NUMBERSTALK 9 - Ahli United

9NUMBERSTALKAnnual Report 2019

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

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

9IN THE NAME OF ALLAH,

THE MOST GRACIOUS,

THE MOST MERCIFUL

His Highness

Sheikh Nawaf Al-AhmadAl-Jaber Al-Sabah

Crown Prince of The State of Kuwait

His Highness

Sheikh Sabah Al-Ahmad Al-Jaber Al-Sabah

Amir of The State of Kuwait

Ahli United Bank K.S.C.P. Annual Report 2019

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increase in Customer Deposits to KD 2.7 billion compared to 201811%

increase in Total Assets to KD 4.4 billion compared to 2018

%

increase in Net Profit to KD 55 Million compared to 20187%

increase in Shareholders’ Equity to KD 0.5 billion compared to 20185.8%

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06THE CHAIRMAN’S STATEMENT

10CEO’S STATEMENT

18FATWA & SHARI’AH SUPERVISORY

BOARD REPORT

14THE BOARD OF DIRECTORS

20FATWA & SHARI’AH SUPERVISORY

BOARD MEMBERS

CONTENTS

22EXECUTIVE MANAGEMENT

30EXECUTIVE SUMMARY

62CONSOLIDSATED FINANCIAL

STATEMENTS

24FINANCIAL PERFORMANCE SUMMARY

39CORPORATE GOVERNANCE

68NOTES TO THE CONSOLIDATED

FINANCIAL STATEMENTS

26MANAGEMENT REPORT & PERFORMANCE ANALUSIS

56INDEPENDENT AUDITOR’S REPORT

111BASEL III PILLAR III - DISCLOSURES


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The Chairman’s Statement

AUB continues to pursue success while capitalizing on its clear strategy, strong presence and leading brand, let alone its long established history and unique position as the first bank in Kuwait since its inception on the 28th of February 1942.

Dr. Anwar Ali Al MudhafChairmanAhli United Bank K.S.C.P.


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Dear Valued Shareholders,On behalf of myself and the Board of Directors, I am truly honored to present to you the 54th Ahli United Bank (AUB) K.S.C.P Annual Report; highlighting AUB’s key achievements and consolidated financial statements for the financial year ending by the 31st of December 2019.

I have every reason to be proud of AUB’s leading position and prominent standing in the banking sector in the State of Kuwait; not to mention being one of the largest Sharia’h compliant banks. We, therefore, continued focusing on innovation to maintain sustainability and enhance our ability to consistently meet the requirements and aspirations of our clients, shareholders and employees. Our innovation and creativity driven strategy was absolutely essential to our success; not to mention the full attentiveness and good preparedness for all developments while demonstrating high flexibility. It was not therefore surprising to see how we consistently realized achievements one after the other.

AUB continues to pursue success while capitalizing on its clear strategy, strong presence and leading brand, let alone its long established history and unique position as the first bank in Kuwait since its inception on the 28th of February 1942. Over several decades and despite the varying political, economic and social conditions, AUB further developed and expanded its business activities, operated under different brand names, until in 1971, it became a 100% Kuwaiti bank under the name “Bank of Kuwait and Middle East”. 2002 witnessed a historical milestone, as the bank became part of AUB Group, capitalizing on its goodwill and preeminence in the banking industry. AUB reached the most remarkable turning point and significant breakthrough in its journey when it converted its business activities to comply with Islamic Shari’ah on April 1, 2010.

AUB has been consistently able to witness success while overcoming several challenges and arising conditions for 78 years. Today, AUB continues to capitalize on growth opportunities wherever they exist. The efforts exerted by the Executive Management in line with the plans and guidelines set by the Board of Directors have been fairly essential to AUB’s continued success.

2019 was an eventful year for AUB, featuring several achievements at different levels. AUB realized record high profits, earned several awards from internationally

recognized organizations, promoted Corporate Social Responsibility (CSR), maintained investments in its human wealth, as well as set up a prudent framework that could meet the regulatory requirements and follow international practices and recommendations.

I could affirm that AUB’s pursuit of digital transformation was the most significant achievement for AUB during 2019. Sustainable investment in state of the art technologies has been a key characteristic of our performance and a key component of our strategy. At AUB, recognized early on the significance of embracing digital transformation and latest technologies which would simplify and shorten the banking process and position AUB at the forefront, making banking with AUB an unrivalled experience!

In view of the above, I would like to emphasize that AUB intends to further support the role of the newly established Digital Transformation Department that will drive AUB towards innovation and apply the latest banking technologies.

Solid Financial PerformanceAUB’s effective strategy that is based customer centricity, human resources’ development and prudent risk management approach have obviously paid off in enhancing the 2019 consolidated financial statements. The positive achievements by AUB are a fair representation of the notable operational performance and strong financial indicators as AUB reported a net profit of KD 55 million in 2019 compared with KD 51.3 million in 2018, a growth by 7.3%.

AUB reported growth in total assets by 11.2% reaching KD 4.4 billion compared with KD 3.9 billion in the previous year. The financing receivables grew by 7.8% to reach KD 3 billion. The customers’ deposits, cautiously and prudently managed to achieve sustainable proceeds, increased by 11.2% to hit KD 2.7 billion during 2019. Shareholders’ equity grew by 5.8% total record KD 0.5 billion by the end of 2019.

The return on average equity (ROAE) and return on average assets (ROAA) recorded 12.7% and 1.4% respectively by the end of 2019; marking some of the highest returns in the market. The resultant earnings per share (EPS) increased to 27.8 Fils in 2019 compared to 25.8 Fils in 2018. AUB effectively adopted a conservative risk management approach; enhancing the quality of assets, reducing irregular financing to 1.26%, with the coverage ratio including collateral to 330%.

The Chairman’s Statement continued


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In addition to such achievements, AUB maintained a high capital adequacy ratio (CAR) before dividends at 16% as of the 31st of December 2019;, which is higher than the percentage set by regulators.

Maximizing Shareholders’ ProfitsIn view of these commendable results, the Board of Directors is pleased to propose to the General-Assembly the distribution of a cash dividend of 15 Fils per share, as well as 5% bonus shares of the issued and paid up capital (15 Fils per share and 5 shares per each 100 shares).

Focus on Corporate Governance and Risk Management AUB always seeks to sustain the highest standards in integrity and transparency that solidify the culture of corporate governance. In this context, AUB adopts a balanced governance framework that is aligned with regulatory requirements of applying governance principles and rules at Kuwaiti banks, and follows the international practices and recommendations to achieve AUB’s goals and maximize AUB’s value for its shareholders, clients and stakeholders. AUB continues to maintain a high standard of governance benchmarked against highly efficient standards and practices with the aim to foster a governance culture that maintains AUB’s values and financial integrity, as well as safeguards shareholders’ equity, secures depositors’ and stakeholders’ rights, and supports in making AUB’s vision a reality.

I would like to note that the Board of Directors continuously working collaboratively with the Executive Management to adopt the highest standards of corporate governance and enable AUB to consistently enhance its practices in alignment with the highest international standards. In 2019, AUB successfully adopted a risk strategy as part of the Bank’s overall integrated strategy, with a set of regulatory policies and regulations in place to ensure that AUB will continue to pursue its business activities according to the approved risk appetite and sustain independence of the internal and external audit functions.

International RecognitionDriven by its enormous potential and ongoing commitment to the highest professional standards which earn the trust of prestigious international rating agencies as a leading Shari’ah compliant banking and financial organization, AUB proudly sustained the positive assessments and ratings by international rating agencies. In addition, AUB earned several prestigious

awards from renowned global bodies known for closely monitoring and assessing the performance of banks and financial institutions. This a remarkable testimony to AUB’s effective business strategy and outstanding performance.

Sustainable Corporate Social Responsibility (CSR)AUB’s success is not only limited to its solid performance and ability to generate profits, rather it includes the Bank’s ability to support others and fulfil its obligations towards the communities in which it operates. CSR and sustainable development initiatives have long been considered a top priority by AUB. For over 78 years, CSR has been a key component of AUB’s culture and values.

Based on such an approach, AUB continues to strengthen its distinctive CSR role as inspired by the Vision of His Highness the Amir Sheikh Sabah Al Ahmad Al Jaber Al Sabah’s “New Kuwait 2035”, which addresses all aspects of the Kuwaiti society, enhances the quality of life, as well as places great emphasis on youth and environment. AUB’s early endeavors to adopt “Green Banking Practices” with the aim to improve the quality of assets and contribute to achieving sustainable development is another source of pride.

In 2019, AUB participated in several initiatives and projects designed to support the most disadvantaged segments of the society in line with AUB’s partnerships with several organizations fostering CSR activities.

Our Human Wealth is a Key Competitive EdgeIn light of the continuous development in the banking sector, human resources with diverse hands on expertise, as well as possessing professional and management skills stand out as a key competitive advantage and the most decisive factor to achieve and sustain success in the banking industry.

Now that ongoing technological breakthroughs have increased the competitive edge between banks, the development of human resources, maximizing abilities for innovation and creativity, in addition to adopting and leveraging constructive ideas have become essential to AUB’s business continuity.

Continuing to invest in its much valued human resources during 2019, AUB developed a well established plan to attract experienced professionals and national skilled youth. AUB launched a comprehensive talent management program



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AUB’s leadership succession plan, and placed a high priority on polishing its staff’s ability to cope with and take advantage of the digital transformation to the best interest of clients.

I have every reason to take pride in AUB’s preeminent position as a unique employer of choice, which is fairly demonstrated by AUB’s retention of several highly experienced professionals for more than 30 years.

Appreciation & GratitudeIn conclusion, on behalf of AUB Board of Directors, Executive Management and all staff, I am honored to extend appreciation to His Highness the Amir Sheikh Sabah Al Ahmad Al Jaber Al Sabah and His Highness the Crown Prince Sheikh Nawaf Al Ahmad Al Jaber Al Sabah, as we look forward to seeing Kuwait prosper and flourish at all times.

In addition, I would like to express gratitude to the Central Bank of Kuwait (CBK), especially CBK Governor Dr. Mohammad Y. Al-Hashel and all regulatory bodies in the State of Kuwait for their positive support to AUB.

Finally, I am pleased to express heartfelt thanks to our valued shareholders for their valued trust in AUB. I would like to also take the opportunity to share utmost appreciation to our Fatwa & Shari’ah Supervisory Board (FSSB) for their efforts, to our valued clients for their continued trust and loyalty, as well as to our Executive Management and employees for their collaborative contributions to maintain the ongoing growth and leading position of AUB.

Dr. Anwar Ali Al-MudhafChairman


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CEO’s Statement

Operationally, AUB’s ongoing digital transformation journey will be essential for strengthening its competitive edge, while improving its customer experience through deployment of new digital channels.

Jehad Al-HumaidhiActing Chief Executive OfficerAhli United Bank K.S.C.P.


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Dear Valued Shareholders,The ambitious relentless pursuit of constant development continues to serve as the key driving force for Ahli United Bank (AUB). Such a spirit and enthusiasm have been essential to AUB’s success and prominent standing for almost eight decades since its inception as the first bank to commence its operations in Kuwait.

Without any doubt, I am confident that we will continue realizing more success due to the dedication and reliability of our employees that are key in achieving our future strategy utilizing state-of-the-art technological solutions and innovations in our business to fulfill the aspirations of our customers.

Through this Annual Report, I am truly delighted for the opportunity to highlight AUB’s achievements over the past year.

Digital Transformation & Preparing for Future RequirementsAUB achieved its goals in the year of 2019 through its successful journey of digital transformation as a key step to prepare for future requirements. AUB set up the Digital Transformation Unit with the objective of enhancing the customers’ experience and open up new horizons of digitalized services. These include Internet and Mobile Banking, as well as Automated ATMs, POS, E-Payment Gateway, Call Centers, Interactive Voice Response (IVR). In addition, we rolled out initiatives to improve current manual processes by using automation and direct processing tools, and introducing automated banking processes solutions (Robotics) in certain operational functions to achieve greater operational efficiency and minimize human errors.

AUB has continued its digital transformation journey in a world where technological development is a key differentiator for success. On such basis, we launched our new and updated Mobile Banking application with its attractive interface and smooth functions. As a result, AUB earned The Best Mobile Banking Application Kuwait 2019 Award” by Banker Middle East (BME).

As added confirmation of our successful efforts in digital transformation, AUB Smart Branch at the Avenues Mall received “The Most Innovative Digital Banking Initiative Smart Branch Kuwait 2019 Award” from Global Banking & Finance Review.

In addition, AUB’s website (www.ahliunited.com.kw) was fully renovated and launched, which led to doubling the number of its visitors with many of them subscribing to the newly introduced marketing newsletter. The new website also included an online platform for on-boarding customer, as well as an advanced text and video chat service.

Enjoyable Banking Experience for CustomersWith the satisfaction of our customers a top priority for AUB, we do not spare any effort to grant them an enjoyable banking experience that is aligned with their aspirations while maintaining their trust and approval. Based on that, we expanded our range of Real-Estate products within the Retail Banking to include “Tawarruq”, while simplifying the process of approval and execution, while continuing to adhere to our prudent risk parameters. The consumer and installment finance receivables continued to grow, primarily due to the automated Shari’ah compliant financial brokerage and the broadened scope of the “Qard Hasan” (profit free financing) initiative.

AUB enriched its Premium Banking Package and set up the Wakala based Investment Account for its valued depositors. The enhanced pricing flexibility led to achieving a record growth of fixed deposits. The automotive finance sales hit a high record, mainly due to enhancing promotional channels, tuning the products criteria, as well as promotions in partnership with major automotive dealers and showrooms in Kuwait.

AUB consistently improved its flagship Al-Hassad Islamic Account which was positively received by customers, especially the unique draws during Eid Al Adha and Eid Al Fitr. This resulted in a rise in customers’ balances and Al Hassad Islamic Account earned the prestigious “Best Savings Product Kuwait 2019 Award” from Banker Middle East.

Corporate Banking continued its uniquely tailored products and services to fulfil the needs and requirements of corporate and institutional customers. This resulted in expanding the base of B2B customers benefiting from Internet Banking as a platform that provides holistic and secure electronic solutions to simplify banking transactions through integration between the system of AUB and the customers’ corporate planning systems. Such an accomplishment was recognized through AUB earning “The Best Online Cash Management

CEO’s Statement continued


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Bank Kuwait 2019 Award” in corporate banking for the third year in a row by Global Finance.

Additionally, AUB’s Personal Banking & Wealth Management was successful in developing facilities processing systems to ensure enhanced efficiency and decrease turnaround time. In recognition of these efforts, AUB’s Personal Banking earned “The Best Personal Banking Kuwait 2019 Award” for the third year by the Banker Magazine in collaboration with Private Wealth Management Magazine.

Key Financial HighlightsAUB achieved robust financial performance by realizing a net profit of KD 55 million in 2019 compared to KD 51.3 million in 2018, recording a 7.3% growth.

AUB reported an 11.2% growth in total assets, reaching KD 4.4 billion compared to KD 3.9 billion in 2018. Financing receivables grew by 7.8% to KD 3.0 billion, and customer deposits grew by 11.2% to KD 2.7 billion in 2019. Assets and deposits have been consistently prudently managed to ensure sustainable earnings. Shareholders’ equity increased by 5.8% to KD 0.5 billion by the end of 2019.

In term of the future, AUB will continue focusing on its core strategy to sustain business growth and development by diversifying its operations. Operationally, AUB’s ongoing digital transformation journey will be essential for strengthening its competitive edge, while improving its customer experience through deployment of new digital channels.

Appreciation & GratitudeIn conclusion, on behalf of AUB, I seize this opportunity to extend appreciation to His Highness the Amir Sheikh Sabah Al Ahmad Al Jaber Al Sabah and His Highness the Crown Prince Sheikh Nawaf Al Ahmad Al Jaber Al Sabah for their substantial support for all key sectors in Kuwait, namely the banking industry. Moreover, I would like to express gratitude to the Central Bank of Kuwait (CBK) for its continuous support to AUB and the Banking sector. In addition, I am pleased to express heartfelt acknowledgement to the Chairman and Members of the Board for their support and guidance, as well as to our valued shareholders and customers for supporting AUB’s remarkable success.

I would also reiterate gratitude and appreciation to AUB’s Executive Management and all staff for their sincere dedication and relentless efforts in leading and executing AUB’s vision to fulfil the expectations and aspirations of our valued shareholders and customers.

We look forward to 2020 as a new year, full of momentous achievements, robust performance and strong growth as a positive phase of AUB’s successful journey.

Jehad Al-HumaidhiActing Chief Executive Officer



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Board of Directors

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 of Banco ABC Brasil S.A.; 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 & CEO of Al-Razzi Holding Company , Chairman of Sama Educational Company; 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.

Mr. Al Nusf joined the Bank’s Board in May 2019. .

Qualifications & Experience: Mr. Raed Al Nusf holds a Bachelor’s degree in Accounting from Kuwait University. He has vast experience in Investment and financial sector.

Current Positions: Deputy Director General for Investment and Operations at The Public Institution for Social Security (PIFSS), in Kuwait. Chairman at Wafra International for Investment Corporation, Deputy Chairman at Wafra Intervest Corporation, and Vice Chairman at Ahli United Bank.

Former Positions: Chief Investment Officer, and the Manager for Equities & Portfolio Investment Department at The Public Institution for Social Security. Deputy Director – Investment Department, Assistant Deputy Director – Investment Department, Head of Private Equity Division, Deputy Head of Internal portfolio Division, and Investment Analyst – Internal portfolio Division at Kuwait Fund for Arab Economic Development. MR. RAED M. AL NUSF

(Non-Executive Director)

Vice Chairman, Member of the Compensation & Nominating Committee, Member of the Executive Committee

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: CEO of Sons of Shaker Alkazemi Ltd; Partner in Sons of Shaker Alkazemi Real Estate; CEO of Shaker Alkazemi General Trading Co.

Former Positions: Deputy Chairman Marsa Alam Holding Company K.S.C.C. ; Deputy General Manager Kazema Engineering Projects WLL., Director Zain (Kuwait, Jordan & Bahrain)

MR. JAMAL SHAKER AL KAZEMI (Non-Executive Director)

Member of Corporate Governance Committee, Member of the Executive Committee

DR. ANWAR ALI AL MUDHAF (Non-Executive Director)

Chairman of the Board, Chairman of Corporate Governance Committee


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Board of Directors continued

Mr. Adel El-Labban joined the Bank’s Board in March 2002.

Qualifications & Experience: Mr. ElLabban 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 extensive 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 - Deputy Chairman - United Bank for Commerce & Investment LSC, Libya - Deputy Chairman - Middle East Financial Investment Co. (Saudi Arabia)- Director - Ahli United Bank PLC, UK - Director - Ahli United Bank Ltd, United Arab Emirates

Former Positions: Chief Executive Officer and Director - United Bank of Kuwait PLC (UK), Managing Director - Commercial International Bank of Egypt (Egypt), Chairman - Commercial International Investment Company (Egypt), First Deputy Chairman - Ahli Bank SAOG (Oman); Deputy Chairman - Ahli United Bank SAE (Egypt), Deputy Chairman - Commercial Bank of PSC (Iraq), Vice President - Corporate Finance, Morgan Stanley (USA), Assistant Vice President - Arab Banking Corporation (Bahrain), Director Bahrain Bourse, formerly Bahrain Stock Exchange (Bahrain), Director Kuwait & Middle East Financial Investment Co. (Kuwait), Director - Bahrain Association of Banks (Bahrain)

MR. ADEL A. EL-LABBAN(Non-Executive Director)

Chairman of the Executive Committee, Member of Compensation & Nominating Committee

Sanjeev Baijal joined the Bank’s Board in March 2016.

Qualifications & Experience: Mr. Sanjeev Baijal is a senior banking and finance professional with 36 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; Second Deputy Chairman, 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

MR. SANJEEV BAIJAL(Non-Executive Director)

Member of Audit & Compliance Committee, Member of Compensation & Nominating Committee

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, UK.

Former 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. KEITH HENRY GALE (Non-Executive Director)

Chairman of Board Risk Committee, Member of the Executive Committee


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Mr. Michael Essex joined the Bank’s Board in March 2015.

Qualifications & 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.

Current Positions: Board Director, Chairman - Audit Committee, Compensation & Nomination Committee and Corporate Governance Committee Ahli United Bank SAE Egypt; Member, Investment Committee, APIS Growth Funds (UK); Board Director, Macquarie Bank, SBI India Infrastructure Fund (Singapore & India).

Former Positions: Director, Investment & Advisory Operations, MENA Region (20 countries-Pakistan to Morocco) 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.

MICHAEL GERALD ESSEX (Independent Director)

Chairman of Compensation & Nominating Committee, Member of the Audit & Compliance Committee Member of Board Risk Committe

Mr. Mohamed Tareq Mohamed Sadeq joined the Bank’s Board in March 2015.

Qualifications & Experience: Mr. Sadeq 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 Member of the Audit & Compliance Committee, Ahli United Bank S.A.E., Egypt, Independent Director and Chairman of the Audit and Compliance Committee of Al Baraka Bank (Pakistan) Limited and non— independent director and member of the Audit & Compliance Committee of National Bank of Bahrain B.S.C. Bahrain He is also an Independent Director on the Boards of Al Zayani Investments B.S.C. (c), Bahrain and Bahrain Golf Course Company B.S.C. (c), Bahrain . He is Advisor to a Family Office in the Kingdom of Bahrain.

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 East & 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 and healthcare • Chairman of Ibdar Bank B.S.C. (c), Bahrain.

MOHAMED TAREQ MOHAMED SADEQ MOHAMED AKBAR (Independent Director)

Chairman of Audit & Compliance Committee

Mr. O’Loan joined the Bank’s Board in July 2019.

Qualifications & Experience: Mr. David O’Loan holds a Master of Science degree in Treasury & Investment from Dublin City University and an MBA from University of Edinburgh. He is also a Qualified Accountant and a Fellow of the Association of Chartered Certified Accountants. He has over 25 years’ experience in the Financial Services Industry.

Current Positions: Deputy Group CEO – Treasury and Investments, Ahli United Bank B.S.C. - Bahrain.

Former Positions: Group Treasurer for J. Sainsbury Plc, UK; Deputy Group Treasurer, RBS Group, UK; Senior Vice President, Swiss Re Asset Management, Switzerland; Investment Director, Standard Life Investments, UK; Head of Treasury, BGB (Ireland) plc, Ireland; Manager, Citibank N.A, Ireland. MR. DAVID O’LOAN

(Non-Executive Director)

Member of Corporate Governance Committee, Member of Board Risk Committee


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Fatwa & Shari’ah Supervisory Report


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Fatwa & Shari’ah Supervisory Report continued


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Fatwa & Shari’ah Supervisory Board Members

- 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 Islamic Studies College.

- 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. KHALED MATHKOUR AL MATHKOURChairman

- 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. ABDULAZIZ KHALIFA AL QASSARExecutive Member

- Ph.D. in Shari’ah- The University of Jordan, (Fiqh Major).

- Faculty Member at Kuwait University, Comparative Fiqh Section- Shari’ah and Islamic StudiesCollege

- 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 FinancialInstitutions.

- Author of a number of studies and research works.

DR. ESSAM KHALAF AL ENEZIEMember

- Ph.D. in Shari’ah- The University of Cairo, Dar Alolom collage

- Professor of Comparative Fiqh at the Shari’ah and Islamic Studies College, Kuwait University- Member of the Shari’ah Council at the Accounting and Audit Board for Islamic Financial Institutions.

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

- Author of a number of studies & researches in Islamic Fiqh

DR. ALI IBRAHIM AL RASHEDMember


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Jehad Soud Al-HumaidiActing Chief Executive Officer

Ms. Jehad Al-Humaidhi has been with the Bank since 1984 holding several leadership positions in Information Technology, operations, administration, and Finance. During 2011, she held the position of General Manager of IT & Operations rising to Senior General Manager in 2016 before she got promoted to Deputy CEO - Banking Support Group in June 2018.

Ms. Al-Humaidhi is a Vice-Chairman of the Shared Electronic Banking Services Company (KNET) and a Board Member of the Gulf Custody Company and Vice-Chairman of The Credit Information Network of Kuwait (Ci-Net).

Ms. Al-Humaidhi holds a Bachelor of Science degree in Mathematics (Major) and Economics (Minor) from Kuwait University.

Tareq Muhmood Acting Chief Executive Officer (resigned on 1 December 2019).

Mr. Tareq Muhmood has over 24 years of banking experience. Prior to joining Ahli United Bank in July 2017, he was with ANZ for 6 years and HSBC Group for 18 years. With ANZ, he held several senior positions including Chief Executive Officer of ANZ in Korea and Vietnam, along with a Global Corporate Banking leadership role based out of Singapore. Mr. Muhmood started his career with HSBC in Hong Kong, and worked in various countries holding a variety of senior positions including HSBC’s Chief Executive Officer in Iraq and The Sultanate of Brunei. Mr. Muhmood holds a Bachelor of Science degree in Management Sciences from the University of Manchester, United Kingdom.

Mr. Muhmood resigned on 1 December 2019 and Ms. Jehad Saud Al-Humaidhi has been appointed as Acting Chief Executive Officer.

Hisham Zaghloul Deputy CEO - Corporate Banking

Mr. Hisham Zaghloul joined the Bank in 2007 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 also a Board Member in the following Financial Institutions: Commercial Bank of Iraq (Iraq), United Bank of Commerce and Investment (UBCI) in Libya and Middle East Financial Investment Company (MEFIC) in Saudi Arabia.

