards will vary based on the performance of individual managers and employees which are linked to overall performance of the Bank and HR compares the rewards with the normal distribution curve to ensure consistency and that any variances have been investigated.

Performance assessment of the Bank's designated approved persons in the function of Risk Management, Internal Audit, Operations, Finance, Shari'ah audit, compliance and AML functions measured primarily on the achievement of the objectives and targets of their functions, ensuring independence from business areas. The performance assessment, fixed and variable compensations for the Heads of Audit and Compliance and the GM-Risk Management are specifically discussed by the committee and endorsed by the Chairman of Audit & Compliance Committee and approved by the CNC.

BANK REMUNERATION


138

Table 24 - Type of Remuneration

Senior management and material risk takers

2016KD 000

2015KD 000

Unrestricted Unrestricted

Fixed remunerations*

Cash based 2,688 2,810

Variable remuneration*

Cash based 637** 510**

Table 25 - Number of Employees and Remuneration Paid

Employees categories

2016KD 000

2015KD 000

Number Of Employees

Total Remuneration

Number Of Employees

Total Remuneration

Senior management* 14 1,805 18 1,825

Material risk takers* 26 1,520 32 1,495

Financial and control functions* 20 1,217 20 1,045

Table 26 - Number of Employees and Other Employment Benefits

2016KD 000

2015KD 000

Number Of Employees

AmountNumber Of Employees

Amount

End of service benefits (Senior Management and Material Risk-takers)*

40 241 50 331

* Some of the positions are duplicated in the categories senior management, material risk takers and Financial and control functions.** Variable remuneration is estimated using the prior year's variable remuneration and is subject to approval of the Board of Directors by the end of first quarter of 2017.

BANK REMUNERATION (CONTINUED)

Remuneration (continued)


Date post:	19-Jul-2020
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ANNUAL REPORT 2016 - Ahli United€¦ · 8 9 Dr. Anwar Al Mudhaf Chairman of Ahli United Bank...

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