Mr. Hisham holds a Bachelor of Arts Degree in Economics from Faculty of Economics & Political Science - Cairo University.

Abdullah AlLangawy

General Manager-Treasury

Mr. Abdullah AlLangawy is the General Manager-Treasury at Ahli United Bank of Kuwait managing full-fledged Treasury and Investments from all aspects in addition he is member of the Board of Directors at MEFIC Capital and member of Audit Committee. His experience lies in Assets & Liabilities management, Investments and Treasury Sales and Derivative desks.

AlLangawy has obtained certificate of investment management and earned his MBA degree from Maastricht Business School of Management and published his MBA thesis in the Journal of Innovation Entrepreneurship and Management. He also graduated from “PLD program” from the prestigious “Harvard Business School” in USA. He also completed many Banking programs and most notably the Certificate of Investment management analysis and Investment Strategies Program at Wharton University of Pennsylvania, USA.

Medhat Tawfik

Senior General Manager - Private Banking & Wealth Management

Mr. Medhat Tawfik joined the Bank in 2005 as Assistant General Manager of Private Banking and Wealth Management. He currently holds the position of Senior General Manager. Mr. Tawfik had 35 years of experience, where prior to joining the Bank, he held managerial positions in credit, International Finance, Investments, accounts relationship & private banking with several other banks. Mr. Tawfik holds a Bachelor of Arts degree in Business.

He holds an Business Adminstration degree from the University of Texas at Arlington and a Master’s degree in Marketing/Management from Amber University, Texas and passed many courses from several institutions as Harvard Business College, Citi Bank Credit Course and series 6 & 7 for investment.

Executive Management


23

Amgad Younes Senior General Manager - Finance

Mr. 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 holds a Bachelor of Commerce degree in Accounting and Finance from Cairo University 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 the 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 Amin General Manager - Human Resources

Mr. 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.

Leen Kumar Senior General Manager - Risk Management

Mr. Leen Kumar joined the Bank in 2018 as Chief Risk Officer of the bank. Prior to joining, he was the Chief Risk Officer of Bank Muscat SAOG, Sultanate of Oman. He has over 24 years of experience in banking and has held leadership roles across Corporate Banking, Retail Banking and Risk Management areas at banks in GCC and India. He holds a Master’s degree in Business Administration from the Asian Institute of Management, Manila and a Master’s degree in Commerce from India. He has also completed the General Management Program (GMP) from Harvard Business School USA. He is a certified Financial Risk Manager (FRM), a Certified Management Accountant (CMA), a Certified Financial Manager (CFM) and a Certified Business Continuity Professional (CBCP).

Alok Misra Senior General Manager – Audit

Mr. Alok Misra heads the bank’s Internal Audit Division. He joined the bank in May 2018 and has previously worked as the Head of Internal Audit with Bahrain Development Bank (2015-2018) and BMI Bank (2010-2015) in Bahrain. Prior to this, Alok had worked in the internal audit divisions of Bank Muscat in Oman (2006-2010) and ICICI Bank in India (2004-2006).

Alok graduated in Commerce from Lucknow University (India) in 1986. He qualified as a Chartered Accountant from the Institute of Chartered Accountants of India in January 1989 and as a Certified Internal Auditor from the Institute of Internal Auditors (USA) in 2013.

Ranjan Sen

General Manager - Retail Banking

Mr. 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 Group. 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.

Professor Osama El Fouli Senior General Manager - Legal

Prof. Osama Mohammad El Fouli joined the Bank in 2018 as the Senior General Manager of Legal and Compliance. Prof. Osama has an extensive legal and financial experience in Islamic banking. He worked as Legal and Financial Advisor for the Central Bank of Kuwait, legal Counsel for the National Bank of Kuwait, Head of the Legal Department for the Ahli United Bank throughout the conversion process.

Prof. Osama graduated from faculty of Law- Alexandria University and has the degree of Doctorat d’Etat in Finance from the University of Grenoble II in France. He is Professor of Economics, Public Finance and Economic and Financial Legislations in the Faculty of Law - Alexandria University where he was the Ex-Dean and joined the Kuwait International Law School (KILAW) for six years as Professor of Islamic Financial Transactions.

Executive Management continued


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Financial Performance Summary

+11.2%increase in Total Assets for 2019

4, 351,404KD’000

KD THOUSANDS (Unless Otherwise Stated) Dec 19 Dec 18 Dec 17

Net Profit 55,017 51,255 44,463

Net Financing Income 85,146 100,402 104,132

Financing Receivables 3,018,755 2,799,906 2,672,832

Total Assets 4,351,404 3,913,653 3,665,579

Total Deposits 3,746,614 3,343,167 3,135,148

Shareholders Equity 455,518 430,762 406,948

Total Equity 516,158 491,402 467,588

Return on Average Assets (ROAA) 1.4% 1.4% 1.2%

Return on Average Equity (ROAE) 12.7% 12.4% 11.4%

Cost to Income 37.3% 30.6% 32.0%

Capital Adequacy Ratio 15.2% 15.7% 17.2%

Earnings Per Share (Fils) 27.8 25.8 22.1


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NET FINANCING INCOME KD’000s 85,146

104,1322017

100,4022018

85,1462019

FINANCE RECEIVABLES KD’000s 3,018,755

2,672,8322017

2,799,9062018

3,018,7552019

TOTAL ASSETS KD’000s 4,351,404

3,665,5792017

3,913,6532018

4,351,4042019

TOTAL DEPOSITS KD’000s 3,746,614

3,135,1482017

3,343,1672018

3,746,6142019

Financial Performance Summary continued


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Management Report & Performance Analysis

Overview of Bank StrategyAUB 2019 results confirmed once again the Bank’s ability to sustain its strong growth and its capacity to withstand competitive developments in its markets.

In 2015, the bank set its five-year strategy (2015-2019) and was able to achieve a series of objectives, such as sustainable growth, offering valuable products and services to customers while continuing the journey in setting up the Bank’s digital capabilities, and channels expansion. The 2019’s customer impacting projects included implementation of the Video & Text Chat initiative that enhanced the Bank’s ability to communicate with its customers, a semi-automated retail risk assessment process that streamlines the finance approval process, a mandated tokenization of MasterCard credit cards, Robotics Process Automation project, ATM Innovation which add more Bank services that can be performed on ATM’s, and the complete integration of a vendor management system that is critical to our Islamic Banking methodology. We continued enhancing our internal systems that allow our employees to be more productive including the development of a mandated Anti Money Laundering programs that automated the reporting to concerned regulatory agencies. The introduction of a secured wireless network within Head Office, upgrading the operating system of our Customer Relationship Management to ensure its continued effectiveness and securing the process of packaging newly issued bank cards intended to safeguard customer’s data.., all have leveraged the Bank’s capabilities. Meanwhile, the work continues on a number of important projects that concentrate on digitalization which involve a new Trade Finance portal, a credit card fraud monitoring system, upgrades of our core Treasury & Islamic Finance systems. On the infrastructure side, AUBK closed 2 Branches (Kaifan & Dhaher) and opened a new one in Salmiya’s Dalal Mall in a continuing effort to re-align our Branch network to customer needs. This is in addition to enhancing the premises security of our Branches by installing new fingerprint readers and security buzzers in sensitive areas.

AUB believes passionately in its social mission, which is regarded as an essential part of the Bank’s overall strategy. Accordingly, the bank continuously strives to define more effective ways to improve and contribute positively to society, which are reflected in the form of social responsibility programs adopted by the bank. The bank adopts many social responsibility programs that may include, but are not limited to, donations, charitable events, educational programs, volunteer programs, employees, community awareness sessions and campaigns, as well as a primary focus on youth and the environment. The bank is keen to compare its performance in terms of

social responsibility of the bank with the performance of its counterparts in the same industry.

Building on the success and as part of the Bank’s Business Excellency Recognition Strategy for 2019, The Bank has been presented several awards including “Most Innovative Digital Banking Initiative in Kuwait for the year 2019” award from Global Banking & Finance- the magazine specialized in banking and financial affairs, for the digital branch that the bank opened in the Avenues Mall in the fourth stage. The bank’s award comes in appreciation of the bank’s dedication to maintaining its leadership and excellence in digital banking services it offers to its customers.

Further. “Best Business IT innovation in Banking – Kuwait 2019” Award by The International Finance Magazine (IFM), specialized in banking and finance. Where the bank won this award based on many achievements and successes achieved by the Information Technology Department, the most prominent of which is the ability of Ahli United Bank to provide promising services to its customers, as the bank always seeks to discover new and more efficient ways to provide services that exceed traditional banking systems. In addition; The International Finance Magazine (IFM), awarded the bank for “Fastest Growing Shari’ah Compliant Banking Solutions Kuwait 2019”, for its new innovative solutions that are compatible with Islamic banking law.

Banker Middle East magazine awarded the Bank “Best Mobile Banking Services in Kuwait 2019” In order to enhance the customer experience and continuous updating in proportion to the customers’ requirements, “Best Social Responsibility Bank of 2019 in Kuwait” in recognition of his distinguished initiatives and strategy aimed at promoting and developing the community, and “Best savings product for the Islamic Hassadi” account in Kuwait for the year 2019.

AUB was also awarded other awards of “Best Bank in Online Cash Management” within the Corporate Banking Sector from Global Finance and “Best Bank in the Private Banking Sector in Kuwait for the year 2019” by The Banker Magazine in cooperation with Private Wealth Management Magazine which offers the global private banking services awards in honor of banking institutions that have achieved success in growth strategies and appropriate investment solutions and the level of services provided in private banking and wealth management in accordance with international standards.

The Bank’s vision as embedded into our strategy is to become innovative Islamic bank operating with international standards while placing our customers always “FIRST”.


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Management Report & Performance Analysis continued

In line with the vision, the Bank proceeded with its plans as defined in the core strategic goals which include:

• Maximize shareholders values on a sustainable basis, by 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.

• 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.

• Retain and develop its human resources through a meritocratic management structure with a view to becoming the employer of choice in the financial services sector in Kuwait. The Bank 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. In addition to grow in digital world sustainably by Adopting clear and state-of-art plans for digital transformation

• Develop a cross-cultural and efficient management structure by Clear organizational structure and effective communication.

The following table shows comparison of growth rates of AUBK from 2017 to 2019:

• Contribute to the social and economic advancement of the local communities in line with the Bank’s commitment towards corporate social responsibility.

Business ProfileFollowing 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 Supervisory Board. The switch to the Islamic Banking Model has been successful resulting in achieving growth in AUBK’s businesses both in terms of deposits and 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.

Financial & Performance OverviewThe Bank’s asset base comprises mainly of net financing constituting 69% of the total asset base. Cash balances, including inter-bank deposits, account for 21% of the total assets, thereby reflecting the rising liquidity levels within the Bank. Investments securities mainly consist of short term and long term investments in sukuks which reached 7% of total assets. The Bank’s liabilities mainly comprise customer deposits, and deposits from banks and financial institutions at 70% and 27% respectively 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.

Main Indicators 2019 2018 2017

Total Assets (million KD) 4,351 3,914 3,666

Total Financing (million KD) 3,019 2,800 2,673

Total Customer Deposits (million KD) 2,697 2,425 2,426

Total Equity 516 491 468

Main Indicators 2019 2018 2017

Total Operating Income (million KD) 107.2 121.6 120.1

Net Profit for Shareholders (million KD) 55.0 51.3 44.5

Earnings Per Share (fils) 27.8 25.8 22.1

Net Profit Trends Attributable to Shareholders


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Management Report & Performance Analysis continued

The Bank recorded a total operating income of KD 107.2 million in comparison to KD 121.6 million for the previous year. The net operating profit recorded at KD 67.2 million.

The Bank’s return on average equity (ROAE) and return on average assets (ROAA) recorded 12.7% and 1.4% for 2019 which are amongst the highest in Kuwait. The Bank enjoys a solid capital adequacy ratio of 16.0% (before dividend) under the Basel-III accord being higher than the regulatory requirement of 13.5% as of 31 December 2019.

The Bank has continued to receive high credit ratings from international credit rating agencies, such as Fitch, Moody’s and Capital Intelligence. 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 “A1” on long term counter party Risk Rating (foreign currency) and “A2” on the Long term Bank deposits (foreign currency), with stable outlook by Moody’s. Capital Intelligence affirmed the Bank’s long term credit rating of foreign currency to “A+” and enhanced the short term foreign currency rating to “A1”. All these ratings underscore the credit standing, capital quality and stability of the Bank now and for future growth.

Future OutlookLooking back at what AUB has achieved in 2019, the bank will continue progressing in the coming year with a confident and positive outlook. Accordingly, the bank prepared its five-year strategic plan for the period from January 2020 to December 2024, the main objectives included the following:

• Lead in digitalization by digitalizing processes, services as well as touchpoints where clients interact with the bank

• Implement modern technology to facilitate access to the segment of new generations and attract this segment that seek technological solutions.

• Revisit branch network through adopting a smart branch network to improve customer satisfaction levels through specialized services, modern technology and strategic locations.

• Verify compliance with the regulatory requirements and enhance the level of relationship with the bank’s customers.

• Implement the best standards of corporate governance in all operational and Shari’ah aspects.

• Providing an attractive structure for Kuwaiti competencies in line with the country’s ambitious plans and the bank’s strategic plan

• Continue to provide its products and services that add social and human values within the framework of social responsibility programs.

• Close monitoring for its strategy “Shaping the Future” based on the specific timeline.


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Executive Summary

Corporate BankingDuring 2019, Corporate Banking has continued to achieve satisfactory growth in terms of credit portfolio size and profitability, while ensuring the quality of the portfolio and diversification in targeted economic sectors under a conservative credit policy. This has contributed to maintaining the Bank’s strong position and achieving growth ratios that are considered among the highest in the Kuwaiti-banking sector.

As a result of its pursuit for excellence, Corporate Banking through its Cash Management & B2B Unit has won the prestigious “Best On-Line Cash Management 2019 Award” for the third consecutive year in the Corporate Banking Services sector within the State of Kuwait. The Cash Management & B2B Unit has continued to offer its customized services to corporate clients, leading to growth in the number of clients benefiting from the Business-to-Business (B2B) on-line banking service, which offers a secure overall electronic solution aimed at facilitating and streamlining banking transactions through integration between the client’s Enterprise Planning System (ERP) and the Bank’s system.

Corporate Banking has succeeded in achieving its objectives in terms of maintaining a high-quality asset portfolio, providing a full-rounded range of product/service, growing the client base among varying business sectors and consequent diversification in both assets 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, participating in local and regional syndications and supporting a good number of the large-scale projects floated under Kuwait’s Government Development Plan.

In addition, there has been a strong emphasis on bolstering the human capital through attracting young qualified nationals and senior bankers with a high level of Islamic banking experience and credentials.

Corporate Banking strives to continue its achievements while augmenting the Bank’s unique brand across the State of Kuwait and the region to contribute positively to the banking sector and the economy as a whole.

Private Banking Private Banking & Wealth Management strongly supported the Bank’s digitization journey with enthusiasm as it transforms its services to a more robust and agile banking experience.

Private Banking & Wealth Management clients’ online services usage increased one fold during 2019 utilizing the Bank’s wide array of online offerings. Working in parallel with the previous notion was the transformation of the clients’ real-estate proceedings to e-channels gateways of “point of sale” machines and other digital services. Digitizing the clients’ income greatly improves the cash flow efficiency and enhances the clients’ control over their assets. This push for digitization comes from the Private Banking & Wealth Management’s intrinsic mission of thriving towards improving its service quality levels.

On another front, Private Banking & Wealth Management revamped the facilities processing systems to improve efficiency and turnaround time “TAT”. PB introduced a new “fast track” process that streamlines the clients’ facilities processing to a significant degree. This has resulted in the reduction of the facilities TAT by almost half, decreasing the time required to process the clients’ requests. Thus, improving both the Bank’s processes efficiency and client satisfaction.

On the international front, Private Banking & Wealth Management hosted a grand opening and site visits for its clients to showcase the Paddington Gardens project in the heart of London, UK. The project’s pristine finishing and central location is exclusive among the competition, which offered our clients with a great opportunity to own assets of such caliber.

On the local front, Private Banking & Wealth Management expanded its business team by adding local young talents that injected the Department with fresh ideas and initiatives. Moreover, training and development included the existing experienced staff to improve the level of service quality offered to the clients.

Finally, Private Banking & Wealth Management was awarded for the third time the “Best Private Bank in Kuwait Award” from The Banker Magazine in collaboration with the Private Wealth Management (PWM) Magazine. The Award signified the trust in the services of AUB Private Banking & Wealth Management and its unequivocal quality of its offerings.

Retail Banking Retail banking continued its positive momentum in 2019 by driving business growth through an enhanced package of products and services, strengthened by continuous automation along with an extensive array of marketing and promotional initiatives.


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Executive Summary continued

The year 2019 commenced with a revamp of the prize pool for the famous Al-Hassad draw account, which was well received by customers, especially the innovative draws during Eid Al- Adha and Eid Al-Fitr. This not only led to a surge in customer balances, but also won the award of “The Best Savings Product in Kuwait 2019” from the Banker Middle East Magazine.

The existing Premium offering was additionally refreshed and relaunched during the year, along with an innovative new packaged offering for the medical community and a unique profit bearing deposit offering for valued depositors. In addition, Enhanced pricing flexibility led to a record growth of the fixed deposit portfolio.

The debit, prepaid and credit card security was strengthened with the introduction of 3D Secure to enable online transactions and also Near- Field Communication (NFC) technology to enable tap-and-pay. This was supplemented with a revamp of the Free for Life pricing platform and a host of cash back campaigns during various times in the year. An upgraded program for Visa Gold and Classic cardholders was also warmly welcomed by cardholders.

On the asset side, the Retail Real Estate product set was enlarged to include a “Tawarruq” variant, along with further streamlining of the approval and execution process, strengthening the sales while continuing to consolidate from a risk perspective. The Consumer & Instalment portfolio continued to grow, with the support of automation of the Shari’ah compliant broker interface, strengthened by the decision to extend insurance coverage to further prevent residual risk. Enhanced pricing flexibility and extension of the “Qard Hassan” initiative to retention of customers was also put in place. Auto Finance sales reached a record high on the back of a revamped customer promotion and amended product parameters, along with joint promotions with all the major dealers and showrooms in Kuwait.

Branch banking began the year with our Avenues branch winning the “Best Digital Innovation in Kuwait”. The network continued the journey of optimizing efficiency by migrating the business of our oldest branch in Salmiya to the Salmiya Boulevard branch and relocating Demna branch to a refreshed and upgraded facility at Dalal Mall; winning the coveted bid for a branch at the Kuwait Petroleum Corporation headquarters; and exiting sub-optimal locations in Keifan and Dahar. Efficiency was further boosted by the implementation of digital signature pads across the network and bulk cash deposit ATM machines in commercial locations.

The Retail Banking products and services continued to be promoted strongly with innovative campaigns, radio shows and impactful mall activations, with the addition of cinema advertising for the first time. To further enhance our marketing reach, the website www.ahliunited.com.kw was revamped and relaunched, leading to doubling unique visitors, many of whom signed up for the newly launched marketing newsletter. The website was further strengthened with the addition of a digital customer onboarding platform, as well the introduction of text and video chat.

Retail Banking continues to be focused on enhancing profitability and market share with a group of offerings planned for 2020, to be delivered through increasingly digital customer journeys.

Digital Transformation & Alternative Channels In FY2019, we firmly established Digital Transformation unit to streamline all ongoing/ upcoming digital initiatives across the business units which is built on robust business cases and tangible consequences. Sustained KPI based initiatives to migrate transactions base from branches to digital channels (such as IB, MB, Website, ATM, POS, Payment Gateway, Call center/ IVR), initiatives to automate existing manual process by using tools Robotics Process Automation, State through Process, Process re-engineering with factual consequence. Besides Digital Transformation ensures that every initiatives are adhering norms of internal and external regulatory compliance prior to launch service for the customers. Adherence to Digital Transformation strategy, we have successfully implemented various value added services with unique value propositions for our valuable customers across the digital channels and throughout the business units.

With tangible aim of migrating customer base from branches to digital channels by enhancing customer experience and engagement. We are privileged to launch our new award winning premier Mobile App by including over 25 customer centric features with better look and feel, accessibility to sensate Omni channel experience and keep on enhancing in phased manner. ATM Innovation is one of our first-to-market digital innovations with numerous value added features such as transfer, payment, profile/ KYC update, card services etc are available on AUB ATMs and keep on introducing new value added features in phased manner. Delighted to introduce our Premier innovative Live Chat (Video/text) service to serve customer through our digital branch, website and Mobile App for unauthenticated features round the clock. Taking the consideration of digitally savvy


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population in Kuwait, we identified a valuable opportunity to launch the digital onboarding platform accessible through website and Mobile App and keep enhancing to automate the process. AUB also took privilege to launch our innovative Website with various value added features, better look and feel and accessibility.

AUB nominated one of premier bank in Kuwait by adhering E-Payment regulations circulated by Central Bank of Kuwait for regulating merchants’ payments. In addition and to streamline our merchant base, we have launched POS Instant discount service which was first-to-market digital innovation to automate the discount. AUB took privilege to launch our value added Acquiring ecommerce service with unique value proposition such as merchant portal, T+1 settlement etc. Furthermore, we have gone live with our Acquiring POS project by switching third party processor from local banks to KNET with tangible advantages. AUB also launched the contactless payment service which allows customers to make in-store purchases instantly by tapping the card with better security controls and customer convenience.

Aligning with one of our customer value proposition to utilize Artificial Intelligence by automating repetitive tasks, which are presently being performed manually to achieve tangible throughput. To achieve so, we have implemented Robotics Process Automation in 3 operational processes (financing, remittance and sanction) by utilizing AI technology and in progress to implement other process as well in phased manner to increase the efficiency and better risk control. To have a centralized view of our customer base, we have implemented in-house developed customer 360 degree solution. Furthermore, Digital Transformation extended footprint to launch our digital innovative E-signature service in the branches to capture customer signature electronically. Simultaneously, Digital transformation extends to the human element as well, with talent development being one of its main pillars. With that in mind, the AUB i-innovate was set up as part of the Bank’s digital strategy to foster innovation and accelerate development of next generation digital services by incorporating more innovative ideas.

Consequently endeavouring to leverage our existing digital channels and expanding to other customer preferred digital channels such as WhatsApp and Chatbot and many more value added services are in progress to introduce across the channels in gradual manner.

Treasury 2019 was the year of consolidation and prosperity for Treasury Department. It was a successful year on various levels and aspects which contributed to the overall performance of AUB Kuwait.

Treasury started the year with an ambitious approach toward positioning itself among local banks. It has expanded its high quality assets portfolio and managed the liabilities of the Bank to a best risk/reward return.

The realization of the achievement was built on a solid base of employees who have been in the market long enough to deal with and anticipate in servicing clients to their requirement and satisfaction.

Combined with close monitoring of regulatory policies and BASEL III guidelines, Treasury has always preemptively remained in a comfortable position with continuous stress testing which led to clear outlook of what the future market holds in terms of possibilities.

Treasury’s usage of latest state-of-the-art platforms and communication means, in addition to automated processes, gave the Bank the edge to have access to the latest information and act accordingly.

Relying on high quality assets joint with stable funds was a key provider of risk control in addition to internal limits set to safeguard the Bank.

Treasury’s ultimate goal of providing liquidity to the Bank and insuring availably of resources occur while meeting a certain level of diversification to spread the client base exposure and launch toward excellence.

Risk Management Risk is inherent in all of the Bank’s activities and is managed through a process of ongoing identification, measurement, analysis, evaluation, monitoring and management of all financial and non-financial risks that could have an impact on the Bank’s performance. The Bank is exposed principally to credit risk, market risk, liquidity 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.

Risk management is the overall responsibility of Board supported by the Board Risk Committee (BRC). The Board of


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Directors reviews and approves the risk management strategy and defines the risk appetite of the Bank. For the purpose of day-to-day management of risks, the Bank has established an independent Risk Management Division (RMD), which objectively reviews and ensures that the various functions of the Bank operate in compliance with the risk parameters set by the Board.

The risk appetite in various business areas is defined and communicated through a well-established risk management framework and policy approved by the Board of Directors. The Bank’s risk policy, approved by the Board, analyses and sets risk limits/thresholds for Credit, Market, Liquidity, Operational and other risks. The risk levels of each of these categories is measured and monitored on a continuous basis and compliance to prescribed risk levels is reported on a regular basis. This ensures prudent management of risks assumed by the Bank in its normal course of business. The risk management framework and policy is updated regularly, based on changes in bank’s strategy / organizational goals, regulatory guidelines, analysis of the economic trends and the operating environment.

The Bank measures risk using a variety of qualitative and quantitative methodologies based on the nature of the risk. 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.

Credit RiskCredit risk is defined as the risk that a customer or a counterparty fails to meet its financial contractual obligations as per agreed terms, resulting in a loss to the Bank.

Credit risk in the Bank is actively managed by an independent process of review, approval and dispersion. Bank’s risk governance structure ensures that all credit proposals are independently and diligently reviewed by the risk management. The approval of all credit proposals is subject to risk-based pricing approach.

The entire set of Bank’s credit policies and procedures are developed in line with CBK’s rules and regulations, and within the internal thresholds set by the Board through the risk appetite of the Bank. All externally unrated exposures are rated internally based on internal credit rating model -

which is reviewed regularly and enhanced to meet changing market dynamics.

The credit approving authorities ensure that the risks are adequately mitigated and if necessitated, acceptable form of collateral is secured. The Bank follows a conservative approach in taking new exposures and adheres to an approach of continuous post-disbursal monitoring. The customer exposures are reviewed regularly to ensure that the performance of the account is within acceptable norms of the Bank.

Market RiskMarket risk is the potential volatility in financial instruments or uncertainty in future earnings from Bank’s on and off balance sheet positions due to changes in market parameters, such as profit rates, FX rates, equity prices, commodity prices and credit spreads.

Bank has implemented a well defined monitoring mechanism to accurately calculate and manage various market risks. The Board approved risk appetite limits sets the parameters for the market-risk taking, while all those exposures are monitored on daily basis.

Liquidity RiskLiquidity risk is the risk that the Bank may not be able 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 liquidity risk, Bank has diversified its funding sources and assets, while maintaining an adequate balance of cash, cash equivalents and readily marketable securities.

Bank’s liquidity policy intends to ensure that liquidity requirements are prudently and effectively managed such that anticipated and unanticipated funding needs are met on an ongoing basis in a controlled manner at the least possible cost.

Operational RiskOperational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or external events.

Bank’s Operational Risk Self-Assessment (ORSA) lays down the principles of how operational risk is to be identified, assessed, monitored and controlled or mitigated within the Bank. The bank tracks key risk indicators (KRI) on regular basis to assess the internal trends in risk levels and take


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corrective action as warranted. Bank’s Operational Risk Management Committee evaluates the frequency and severity of various operational risk events and prescribes the necessary course of action based on root cause analysis.Bank’s business continuity and disaster recovery management looks into various scenarios to which the Bank may be vulnerable .

Information TechnologyIT is a strategic business partner providing innovative and futuristic solutions which would assist in fulfilling of the overall vision of Ahli United Bank.

With digital transformation at the center of our thought process, IT strives to adopt the latest technology to provide stable, scalable and up to date technology platforms to enable the Bank to become a regional leader in Islamic banking. To fulfil this goal, IT undertook several customer focused projects to support the digitalization strategy of the Bank by enhancing several customer interfaces front ends. Some of the major improvements were the online onboarding of customers, electronic capture of customer signatures in branches, automation of the salary system for faster processing and turn-around time for the customers.

IT also enabled the Bank to be one of the few in the country to adopt Robotic Process Automation (RPA) in Central Operations to achieve greater operational efficiency and to reduce human errors. Using RPA has led to achieve the goals of operational efficiency by reducing load of staff, enabling them to focus on strategic tasks of the Bank. The coming years will see adoption of RPA to other areas of the bank at a bigger scale.

In order to continue developing our electronic channels and strengthening our offering of cards, Near Field Communication (NFC) enabled debit cards (tap and pay) were launched along with a 3D-Secure capability in order to allow our NFC enabled debit cards to be used for e-commerce internationally. NFC technology, also termed ‘Contactless’, enables customers to make fast, convenient and secure payments by simply tapping their NFC embedded card at any NFC-embedded POS merchant/ATM location or any e-commerce websites.

The Video and Text chat was extended to be made available through our Mobile Banking and Website to widen the reach and availability of the Bank for our customers to contact us at their convenience.

Enhanced and Enriched statements for customers with their spend analysis of credit cards and accounts was introduced to give customers the visibility of their spend patterns to help them plan their finances.

ATM, which remains the most utilized channel world-wide, was enriched with additional new functions as part of the ATM Innovation project. Many of the functions available on other channels like Mobile/Internet banking were made available through ATMs to cater to a wider customer base. Many new other functions are scheduled to be introduced in the near future.

On the infrastructure front, every device on a network is a potential attack point that must be discovered and secured. In line with the Bank’s policy, which focusses on tightening internal information security, IT implemented the Access Control solution that is aimed at securing the devices connecting to Bank’s network. The solution continuously monitors the Bank’s network in order to detect any abnormal behavior. In order to have more real time visibility into the Bank’s ATM network and a comprehensive dashboard showing the operations of all of ATMs, the monitoring application was upgraded.

In an effort to keep pace with the future growth of the bank, IT updated all systems including network devices to the latest versions, so that it can effectively run mission-critical requirements alongside modern data-intensive workloads.

Complaints & Customer ProtectionThe Customer Protection Department was established in 2015 to enhance customer satisfaction and ensure that the Bank applies the highest standards of service quality through three main units: the Service quality Unit, the Complaints Unit and the Customer Protection Unit. The Department has strengthened the role of these units by obtaining the accreditation of quality witness ISO 9001:2015 by SGS, United Kingdom.

Below are the main focus areas for the Department’s units during 2019:

Service Quality UnitIn line with Service Quality management strategy, we are investing our efforts in several axes, the most important of which is digital and technological development, we had implemented an integrated system to measure and monitor service quality using a workflow solution that helped in


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improving service quality, increased productivity and provided service quality reports for various departments of the bank. Highlighting areas for service quality improvement. This contributed in raising the levels of actual customer satisfaction and the overall service quality. Furthermore, a direct digital system was designed to obtain direct feedback from customers on AUB’s products and services once performing a transaction with the Bank. This will improve the Bank’s engagement with customers and enables customers to give their feedback and comments on the services provided to them in a direct easy and cost effective way. This engagement will provide an opportunity to collect and analyze data for additional development of products and services. Reaching an integrated quality management while creating a culture of excellence and continuous development.

Complaints unit The Complaints Unit guarantees that all complaints were handled efficiently. After proper investigation, persons submitting Complaints are provided with the required assistance to ensure they understand the procedure in relation to complaints and advice. All complaints are resolved in a timely and appropriate manner where the response is provided within the agreed timings. All required corrective actions are followed up until implementation reaching customer satisfaction.

Complaints unit accepts only authenticated complaints to preserve the rights of customers and protect their information by ensuring confidentiality.Throughout 2019, the Complaints Unit identified many root causes which required corrective action from different divisions that were implemented or under implementation

Customer Protection UnitThe Customer Protection Unit ensures that all the requirements of the Customer Protection Manual are applied, to provide appropriate environment for the preservation of the rights of clients and to enhance their confidence. This is done through the development of regulatory frameworks of policies, procedures and applications that ensure customers access to various services, where the Customer Protection Unit produces an annual report for the Board of Directors that contains the results of the customer protection verification and recommendations to ensure fair and consistent implementation.

Human ResourcesAs Digitalization is driving the innovation in the Banking

industry, AUB started the implementation of the Digital Transformation training plan to improve the understanding of the competitive advantage provided by the FinTech approach. During 2019, HR Digital Transformation remained a key focus for Human Resources & Development.

The significant development of technology in field of Human Resources supported AUB’s ongoing efforts to implement one of the best HR systems.

While AUB’s human capital is the organization’s cornerstone and key driver, attracting and retaining competent Kuwaiti graduates remained one of the key measures in 2019 and is in line with the Bank’s strategy for building a competent local workforce. The Kuwaitization of the Bank’s jobs remained a top priority as the Central Bank raised the bar for localization up to 70% in June 2019.

AUB has one of the best cost to income ratio among banks in Kuwait (32.0%), which is a result of work efficiency and higher productivity.

The turnover ratio has improved over the past four years due to the high level of employee engagement. AUB is also witnessing improvement in the turnover of Kuwaiti youths due to a stronger sense of belonging. In addition, based on AUB’s reputation in supporting professional and personal growth, it has become a magnet for applicants who are keen on development and growth as a worthy investment in their career advancement.

AUB participated in the “Because You Deserve it” event, organized by the Manpower and Government Restructuring Program (MGRP). This thorough selection was based on professional interviews that enabled AUB to hire talents in line with the Bank’s commitment to empower Kuwaiti youth and encourage talented young people to join the Bank.

The HR Learning & Development (L&D) team and other selected employees have attended customized training programs on emotional intelligence and human behavior to enhance their understanding of different character types and capitalize on human profiling skills. The training plan included several fields of knowledge, such as Digital Transformation, Finance, as well as Banking Regulatory training using different training methods and tools.

In Addition, L&D organized the Retail academy for Relationship Officers (RO) School to qualify new ROs to



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handle the new role responsibilities through a professional manner.

L&D supported the internship programs by accommodating high-school students through the national organizations such as LOYAC to provide the job experience to students and inflight the future career options. In addition, the internships have been facilitated for students from local and international universities to empower the practical part of the students’ academic journeys.

L&D contributed towards career development of staff in all business areas by offering international qualifications in different specializations.

In addition, L&D has been giving special attention to the business group through coaching programs for Retail Branches and engaging events to reinforce required competencies such as team building, effective communication and networking. Such activities were well received and enjoyed.

Furthermore, HR launched the Fast Track Talent Development Program to identify talents across the Bank, optimize talent management and enhance employee engagement. Using defined criteria supported by managerial and HR recommendations, talented staff were identified and assessed in line with ambitious and competitive plans which will support their career advancement and help shape them to assume their future leadership roles.

HR maintains its vision that makes AUB the “Employer of Choice”. While streamlining its mission to become a strategic partner with the core functions in building AUB’s business by maximizing the value of Human Capital and aligning it with the Bank’s mission, values, Business and ROI strategies. HR’s Objectives have been clearly defined for next five years as follows:

Intrinsic Factors1. Transformation of HR functions & services and reengineer

the existing HR processes aiming at digitalizing wherever possible for a fully automated paperless work environment based on the internal customer (staff) experience.

2. Update and upgrade the current recruitment criteria to ensure effective assessment of the local talented workforce in an agile environment, which can fit in to the changing workforce.

3. Revisit existing job competencies to widen Bank’s talent pools and attract a border range of skills, in line with the rapidly evolving needs and expectations of customers.

4. Transform Bank’s Corporate Culture into an Efficient and Agile Culture to ensure prudent risk management when it comes to delivering solutions.

Extrinsic Factors 1. Partner with the external educational institutions to build

the future workforce capable of working in a digitally transformed organization.

2. Continue to educate employees across the Bank on Cyber Security threat, Risk Awareness, Compliance and Corporate Governance to ensure a confident workforce.

3. Restructure the Bank’s departments to cater for the desired change across the Bank for building digitally transformed effective & agile organizations.

4. Redeploy employees from the Retail Branches (subject to effective plan for filling vacancies) to the other areas of the Bank.

5. Work closely with IT and Digital transformation teams with full support to ensure running the existing IT systems while pursuing digital transformation.

As a result of the continuous efforts for engagement and development, AUB HR Team conducted an Employee Satisfaction Survey in 2019 through a third party (People Pulse). The survey’s results and analysis reflects crucial facts and figures which gives the HR an opportunity to grow stronger and increase the level of internal customer satisfaction during the coming years.


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Corporate Governance

CORPORATE GOVERNANCE FRAMEWORKOverviewAhli United Bank is adopting a robust Corporate Governance Framework which continues to focus on maintaining and developing effective relationships between the key players in the Bank (shareholders, Board members, and senior executive management) and other stakeholders. The Corporate Governance Framework was developed and maintained as a business culture cascaded into day-to-day Bank operations.

The Corporate Governance structure is built to ensure a dynamic system of responsibilities and accountabilities, mainly segregation between the oversight role of the Board of Directors, the Shari’ah Supervisory role and the Executive Management role of running the daily operations of the Bank. The structure is designed to be adequate and proportionate to fit to the purpose of the Bank’s stakeholders. The Board of Directors is keen to maintain the governance structure in line with the Central Bank of Kuwait (CBK) rules and regulations, in addition to benchmarking it with leading practices and international recommendations of Corporate Governance.

The Board of Directors elected by the General Assembly of the Shareholders is having the ultimate oversight responsibility on the Bank’s business activities and business risks, this role is empowered through a group of Board committees with effective and independent channels of communication and overseeing the Executive Management.

The Board committees are armed with independent control & governance functions, either pre-fact control functions such as risk management, regulatory compliance, Corporate Governance and disclosure or the post fact control functions such as internal audit and Shari’ah internal audit.

Business performance is governed through a set of “entity level” key performance indicators linked to the key risk indicators. The day to day business activities are run within well- structured policies, procedures and authority levels aligned with the overall risk appetite and risk management strategy of the Bank.

The Board approved a set of management reporting packs, which are submitted, on timely basis from Executive Management to the Board and Board Committees. The reporting packs are considered as tools used to ensure proper management progress and highlight key issues and risks that need actions.

The Shari’ah Supervisory Board oversees the Shari’ah governance implementation rules issued by CBK in addition to reviewing the Bank’s products and service offerings to ensure its compliance with the applicable Islamic Shari’ah provisions. The governance structure ensures effective handshaking between the Board of Directors, its Committees ,Shari’ah Supervisory Board, and Executive Management. This integration demonstrates a crystal clear mandate of each party and avoidance of any overlapping.

Graph 1: Corporate Governance structure

Shareholders

GeneralAssembly

Electing

Appointing

Oversight Oversightarms

Control & Governance

Functions

ExecutiveManagement

Compensation and Nominating

Committee

CEO

ManagementCommittees

Audit and Compliance Committee

Executive Committee

Risk Committee

Corporate Governance Committee

Governance & Disclosure

Risk Management

Internal Shari’ahAudit

Board of Directors

Shari’ah Supervisory Board

Regulatory Compliance

Internal Audit


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Corporate Governance continued

Our Governance Transformation JourneyThe Bank started its governance transformation journey in 2012, the Bank took significant steps during the year 2013 until the year 2019 This journey showed a substantive progression in terms of the governance culture, Board of Directors effectiveness, Stakeholders engagement in addition to disclosure and transparency. Furthermore, the Bank has adopted several steps toward developing governance

implementation tools and dashboards that reflect quantitative and qualitative measures of the governance implementation and its impact on the Bank. Including adoption of the latest Corporate Governance requirements issued by The Central Bank of Kuwait on September 10, 2019 A summary of the governance transformation journey is shown in the following diagram.

Graph 2: Corporate Governance transformation journey

2019Corporate Governance sustainability & maintenance

2017Transforming discourse andtransperency framework

2015Developing Governanceimplementation monitoring tools

2013Corporate GovernanceCBK Rule Implementation

2018Benchmarking and upgrading the governance framework and introducing automated tools

2016CBK Shari’ahGovernance Rules

2014Enhancing theGovernance Culture


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Corporate Governance Pillars Corporate Governance framework building blocks covering the CBK.

AUB Corporate Governance Pillars - Graph 2

The Board OversightThe Board of Directors comprises of nine non-executive directors two of which are independent. The Board Chairman facilitates the effective contribution of non-executive and independent directors and ensures constructive relations between all directors. Non-executive and independent directors provide constructive challenges on strategy. Non-executive directors and independent directors in addition to scrutinize the performance of management in achieving the set bank’s goals and objectives and monitor their performance.

The Board, as part of its philosophy, focuses on the independence of the Board members to ensure the following:

• Bring an outside perspective on strategy and control. • Add new skills and knowledge that may not be available

within the Bank • Bring independent and objective views• Bring an independent view when there may be conflicts

of interest within the Board. • Act in the best interest of all shareholders

The Board has the ultimate responsibility of developing and monitoring the Bank’s strategy within an approved risk strategy and risk appetite. The Board’s governance role considers the check and balances, the delegation of authorities and a robust internal control framework implemented by Executive Management.

Board Oversight

Risk Governance & Internal Controls

Stakeholder Protection

Disclosure & Transparency

Remuneration & Performance Management

Sustainability & CSR


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Board Effectiveness Review: Evaluation of DirectorsThe Bank continues focusing the due care, professionalism and the effectiveness of the Board activities. The Board Compensation and Nominating Committee initiates the annual process of assessing and developing the Board

Subsequent to the evaluation process, an action plan is developed to enhance the Board, Committees activities for developing the Board individuals. The plan includes a set of learning and development programs in the areas of Risk Management, Shari’ah Compliance, FinTech, Digital transformations in addition to the international financial reporting standards. Furthermore to another set of actions to improve the Board and Board Committees activities.

Board CommitteesInline with the governance structure of the Bank, there are five committees emanated from the Board of Directors to provide the necessary support governed by its terms of reference, the five committees are illustrated in the following diagram:

of Directors through an approved methodology of self-evaluation. The methodology considers the following four dimensions for the Board, Board Committees and also the individual Board members.

Size & Composition

Board Culture

BOARDEFFECTIVENESS

Involvement and Time Dedication

Board Operations

CorporateGovernanceCommittee

Board RiskCommittee

Audit & ComplianceCommittee

Compensation& Nominating

Committee

ExecutiveCommittee


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Board of Directors / Board Committees Meetings and Attendance

Board of Directors key achievements• Approving the Bank’s new Business Strategy & Plan for

2020-2024

• Reviewed and enhanced the overall governance

framework

• Monitored the strategy implementation on semi-annual

basis

• Approved the Financial Statements

• Conducted Branches networking review

• Reviewed the regulatory compliance reporting packs

• Reviewed and approved the risk appetite statement

• Approved Bank lines & country limits

• Reviewed and approved The Internal Capital Adequacy

Assessment (ICAAP) Process and Stress Testing.

• Reviewed Risk/Audit Reports raised by their respective

committees

• Approved 2020 estimated budget and business plans

• Reviewed Bank’s policies to ensure compliance with

Shari’ah governance laws issued by Central Bank of Kuwait

• Noted Resolutions rendered by the Shari’ah Supervisory

Board

Number of Meetings held in 2019Board ofDirectorsMeetings

CorporateGovernanceCommittee

Board RiskCommitee

Aiudit &Compliance Committee

Compensation& Nominating

Committee

ExecutiveCommittee

Indicators 6 2 4 4 2 3

Indicators 8 2 4 9 2 3

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

Anwar Ali Al-Mudhaf 8 2 - - - -

Raed M. Al Nusf (1) 4 - - - - 3

Jamal Shaker Al-Kazemi (2) 6 2 - 1 - 3

Adel Mohamed El-Labban 8 - - - 2 3

Sanjeev Baijal 8 - - 9 2 -

Keith Henry Gale 8 - 4 - - 3

Michael Gerald Essex 8 - 4 9 2 -

Mohamed Tareq Mohamed Sadeq Mohamed Akbar

8 - - 9 - -

Abdulla Ahmed Al-Raeesi (3) 5 - 2 - - -

David O’Loan (4) 3 2 2

(1) Mr. Raed Al Nusf Joined the board on 17th April, 2019. Noting that the Compensation & Nominating Committee held its meetings before he joined.

(2) A reformation of memberships of the committees took place in January 2019. Mr. Jamal Al Kazemi joined the Executive Committee and left the Audit & Compliance Committee

(3) Mr. Abdulla Al-Raeesi resigned from the Board of Directors on July 10th, 2019(4) The reserve board director Mr. David O’Loan was called to join the board as a successor to Mr. Abdulla Al-Raeesi


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BOARD COMMITTEES1. CORPORATE GOVERNANCE COMMITTEE:

Committee ObjectivesSupport the Board of Directors in overseeing the implementation of Corporate Governance framework, ensuring an effective governance culture across the Bank’s business unites and monitor the governance policies in addition to providing enhancements and recommendations on the governance practices.

Committee Members:Dr. Anwar Ali Al-Mudhaf ChairmanJamal Shaker Al-Kazemi MemberDavid O’Loan Member

Number of meetings held during 2019: 2

Key Achievements• Reviewed the governance manual and suggest

enhancements • Reviewed and discuss the governance self-assessment

reports • Reviewed and discuss Shari’ah governance self-

assessment dashboard • Initiated a project to review and enhance the overall

governance framework • Reviewed the disclosure and transparency manual • Reviewed the implementation of the investment strategy

laid down for the Investment Account holders, and appropriate /timely disclosures.

• Reviewed the implementation plan for the updated Governance instructions issued by the Central Bank of Kuwait.

2. BOARD RISK COMMITTEE:

Committee ObjectivesThe Board Risk Committee (BRC) assists the Board of Directors in fulfilling its oversight responsibilities related to the overall enterprise risk management framework, this includes the risk profile of the Bank, the risk management policies, the risk appetite statement and the approved risk limits.

Committee Members:Keith Henry Gale ChairmanMichael Gerald Essex Member (independent)David O’Loan Member


Key Achievements• Reviewed the assessment of the Bank’s performance

based on CAMEL B-COM. • Reviewed all stress-tests and ICAAP submissions,

underlying analysis and methodologies • Reviewed the bank’s performance vis-à-vis its peers and

progress of its strategy • Reviewed the bank’s risk appetite in light of the operating

environment• Conducted Analysis of sukuk investment , real estate

and reverted assets • Conducted a review of the bank’s Corporate banking,

private banking and retail banking portfolios • Reviewed and discuss the reputational risk modeling • Reviewed and followed up the work plan for the

assessment of security systems and information • Conducted a review of operational risk management at

the bank• Reviewed the risk exposures and risk limits • Reviewed updates and implementation process of IFRS 9.• Reviewed Retail Real Estate Portfolio.• Timely monitoring of the ERM risk management

reporting pack

3. AUDIT AND COMPLIANCE COMMITTEE:

Committee ObjectivesActing as a supporting arm to the Board of Directors in supervising the Bank’s overall control environment, overseeing the external audit and the internal audit activities, monitoring the financial reporting according to regulatory requirements and IFRS, in addition to overseeing the regulatory compliance aspects.

Committee Members:Mohamed Tareq Mohamed Sadeq Mohamed Akbar Chairman (independent)Sanjeev Baijal MemberMichael Essex Member (independent)


Key Achievements• Reviewed and discuss the quarterly reports of the internal

audit / shari’ah audit• Conducted an independent quality assessment on the

internal audit function by an external party • Reviewed and approve Shari’ah audit plan • Reviewed the internal audit charter and internal audit

manual


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• Approved the risk based internal audit plan for the year 2020

• Reviewed the regulatory compliance reports;• Reviewed and evaluated the Internal Control System

Review (ICR) report of the Bank; • Reviewed Subsidiary Internal Audit semi-annual and ICR

reports;• Initiate a project to enhance the AML and CTF processes • Discussed the internal audit strategy of 2019-2021• Reviewed reports from the anti-money laundering (AML)

unit;• Reviewed complaints reports from the Complaints and

Customer Protection 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 appointment of external auditors with recommendations to the Board;

• Assessed the performance of General Manager Audit & Assistant General Manager Regulatory Compliance and recommended their compensation to the Board;

• Assessed the performance of Internal Shari’ah Auditor in consultation with the Shari’ah Supervisory Board.

4. COMPENSATIONS & NOMINATING COMMITTEE:

Committee ObjectivesAssist 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 potential nominations of qualified nominees to become members of the Board and the Bank’s Senior Management; and initiates the assessment process of the Board performance, its members and its individual Committees.

Committee Members:Michael Essex Chairman (independent)Raed Al Nusf MemberAdel El-Labban MemberSanjeev Baijal Member


Key Achievements• Reviewed the nomination and structure of the Shari’ah

Supervisory Board and provided recommendation to the Board of Directors

• Reviewed the Board and Board Committees remuneration

• Conducted an independent review on the Bank’s remuneration policy and remuneration practices

• 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 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

• Reviewed the senior management promotions• Developed the annual Board’s training and development

plan • Reviewed the nomination of recruiting new executives

during the year 2019 • Reviewed the Bank’s Succession Planning

5. EXECUTIVE COMMITTEE:

Committee ObjectivesAssists the Board of Directors in the oversight of key executive activities of the Bank, mainly related to the core banking functions and any other tasks delegated by the Board. It discharges 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:Adel El-Labban ChairmanRaed Al Nusf MemberKeith Gale MemberJamal Al-Kazemi Member


Key Achievements• Oversaw the financing proposal and approved within

the committee jurisdictions • Assisted the Board of Directors in reviewing and activities

of management committees • Reviewed and approved the investment proposals and

ensuring its alignment with the Bank’s polices


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SHARI’AH SUPERVISORY BOARDIn 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 its functions.Shari’ah Board resolutions are binding upon the Bank’s 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 with Islamic Shari’ah provisions.

The Fatwa & Shari’ah Supervisory Board convened (six) times in 2019. Hereunder is a table of attendance of the Shari’ahBoard members: Shari’ah Board Members Number of Meetings Attended by the Member

Sheikh Dr. Khaled M. Al Mathkour 6/6Sheikh Dr. Abdulaziz K. Al-Qassar 6/6Sheikh Dr. Issam K. Al-Enezi 6/6Sheikh Dr. Ali I. Al-Rashed 6/6

The SSB isued 67 resolutions.

Internal Shari’ah AuditInternal Shari’ah Audit conducts quarterly audits on all the Bank’s departments to ensure their compliance with the 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 Supervisory Board. The Internal Shari’ah Audit submits its reports to the Shari’ah Supervisory Board on the findings of the audit function and its recommendations on these findings.

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 Shari’ah Supervisory Board) were detected during 2019.

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 31/12/2019 amounted to KD 576,528.

REMUNERATION OF THE SHARI’AH SUPERVISORY BOARD The annual general assembly endorses appointment/reappointment of the Shari’ah Supervisory Board members and authorizes the board of directors to determine their remunerations. The total remuneration was KD 42,000

RISK GOVERNANCE AND INTERNAL CONTROLSRisk is inherent in all of the Bank’s activities and is managed through a process of ongoing identification, measurement, analysis, evaluation, monitoring and management of all financial and non-financial risks that could have an impact on the Bank’s performance. The Bank is exposed principally to credit risk, market risk, liquidity 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.

Risk management is the overall responsibility of Board supported by the Board Risk Committee (BRC). The Board of Directors reviews and approves the risk management strategy and defines the risk appetite of the Bank. For the purpose of day-to-day management of risks, the Bank has established an independent Risk Management Division (RMD), which objectively reviews and ensures that the various functions of the Bank operate in compliance with the risk parameters set by the Board.

The risk appetite in various business areas is defined and communicated through a well-established risk management framework and policy approved by the Board of Directors. The Bank’s risk policy, approved by the Board, analyses and sets risk limits/thresholds for Credit, Market, Liquidity, Operational and other risks. The risk levels of each of these categories is measured and monitored on a continuous basis and compliance to prescribed risk levels is reported on a regular basis. This ensures prudent management of risks assumed by the Bank in its normal course of business. The risk management framework and policy is updated regularly, based on changes in bank’s strategy / organizational goals,


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regulatory guidelines, analysis of the economic trends and the operating environment.

The Bank measures risk using a variety of qualitative and quantitative methodologies based on the nature of the risk. 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

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.

The Board has reviewed the Internal Control systems and the Risk Management responsibilities and ensured their effectiveness within the Bank for the year 2019. In light of CBK instructions on internal audits within financial institutions,

that the bank’s risk estimates are reasonable, reflective of the risk of the underlying positions and comparable to best practices.

Internal control The Board of Directors adopts the COSO (Committee of Sponsoring Organizations) internal controls framework which consists of the following five major components:

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 and no significant control gaps were detected in the opinion concluded by the report. Accordingly, the Board of Directors certifies the adequacy of the internal controls and supervision of the Bank.

Control Environemnt

Risk Assessment Control Activities

Monitoring ActivitiesInformation &

Communication


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49



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Stakeholders ProtectionThe Bank adopts an integrated module to protect its stakeholders. The Bank looks equally to his external and internal

stakeholders. The Stakeholders protection module consists of a set of policies, procedures and mandates.

ExtrenalStatekholder

InternalStatekholder

Shareholders

Society

Suppliers

Employees

Regulators

CompetitorsSubsidiaries

Customers

Board of Directors


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Components of the Stakeholders protection module:

Code of Condcut Confidentiality and

Information Security Managing conflict Whistle-blowing

Customers

Complaints Process

The Bank’s Code of Conduct Provide controls on the values and ethical behaviours of the Bank Board of Directors, Executive Management and the employees. These values and standards govern employee interactions with our clients, competitors, business partners, shareholders and forms the basis of our policies, which provide guidance on compliance with applicable laws and regulations. The Bank’s directors, executive management and employees are committed to the highest degree of adherence to the code of conduct policies.

The Bank adopts well structured policies and procedures to ensure full adherence to the Bank’s privacy and confidentiality. This is also supported by a well established information security framework & policy approved by the Board of Directors & monitored independently by the risk management function in the Bank.

The Bank has in place specific policies & controls that ensure all reasonable steps are taken to identify & adequately manage conflicts entailing any material risk to Stakeholders’ interests. This applies to Bank employees, Board members, their immediate family members and the Bank, over their commercial and economic interests. All transactions with related parties must be executed on an arms-length basis. The procedures for such transactions are detailed in the Bank’s Related Parties Transactions Policy. Related Parties shall be determined based on International Accounting Standards (IAS 24).

The Bank’s Whistle blowing policy is intended to make it easier for staff members to report irregularities in ultimate confidentiality, without having to fear adverse consequences for their action. Staff members are encouraged to speak up if they have genuine concerns about malpractice or unlawful conduct they suspect is within the Bank. Such misconduct may relate to financial malpractice, in compliance with a legal or regulatory obligation, criminal offence, behavior detrimental to the image or reputation of the Bank, endangering of health & safety of the environment, or the deliberate concealment of similar matters. The Bank will protect and support anyone raising genuine concerns and will respect a need for anonymity.

The customers complaints unit is well equipped with the experienced resources who are capable to deal will all the complaints independently and adopting a criteria to solve all complains within a quality assurance program to ensure the targeted customers satisfaction.

Largest Shareholders:

Shareholder Holding Percentage

Ahli United Company 67.33 %

Public Institution for Social Securities 12.34%


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Disclosure and Transparency As part of its overall corporate governance culture, The Bank is keen to provide accurate, comprehensive, transparent, detailed, sufficient, and timely substantial information to the Bank’s shareholders and other stakeholders so as to enable them to evaluate the performance of the Bank and make informed business decisions.

The Bank has adopted a comprehensive and clear disclosure mechanism that ensures accountability and effective implementation. The same is in line with the guiding principles on Disclosure & Transparency outlined in CBK instructions on Corporate Governance.

The Bank adopts a disclosure policy which describes the centralized framework for complying with the public disclosure requirements of the Central Bank of Kuwait (CBK) contained in their directive on Principles of Good Corporate Governance in financial institutions and in the rules & regulations concerning Capital Adequacy Standard issued by the CBK. In addition, the policy covers Kuwait Capital Market Authority (CMA) Disclosure requirements, International Financial Reporting Standards and other applicable laws, regulations.

Remuneration and Performance Management The Board of Directors through the CNC governs the Bank’s remuneration process and its development. The Bank’s Remuneration Policy sets out key aspects and components of the remuneration of the Executive Management and other employees. The Bank follows a unified approach in applying the Remuneration Policy.

The policy formulates the linkage to the Bank’s long-term strategic objectives and its risk- taking. Also there is a differentiation between remuneration of Senior Management, Material Risk-Takers and Control Functions. These are all linked to key performance indicators subject to risk-adjusted approach.

As per the remuneration policy the Bank applies a deferment approach up to three years (final vesting of the variable component). Vesting of the variable component is subject to achieving the long-term performance targets and risk materialization. Claw-back applies on the vested portions in case of not meeting long-term targets or risk materialization.

Risk Based Remuneration and Long Term Incentives The Bank’s performance measurement framework is in place to assess the achievements of the Bank as a whole, its business lines and organizational units as well as individual employees. In order to maximize the incentive to deliver adequate performance and to take into account any risks of the business activities, the Bank closely links remuneration outcomes with performance and risk outcomes.

The Bank has shown a progress in tailoring performance and risk measures to the specific activities and roles of the business units and the responsibilities of employees aiming for a performance and risk capture that is as complete as possible.

The Bank is adopting a wide combination of financial and non-financial metrics to assess employee performance, and construct highly tailored “indices” to reflect unique individual or corporate activities. The extent to which the performance measures used are appropriate to capture the risks taken and the risks outcome varies across institutions.

Also certain measures of financial performance, such as targets based on revenue, profit or income, cash flow or return on equity are adopted by the Bank. Measures used are often accounting-based and retrospective. Some other measures adopted by the Bank are related to using economic efficiency measures in their performance measurement process, such as risk-adjusted return on capital (RAROC). Other frequently used measures include economic profit, risk-adjusted cost of funding (where the risks of a specific activity are directly priced into the cost of capital) or pure accounting adjustments (such as provisioning for future expense). These measures are used directly to assess risk-adjusted performance or as driver to apply risk adjustment in the award process.

In addition, the Bank’s performance is also measured using non-financial measures such as compliance with internal controls, teamwork or other more qualitative criteria aimed at assessing the non-financial contributions of the of the employee.

For the operational implementation of a performance and risk aligned remuneration process, the Bank uses “bonus pools” that represent one or more intermediary steps between the employee’s individual remuneration and the total remuneration at the level of the Bank. Therefore, performance measures and risk adjustment are also considered on various levels when determine the remuneration pool.


53


Remuneration disclosure and reporting The Bank’s is complying with its discourse and transparency policy, accordingly on annual basis, the Bank issues its annual remuneration disclosure report along with its annual corporate governance report. The Bank has fulfilled all the CBK requirements in reporting and disclosing the remuneration categories and provided a transparent methodology of showing the annual remuneration values this is according to the annual report as of 31 December 2019.

Sustainability and CSR The Board of Directors oversees the Corporate Responsibility program and ensure for its implementation across the Bank.Management continuously seeks to determine more efficient and effective ways of improving and positively contributing to the society in which the Bank operates in and that the same is reflected in the form of CSR Programs adopted and executed by the Company.

The Bank adopts various CSR Programs that may include but not limited to the following:

• Sponsorships;• Donations;• Charitable Events;• Educational Programs;• Corporate Volunteering Programs;• Employees and Society Awareness Sessions and

Campaigns.

The Bank is keen to compare its performance in terms of Corporate Social Responsibility with the performance of other leading peers within the same industry or carrying out similar activities, results of such comparison shall be utilized in the development and enhancement of CSR Programs developed by the Bank .

Further details about the sustainability and corporate social responsibility can be found in the Bank’s annual CSR report.

• Remuneration of the Board and the related committees committed to KD 250,722 collectively.

• Total remuneration of the top seven (7) Bank’s executives, including the GM Finance, GM Internal Audit and GM Risk Management KD 1,225,705 Disclosure of Remuneration as per Employees Categories

Personal Categories No. of EmployeesFixed

Remunerations (KD) Variable

Remunerations (KD) Total

Payments (KD)

Senior Management 11 1,239,782

485,637

1,725,419

Material Risk Takers 26 1,599,953

559,537

2,159,490

Financial & Control Functions

20 1,303,873 309,591 1,613,464

Disclosure of Remuneration as per Employees Categories


54


55

Contents

56 Independent Auditors’ Report to the Shareholders of Ahli United Bank K.S.C.P

62 Consolidated Statement of Profit and Loss

63 Consolidated Statement of Comprehensive Income

64 Consolidated Balance Financial Position

65 Consolidated Statement of Changes in Equity

67 Consolidated Statement of Cash Flows

68 Notes to the Consolidated Financial Statements

Consolidated Financial Statements


56

Independent Auditors’ Report to the Shareholders of Ahli United Bank K.S.C.P.


57

Independent Auditors’ Report to the Shareholders of Ahli United Bank K.S.C.P. continued


58



59



60



61

Consolidated Financial Statements


62

Consolidated Statement of Profit and LossFor the year ended 31 December 2019

2019 2018 Notes KD ‘000 KD ‘000

Financing income 169,312 156,811Distribution to depositors 3 (84,166) (56,409)

NET FINANCING INCOME 85,146 100,402

Net fees and commission income 4 9,802 9,878Foreign exchange gains 3,132 3,622Net gain from investment securities 6,811 4,479Net gain on sale of investment properties 1,293 174Share of results from associate 12 (286) 1,491Other income 5 1,310 1,528

TOTAL OPERATING INCOME 107,208 121,574

Provision and impairment losses 6 (9,424) (30,513)

OPERATING INCOME AFTER PROVISIONS AND IMPAIRMENT LOSSES 97,784 91,061

Staff costs (22,931) (22,159)Depreciation (5,520) (2,979)Other operating expenses (11,509) (12,055)

TOTAL OPERATING EXPENSES (39,960) (37,193)

PROFIT FROM OPERATIONS 57,824 53,868Taxation 7 (2,552) (2,375)Directors’ remuneration (255) (238)

PROFIT FOR THE YEAR 55,017 51,255

Basic and diluted earnings per share (fils) 8 27.8 25.8

The attached notes 1 to 28 form part of these consolidated financial statements.


63

Consolidated Statement of Other Comprehensive IncomeFor the year ended 31 December 2019

2019 2018 Note KD ‘000 KD ‘000

Profit for the year 55,017 51,255

Other comprehensive income (loss):

Other comprehensive loss to be reclassified to consolidated statement of profit or loss in subsequent periods:Exchange differences on translation of foreign operations - (41)

Other comprehensive loss to be reclassified to consolidated statement of profit or loss in subsequent periods - (41)

Other comprehensive (loss) income not to be reclassified to consolidated statement of profit or loss in subsequent periods:Net movement in cumulative changes in fair values of investment securities (442) (624)Revaluation of freehold land 14 69 (138)

Net other comprehensive loss not to be reclassified to consolidated statement of profit or loss in subsequent periods (373) (762)

Other comprehensive loss for the year (373) (803)

Total comprehensive income for the year 54,644 50,452



64

Consolidated Statement of Financial PositionAs at 31 December 2019

2019 2018 Notes KD ‘000 KD ‘000

ASSETS Cash and balances with banks 9 133,712 76,937Deposits with Central Bank of Kuwait 344,834 346,097Deposits with other banks 454,437 334,801Financing receivables 10 3,018,755 2,799,906Investment securities 11 303,239 264,185Investment in associate 12 8,261 8,823Investment properties 13 29,230 36,539Premises and equipment 14 40,907 34,279Other assets 15 18,029 12,086

TOTAL ASSETS 4,351,404 3,913,653 LIABILITIES AND EQUITY LIABILITIESDeposits from banks and other financial institutions 1,049,630 918,651Deposits from customers 16 2,696,984 2,424,516Other liabilities 17 88,632 79,084

3,835,246 3,422,251 EQUITYShare capital 18 206,273 196,451Reserves 18 293,202 278,268

499,475 474,719Treasury shares 19 (43,957) (43,957)

Attributable to Bank’s equity shareholders 455,518 430,762Perpetual Tier 1 Sukuk 20 60,640 60,640

TOTAL EQUITY 516,158 491,402

TOTAL LIABILITIES AND EQUITY 4,351,404 3,913,653

Dr. Anwar Ali Al-Mudhaf Jehad Al-Humaidhi Chairman Acting Chief Executive Officer



65

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67


2019 2018 Notes KD ‘000 KD ‘000

OPERATING ACTIVITIES Profit for the year 55,017 51,255 Adjustments for: Net gain on sale of investment properties (1,293) (174) Net gain from investment securities (6,811) (4,479) Share of results from associate 12 286 (1,491) Dividend income 5 (1,225) (1,013) Net income from investment properties 5 (44) (447) Depreciation 5,520 2,979 Provision and impairment losses 6 9,424 30,513 Amortisation of sukuk premium 543 537

Operating profit before changes in operating assets and liabilities 61,417 77,680

Changes in operating assets / liabilities: Deposits with Central Bank of Kuwait 91,269 69,529 Deposits with other banks (137,902) (133,190) Financing receivables (242,794) (148,964) Other assets (5,936) 2,502 Deposits from banks and other financial institutions 130,969 209,743 Deposits from customers 272,468 (1,765) Other liabilities 6,195 7,095

Net cash from operating activities 175,686 82,630 INVESTING ACTIVITIES Purchase of investment securities (373,535) (312,164)Sale and redemption of investment securities 344,032 269,564Proceeds from sale of subsidiary 1 7,579 -Purchase of investment properties (2,194) (30)Proceeds from sale of investment properties 10,971 1,500Purchase of premises and equipment (5,351) (4,123)Net income from investment properties 5 44 447Dividend income received 5 1,225 1,013

Net cash used in investing activities (17,229) (43,793) FINANCING ACTIVITIES Profit payment on Tier 1 Sukuk (3,357) (3,329)Dividend paid to shareholders 18 (26,531) (21,899)

Net cash used in financing activities (29,888) (25,228) NET INCREASE IN CASH AND CASH EQUIVALENTS 128,569 13,609Cash and cash equivalents at 1 January 101,210 87,601

CASH AND CASH EQUIVALENTS AT 31 DECEMBER 9 229,779 101,210

Financing income received amounted to KD 170,106 thousand (2018: KD 157,384 thousand) and distribution to depositors paid amounted to KD 75,214 thousand (2018: KD 52,486 thousand).

Consolidated Statement of Cash FlowsFor the year ended 31 December 2019


68

Notes to the Consolidated Financial StatementsAs at 31 December 2019

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 Boursa Kuwait. It is engaged in carrying out banking activities in accordance with Islamic Sharia’a 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 Sharia’a, as approved by the Bank’s Fatwa and Sharia’a Supervisory Board.

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

As at 31 December 2018, the Bank held 50.41% effective interest in its subsidiary, Kuwait and Middle East Financial Investment Company K.S.C.P. (“KMEFIC”), a company incorporated in the State of Kuwait. KMEFIC is listed on the Boursa Kuwait and is engaged in investment and portfolio management activities for its own account and for its clients. Since KMEFIC was a non-Sharia’a compliant investment, the value of its impaired assets was fully provided by the Bank in prior years. During the year, the Bank has sold its equity interest in KMEFIC for a total consideration of KD 7,579 thousand which has been adjusted against provision and impairment losses in the consolidated statement of profit or loss (Note 6).

The consolidated financial statements comprising the financial statements of the Bank and its subsidiary (collectively, the “Group”) were authorised for issue in accordance with a resolution of the Board of Directors of the Bank on 9 January 2020 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 OF SIGNIFICANT ACCOUNTING POLICIES 2.1 Basis of preparationThe consolidated financial statements are prepared under the historical cost convention except for the re-measurement at fair value of investment securities, freehold land and derivative financial instruments.

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 complianceThe consolidated financial statements have been prepared in accordance with the regulations for financial services institutions as issued by CBK in the State of Kuwait. These regulations require expected credit loss (“ECL”) to be measured at the higher of the ECL on credit facilities computed under IFRS 9 according to the CBK guidelines or the provisions as required by CBK instructions; the consequent impact on related disclosures; and the adoption of all other requirements of International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (“IASB”), collectively referred to as IFRS, as adopted for use by the State of Kuwait.

2.3 Changes in accounting policies The accounting policies applied are consistent with those used in the previous year except for the changes arising from the adoption of IFRS 16 Leases, effective from 1 January 2019.

IFRS 16: Leases IFRS 16 supersedes IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases-Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. The standard sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for most leases under a single on-balance sheet model.


69


2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.3 Changes in accounting policies (continued)Lessor accounting under IFRS 16 is substantially unchanged from IAS 17. Lessors will continue to classify leases as either operating or finance leases using similar principles as in IAS 17. Therefore, IFRS 16 did not have an impact for leases where the Group is the lessor.

The Group adopted IFRS 16 using the modified retrospective method of adoption with the date of initial application of 1 January 2019 and accordingly, the comparative information is not restated. The Group elected to use the transition practical expedient allowing the standard to be applied only to contracts that were previously identified as leases applying IAS 17 and IFRIC 4 at the date of initial application. The Group also elected to use the recognition exemptions for lease contracts that, at the commencement date, have a lease term of 12 months or less and do not contain a purchase option (‘short-term leases’), and lease contracts for which the underlying asset is of low value (‘low-value assets’).

Upon adoption of IFRS 16, the Group has recognised right-of-use assets representing the right to use the underlying assets under premises and equipment and the corresponding lease liabilities to make lease payments under other liabilities. The right-of-use assets and lease liabilities recognised as at 1 January 2019 amounted to KD 8,822 thousand, with no impact on retained earnings.

The Group applied a single recognition and measurement approach for all leases that it is the lessee, except for short-term leases and leases of low-value assets. Refer to Note 2.13 Leases for the accounting policy beginning 1 January 2019.

• Leases previously classified as finance leasesAs at 1 January 2019, the Group did not have any lease classified as finance lease.

• Leases previously accounted for as operating leasesThe Group recognised right-of-use assets and lease liabilities for those leases previously classified as operating leases, except for short-term leases and leases of low-value assets. The right-of-use assets were recognised based on the amount equal to the lease liabilities, adjusted for any related prepaid and accrued lease payments previously recognised. Lease liabilities were recognised based on the present value of the remaining lease payments, discounted using the incremental profit rate of 2.5% at 1 January 2019.

2.4 Standards issued but not yet effectiveThe new and amended standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Group’s consolidated financial statements are disclosed below. The Group intends to adopt these new and amended standards and interpretations, if applicable, when they become effective.

Amendments to IFRS 3: Definition of a Business In October 2018, the IASB issued amendments to the definition of a business in IFRS 3 Business Combinations to help entities determine whether an acquired set of activities and assets is a business or not. They clarify the minimum requirements for a business, remove the assessment of whether market participants are capable of replacing any missing elements, add guidance to help entities assess whether an acquired process is substantive, narrow the definitions of a business and of outputs, and introduce an optional fair value concentration test. New illustrative examples were provided along with the amendments.

Since the amendments apply prospectively to transactions or other events that occur on or after the date of first application, the Group will not be affected by these amendments on the date of transition.


70

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.4 Standards issued but not yet effective (continued)Amendments to IAS 1 and IAS 8: Definition of Material In October 2018, the IASB issued amendments to IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors to align the definition of ‘material’ across the standards and to clarify certain aspects of the definition. The new definition states that, ‘Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity’.

The amendments to the definition of material is not expected to have a significant impact on the Group’s consolidated financial statements.

2.5 Basis of consolidationThe consolidated financial statements comprise the financial statements of the Bank as at 31 December 2019 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 financial statements 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 derecognises 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.



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2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.6 Financial instruments a) 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.

b) Classification and measurementThe Bank offers Sharia’a 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 recognised.

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.

The Group classifies all of its financial assets except for equity instruments and derivatives, based on the business model for managing the assets and the asset’s contractual cashflow characteristics.

Financial liabilities, other than loan commitments and financial guarantees, are measured at amortised cost or at fair value through profit or loss (FVTPL) when they are held for trading and derivative instruments or the fair value designation is applied.

Business model assessmentThe Group determines its business model at the level that best reflects how it manages groups of financial assets to achieve its business objective. That is, whether the Group’s objective is solely to collect the contractual cash flows from the assets or is to collect both the contractual cash flows and cash flows arising from the sale of assets.

The Group’s business model is not assessed on an instrument-by-instrument basis, but at a higher level of aggregated portfolios and is based on observable factors such as:

• How the performance of the business model and the financial assets held within that business model are evaluated and reported to the entity’s key management personnel;

• The risks that affect the performance of the business model (and the financial assets held within that business model) and, in particular, the way those risks are managed;

• How managers of the business are compensated (for example, whether the compensation is based on the fair value of the assets managed or on the contractual cash flows collected)

The expected frequency, value and timing of sales are also important aspects of the Group’s assessment.



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2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.6 Financial instruments (continued)b) Classification and measurement (continued)The business model assessment is based on reasonably expected scenarios without taking ‘worst case’ or ‘stress case’ scenarios into account. If cash flows after initial recognition are realised in a way that is different from the Group’s original expectations, the Group does not change the classification of the remaining financial assets held in that business model, but incorporates such information when assessing newly originated or newly purchased financial assets going forward.

The Contractual Cash flows assessment – Solely Payment of Principal and Profit (SPPP) test The Group assesses whether the financial instruments’ cash flows represent Solely Payments of Principal and Profit (the ‘SPPP test’).

‘Principal’ for the purpose of this test is defined as the fair value of the financial asset at initial recognition that may change over the life of the financial asset (for example, if there are repayments of principal or amortisation of the premium/discount).

The most significant elements of profit within a lending arrangement are typically the consideration for the time value of money and credit risk. To make the SPPP assessment, the Group applies judgement and considers relevant factors such as the currency in which the financial asset is denominated, and the period for which the profit rate is set.

In contrast, contractual terms that introduce a more than de minimis exposure to risks or volatility in the contractual cash flows that are unrelated to a basic lending arrangement do not give rise to contractual cash flows that are solely payments of principal and profit on the amount outstanding. In such cases, the financial asset is required to be measured at FVTPL.

b) Classification and measurement (continued)The Group reclassifies when and only when its business model for managing those assets changes. The reclassification takes place from the start of the first reporting period following the change. Such changes are expected to be very infrequent. The Group classifies its financial assets upon initial recognition into the following categories:

• Debt instruments at amortised cost• Debt instruments at Fair Value through Other Comprehensive Income (FVOCI)• Equity instruments at FVOCI, with no recycling of gains or losses to consolidated statement of profit or loss on derecognition• Financial assets at FVTPL

i) Debt instruments at amortised costA financial asset which is a debt instrument, is measured at amortised cost if it meets both of the following conditions and is not designated as at FVTPL:

- The asset is held within a business model whose objective is to hold assets to collect contractual cash flows; and- The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal

and profit (SPPP) on the principal amount outstanding.

Deposits with CBK, deposits with other banks, financing receivables, certain investments securities mainly representing Group’s investment in Sukuks and other assets are classified as debt instruments at amortised cost.

Debt instruments categorised at amortised cost are subsequently measured at amortised cost using the effective yield method adjusted for effective fair value hedges and impairment losses, if any. Profit income, foreign exchange gains and losses and impairment are recognised in the consolidated statement of profit or loss. Any gain or loss on derecognition is recognised in the consolidated statement of profit or loss.


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2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.6 Financial instruments (continued)b) Classification and measurement (continued)ii) Debt instruments at FVOCIA debt instrument is carried at FVOCI if it meets both of the following conditions:- The instrument is held within a business model, the objective of which is achieved by both collecting contractual cash

flows and selling financial assets; and- The contractual terms of the financial asset meet the SPPP test.

Debt instruments at FVOCI are subsequently measured at fair value with gains and losses arising due to changes in fair value recognised in other comprehensive income. Profit income and foreign exchange gains and losses are recognised in the consolidated statement of income. Fair value changes which are not part of an effective hedging relationship are recognised in other comprehensive income and presented in the cumulative changes in fair values as part of equity until the asset is derecognised or reclassified. When the financial asset is derecognised, the cumulative gain or loss previously recognised in other comprehensive income is reclassified from equity to the consolidated statement of profit or loss.

iii) Equity instruments at FVOCIUpon initial recognition, the Group may elect to classify irrevocably some of its equity investments as equity instruments at FVOCI when they meet the definition of Equity under IAS 32 Financial Instruments: Presentation and are not held for trading. Such classification is determined on an instrument-by- instrument basis.

Equity instruments at FVOCI are subsequently measured at fair value. Changes in fair values including foreign exchange component are recognised in other comprehensive income and presented in the cumulative changes in fair values as part of equity.

Gains and losses on these equity instruments are never recycled to consolidated statement of profit or loss. Dividends are recognised in consolidated statement of profit or loss when the right of the payment has been established, except when the Group benefits from such proceeds as a recovery of part of the cost of the instrument, in which case, such gains are recorded in the consolidated statement of comprehensive income.

iii) Equity instruments at FVOCI (continued)Equity instruments at FVOCI are not subject to an impairment assessment. Upon disposal, cumulative gains or losses are reclassified from cumulative changes in fair value to retained earnings in the consolidated statement of changes in equity. Equity instruments at FVOCI are included in investment securities in the consolidated statement of financial position.

iv) Financial asset carried at FVTPLThe Group classifies financial assets as carried at fair value through profit and loss when the business model of the class of financial assets is neither to solely collect the contractual cash flows from the assets nor to collect both the contractual cash flows and cash flows arising from the sale of assets. Financial assets that do not satisfy the SPPP test are mandatory classified under this category.

In addition, on initial recognition, the Group may irrevocably designate a financial asset that otherwise meets the requirements to be measured at amortised cost or at FVOCI as at FVTPL, if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise. Included in this classification are certain debt securities, equities and derivatives that are not designated as hedging instruments in a hedge relationship, that have been acquired principally for the purpose of selling or repurchasing in the near term.

FVTPL assets are subsequently measured at fair value.


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2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.6 Financial instruments (continued)b) Classification and measurement (continued)Changes in fair values, financing income and dividends are recorded in the consolidated statement of profit or loss according to the terms of the contract, or when the right to payment has been established.

c) Impairment of financial assets The Group recognises ECL on financing receivables, non-cash credit facilities in the form of bank guarantees, letters of guarantee, documentary letters of credit, bank acceptances, undrawn cash and non-cash credit facilities (revocable and irrevocable) and investment in debt securities measured at amortised cost or FVOCI.

Balances with the CBK and Sukuks issued by the CBK and the Government of Kuwait, are low risk and fully recoverable and hence no ECL is measured. Equity investments are not subject to ECL. Impairment of financing receivables shall be recognised at the higher of ECL computed based on CBK guidelines for measurement of ECL under IFRS 9, and the provision required by the CBK instructions.

Expected credit lossesThe Group has established a policy to perform an assessment at the end of each reporting period, whether credit risk has increased significantly since initial recognition by considering the change in the risk of default occurring over the remaining life of the financial instrument. To calculate ECL, the Group will estimate the risk of a default occurring on the financial instrument during its expected life. ECLs are estimated based on the present value of all cash shortfalls over the remaining expected life of the financial asset, i.e., the difference between: the contractual cash flows that are due to the Group under the contract, and the cash flows that the Group expects to receive, discounted at the effective profit rate of the loan.

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

Stage 1: 12 months ECL The Group measures loss allowances at an amount equal to 12-month ECL on financial assets where there has not been significant increase in credit risk since their initial recognition or on exposures that are determined to have a low credit risk at the reporting date. The Group considers a financial asset to have low credit risk when its credit risk rating is equivalent to the globally understood definition of ‘investment grade’.

Stage 2: Lifetime ECL – not credit impaired The Group measures loss allowances at an amount equal to lifetime ECL on financial assets where there has been a significant increase in credit risk since initial recognition but are not credit impaired.

Stage 3: Lifetime ECL – credit impaired. The Group measures loss allowances at an amount equal to 100% of net exposure i.e. after deduction from the amount of exposure the value of collaterals determined in accordance with the CBK guidelines.

Life time ECL is ECL that result from all possible default events over the expected life of a financial instrument. The 12 months ECL is the portion of life time expected credit loss that result from default events that are possible within the 12 months after the reporting date. Both life time ECLs and 12 month ECLs are calculated on either an individual basis or a collective basis depending on the nature of the underlying portfolio of financial instruments.


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2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.6 Financial instruments (continued)c) Impairment of financial assets (continued)Expected credit losses (continued)For financial assets for which the Group has no reasonable expectations of recovering either the entire outstanding amount, or a portion thereof, the gross carrying amount of the financial asset is reduced. This is considered a (partial) derecognition of the asset. When estimating lifetime ECL for undrawn financing commitments, the Group estimates the expected portion of the financing commitment that will be drawn down over its expected life. The ECL is then based on the present value of the expected shortfalls in cash flows if the financing facility is drawn down. The expected cash shortfalls are discounted at an approximation to the expected effective profit rate on the financing.

The Group’s liability under each guarantee is measured at the higher of the amount initially recognised less cumulative amortisation recognised in statement of profit or loss, and the ECL provision. For this purpose, the Group estimates ECLs based on the present value of the expected payments to reimburse the holder for a credit loss that it incurs. The shortfalls are discounted by the risk-adjusted profit rate relevant to the exposure.

Determining the stage of impairmentThe Group continuously monitors all assets subject to ECLs. In order to determine whether an instrument or a portfolio of instruments is subject to 12-month ECL or Lifetime ECL, the Group assesses whether there has been a significant increase in credit risk since initial recognition and back stop indicators and analysis based on the Group’s historical experience and expert credit risk assessment, including forward-looking information. The Group considers an exposure to have significantly increased in credit risk when there is significant deterioration in customer rating compared to rating at origination, restructured due to financial difficulties of the borrowers and other conditions mentioned below.

The Group also applies a secondary qualitative method for triggering a significant increase in credit risk for financial assets, such as moving a customer/facility to the watch list, or the account becoming forborne. In certain cases, the Group may also consider that events explained below (and not restricted to) are indicators of significant increase in credit risk as opposed to a default.

• Internal rating of the borrower indicating default or near-default;

• The borrower requesting emergency funding from the Group;

• The borrower having past due liabilities to public creditors or employees;

• The borrower is deceased;

• A material decrease in the underlying collateral value where the recovery of the loan is expected from the sale of the collateral;

• A material decrease in the borrower’s turnover, loss of major customers or deterioration of customer financial position;

• A covenant breach not waived by the Group;

• The obligor (or any legal entity within the obligor’s group) filing for bankruptcy application / protection or liquidation;

• Obligor’s listed debt or equity suspended at the primary exchange because of rumours or facts about financial difficulties;

• Legal measures and action against customer by other creditors;

• Clear evidence that the customer is unable to repayment financing receivable on maturity dates;

• Financial assets are classified under Stage 2 when there has been a downgrade in the facility’s credit rating by 2 grades for the facilities with Investment Grade and by 1 grade for those with Non-Investment Grade;

• All rescheduled financial assets are classified under the Stage 2 unless it qualifies for Stage 3 classification.


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2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.6 Financial instruments (continued)c) Impairment of financial assets (continued)Expected credit losses (continued)Determining the stage of impairment (continued)The quantitative criteria used to determine a significant increase in credit risk is a series of relative and absolute thresholds. All financial assets that are more than 30 days past due are deemed to have significant increase in credit risk since initial recognition and migrated to stage 2 even if other criteria do not indicate a significant increase in credit risk.

Purchased or originated credit-impaired financial assets are those financial assets that are credit-impaired on initial recognition and are taken to Stage 3.

Objective evidence that debt instrument is impaired includes whether any payment of principal or profit is 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, etc. The Group assess whether objective evidence of impairment exists on an individual basis for each individually significant asset and collectively for others not deemed individually significant.

Except for consumer and instalment financing, transfer of credit facility from Stage 2 to Stage 1 is made after a period of 12 months from the satisfaction of all conditions that triggered classification of the credit facility to Stage 2. Transfer of credit facility from Stage 3 to Stage 2 or Stage 1 is subject to approval of CBK.

Measurement of ECLsECLs are probability weighted estimates of credit losses and are measured as the present value of all cash shortfalls discounted at the effective profit rate of the financial instrument. Cash shortfall represent the difference between cashflows due to the Group in accordance with the contract and the cashflows that the Group expects to receive. The key elements in the measurement of ECL include probability of default, loss given default and exposure at default.

The Probability of Default (“PD”) is an estimate of the likelihood of default over a given time horizon.

• A default may only happen at a certain time over the assessed period, if the financial asset has not been previously derecognised and is still in the portfolio. The Group uses Point In Time PD (PIT PD) for each rating to calculate the ECL. The minimum PD is 0.75% for Investment Grade credit facilities and 1% for Non-Investment Grade credit facilities except for credit facilities granted to Government and Banks rated as Investment Grade by an external rating agency and financing transactions related to consumer and housing loans (except for credit cards).

• The Exposure at Default (“EAD”) is an estimate of the exposure at a future default date, taking into account expected changes in the exposure after the reporting date, including repayments of principal and profit, whether scheduled by contract or otherwise, expected drawdowns on committed facilities. As per CBK requirements, the Group applies 100% Credit Conversion Factor (CCF) on utilised cash and non-cash facilities. For unutilised facilities, CCF is applied based on the CBK requirements for leverage ratio issued on 21 October 2014.

• The Loss Given Default (“LGD”) is an estimate of the loss arising in the case where a default occurs at a given time. It is based on the difference between the contractual cash flows due and those that the lender would expect to receive, including from the realisation of any collateral. It is usually expressed as a percentage of the EAD.


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2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.6 Financial instruments (continued)c) Impairment of financial assets (continued)Expected credit losses (continued)Measurement of ECLs (continued)The maximum period for which the credit losses are determined is the contractual life of a financial asset, including credit cards and other revolving facilities unless the Group has the legal right to call it earlier. However, for financial assets in Stage 2, the Group considers a minimum maturity of 7 years for all credit facilities (excluding consumer financing, credit cards and housing financing) unless credit facilities have non-extendable contractual maturity and final payment is less than 50% of the total facility extended. For consumer financings and credit cards and housing financings in Stage 2, the Group considers minimum maturity of 5 years and 15 years respectively.

Incorporation of forward looking informationThe Group incorporates forward-looking information into both its assessment of whether the credit risk of an instrument has increased significantly since its initial recognition and its measurement of ECL. The Group has performed historical analysis and identified the key economic variables impacting credit risk and expected credit losses for each portfolio. Relevant macro-economic adjustments are applied to capture variations from economic scenarios. These reflect reasonable and supportable forecasts of future macro-economic conditions that are not captured within the base ECL calculations. Macro-economic factors taken into consideration include, but are not limited to, gross domestic product, consumer price index and government expenditure, and require an evaluation of both the current and forecast direction of the macro-economic cycle. Incorporating forward-looking information increases the degree of judgement required as to how changes in these macro-economic factors will affect ECLs. The methodologies and assumptions including any forecasts of future economic conditions are reviewed regularly.

Renegotiated financing receivablesIn the event of a default, the Group seeks to restructure financing to customers rather than take possession of collateral. This may involve extending the payment arrangements and the agreement of new financing conditions. When the financing to customers has been renegotiated or modified but not derecognised, any impairment is measured using the original effective yield method as calculated before the modification of terms. Management continually reviews renegotiated financing to ensure that all criteria are met and that future payments are likely to occur. Management also assesses whether there has been significant increase in credit risk or the facility should be classified in Stage 3.

Presentation of allowance for ECL in the consolidated statement of financial positionLoss allowances for ECL are presented as a deduction from the gross carrying amount of the financial assets for financial assets carried at amortised cost. In the case of debt instruments measured at FVOCI, the Group recognises the ECL charge in the consolidated statement of profit or loss and a corresponding amount is recognised in other comprehensive income with no reduction in the carrying amount of the financial asset in the consolidated statement of financial position.

Write-offsFinancial assets are written off either partially or in their entirety only when the Group has stopped pursuing the recovery. If the amount to be written off is greater than the accumulated loss allowance, the difference is first treated as an addition to the allowance that is then applied against the gross carrying amount. Any subsequent recoveries are credited to credit loss expense.


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2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.6 Financial instruments (continued)c) Impairment of financial assets (continued)Provisions for credit losses in accordance with CBK instructions The Group is required to calculate provisions for credit losses on financing receivables in accordance with the instructions of CBK on the classification of financing receivables and calculation of provisions. Financing receivables are classified as past due when a payment has not been received on its contractual payment date or if the facility is in excess of pre-approved limits. A financing receivable is classified as past due and impaired when the profit or a principal instalment is past due for more than 90 days and if the carrying amount of the facility is greater than its estimated recoverable value. Past due and past due and impaired financing receivables are managed and monitored as irregular facilities and are classified into the following four categories which are then used to determine the provisions.

The maximum period for which the credit losses are determined is the contractual life of a financial asset, including credit cards and other revolving facilities

Category Criteria Specific provision

Watch list Irregular for a period up to 90 days -

Substandard Irregular for a period of 91- 180 days 20%

Doubtful Irregular for a period of 181- 365 days 50%

Bad Irregular for a period exceeding 365 days 100%

The Group may also include a credit facility in one of the above categories based on management’s judgement of a customer’s financial and/or non-financial circumstances.

In addition to specific provisions, minimum general provisions of 1% on cash facilities and 0.5% on non-cash facilities are made on all applicable credit facilities (net of certain restricted categories of collateral) which are not subject to specific provisioning.

d) DerecognitionA financial asset (in whole or in part) is derecognised 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 derecognised when the obligation specified in the contract is discharged, cancelled or expired. When an existing financial liability is replaced by another from the same counterparty on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition 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.

e) 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.


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2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.7 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 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.


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2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.8 Derivative financial instruments and HedgingThe Group deals in Islamic derivative instruments to manage exposures to profit rate, foreign currency and credit risks.

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

Islamic Forward AgreementsIn 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 Sharia’a.

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 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 derivative contracts that do not qualify for hedge accounting, any gains or losses arising from changes in fair value of the derivative contract are taken directly to the consolidated statement of profit or loss.

Profit rate swaps Profit rate swaps are contractual agreements between two parties and may involve exchange of profit or exchange of both principal and profit for a fixed period of time based on contractual terms.

The notional amounts indicate the volume of transactions outstanding at the period-end and are neither indicative of the market risk nor credit risk. Most of the Group’s profit rate swaps are held for hedging.

Hedge accountingIn order to manage particular risks, the Group applies hedge accounting for transactions, which meet the specified criteria. 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 the purposes of hedge accounting, hedges are classified into two categories: (a) fair value hedges when hedging the exposure to changes in the fair value of a recognised asset or liability or an unrecognised firm commitment; and (b) 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 a foreign currency risk in an unrecognised firm commitment.

The changes in fair value of the hedging instrument that qualify and is designated as fair value hedge is recorded in the consolidated statement of profit or loss, together with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. If the hedge accounting is discontinued, the fair value adjustment to the hedged item is amortised to the consolidated statement of profit or loss over the period to maturity of the previously designated hedge relationship using the effective profit rate. If the hedged item is derecognised, the unamortised fair value is recognised immediately in the consolidated statement of profit or loss.


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2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.8 Derivative financial instruments and Hedging (continued)Hedge accounting (continued)When an unrecognised firm commitment is designated as a hedged item, the subsequent cumulative change in the fair value of the firm commitment attributable to the hedged risk is recognised as an asset or liability with a corresponding gain or loss recognised in consolidated statement of profit or loss.

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.

a) it is determined that the hedging instrument is not, or has ceased to be, highly effective as a hedge;b) the hedging instrument expires, or is sold, terminated, or exercised;c the hedged item matures or is sold or repaid; ord) a forecast transaction is no longer deemed highly probable.

2.9 Financial guaranteesIn 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 amortised 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. A provision for credit losses based on the higher of ECL under IFRS 9 according to the CBK guidelines and the provisions required by the CBK instructions is also accounted.

2.10 Investment in associateThe 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.


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2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.10 Investment in associate (continued)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 propertiesLand 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 equipmentFreehold 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.


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2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.12 Premises and equipment (continued)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 Leases – Group as a lesseeThe Group assesses at contract inception whether a contract is, or contains, a lease. That is, if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

Policy applicable from 1 January 2019The Group applies a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets. The Group recognises lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets.

a) Right-of-use assetsThe Group recognises right-of-use assets at the commencement date of the lease (i.e., the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any re-measurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Unless the Group is reasonably certain to obtain ownership of the leased asset at the end of the lease term, the recognised right-of-use assets are depreciated on a straight-line basis over the shorter of its estimated useful life and the lease term. Right-of-use assets are subject to impairment. The carrying value of the right-of-use assets are presented under premises and equipment in the consolidated statement of financial position.

b) Lease liabilitiesAt the commencement date of the lease, the Group recognises lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including in- substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the Group and payments of penalties for terminating a lease, if the lease term reflects the Group exercising the option to terminate. The variable lease payments that do not depend on an index or a rate are recognised as expense in the period on which the event or condition that triggers the payment occurs.


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2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.13 Leases – Group as a lessee (continued)b) Lease liabilities (continued)In calculating the present value of lease payments, the Group uses the incremental profit rate at the lease commencement date if the profit rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of profit and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the in-substance fixed lease payments or a change in the assessment to purchase the underlying asset and are presented under other liabilities in the consolidated statement of financial position.

Policy applicable before 1 January 2019Operating lease payments are recognised as an expense in the consolidated statement of profit or loss on a straight-line basis over the lease term. Contingent rental payable is recognised as an expense in the period in which they are incurred.

2.14 Perpetual Tier 1 SukukPerpetual Tier 1 Sukuk are recognised under equity in the consolidated statement of financial position and corresponding distributable profits on those Sukuk are accounted as a debit to the retained earnings.

2.15 Impairment of non-financial assetsThe 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. 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 indemnityProvision 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. This basis is considered to be a reliable approximation of the present value of the final obligation.

2.17 Treasury sharesTreasury 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.


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2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.18 Cash and cash equivalentsCash 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 (i) Financing income For all financial instruments measured at amortised cost, 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 “financing 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.

(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.

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.


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2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.21 ProvisionsProvisions 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. Non-monetary assets and liabilities in foreign currencies that are stated at fair value are translated to Kuwaiti Dinars using exchange rates ruling at the dates when the fair value was determined. In case of non-monetary assets, whose changes in fair values are recognised directly in other comprehensive income, related foreign exchange differences are also recognised directly in other comprehensive income unless it is part of an effective hedging strategy. For other non-monetary assets foreign exchange differences are recognised directly in the consolidated statement of profit or loss.

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

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

2.24 ContingenciesContingent 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 recognised when the outflow of resources is probable.

2.25 Fiduciary assetsAssets 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.

Accounting JudgementsClassification of financial assets The Group determines the classification of financial assets based on the assessment of the business model within which the assets are held and assessment of whether the contractual terms of the financial asset are solely payments of principal and profit on the principal amount outstanding.


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2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.26 Significant accounting judgement, estimates and assumptions (continued)Determining the lease term of contracts with renewal and termination options- Group as lesseeThe Group determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain not to be exercised.

The Group has the option, under some of its leases to lease the assets for additional terms. The Group applies judgement in evaluating whether it is reasonably certain to exercise the option to renew. That is, it considers all relevant factors that create an economic incentive for it to exercise the renewal. After the commencement date, the Group reassesses the lease term if there is a significant event or change in circumstances that is within its control and affects its ability to exercise (or not to exercise) the option to renew (e.g., a change in business strategy).

Estimation uncertainty and assumptionsThe key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below:

Impairment of financial instruments The measurement of impairment losses across all categories of financial assets requires judgement, in particular, the estimation of the amount and timing of future cash flows and collateral values when determining impairment losses and the assessment of a significant increase in credit risk. These estimates are driven by a number of factors, changes in which can result in different levels of allowances.

The Group’s ECL calculations are outputs of complex models with a number of underlying assumptions regarding the choice of variable inputs and their dependencies. Elements of the ECL models that are considered accounting judgements and estimates include:

• The Group’s internal credit rating model, which assigns PDs to the individual grades.• The Group’s criteria for assessing if there has been a significant increase in credit risk so allowances for financial assets

should be measured on a lifetime ECL basis and qualitative assessment.• The segmentation of financial assets when their ECL is assessed on a collective basis.• Development of ECL models, including various formulas and choice of inputs.• Determination of associations between macroeconomic scenarios and, economic inputs, and the effect on PDs, EADs

and LGDs. • Selection of forward-looking macroeconomic scenarios and their probability weightings, to derive the economic inputs

into the ECL models.

The Group has the policy to regularly review its models in the context of actual loss experience and adjust when necessary.

Impairment of investment in associatesThe Group calculates the amount of impairment as the difference between the recoverable amount and its carrying value if there is any objective evidence that the investment in associates are impaired. The estimation of recoverable amount requires the Group to make an estimate of the expected future cashflows and selection of appropriate inputs for valuation.

Fair values of assets and liabilities including intangiblesConsiderable judgment by management is required in the estimation of the fair value of the assets including intangibles with definite and indefinite useful life, liabilities and contingent liabilities acquired as a result of business combination.


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2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.26 Significant accounting judgement, estimates and assumptions (continued)Accounting Judgements (continued)Valuation of unquoted financial assetsFair value of unquoted financial assets is determined using valuation techniques including the discounted cash flow model. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in establishing fair values. The judgments include considerations of inputs such as liquidity risk, credit risk and volatility. Changes in assumptions about these factors could affect the reported fair value of financial instruments. The determination of the cash flows and discount factors requires significant estimation.

3 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.

4 NET FEES AND COMMISSION INCOME 2019 2018 KD ‘000 KD ‘000

Investment management fees 994 1,520Credit related fees and commission 10,020 9,493Brokerage fees 865 861

Total fees and commission income 11,879 11,874Fees and commission expense (2,077) (1,996)

Net fees and commission income 9,802 9,878

5 OTHER INCOME 2019 2018 KD ‘000 KD ‘000

Dividend income 1,225 1,013Net income from investment properties 44 447Other income 41 68

1,310 1,528

6 PROVISION AND IMPAIRMENT LOSSES 2019 2018 KD ‘000 KD ‘000

Impairment of financing receivables (Note 10) 26,652 24,158Recoveries from written off financing receivables (3,988) (2,267)Impairment of non-cash credit facilities (Note 10) 1,351 (55)Impairment of investment properties (Note 13) 407 30Other provisions (7,614) 8,492Expected credit losses for investment in sukuks (Note 11) 140 134Expected credit losses for other financial assets 55 21Reversal of impairment loss (Note 1) (7,579) -

9,424 30,513


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7 TAXATION 2019 2018 KD ‘000 KD ‘000

Contribution to Kuwait Foundation for the Advancement of Sciences (KFAS) 520 485National Labour Support Tax (NLST) 1,455 1,354Zakat 577 536

2,552 2,375

8 BASIC AND DILUTED EARNINGS PER SHARE 2019 2018 KD ‘000 KD ‘000

Net profit for the year attributable to the Bank’s equity shareholders (KD 000) 55,017 51,255Less: Profit payments on Tier 1 Sukuks (KD 000) (3,357) (3,329)

Net profit for the year attributable to equity holders of the Bank after profit payment on Tier 1 Sukuks (KD 000) 51,660 47,926

Weighted average number of shares outstanding during the year 1,857,172,776 1,857,172,776

Basic and diluted earnings per share attributable to the Bank’s equity shareholders (fils) 27.8 25.8

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

2019 2018

Weighted average number of Bank’s issued and paid up shares 2,062,731,198 2,062,731,198Less: Weighted average number of treasury shares (205,558,422) (205,558,422)

1,857,172,776 1,857,172,776

Earnings per share for the year ended 31 December 2018 was 27.1 fils, before retroactive adjustment to the number of shares following the bonus issue (Note 18).

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

9 CASH AND CASH EQUIVALENTSCash and cash equivalents included in the consolidated statement of cash flows consists of the following:

2019 2018 KD ‘000 KD ‘000

Cash and balances with banks 133,712 76,937Deposits with Central Bank of Kuwait and other banks with an original maturity of seven days or less 96,067 24,273

229,779 101,210


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

Retail Commercial financing financing Total KD ‘000 KD ‘000 KD ‘000

At 1 January 2019 14,522 109,607 124,129Charge for the year (Note 6) 3,239 23,413 26,652Amounts written off (7,615) (39,134) (46,749)

At 31 December 2019 10,146 93,886 104,032

Retail Commercial financing financing Total KD ‘000 KD ‘000 KD ‘000

At 1 January 2018 10,700 102,384 113,084Charge for the year (Note 6) 3,988 20,170 24,158Amounts written off (166) (12,947) (13,113)

At 31 December 2018 14,522 109,607 124,129

The ECL determined under IFRS 9 guidelines by CBK for credit facilities as of 31 December 2019 is KD 54,098 thousand (2018: KD 101,349 thousand), which is lower than provision for credit losses calculated in accordance with CBK instructions.

As at 31 December 2019, non-performing financing receivables on which income has been suspended from recognition amounted to KD 39,444 thousand (2018: KD 37,191 thousand).

The available specific provision on cash facilities is KD 10,790 thousand (2018: KD 8,464 thousand).

The provision charge for the year on non-cash facilities is KD 1,351 thousand (2018: provision reversal of KD 55 thousand). The available provision on non-cash facilities of KD 9,087 thousand (2018: KD 7,736 thousand) is included in other liabilities (Note 17).

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 CBK 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.


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11 INVESTMENT SECURITIES 2019 2018 KD ‘000 KD ‘000

Measured at amortised cost: Sukuks 297,448 241,730

Measured at FVTPL: Equity securities and funds - Quoted 12 16,068 - Unquoted 657 -

669 16,068 Measured at FVOCI: Equity securities and funds - Quoted - 658 - Unquoted 5,122 5,729

5,122 6,387

303,239 264,185

An analysis of changes in the gross carrying amount and the corresponding expected credit losses in relation to investment in sukuks are as follows: 2019 2018 KD ‘000 KD ‘000

Gross carrying amount as at 1 January 241,864 210,796New assets purchased net of redemptions/sales during the year 54,152 30,023Exchange rate and other movements 1,706 1,045

At 31 December 297,722 241,864

2019 2018 KD ‘000 KD ‘000

ECL allowance as at 1 January 134 -Net charge during the year 140 134

At 31 December 274 134


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12 INVESTMENT IN ASSOCIATE The share in assets, liabilities and results of the associate for the year ended is as follows: 2019 2018 KD ‘000 KD ‘000

Share of associate’s statement of financial position: Current assets 3,466 3,834Non-current assetsNon-current assets 5,853 8,675Current liabilities (897) (3,535)Non-current liabilities (161) (151)

Net assets 8,261 8,823

Share of associate’s results: Operating income 1,001 3,533

(Loss) profit for the year (286) 1,491

13 INVESTMENT PROPERTIESThese represent properties acquired by the Group and is recognised at cost less accumulated depreciation and impairment. For the purpose of impairment testing, 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 29,752 thousand (2018: KD 38,867 thousand).

Movement for the year is as follows: 2019 2018 KD ‘000 KD ‘000

At 1 January 36,539 38,026Additions 2,817 30Disposals (9,678) (1,325)Impairment (Note 6) (407) (30)Depreciation charged for the year (41) (162)

At 31 December 29,230 36,539

14 PREMISES AND EQUIPMENTPremises and equipment includes a revaluation increase of KD 69 thousand (2018: decrease of KD 138 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.

15 OTHER ASSETS 2019 2018 KD ‘000 KD ‘000

Profit receivable 5,731 6,525Positive fair value of derivative financial instruments (Note 23) 880 1,245Others 11,418 4,316

18,029 12,086


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16 DEPOSITS FROM CUSTOMERSDepositors’ 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 Sharia’a. 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.

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 utilised 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, in accordance with Islamic Sharia’a. The fair values of deposits from customers do not differ significantly from their carrying values.

17 OTHER LIABILITIES 2019 2018 KD ‘000 KD ‘000

Depositors’ profit share payable 25,734 16,782Provision for staff indemnity and passage 7,070 6,635Provision for non-cash credit facilities (Note 10) 9,087 7,736Negative fair value of derivative financial instruments (Note 23) 3,675 1,485Account payables, accruals and others 43,066 46,446

88,632 79,084

18 EQUITYi) The authorised share capital as at 31 December 2019 comprises of 2,500,000,000 ordinary shares (31 December 2018:

2,500,000,000 shares) of 100 fils each and the issued and fully paid share capital as at 31 December 2019 comprises of 2,062,731,198 ordinary shares (31 December 2018: 1,964,505,903 shares) of 100 fils each.

ii) The Board of Directors of the Bank has proposed cash dividend of 15% (2018: 15%) amounting to 15 fils per share (2018: 15 fils) and bonus shares of 5% (2018: 5%). 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 25 March 2019 approved the distribution of cash dividend of 15 fils per share (2017: 13 fils per share) and issuance of bonus shares of 5% (2017: 5%) for the year ended 31 December 2018.


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18 EQUITY (continued)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. Accordingly, the Bank has transferred KD 5,782 thousand (2018: KD 5,387 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 derecognised.

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.

19 TREASURY SHARESThere was no purchase or sale of treasury shares during the current year. 2019 2018 KD ‘000 KD ‘000

Number of treasury shares 205,558,422 195,769,926Treasury 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) 70,301 58,144

Weighted average market value per treasury share (fils) 322 301

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

20 PERPETUAL TIER 1 SUKUKIn October 2016, the Bank through a Sharia’s 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.

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 then prevailing 5 years U.S Mid Swap Rate plus initial margin of 4.226 % per annum.


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20 PERPETUAL TIER 1 SUKUK (continued)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.

Semi-annual profits were paid during the year ended 31 December 2019.

21 TRANSACTIONS WITH RELATED PARTIESThe 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:

Number of Number of Board members or related Parent Others Total executive officers parties KD ‘000 KD ‘000 KD ‘000

As at 31 December 2019

Financing receivables - 6 - 32,045 32,045Deposits with other banks - 5 106,818 3,455 110,273Deposits from banks and financial institutions - 8 20,119 486,968 507,087Deposits from customers 21 21 - 4,184 4,184Commitments and contingent liabilities - 6 11,427 38,509 49,936Islamic Forward Agreements - 1 757 - 757Profit Rate Swaps - 1 211,825 - 211,825

Number of Number of Board members or related Parent Others Total executive officers parties KD ‘000 KD ‘000 KD ‘000

As at 31 December 2018

Financing receivables - 6 - 42,319 42,319Deposits with other banks - 4 72,100 314 72,414Deposits from banks and financial institutions - 7 36,712 503,180 539,892Deposits from customers 13 26 - 27,917 27,917Commitments and contingent liabilities - 6 12,258 41,087 53,345Islamic Forward Agreements - 1 10,498 - 10,4987Profit Rate Swaps - 1 104,866 - 104,866

Parent Others Total KD ‘000 KD ‘000 KD ‘000

TransactionsFor the year ended 31 December 2019Financing income 3,519 1,648 5,167Distribution to depositors 710 15,435 16,145 For the year ended 31 December 2018 Financing income 2,779 1,977 4,756Distribution to depositors 844 11,680 12,524


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21 TRANSACTIONS WITH RELATED PARTIES (continued) 2019 2018 KD ‘000 KD ‘000

Directors: Board of Directors’ remuneration 255 238

Key management compensation: Salaries and other short-term benefits 1,725 1,874Post-employment benefits 99 232

1,824 2,106

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

22 COMMITMENTS AND CONTINGENT LIABILITIESa) Credit- related commitmentsCredit-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:

2019 2018 KD ‘000 KD ‘000

Acceptances 35,227 23,895Letters of credit 56,679 69,443Guarantees 439,115 449,301

531,021 542,639

Irrevocable credit commitments to extend credit at the reporting date amounted to KD 11,475 thousand (2018: KD 919 thousand).

b) Capital commitmentThe capital commitment for purchase of assets as at 31 December 2019 is KD 1,140 thousand (2018: KD 1,495 thousand).

23 DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGINGIslamic forward agreements (Waad)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 Sharia’a.

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 are measured.



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23 DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING (continued)Islamic forward agreements (Waad)Most of the Group’s islamic forward agreements relate to deals with customers, which are normally matched by entering into reciprocal deals with counterparties.


Most of the Group’s islamic forward agreements relate to deals with customers, which are normally matched by entering into reciprocal deals with counterparties.

Profit rate swapsProfit rate swaps are contractual agreements between two parties and may involve exchange of profit or exchange of both principal and profit for a fixed period of time based on contractual terms.

The notional amounts indicate the volume of transactions outstanding at the period-end and are neither indicative of the market risk nor credit risk. Most of the Group’s profit rate swaps are held for hedging.

The fair value of derivative financial instruments included in the financial records, together with their notional amounts is summarised as follows:

Notional amount

Assets Liabilities Less than 1 1 to 3 3 to 12 More than (Positive) (Negative) month months months 12 months Total2019 KD ’000 KD ’000 KD ’000 KD ’000 KD ’000 KD ’000 KD ’000

Waad 48 54 - 1,218 2,275 - 3,493Profit Rate Swaps (held as fair value hedge) 815 3,604 - - 4,546 176,974 181,520Profit Rate Swaps (others) 17 17 - - 60,610 - 60,610

880 3,675 - 1,218 67,431 176,974 245,623

Notional amount

Assets Liabilities Less than 1 1 to 3 3 to 12 More than (Positive) (Negative) month months months 12 months Total 2018 KD ’000 KD ’000 KD ’000 KD ’000 KD ’000 KD ’000 KD ’000

Waad 422 444 10,758 8,984 5,931 - 25,673Profit Rate Swaps (held as fair value hedge) 508 726 - - 19,715 54,821 74,536Profit Rate Swaps (others) 315 315 - - - 60,660 60,660

1,245 1,485 10,758 8,984 25,646 115,481 160,869


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24 FAIR VALUES MEASUREMENTThe 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 2019 is as follows:

Level: 1 Level: 2 Level: 3 Level: 42019 KD ‘000 KD ‘000 KD ‘000 KD ‘000

Assets measured at fair valueFinancial assets 12 1,251 4,528 5,791Investments securities Derivative financial instruments Waad - 48 - 48Profit Rate Swaps - 832 - 832

- 880 - 880

12 2,131 4,528 6,671

Liability measured at fair valueDerivative financial instrumentsWaad - 54 - 54Profit Rate Swap - 3,621 - 3,621

- 3,675 - 3,675

Level: 1 Level: 2 Level: 3 Level: 42018 KD ‘000 KD ‘000 KD ‘000 KD ‘000

Assets measured at fair valueFinancial assets Investments securities 16,726 1,166 4,563 22,455 Derivative financial instruments Waad - 422 - 422Profit Rate Swaps - 823 - 823

- 1,245 - 1,245

16,726 2,411 4,563 23,700

Liability measured at fair valueDerivative financial instrumentsWaad - 444 - 444Profit Rate Swap - 1,041 - 1,041

- 1,485 - 1,485

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 change in fair value 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.


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24 FAIR VALUES MEASUREMENT (continued)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 amortised 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 profit 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.

25 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:

Up to 3 to 12 Over 3 months months 1 year Total2019 KD ‘000 KD ‘000 KD ‘000 KD ‘000

ASSETSCash and balances with banks 133,712 - - 133,712Deposits with Central Bank of Kuwait 219,441 125,393 - 344,834Deposits with other banks 235,891 218,546 - 454,437Financing receivables 2,079,604 418,444 520,707 3,018,755Investment securities 21,881 34,257 247,101 303,239Investment in associate - - 8,261 8,261Investment properties - - 29,230 29,230Premises and equipment - - 40,907 40,907Other assets 12,296 3,460 2,273 18,029

Total assets 2,702,825 800,100 848,479 4,351,404 LIABILITIES Deposits from banks and other financial Institutions 804,728 244,902 - 1,049,630Deposits from customers 1,698,524 955,043 43,417 2,696,984Other liabilities 31,623 20,803 36,206 88,632

Total liabilities 2,534,875 1,220,748 79,623 3,835,246

Net liquidity gap 167,950 (420,648) 768,856 516,158


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25 MATURITY ANALYSIS OF ASSETS AND LIABILITIES (continued)

Up to 3 to 12 Over 3 months months 1 year Total2018 KD ‘000 KD ‘000 KD ‘000 KD ‘000

ASSETSCash and balances with banks 76,937 - - 76,937Deposits with Central Bank of Kuwait 123,853 222,244 - 346,097Deposits with other banks 334,801 - - 334,801Financing receivables 1,897,241 399,060 503,605 2,799,906Investment securities 105,888 31,845 126,452 264,185Investment in associate - - 8,823 8,823Investment properties - - 36,539 36,539Premises and equipment - - 34,279 34,279Other assets 9,381 1,999 706 12,086

Total assets 2,548,101 655,148 710,404 3,913,653 LIABILITIES Deposits from banks and other financial Institutions 547,488 371,163 - 918,651Deposits from customers 1,997,719 380,621 46,176 2,424,516Other liabilities 19,390 17,246 42,448 79,084

Total liabilities 2,564,597 769,030 88,624 3,422,251

Net liquidity gap (16,496) (113,882) 621,780 491,402

26 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT Strategy in using financial instrumentsAs an Islamic commercial bank, the Bank’s activities are principally related to the sourcing of funds through Sharia’a compliant financial instruments, within the guidelines prescribed by the Central Bank of Kuwait (CBK) and deploying these funds in Sharia’a 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 and Sharia’a 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 MANAGEMENTThe 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.

The 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.


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26 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)RISK MANAGEMENT (continued)A. CREDIT RISK (continued)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.

Assessment of expected credit losses Definition of defaultThe Group considers a financial asset to be in default and therefore Stage 3 (credit impaired) for ECL calculations when for those facilities where any payment of principal or profit is 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 etc. In such cases, the Group recognises a loss allowance for the life time ECL.

Any credit impaired or stressed facility that has been restructured during the year would also be considered as in default. The Group considers externally-rated exposures with ratings ‘D’ for S&P and Fitch, and ‘C’ for Moody’s as defaulted.

The Group considers a variety of indicators that may indicate unlikeliness to pay as part of a qualitative assessment of whether a customer is in default. Such indicators include:• breaches of covenants• borrower having past due liabilities to public creditors or employees• borrower is deceased

Significant increase in credit riskThe Group continuously monitors all assets subject to ECLs. In order to determine whether an instrument or a portfolio of instruments is subject to 12 months ECL or life time ECL, the Group assess whether there has been a significant increase in credit risk since initial recognition. The Group applies a consistent quantitative criterion for internally and externally rated portfolio to assess significant increase in credit risk.

Internal rating and PD estimation processGroup’s internal grading system uses various qualitative assessments. Other than the staging rules mentioned in Note 2.6, the Group also complies with the guidelines mentioned in the CBK Instructions, as follows:

• Credit facilities except consumer financing, are classified under Stage 2 where there has been a default in principal or profit payment for more than 30 days and for consumer financing, the default period is more than 60 days;

• Credit facilities are classified under Stage 2 when there has been a downgrade in the facility’s credit rating by 2 grades for the facilities with Investment Grade and by 1 grade for those with Non-Investment Grade;


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26 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)RISK MANAGEMENT (continued)A. CREDIT RISK (continued)Assessment of expected credit losses (continued)Internal rating and PD estimation process (continued)IFRS 9 requires the use of separate PD for a 12-month duration and lifetime duration depending on the stage allocation of the obligor. A PD used for IFRS 9 should reflect the Group’s estimate of the future asset quality. The Group uses Point In Time PD (PIT PD) for each rating to calculate the ECL. The minimum PD is 0.75% for Investment Grade credit facilities and 1% for Non-Investment Grade credit facilities except for credit facilities granted to Government and Banks rated as Investment Grade by an external rating agency and financing transactions related to consumer and housing loans (except for credit cards).

Measurement of ECLsECLs are probability weighted estimates of credit losses and are measured as the present value of all cash shortfalls discounted at the effective interest rate of the financial instrument. Cash shortfalls represent the difference between cash flows due to the Group in accordance with the contract and the cash flows that the Group expects to receive. The key elements in the measurement of ECL include probability of default (PD), loss given default (LGD) and exposure at default (EAD). The Group estimates these elements using appropriate credit risk models taking into consideration the internal and external credit ratings of the assets, forward looking macro-economic scenarios etc.

Incorporation of forward-looking informationThe Group considers key economic variables that are expected to have an impact on the credit risk and the ECL in order to incorporate forward looking information into the ECL models. These primarily reflect reasonable and supportable forecasts of the future macro-economic conditions. The consideration of such factors increases the degree of judgment in determination of ECL. The Group employs statistical models to incorporate macro-economic factors on historical default rates. The Group considers 3 scenarios (base case, upside case, and a downside case) of forecasts of macro-economic data separately for each geographical segments and appropriate probability weights are applied to these scenarios to derive a probability weighted outcome of expected credit loss. The management reviews the methodologies and assumptions including any forecasts of future economic conditions on a regular basis.

Maximum exposure to credit riskThe 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.

Maximum Maximum exposure exposure 2019 2018 KD ‘000 KD ‘000

Credit risk exposures relating to consolidated statement of financial position items: Balances with banks 109,864 59,949Deposits with the Central Bank of Kuwait 344,834 346,097Deposits with other banks 454,437 334,801Financing receivables 3,018,755 2,799,906Investment securities 297,448 241,730Other assets 15,920 10,903

4,241,258 3,793,386

Credit risk exposures relating to off - balance sheet items: (Note 22a) Acceptances, letters of credit, and guarantees 531,021 542,639Irrevocable credit commitments 11,475 919

542,496 543,558


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26 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)RISK MANAGEMENT (continued)A. CREDIT RISK (continued)Maximum exposure to credit risk (continued)The gross maximum credit exposure to a single client or counterparty as of 31 December 2019 is KD 77,554 thousand (2018: KD 76,516 thousand) before taking account of any collaterals.

Geographical and industry-wise concentration of assets and off-balance sheet items are as follows: Contingencies & Assets Commitments representing representing credit risk credit risk2019 KD ‘000 KD ‘000

Geographic region: Kuwait 3,700,771 431,133Other GCC 418,357 43,337Europe 13,479 56,554North America 22,771 3,425Other countries 85,880 8,047

4,241,258 542,496

Contingencies & Assets Commitments representing representing credit risk credit risk2019 KD ‘000 KD ‘000

Industry sector: Trading and manufacturing 653,759 191,400Banks and financial institutions 1,130,554 79,630Construction and real estate 1,274,453 167,097Other 1,182,492 104,369

4,241,258 542,496

Contingencies & Assets Commitments representing representing credit risk credit risk2018 KD ‘000 KD ‘000

Geographic region: Kuwait 3,355,808 417,918Other GCC 285,816 68,015Europe 34,847 39,145North America 18,718 3,473Other countries 98,197 15,007

3,793,386 543,558


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26 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)RISK MANAGEMENT (continued)A. CREDIT RISK (continued)Maximum exposure to credit risk (continued) Contingencies & Assets Commitments representing representing credit risk credit risk2018 KD ‘000 KD ‘000

Industry sector: Trading and manufacturing 613,848 189,783Banks and financial institutions 1,001,199 109,499Construction and real estate 1,190,244 170,831Other 988,095 73,445

3,793,386 543,558

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

Neither past due nor impaired (KD ‘000)

High Standard Closely2019 grade grade monitored Total

Balances with banks 109,864 - - 109,864Deposits with Central Bank of Kuwait 344,834 - - 344,834Deposits with other banks 454,437 - - 454,437Financing receivables 2,785,849 147,009 24,722 2,957,580Investment securities 297,448 - - 297,448Other assets 15,920 - - 15,920

4,008,352 147,009 24,722 4,180,083

Neither past due nor impaired (KD ‘000)

High Standard Closely2019 grade grade monitored Total

Balances with banks 59,949 - - 59,949Deposits with Central Bank of Kuwait 346,097 - - 346,097Deposits with other banks 334,801 - - 334,801Financing receivables 2,495,675 205,833 48,728 2,750,236Investment securities 241,730 - - 241,730Other assets 10,903 - - 10,903

3,489,155 205,833 48,728 3,743,716


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26 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)RISK MANAGEMENT (continued)A. CREDIT RISK (continued)Maximum exposure to credit risk (continued)Financial assets by class that are past due but not impaired:

Past due Past due Past due up to 30 31 to 60 61 to 90 days days days Total2019 KD ‘000 KD ‘000 KD ‘000 KD ‘000

Financing receivables - Retail financing 6,888 2,303 1,251 10,442 - Commercial financing 14,325 5,692 2,062 22,079

21,213 7,995 3,313 32,521

Fair value of collateral 21,165

Past due Past due Past due up to 30 31 to 60 61 to 90 days days days Total2018 KD ‘000 KD ‘000 KD ‘000 KD ‘000

Financing receivables - Retail financing 7,059 2,723 1,463 11,245 - Commercial financing 2,127 2,831 4,740 9,698

9,186 5,554 6,203 20,943

Fair value of collateral 8,350

Financial assets by class that are impaired:

Gross Imapirment Fair value exposure provision of collateral2019 KD ‘000 KD ‘000 KD ‘000

Financing receivables - Retail financing 3,996 1,590 - - Commercial financing 35,448 9,200 26,077

39,444 10,790 26,077

Gross Imapirment Fair value exposure provision of collateral2018 KD ‘000 KD ‘000 KD ‘000

Financing receivables - Retail financing 8,655 5,774 - - Commercial financing 28,536 2,690 26,081

37,191 8,464 26,081

The factors the Group considered in determining impairment are disclosed in Note 2 – Summary of Significant accounting policies.


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26 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)RISK MANAGEMENT (continued)B. LIQUIDITY RISKLiquidity 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 to 3 3 to 12 1 to 5 Over 1 month months months years 5 years Total2019 KD ’000 KD ’000 KD ’000 KD ’000 KD ’000 KD ’000

Deposits from banks and other financial institutions 532,914 273,315 248,671 - - 1,054,900Deposits from customers 1,353,030 347,987 973,142 44,855 - 2,719,014Other liabilities 22,538 9,085 20,803 36,206 - 88,632

1,908,482 630,387 1,242,616 81,061 - 3,862,546

Less than 1 to 3 3 to 12 1 to 5 Over month months months years 5 years Total 2018 KD ’000 KD ’000 KD ’000 KD ’000 KD ’000 KD ’000

Deposits from banks and other financial institutions 298,505 250,002 377,305 - - 925,812Deposits from customers 1,564,687 436,135 385,987 47,966 - 2,434,775Other liabilities 9,958 9,432 17,246 42,448 - 79,084

1,873,150 695,569 780,538 90,414 - 3,439,671

The table below shows the contractual expiry by maturity of the Group’s credit related contingent liabilities and commitments as disclosed in Note 22:

Less than 1 to 3 3 to 12 1 to 5 Over 1 month months months years 5 years Total2019 KD ’000 KD ’000 KD ’000 KD ’000 KD ’000 KD ’000

Credit related contingent liabilities 12,724 61,175 241,423 211,799 3,900 531,021Irrevocable credit commitments - - - - 11,475 11,475

12,724 61,175 241,423 211,799 15,375 542,496


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26 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)RISK MANAGEMENT (continued)B. LIQUIDITY RISK (continued)Analysis of financial liabilities by remaining contractual maturities (continued)

Less than 1 to 3 3 to 12 1 to 5 Over 1 month months months years 5 years Total 2018 KD ’000 KD ’000 KD ’000 KD ’000 KD ’000 KD ’000

Credit related contingent liabilities 32,472 58,818 224,286 205,959 21,104 542,639Irrevocable credit commitments - - - 46 873 919

32,472 58,818 224,286 206,005 21,97 543,558

C. MARKET RISKThe 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 profit rate risk, currency risk and equity price risk.

C.1 PROFIT RATE RISKProfit rate risk arises from the possibility that changes in profit rates will affect the value of the underlying financial instruments. The Group is not exposed to profit rate risk since in accordance with Islamic Sharia’a the Bank does not charge variable profit.

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

Change in 2019 2018Currency currency rate in % KD ‘000 KD ‘000

US Dollars +5 % 7 54

A 5 percent decrease of the above currency against the Kuwaiti Dinar would have had equal, but opposite, effect of the amount shown above, on the basis that all other variables remain constant.

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.


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26 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)RISK MANAGEMENT (continued)C.3 EQUITY PRICE RISK (continued)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 equity

Changes in 2019 2018Market indices equity price % KD ‘000 KD ‘000

Kuwait Index +5 % - 33

Effect on statement of profit or loss

Changes in 2019 2018Market indices equity price % KD ‘000 KD ‘000

Saudi Arabia +5 % - 530

An equal change in the opposite direction would have had equal, but opposite effect to the amount shown above, on the basis that all other variables remain constant.

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 RISKThe 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”.


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27 SEGMENT REPORTINGThe 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 overhead cost.

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 Commercial Treasury and Investment Banking Management Total

2019 2018 2019 2018 2019 2018 KD ’000 KD ’000 KD ’000 KD ’000 KD ’000 KD ’000

Net financing income 60,788 81,966 24,358 18,436 85,146 100,402Fees, commissions and others 12,761 10,572 9,301 10,600 22,062 21,172

Total operating income 73,549 92,538 33,659 29,036 107,208 121,574Provision and impairment losses (14,524) (30,235) 5,100 (278) (9,424) (30,513)Operating expenses and taxation (35,544) (33,233) (7,223) (6,573) (42,767) (39,806)

Segment result 23,481 29,070 31,536 22,185 55,017 51,255

Profit for the year 55,017 51,255

Retail and Commercial Treasury and Investment Banking Management Total

2019 2018 2019 2018 2019 2018 KD ’000 KD ’000 KD ’000 KD ’000 KD ’000 KD ’000

Segment assets 3,090,746 3,188,710 1,260,658 724,943 4,351,404 3,913,653

Segment liabilities 2,213,631 1,935,459 1,621,615 1,486,792 3,835,246 3,422,251

The Group primarily operates in Kuwait.


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28 CAPITAL MANAGEMENTThe 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 maximise 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 2019 are calculated in accordance with CBK circular number 2/RB, RBA/336/2014 dated 24 June 2014 are shown below:

2019 2018 KD ‘000 KD ‘000

Risk weighted assets 3,477,724 3,196,336

Total capital required 452,104 415,524

2019 2018 KD ‘000 KD ‘000

Capital available Tier 1 capital 515,530 490,772 Tier 2 capital 41,580 38,324

Total capital 557,110 529,096 Tier 1 capital adequacy ratio 14.82% 15.35%Total capital adequacy ratio 16.02% 16.55%

The Group’s financial leverage ratio for the year ended 31 December 2019 is calculated in accordance with CBK circular number 2/IBS/ 343/2014 dated 21 October 2014 is shown below:

2019 2018 KD ‘000 KD ‘000

Tier 1 capital 515,530 490,772

Total exposure 5,809,013 5,451,278

Financial leverage ratio 8.87% 9.0%

December 31, 2019

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 June 24, 2014

Basel III – Pillar III Disclosures


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BASEL III – PILLAR III DISCLOSURES31 December 2019

INFORMATION ON SUBSIDIARIES AND SIGNIFICANT INVESTMENTSThe 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/336/2014 dated June 24, 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 owns 30% (31 December 2018: 30%) equity interest in Middle East Financial Investment Company, an unquoted company incorporated in the Kingdom of Saudi Arabia engaged in investment activities.

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 BANKThe Group’s capital comprises Common Equity Tier (1) (CET1), Additional Tier (1) (AT1) and Tier (2) capital. CET1 capital demonstrates the Group’s strength and includes share capital, reserves minus the treasury shares, dividends declared, goodwill, intangible assets and certain investments which are required to be deducted. AT1 capital includes additional paid in capital, including AT1 sukuk, and non-controlling interest. 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 2019 comprises 2,165,867,758 (31 December 2018: 2,062,731,198) ordinary shares of 100 fils each (31 December 2018: 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 its issued shares. No cash dividend is paid on treasury shares held by the Group. However, treasury shares are entitled for bonus shares.

During October 2016, the Group issued USD 200 million (31 December 2019: 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 Sharia’a principles.


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TABLE 1 – CAPITAL STRUCTURE 2019 2018Details KD ‘000 KD ‘000

Common Equity Tier 1 Paid up share capital 216,587 206,273Property revaluation reserve 9,907 9,838 Cumulative changes in fair value reserve 3,460 3,772 Profit equalization reserve 2,313 2,313 Statutory Reserve 84,264 84,264 General Reserve 22,660 22,660 Treasury share reserves 974 974Other disclosed reserve 12,883 12,883 Retained earnings 117,941 104,581

Less: Treasury shares (43,957) (43,957)

Total Common Equity Tier 1 427,032 403,601 Additional Tier 1 Perpetual Tier 1 Sukuk 60,640 60,640Eligible non-controlling interest in consolidated subsidiaries - -

Total Additional Tier 1 60,640 60,640

Total Core Capital 487,672 464,241 Tier 2 capital Eligible non-controlling interest in consolidated subsidiaries - -General provision (up to 1.25% of RWA) 41,580 38,324

Total Tier 2 capital 41,580 38,324

Total Eligible Capital 529,252 502,565


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TABLE 2 – RECONCILIATION BETWEEN THE STATEMENT OF FINANCIAL POSITION AND THE REGULATORY CAPITAL ELEMENTS – DECEMBER 2019

STEP 1 TEP 2019 KD ‘000

Statement of financial position as per Under published regulatory financial scope ofDetails statement consolidation

Asset Cash and balances with banks 133,712 133,712 Deposits with Central Bank of Kuwait 344,834 344,834 Deposits with other banks 454,437 *454,512Financing receivables 3,018,755 **3,111,997 Investment securities 303,239 *303,514Investment in associate 8,261 8,261 Investment properties 29,230 29,230 Premises and equipment 40,907 40,907 Other assets and intangibles 18,029 ***17,149

Total assets 4,351,404 4,444,116 Liabilities Deposits from banks and other financial institutions 1,049,630 ****-Deposits from customers 2,696,984 ****-Other liabilities 88,632 ****-

Total liabilities 3,835,246 ****- Equity Share capital 206,273 *****216,587Reserves 293,202 ******254,402Treasury shares (43,957) (43,957)Attributable to Bank’s equity shareholders 455,518 427,032

Perpetual Tier 1 Sukuk 60,640 60,640Total equity 516,158 487,672

Total liabilities and equity 4,351,404 487,672

Tier 2 capital 41,580

Total Eligible Capital 529,252

* Difference is due to IFRS9 Stage 1 ECL which was deducted for the accounting consolidation.** Difference is due to inclusion of general provision which was deducted for the accounting consolidation.*** Difference is due to replacement cost for Shari’ah compliant hedging contracts.**** Liabilities are not considered in the capital adequacy computations under Basel III Pillar I.***** Difference is due to bonus shares.****** Difference is due to accrual for the profit distribution on the AT1 Sukuk, proposed dividends and bonus shares.


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STEP 2 TEP 2019 KD ‘000

Statement of financial position as Under per published regulatory financial scope of Details statement consolidation Reference

Asset Cash and balances with banks - Cash items 23,848 23,848 - Bank balances with CBK 81,060 81,060 - Bank balances at other banks 28,804 28,804 Deposits with Central Bank of Kuwait 344,834 344,834 Deposits with other banks 454,437 454,512 Financing receivables 3,018,755 3,111,997 Investments securities 303,239 303,514 Investment in associate 8,261 8,261 Investment properties 29,230 29,230 Premises and equipment 40,907 40,907 Other assets and intangibles 18,029 17,149

Total assets 4,351,404 4,444,116 Liabilities Deposits from banks and other financial institutions 1,049,630 - Deposits from customers 2,696,984 - Other liabilities 88,632 -

Total liabilities 3,835,246 -


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STEP 2 (continued)TEP 2019 KD ‘000


Equity Share capital 206,273 216,587 (a)Treasury shares (43,957) (43,957) (b)Reserves - Statutory reserve 90,046 84,264 (c)- Voluntary reserve 22,660 22,660 (d)- Cumulative changes in fair value 3,460 3,460 (e)- Property revaluation reserve 9,907 9,907 (f)- Treasury share reserve 974 974 (g)- Other disclosed reserves 12,883 12,883 (h)- Profit equalisation reserve - 2,313 (i)- Retained earnings 153,272 *117,941 (j)

Attributable to Bank’s equity shareholders 455,518 427,032 Perpetual Tier 1 Sukuk (AT1 Sukuk) 60,640 60,640 (k)Total equity 516,158 487,672 Tier 2 capital 41,580


* 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)”.


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STEP 3TEP 2019 KD ‘000

Source based on refernce of the balance sheet under Component of the regulatory regulatory capital scope of reported by consolidationDetails the Bank from Step 2

Share capital 216,587 (a)Retained earnings 117,941 (j)Property revaluation surplus 9,907 (f)Cumulative changes in fair value 3,460 (e)Profit equalisation reserve 2,313 (i)Statutory Reserve 84,264 (c)Voluntary Reserve 22,660 (d)Treasury share reserve 974 (g)Other Disclosed Reserves 12,883 (h)

Common Equity Tier (1) capital before regulatory adjustments 470,989

Treasury shares (43,957) (b)

Common Equity Tier (1) capital 427,032

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

Total Tier 1 Capital 487,672




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STEP 1EP 2018 KD ‘000

Statement of financial Under position as regulatory per published scope of financialDetails consolidation statement

Asset Cash and balances with banks 76,937 76,937 Deposits with Central Bank of Kuwait 346,097 346,097Deposits with other banks 334,801 *334,822 Financing receivables 2,799,906 **2,915,570Investment securities 264,185 *264,319Investment in associate 8,823 8,823 Investment properties 36,539 36,539 Premises and equipment 34,279 34,279Other assets and intangibles 12,086 ***10,841

Total assets 3,913,653 4,028,227 Liabilities Deposits from banks and other financial institutions 918,651 ****-Deposits from customers 2,424,516 ****-Other liabilities 79,084 ****-

Total liabilities 3,422,251 ****- Equity Share capital 196,451 *****206,273Reserves 278,268 ******241,285Treasury shares (43,957) (43,957)

Attributable to Bank’s equity shareholders 430,762 403,601

Perpetual Tier 1 Sukuk 60,640 60,640Total equity 491,402 464,241

Total liabilities and equity 3,913,653 464,241

Tier 2 capital 38,324Total Eligible Capital 502,565

* Difference is due to IFRS9 Stage 1 ECL which was deducted for the accounting consolidation.** Difference is due to inclusion of general provision which was deducted for the accounting consolidation.*** Difference is due to replacement cost for Shari’ah compliant hedging contracts.**** Liabilities are not considered in the capital adequacy computations under Basel III Pillar I.***** Difference is due to bonus shares.****** Difference is due to accrual for the profit distribution on the AT1 Sukuk, proposed dividends and bonus shares.


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STEP 2EP 2018 KD ‘000


Asset Cash and balances with banks - Cash items 16,988 16,988 - Bank balances with CBK 46,249 46,249 - Bank balances at other banks 13,700 13,700 Deposits with Central Bank of Kuwait 346,097 346,097 Deposits with other banks 334,801 334,822 Financing receivables 2,799,906 2,915,570 Investments securities 264,185 264,319 Investment in associate 8,823 8,823 Investment properties 36,539 36,539 Premises and equipment 34,279 34,279 Other assets and intangibles 12,086 10,841

Total assets 3,913,653 4,028,227



Liabilities Deposits from banks and other financial institutions 918,651 - Deposits from customers 2,424,516 - Other liabilities 79,084 -

Total liabilities 3,422,251 -


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STEP 2 (continued)TEP 2018 KD ‘000


Equity Share capital 196,451 206,273 (a)Treasury shares (43,957) (43,957) (b)Reserves - Statutory reserve 84,264 84,264 (c)- Voluntary reserve 22,660 22,660 (d)- Cumulative changes in fair value 3,772 3,772 (e)- Property revaluation reserve 9,838 9,838 (f)- Treasury share reserve 974 974 (g)- Other disclosed reserves 12,883 12,883 (h)- Profit equalisation reserve - 2,313 (i)- Retained earnings 143,877 *104,581 (j)



* 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)”.


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STEP 3TEP 2019 KD ‘000

Source based on refernce of the balance sheet under Component of the regulatory regulatory capital scope of reported by consolidationDetails the Bank from Step 2

Share capital 206,273 (a)Retained earnings 104,581 (j)Property revaluation surplus 9,838 (f)Cumulative changes in fair value 3,772 (e)Profit equalisation reserve 2,313 (i)Statutory Reserve 84,264 (c)Voluntary Reserve 22,660 (d)Treasury share reserve 974 (g)Other Disclosed Reserves 12,883 (h)

Common Equity Tier (1) capital before regulatory adjustments 447,558

Treasury shares (43,957) (b)

Common Equity Tier (1) capital 403,601

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

Total Tier 1 Capital 464,241




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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 216,587 thousands (2018: KD 206,273 thousands)

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

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


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TABLE 4 – MAIN FEATURES OF REGULATORY CAPITAL INSTRUMENTS (continued)

Share Capital AT1 Sukuk

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

If write-down, write-down trigger Not applicable

A non-viability event means that the CBK has informed the AUBK 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:

• AUBK 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 AUBK 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


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INFORMATION ON LICENSED BANK’S CAPITAL ADEQUACYThe 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 maintains at least 0.5% cushion over the regulatory minimum at all points in time. The Group may resort to the disposal of its Treasury shares or other measures as outlined in the Bank’s ICAAP to enhance capital adequacy subject to the market conditions.

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 raising any additional capital requirements including resorting to eligible Sharia’a compliant instruments at competitive pricing to support any need for additional capital.

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.

Currently the Group’s measurement of capital requirement is based on the CBK’s Basel III 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.

CBK has imposed a Domestic Systemically Important Bank (D-SIB) buffer of 50Bps on the Bank effective 31 December 2019 which increased minimum capital ratio from 13% to 13.5%.

At 31 December 2019, the total Capital Adequacy Ratio recorded as 15.22% (31 December 2018: 15.72%) higher than the ratio required by regulatory authorities of 13.5% (31 December 2018: 13.0%) and Tier (1) Capital 14.02% (31 December 2018: 14.52%) and CET1 Capital 12.28% (31 December 2018: 12.63%).

• 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 ratio 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 ratio 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).


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TABLE 5 – MAIN FEATURES OF REGULATORY CAPITAL INSTRUMENTS 2019 2018 KD ‘000 KD ‘000

Risk Minimum Risk Minimum Weighted capital Weighted capitalStandard Portfolio Assets requirement Assets requirement

Claims on Sovereigns 51,564 6,961 - - Claims on PSE 12,482 1,685 Claims on MDBs 2,992 404 Claims on banks 188,648 25,467 147,886 18,938 Claims on corporate 2,394,821 323,301 2,208,316 282,702 Claims on regulatory retail 410,276 55,387 393,505 50,299 Past due exposures 27,282 3,683 17,453 2,231 Goods & commodity other than real estate 642 87 351 45 Investments in real estate and real estate inventory 57,703 7,790 73,078 9,340 Share & commercial real estate financing 81,434 10,994 160,089 20,462 Securitized Sukuk - - - - Other exposures 98,565 13,306 113,858 14,554

Total credit risk weighted assets 3,326,409 449,065 3,114,536 398,571

Credit risk weighted assets adjustments (59,742) (8,065) (85,018) (11,052)Net credit risk weighted exposure 3,266,667 - 3,029,518 -

Minimum capital requirement for credit risk 441,000 387,519

Minimum market risk capital charge 488 204

Minimum operational risk capital charge 28,005 27,801

Total 469,493 415,524


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INFORMATION RELATED TO A LICENSED BANK’S INTERNAL CAPITAL ADEQUACY ASSESSMENT PROCESS (ICAAP) Internal Capital Adequacy Assessment Process (ICAAP) provides the foundation to determine the economic capital which Bank requires to cover all material risks. ICAAP reflects the strategy of the Bank and its risk appetite. ICAAP is an integrated process of the management decision making for capital planning, asset and profitability growth.

Bank’s ICAAP 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;• Identify and quantify the additional risks, which are otherwise not covered in Pillar 1 while calculating minimum capital

adequacy requirement;• Perform stress test based on various mild to severe scenarios, to develop the capital contingency requirement; • Assess available risk mitigation techniques and analyze as how those tools can be used to lessen any adverse impact; • Help in capital and liquidity planning to support capital, funding and business growth targets;• Provide a guidance in the business decision-making process vis-à-vis capital adequacy requirements and its impact.

The Bank’s ICAAP comprises the identification and analysis of the key risks. Below are the key risks that form part of the Bank’s ICAAP process:

Pillar I risks• Credit Risk• Operational Risk• Market Risk

Additional Pillar II risks• Concentration Risk• Residual Credit Risk• Residual Market Risk• Residual Operational Risk• Profit Rate Risk• Liquidity Risk• Reputational Risk• Strategic Risk• Legal Risk• Regulatory & Sharia 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 case of deteriorating business conditions. ICAAP is an ongoing process and reviewed by management on a semiannual basis.

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 range of risks and business areas as an Enterprise-wide risk assessment, quantification, impact analysis and decision making. The stress testing process assesses the additional capital requirement to absorb losses on various stress scenarios.


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INFORMATION RELATED TO A LICENSED BANK’S INTERNAL CAPITAL ADEQUACY ASSESSMENT PROCESS (ICAAP) (continued)The Board of Directors and Senior Management ensure that the ICAAP and stress testing takes into account the following major considerations, which are then communicated across all the business and support units.

• Identification of all the risks that the Bank may be exposed to, with quantification; • 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 and medium-term business plans and strategies to achieve such plans;• Assessment of the level of capital required to protect the Bank against anticipated business risks;• Sources of capital;• Quality and loss absorbency of the 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 also employs other tools 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 MANAGEMENTThe Bank maintains a strong risk management culture balancing risks and rewards focusing on maximizing shareholder value on sustainable basis. The Bank continuously reviews its risk management policies and practices to ensure that it is not subject to large asset valuation and earnings volatility.

The Board has the ultimate responsibility for the risk management of the Bank. The Board determines the Bank’s overall risk appetite that provides guidance on risk management. The Board, senior management and risk management contribute in effective enterprise-wide risk management. Risk management is responsible to adequately identify, measure and monitor all the material risks in the Bank to ensure that they are in line with the risk appetite. The risk framework in the Bank is designed in such a way that there is an established effective relationship between the risk managers and the business areas. It helps in 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 “Senior General Manager – Risk Management” reporting to the Board’s Risk Committee. The division is comprised of the following major units to address the pertinent risk exposure of the Bank:

- Credit risk- Market and liquidity risk- Operational risk- Information Security

The summary of Risk Management’s main responsibilities include:1. Implementation of risk framework and risk strategy;2. Development and continuously updating of risk management policies and procedures;3. Setting up the Bank’s risk appetite; 4. Implementation of risk management tools to identify, assess, monitor, control and mitigate risks;5. Periodic reports to the Board and the Board approved committees to assist in taking informed decisions;6. Building risk awareness culture by providing regular trainings and other awareness programs.


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INFORMATION RELATED TO A LICENSED BANK’S INTERNAL CAPITAL ADEQUACY ASSESSMENT PROCESS (ICAAP) (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 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 provide 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 exercising authority on credit, investment, liquidity and market risks, in excess of limits assigned to other committees.

3) Sharia’a Supervisory Board (SSB), whose members are assigned by the General Assembly, supervises and controls the validity of the Bank’s activities to ensure that they comply with principles and rulings of the Islamic Sharia’a. SSB holds the authority to address any Sharia’a non-compliance to the Board directly.

4) Senior Credit Committee (SCC) approves financing proposals with limits in excess to 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 and/or IFRS 9 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) reviews and approves 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) Operational Risk Committee (ORC) ensures that operational, legal, information security, regulatory compliance and AML risk management framework, policies and procedures are applied across all divisions of the Bank. ORC assists the BRC and the Board in fulfilling its oversight responsibilities related to those risk management practices, implementation and on-going assessment of the risk framework.

The risk management function of the Bank’s 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.


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INFORMATION RELATED TO A LICENSED BANK’S INTERNAL CAPITAL ADEQUACY ASSESSMENT PROCESS (ICAAP) (continued)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 RISKThe Bank defines strategic risk as the adverse impact on Bank’s earnings, capital, and risks arising from changes in the environment the Bank operates in, from adverse strategic decisions, improper implementation of decisions or lack of responsiveness to industry strength, economic direction or technological changes. 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.

FINANCING RISKFinancing 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 transactions.

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.


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INFORMATION RELATED TO A LICENSED BANK’S INTERNAL CAPITAL ADEQUACY ASSESSMENT PROCESS (ICAAP) (continued)FINANCING RISK (continued)Portfolio Strategy and Planning (continued)The Risk Management and Senior Management, on monthly basis reviews 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 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.

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 Group Risk 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 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 corporate and private banking portfolio in 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 take 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 conduct 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.


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INFORMATION RELATED TO A LICENSED BANK’S INTERNAL CAPITAL ADEQUACY ASSESSMENT PROCESS (ICAAP) (continued)FINANCING RISK (continued)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 dimensions

2) Credit quality indicators

3) Exceptions to risk appetite policy

4) 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.

MARKET RISKThe Bank defines ‘Market risk’ as the uncertainty in future earnings and capital due to on and off Balance Sheet positions, resulting from changes in market parametersi.e. foreign exchange rates, profit rates, equity prices and credit spreads. Market risk management covers following four main risks:

• Profit rate risk• Equity risk• Foreign exchange (FX) risk• Commodity risk

The management of market risks include:

- the setup of market risk related risk appetite and limit;- identification and measurement of all market risks;- limit monitoring, reporting and escalation of market risk exposures;

The risk management performs various stress tests based on multiple scenarios to assess the potential downside risk due to changes in the market dynamics.


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INFORMATION RELATED TO A LICENSED BANK’S INTERNAL CAPITAL ADEQUACY ASSESSMENT PROCESS (ICAAP) (continued)MARKET RISK (continued)The Market Risk Management policy covers the following broad areas:Profit rate risk;Profit rate risk is the risk of potential adverse impact on the Bank’s earnings and capital due to change in market rates. The management of the profit rate risk lies with Bank’s Asset Liability Committee (ALCO). The Bank assesses its profit rate risk from both earnings and economic value perspective. The earnings at risk (EaR) or ΔNII is performed by analysis of the repricing maturity profile of the rate-sensitive assets and liabilities. The net repricing gap is applied a parallel rate shock of 100 bps to estimate the adverse impact. In a similar manner, the rate-sensitivity or ΔEVE is estimated by applying a 200 bps parallel shock on the repricing balance sheet’s individual rate-sensitivities. The Bank also performs Basel’s Interest Rate Risk in the Banking Book (IRRBB) approach of six parallel and variable rate shocks on currency-wise exposures. The Bank has performed a behavioral study and analysis of its non-maturity deposits and the repricing assumptions are based on IRRBB Basel guidelines.

As the majority of Bank’s financing assets are based on CBK’s discount rate, any change in those rates lead to a change in the repricing of the financing book as well. Although having short-term maturing time deposits, Bank’s assets linked to floating CBK rate hedges the profit rate naturally.

Foreign exchange risk;Foreign exchange risk is the potential adverse impact on the earnings or the FX positions due to change in the FX rates. The risk arises from a currency mismatch between the Bank’s assets and liabilities. Conventional methods such as limiting the net open positions, are used to manage any significant risk in foreign currencies. Assets carried at fair values that are not denominated in 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. Bank’s FX Waad positions are always backed to a full amount with the forward buy or sell of the foreign currency.

Risk Management Division monitors the various foreign exchange limits (overnight, forward gap, stop loss, etc.) on daily basis and the report to ALCO on regular basis.

Equity risk;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 can be idiosyncratic or issuer specific or it can be due to general market or systemic risks.

The equity risk in the Bank is limited as the overall size of the portfolio is minimal.

Liquidity riskThe Bank defines liquidity risk as the risk to its ability to meet all present and future financial obligations in a timely manner and without undue effort and 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. Moreover Bank’s risk appetite has placed limits on the total amount of deposit from any individual depositor;

• As per Central Bank of Kuwait rules and regulation, the Bank keeps at least 18% of its deposits in qualifying liquid assets. The amount of funds in quality assets is monitored on daily basis;

• A liquidity gap report is prepared as per CBK guidelines. The maturity mismatch analysis on cash flow balance sheet assesses the gaps where maturing liabilities are in excess of assets. The Bank keep the cash flow gaps within the CBK limits;

• The amount of financing is capped at 90% of Bank’s total deposits as per CBK guidelines. Bank prepares and monitors financing against deposits on a daily basis. The Bank also prepares a forecasted ratio to manage the expected liquidity accordingly;


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INFORMATION RELATED TO A LICENSED BANK’S INTERNAL CAPITAL ADEQUACY ASSESSMENT PROCESS (ICAAP) (continued)MARKET RISK (continued)Liquidity risk (continued)• The Bank calculates its high quality liquid assets (HQLA) against net cash outflows in 30-days period 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 the Bank’s external auditors. The Bank’s LCR has remained consistently higher than 100% as the Bank has maintained HQLAs at more than net cash outflows.

• 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 stable required funding against stable available funding. NSFR is prepared on daily basis and submitted to CBK on monthly basis after being reviewed by the Bank’s external auditors. The Bank’s NSFR has remained consistently higher than 100% as the Bank has maintained available stable funds at more than required stable funds.

In addition to above measures, the Bank reviews the following:A liquidity stress testing is performed and reported to ALCO. The stress test is based on various behavioral assumptions and expected draw-downs. The net cash outflow in one-month time is adjusted against the liquidity buffer consisting of high quality liquid assets.

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.

TABLE 6 – MATURITY ANALYSIS OF LIABILITIES

2019 KD ‘000

Up to 3 3 to 12 Over 1Standard Portfolio months months year Total

Deposits from banks and other financial institutions 804,728 244,902 - 1,049,630Deposits from customers 1,698,524 955,043 43,417 2,696,984Other liabilities 31,623 20,803 36,206 88,632

Total 2,534,875 1,220,748 79,623 3,835,246

2018 KD ‘000

Up to 3 3 to 12 Over 1Standard Portfolio months months year Total

Deposits from banks and other financial institutions 547,488 371,163 - 918,651Deposits from customers 1,997,719 380,621 46,176 2,424,516Other liabilities 19,390 17,246 42,448 79,084

Total 2,564,597 769,030 88,624 3,422,251

OPERATIONAL RISKThe 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.


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INFORMATION RELATED TO A LICENSED BANK’S INTERNAL CAPITAL ADEQUACY ASSESSMENT PROCESS (ICAAP) (continued)OPERATIONAL RISK (continued)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, it went through an enterprise wide assessment of potential risks, came up with robust control processes, updated the policy and procedures documents and educated the staff on the Islamic products, processes and systems. These were complemented by the establishment of the Sharia’a Board to ensure that the Bank’s activities comply with the principles and rulings of the Islamic Sharia’a.

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 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.

• 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 a 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. and

• Outsourcing – An integral part of Operational Risk management is associated with oversight on outsourcing of services. Operational Risk management and concerned business units evaluate all the risks associated with such outsourcing and ensure proper risk mitigation.

Drivers of Operational RiskMain driver of Operational Risk in 2019 arising from Execution, Delivery and Process Management which comprises of 96% of our total losses.

The Bank’s management through Operational Risk Committee has reviewed all the operational losses during 2019 and put additional controls / processes to prevent the recurrence of same losses.

Operational Risk Management Stress Testing ConceptAUB may be exposed to Operational Risk due to non-adherence to specified policies, weakness in the internal control systems, internal or external frauds and failure of key IT systems.


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INFORMATION RELATED TO A LICENSED BANK’S INTERNAL CAPITAL ADEQUACY ASSESSMENT PROCESS (ICAAP) (continued)OPERATIONAL RISK (continued)Operational Risk Management Stress Testing Concept (continued)Historical data of operational loss is collated by the RMD for all seven operational risk events identified by BASEL guidelines:

• Internal Fraud• External Fraud• Employment Practices & Workplace Safety• Clients, Products & Business Practices• Damage to Physical Assets• Business Disruption and System Failure• Execution, Delivery & Process Management

Operational Loss is calculated by the maximum of any year’s total operational loss based on above seven categories or summing 75% of maximum of every loss event based on last 8 3 years data.

Bank projects three stress scenarios whereby the highest operational risk loss recorded in the last 8 years is compared with 75% of the aggregate of highest operational losses in each event type. The higher of two is then stressed by 25%, 50% and 100%.

Operational Risk Management SystemBank has implemented an Operational Risk System “Accelerate” to effectively manage operational risk. The system provides capability to perform risk and control assessment, monitor Key Risk Indicators and record all losses and events. It also provides variety of reports for Management and Board for better decision making

Fraud Risk ManagementBank has a very robust Anti-Fraud policy to manage frauds (internal and external) which is in line with the newly rolled out Central Bank of Kuwait (CBK) guidelines. All fraud cases are reported to the Central Bank within same day of detection and detailed investigation report is being submitted to CBK within 15 working days of reporting the incident after conducting detailed investigation, identifying modus operandi, involvement of internal staff and actions taken to avoid such incidents in future.

Business Continuity ManagementThe 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 identify 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’s has enhanced its Business Continuity Management by implementing Active/ Active environment to ensure Recovery Time Objective is minimal since all the systems will be automatically fail over 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 regular tests which includes not limited to:

a. Full BCP test where head office including data center in not available and all systems and processes are recovered from the BCP Site.

b. System/ applications testing – one or more application are not available from the primary data center and are recovered from the Site 2 (DR Site)

c. Floor Testing – one or more floors got disconnected from primary data center and all applications are recovered from Site 2 data center.


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INFORMATION RELATED TO A LICENSED BANK’S INTERNAL CAPITAL ADEQUACY ASSESSMENT PROCESS (ICAAP) (continued)OPERATIONAL RISK (continued)Business Continuity Management (continued)Results of the all the test are presented to Operational Risk Committee and Board Risk Committee.

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 conducted fire drills intended to meet any contingency. 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.

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 AUBK’s reputation is of paramount importance to its continued operations and is the responsibility of every member of staff. Board, the ORC, 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 adequately and promptly to changes of a market/regulatory nature that impacts Banks reputation and foster a sound culture that is well adopted throughout the Bank and has proven very efficient over time. The Bank has setup the monitoring of various reputational risk indicators - quantitative as well as qualitative, which guide the Bank on any potential reputational adverse impact.

In addition, the Bank has 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 ManagementData Security is a fundamental element in the Bank’s overall posture; 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, or 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 necessary documents of such framework are 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. Access to such data is granted based on “Need to Know – Need to Do” concept.


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INFORMATION RELATED TO A LICENSED BANK’S INTERNAL CAPITAL ADEQUACY ASSESSMENT PROCESS (ICAAP) (continued)OPERATIONAL RISK (continued)Data Security Management (continued)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 employees and current 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.

• The bank acquired a leading network access control solution to protect the information assets from malicious threats,

• Information security awareness emailers are sent to all staff to keep them abreast with the latest cyber threats.

• Phishing campaigns are carried to assess the awareness level of staff

• The bank has acquired a leading mobile security solution to secure email’s on mobile devices to prevent exposure to sensitive information.

Legal and ComplianceLegal 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 legislative party, 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.


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INFORMATION RELATED TO A LICENSED BANK’S INTERNAL CAPITAL ADEQUACY ASSESSMENT PROCESS (ICAAP) (continued)OPERATIONAL RISK (continued)Legal and Compliance (continued)The Bank, whenever required, follows international standards and adopts best market practices when it comes to risk management activities. RMD stays 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 RiskThe Bank offers FX Waad and Profit Rate Swaps (PRS) to its customers for hedging purposes. Moreover, Bank also enter into PRS agreements to hedge proprietary fixed-income investment book. All customer positions are covered back-to-back with counterparties of investment grade ratings.

The Bank ensures that proper limits are setup for all the customers for all of their forward positions. Customers are well informed of the risks which are inherent in those transactions. The risk management performs the daily valuation of all open positions and the net present value of those contracts is assessed against approved limits. All FX Waad and PRS transactions are reported gross and there are no netting arrangements or collaterals.

The Bank also performs Credit Value Adjustment based on standardized approach as per CBK guidelines to account for potential counterparty credit deterioration.

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

TABLE 7 – WAAD TRANSACTIONS

2019 2018 KD ‘000 KD ‘000

Assets Liabilities Notional Assets Liabilities Notional (Positive) (Negative) amount (Positive) (Negative) amount

Waad Contracts 48 54 3,493 422 444 25,673PRS (held as fair value hedge) 815 3,604 181,520 508 726 74,536PRS (others) 17 17 60,610 315 315 60,660

880 3,675 245,623 1,245 1,485 160,869

INFORMATION RELATED TO A LICENSED BANK’S INVESTMENT & FINANCE EXPOSURESCredit Risk ManagementThe 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 AUB, 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.


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INFORMATION RELATED TO A LICENSED BANK’S INVESTMENT & FINANCE EXPOSURES (continued)Credit Risk Management (continued)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. In compliance with Central Bank of Kuwait regulations regarding IFRS9 requirements, an internal credit rating system is in place to calculate the expected credit loss (ECL). The calculation of ECL is based on staging requirement stipulated by CBK and as per PD, LGD, EAD calculated by the internal credit rating system considering built in macroeconomic factors.

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

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:

ECAI’s have been used for the following standard portfolios

Standard portfolio ECAI

Claims on banks Fitch, Moody’s and Standard & Poor’s


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INFORMATION RELATED TO A LICENSED BANK’S INVESTMENT & FINANCE EXPOSURES (continued)Credit Risk Management (continued)TABLE 8 – GROSS CREDIT RISK EXPOSURES BEFORE CRM

2019 KD ‘000

Year end balances Monthly average balances

Self- Self- financed URIA Total financed URIA Total

Claims on Cash Items 23,230 618 23,848 17,898 558 18,456Claims on sovereigns 488,873 12,998 501,871 461,550 13,760 475,310Claims on PSE 127,760 3,219 130,979 101,235 2,784 104,019Claims on MDBs 8,857 236 9,093 2,946 91 3,037Claims on banks 582,724 14,247 596,971 493,366 13,998 507,364Claims on corporate 2,708,429 65,972 2,774,401 2,603,132 73,830 2,676,962Claims on regulatory retail 424,661 11,276 435,937 408,608 12,591 421,199Past due exposures 36,846 977 37,823 42,178 1,288 43,466Inventory & commodity other than real estate 338 9 347 314 10 324Investment in real estate and real estate inventory 28,473 757 29,230 29,248 907 30,155Share & commercial real estate financing 96,327 2,561 98,888 136,972 4,270 141,242Other exposures 84,227 2,233 86,460 71,747 2,235 73,982

Total 4,610,745 115,103 4,725,848 4,369,194 126,322 4,495,516

Average balances are calculated by averaging month-end balances of capital adequacy returns which is the most frequent reporting interval for Management reporting purpose.


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INFORMATION RELATED TO A LICENSED BANK’S INVESTMENT & FINANCE EXPOSURES (continued)Credit Risk Management (continued)TABLE 8 – GROSS CREDIT RISK EXPOSURES BEFORE CRM (continued)

2018 KD ‘000

Year end balances Monthly average balances

Self- Self- financed URIA Total financed URIA Total

Claims on Cash Items 16,417 571 16,988 26,954 938 27,892 Claims on sovereigns 430,818 14,980 445,798 451,141 15,686 466,827 Claims on PSE 84,451 2,936 87,387 60,080 2,089 62,169 Claims on MDBs 2,933 102 3,035 2,910 101 3,011 Claims on banks 445,595 15,493 461,088 312,414 10,862 323,276 Claims on corporate 2,472,213 85,957 2,558,170 2,362,711 82,149 2,444,860 Claims on regulatory retail 399,322 13,884 413,206 394,649 13,721 408,370 Past due exposures 37,853 1,316 39,169 40,704 1,415 42,119 Inventory & commodity other than real estate 181 6 187 113 4 117 Investment in real estate and real estate inventory 35,311 1,228 36,539 35,635 1,239 36,874 Share & commercial real estate financing 152,973 5,319 158,292 199,728 6,945 206,673Other exposures 73,950 2,571 76,521 63,698 2,215 65,913

Total 4,152,017 144,363 4,296,380 3,950,737 137,364 4,088,101

Average balances are calculated by averaging month-end balances of capital adequacy returns which is the most frequent reporting interval for Management reporting purpose.


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INFORMATION RELATED TO A LICENSED BANK’S INVESTMENT & FINANCE EXPOSURES (continued)Credit Risk Management (continued)TABLE 9 – GEOGRAPHIC DISTRIBUTION OF EXPOSURES

2019 KD ‘000

Other USA & Other Standard Portfolio Kuwait Middle East Europe Canada countries Total

Cash Items 23,848 - - - - 23,848Claims on sovereigns 425,894 62,977 - - 13,000 501,871Claims on PSE 118,521 12,458 - - - 130,979Claims on MDBs - 9,093 - - - 9,093Claims on banks 311,710 223,927 33,490 24,483 3,361 596,971Claims on corporate 2,571,124 121,702 8,193 - 73,382 2,774,401Claims on regulatory retail 435,937 - - - - 435,937Past due exposures 37,823 - - - - 37,823Inventory & commodity other than real estate 347 - - - - 347Investments in real estate and real estate inventory 19,487 9,743 - - - 29,230Share & commercial real estate financing 98,888 - - - - 98,888Other exposures 68,291 18,169 - - - 86,460

Total 4,111,870 458,069 41,683 24,483 89,743 4,725,848

2018 KD ‘000

Other USA & Other Standard Portfolio Kuwait Middle East Europe Canada countries Total

Cash Items 16,988 - - - - 16,988 Claims on sovereigns 415,473 30,325 - - - 445,798 Claims on PSE 87,387 - - - - 87,387 Claims on MDBs - 3,035 - - - 3,035 Claims on banks 217,372 171,852 21,214 20,464 30,186 461,088 Claims on corporate 2,360,706 99,242 - - 98,222 2,558,170 Claims on regulatory retail 413,206 - - - - 413,206 Past due exposures 39,169 - - - - 39,169 Inventory & commodity other than real estate 187 - - - - 187 Investments in real estate and real estate inventory 28,591 7,948 - - - 36,539 Share & commercial real estate financing 158,292 - - - - 158,292 Other exposures 51,049 25,467 5 - - 76,521

Total 3,788,420 337,869 21,219 20,464 128,408 4,296,380

The exposures are allocated under each geographic unit based on the residence / domicile of the obligor.


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INFORMATION RELATED TO A LICENSED BANK’S INVESTMENT & FINANCE EXPOSURES (continued)Credit Risk Management (continued)TABLE 10 - DISTRIBUTION OF GROSS EXPOSURES BY INDUSTRY 2019 KD ‘000

Standard Portfolio Funded Unfunded Total

Trading & manufacturing 658,964 105,630 764,594Banks & financial institutions 1,027,119 39,224 1,066,343Construction & real estate 1,316,919 80,534 1,397,453Others 1,441,114 56,344 1,497,458

Total 4,444,116 281,732 4,725,848

2018 KD ‘000

Standard Portfolio Funded Unfunded Total

Trading & manufacturing 637,401 95,055 732,456Banks & financial institutions 1,046,719 56,380 1,103,099Construction & real estate 1,285,325 80,752 1,366,077Others 1,058,783 35,965 1,094,748

Total 4,028,228 268,152 4,296,380


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INFORMATION RELATED TO A LICENSED BANK’S INVESTMENT & FINANCE EXPOSURES (continued)Credit Risk Management (continued)TABLE 11 - DISTRIBUTION OF GROSS EXPOSURES BY RESIDUAL CONTRACTUAL MATURITY

2019 KD ‘000

Up to 1 1 to 3 3 to 12 Over 1 Standard Portfolio month months months year Total

Cash Items 23,848 - - - 23,848Claims on sovereigns 242,480 58,022 125,393 75,976 501,871Claims on PSE - - 317 130,662 130,979Claims on MDBs 3,031 - - 6,062 9,093Claims on banks 126,371 143,462 235,686 91,452 596,971Claims on corporate 79,011 100,116 1,205,761 1,389,513 2,774,401Claims on regulatory retail 5,053 443 4,932 425,509 435,937Past due exposures 9,519 59 7,706 20,539 37,823Inventory & commodity other than real estate 347 - - - 347Investments in real estate and real estate inventory 29,230 - - - 29,230Share & commercial real estate financing 9,087 16,205 30,750 42,846 98,888Other exposures 67,395 - - 19,065 86,460

Total 595,372 318,307 1,610,545 2,201,624 4,725,848

2018 KD ‘000

Up to 1 1 to 3 3 to 12 Over 1 Standard Portfolio month months months year Total

Cash Items 16,988 - - - 16,988 Claims on sovereigns 140,340 68,203 137,368 99,887 445,798 Claims on PSE 6,865 60,882 19,640 - 87,387 Claims on MDBs 3,035 - - - 3,035 Claims on banks 233,747 173,195 29,511 24,635 461,088 Claims on corporate 1,061,664 873,646 388,779 234,081 2,558,170 Claims on regulatory retail 7,820 2,385 4,692 398,309 413,206 Past due exposures 39,169 - - - 39,169 Inventory & commodity other than real estate 187 - - - 187 Investments in real estate and real estate inventory - - - 36,539 36,539 Share & commercial real estate financing 21,552 64,725 31,020 40,995 158,292 Other exposures 26,113 - 2,298 48,110 76,521

Total 1,557,480 1,243,036 613,308 882,556 4,296,380


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INFORMATION RELATED TO A LICENSED BANK’S INVESTMENT & FINANCE EXPOSURES (continued)Credit Risk Management (continued)TABLE 12 - IMPAIRED FINANCINGS AND PROVISIONS 2019 KD ‘000

* Charge/ (Reversal) Impaired Past due Specific for the GeneralStandard Portfolio Financing Financing Provisions Period Write Off Provisions

Trading & manufacturing 88 590 45 987 960 19,746Banks & financial institutions 894 - - - - 2,625Construction & real estate 34,156 21,118 9,024 42,719 36,297 34,241Others 4,306 10,813 1,721 5,369 9,492 36,630

Total 39,444 32,521 10,790 49,075 46,749 93,242

2018 KD ‘000

* Charge/ (Reversal) Impaired Past due Specific for the General Standard Portfolio Financing Financing Provisions Period Write Off Provisions

Trading & manufacturing 88 - 18 1,084 1,763 16,406 Banks & financial institutions 1,104 - - - - 3,184 Construction & real estate 26,509 8,801 2,602 5,822 6,204 53,111 Others 9,490 12,142 5,844 9,238 5,146 42,964

Total 37,191 20,943 8,464 16,144 13,113 115,665

There are no impaired or past due financings outside Kuwait.

* Charge for specific provision

As at 31 December 2019, the Bank carries a total provision of KD 104,032 thousand (31 December 2018: KD 124,129 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 1,333 (31 December 2018: KD 1,977) has been suspended on the above mentioned impaired financing.

TABLE 13 - MOVEMENT IN SPECIFIC PROVISION 2019 2018 KD ‘000 KD ‘000

Details Specific provision Specific provision

At 1 January 8,464 5,433Charge for the year 49,075 16,144Amounts written off (46,749) (13,113)

At 31 December 10,790 8,464


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INFORMATION RELATED TO A LICENSED BANK’S INVESTMENT & FINANCE EXPOSURES (continued)Credit Risk Management (continued)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 2019 2018 KD ‘000 KD ‘000

Details Past due exposure Past due exposure

Past due but not impaired

90 days or less 32,521 20,943

Past due and impaired

91 – 180 days 1,950 4,659 181 – 365 days 2,665 2,974 More than 365 days 34,829 29,558

At 31 December 71,965 58,134

Renegotiated financing:The Bank has not renegotiated any financial asset of major exposures that would otherwise be past due or impaired.


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INFORMATION RELATED TO A LICENSED BANK’S INVESTMENT & FINANCE EXPOSURES (continued)Credit Risk Management (continued)TABLE 15 - EXPOSURE POST RISK MITIGATION AND CREDIT CONVERSION 2019 2018 KD ‘000 KD ‘000

Standard Portfolio Rated Unrated Total Rated Unrated Total

Claims on Sovereigns 52,240 - 52,240 - - -Claims on PSE - 12,569 12,569 - - -Claims on MDBs 3,031 - 3,031 - - -Claims on banks 189,007 1,791 190,798 147,882 4 147,886 Claims on corporate 74,991 2,348,269 2,423,260 67,046 2,141,270 2,208,316 Regulatory retail exposures - 415,651 415,651 - 393,505 393,505 Past due exposures - 27,638 27,638 - 17,453 17,453 Inventory & commodity other than real estate - 651 651 - 351 351 Investments in real estate and real estate inventory - 58,460 58,460 - 73,078 73,078 Share & commercial real estate financing - 82,503 82,503 - 160,089 160,089 Securitized Sukuk - - - Other exposures 14,512 85,343 99,855 - 113,858 113,858

Total 333,781 3,032,875 3,366,656 214,928 2,899,608 3,114,536

Information Related to Financing Risk MitigationCollateral is obtained from clients 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 Sharia’a 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 Sharia’a 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.


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INFORMATION RELATED TO A LICENSED BANK’S INVESTMENT & FINANCE EXPOSURES (continued)Information Related to Financing Risk Mitigation (continued)

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

2019 2018 KD ‘000 KD ‘000

Gross Eligible Eligible Gross Eligible EligibleStandard Portfolio Exposure collaterals Guarantees Exposure collaterals Guarantees

Claims on banks 596,971 - - 461,088 - -Claims on corporate 2,774,401 301,086 - 2,558,170 288,662 -Regulatory retail exposures 435,937 18,553 - 413,206 16,612 -Past due exposures 37,823 7,504 - 39,169 8,138 -Real Estate & Shares Trading 98,888 43,886 - 158,292 51,566 -

Total 3,944,020 371,029 - 3,629,925 364,978 -


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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 trade 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 2019 2018 KD ‘000 KD ‘000

Commodity risk 104 54Equity position risk - -Benchmark risk - -Foreign exchange risk 384 150

Total 488 204

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 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

• 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 ORC.


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INFORMATION RELATED TO OPERATIONAL RISK (continued)• 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

• 3 - Loss Data Collection – the Bank’s collection of historical operational risk losses as well as “near misses” is an ongoing exercise. Operational Risk performs the root cause analysis of the all the actual and near miss incidents to understand the cause and to assess existing controls and its effectiveness. New controls are put in place if required to avoid re-occurrence of such incidents and accordingly procedures and ORSA documents are being updated.

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.

• 4 – Operational Risk System – the Bank has implemented state of the art Operational Risk system which enables Bank to effectively identify, assess, monitor and control Operational Risk across all Business Units in the Bank.

The system has the capability to perform ORSA exercise whereby each designated Business Risk Officer captures the identified risks, assess the risk based on impact and probability, assess existing controls and its effectiveness. The system also has the functionality to record KRIs and perform trend analysis to proactively manage Operational Risk. All incidents (actual and near miss) are being recorded into the system along with its root cause and mitigating actions.

• 5 – Operational Risk Awareness Program – the Bank is continuously making efforts to promote risk awareness culture in the Bank by providing risk awareness trainings to all the staff and Business Risk Officers through workshop and online trainings programs.

• 6 - Business Continuity Management – to avoid business disruption and to provide services to the customers during disaster situations, each business unit in the Bank has developed BCPs in co-ordination with Operational Risk team where in all processes undergo Business Impact Analysis to assess the criticality and recovery strategy.

To ensure its readiness to be able to recover the business during disaster situations, the Bank has been conducting various BCP tests throughout the year covering different scenarios such as Loss of site, Loss of System and Loss of people.

TABLE 18 - CAPITAL REQUIREMENT FOR OPERATIONAL RISK 2019 2018Year KD ‘000 KD ‘000

Net income from financing activities 40,033 35,548 Net income from investing activities 1,601 1,480 Fees and service income 1,957 2,520 Deduction: Investment Account Holders’ Share of Income (15,586) (11,747)

Total 28,005 27,801


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INFORMATION RELATED TO INVESTMENT SECURITIESInvestments in the banking book are made in accordance with Sharia’a principles and governed by the CBK guidelines on financial and direct investments. All investments are subject to Bank’s internal risk appetite and are reviewed by risk and approved by Board’s Executive Committee. The majority of Bank’s financial investments are high quality quoted fixed-income Sukuk investments. All listed or quoted securities are marked-to-market on regular while any unquoted private equity investment is marked-to-model based on internal valuation methodologies.

Investments are classified at the time of acquisition into those which are acquired for capital gains and strategic holdings. Investments acquired with a view of generating income and profits from capital appreciation are reviewed periodically and disposed off at opportune timings.

TABLE 19 - INVESTMENT SECURITIES IN BANKING BOOK 2019 2018 KD ‘000 KD ‘000

Carrying Capital Carrying CapitalInvestment Type Value Charge Value Charge

Publicly traded 5,778 780 258,456 33,585 Privately held 297,461 40,157 5,729 1,236

Total 303,239 40,937 264,185 34,821

TABLE 20 - CLASSIFICATION OF INVESTMENT SECURITIES BY INDUSTRY 2019 2018 KD ‘000 KD ‘000

Minimum Minimum Carrying capital Carrying capitalIndustry Sector Value requirements Value requirements

Banks and financial institutions 136,448 18,420 194,703 25,319 Services 67,212 9,074 19,019 2,467 Real estate 4,238 572 1,239 71 Others 95,341 12,871 49,224 6,964

Total 303,239 40,937 264,185 34,821

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 303,239 thousand (31 December 2018: KD 264,185 thousand). Cumulative realized gain on investment securities is KD 6,811 thousand (31 December 2018: KD 4,479 thousand). The total unrealized gain recognized in the equity is KD 3,460 thousand (31 December 2018: KD 3,772 thousand).

INVESTMENT ACCOUNTSThe 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.


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INVESTMENT ACCOUNTS (continued)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 Sharia’a principles.

Following are the Investment percentages for major Mudaraba based deposits used for the Profit distribution:

TABLE 21 - DEPOSIT ACCOUNTS INVESTMENT PERCENTAGE Investment Investment Percentage PercentageDespoit Category 2019 2018

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 INVESTMENT SECURITIES BY INDUSTRY 2019 2018 KD ‘000 KD ‘000

Profit Investment Profit Investment equalization risk equalization riskDeposit categories reserve reserve reserve reserve

Unrestricted 1,439 2,279 919 2,279Restricted - - - -

Total 1,439 2,279 919 2,279

P 2019 KD ‘000

Profit rate Investment Profit reserve to risk reserve to distributed to profit-sharing profit-sharing profit-sharingDeposit categories deposits deposits deposits

Unrestricted 0.85% 1.34% 2.02%Restricted - - -

P 2018 KD ‘000

Unrestricted 0.46% 1.14% 1.94%Restricted - - -


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SHARIA’A GOVERNANCESharia’a Governance is a main pillar in any Islamic financial institution. The strengths of the Sharia’a Control unit in any bank provides assurance on the solidity of its operations and accuracy of its businesses and income in compliance with Sharia’a 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 Sharia Governance. The Bank is fully compliant with the requirements of Sharia Governance Standards as applicable for implementation by 1 January 2018.

Sharia’a Control StructureSharia’a Supervisory Board (Sharia’a Board)The Sharia’a 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 Sharia’a Board. The resolutions of the Sharia’a Board are enforceable and due for execution as specified and determined. The Sharia’a Department & Sharia’a Board are responsible to ensure compliance and report the results of the annual review to the AGM.

Executive member of the Sharia’a Board Executive member of the Sharia’a Board responsibilities includes reviewing all matters delegated or referred to him by the Sharia’a Board and Executive Committee. He has further to monitor the execution of the Sharia’a resolutions. In addition, he carries out the oversight duties over the Sharia’a Internal Audit Department and presents their results to the Sharia’a Board in each meeting.

The Supervisory Authority on Revenues Received from Non-Sharia’a Compliant Sources or Activities. Revenues generated from non-Sharia’a compliant sources either pre-conversion to Islamic Bank or having resulted from some unintentional defective transactions contradicted with the Sharia’a 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 Sharia’a Board.

Sharia’a Internal Audit Sharia’a Internal Audit department carries out periodical audits on all departments of the Bank to ensure compliance with the resolutions of the Sharia’a Board. It is also responsible for ascertaining the appropriateness, adequacy and effectiveness of the Sharia’a control system in achieving the objective of internal Sharia’a control, which is to ensure compliance with Islamic Sharia’a in all bank transactions, and to raise all findings and recommendations after discussion with the concerned department to the Sharia’a Board and to Audit and Compliance Committee.

In order to achieve its role and the formation of an efficient administrative apparatus as part of a strong oversight system, the department participates in the training of staff in collaboration with the Human Resources and other various development departments in the bank.

Sharia’a AdvisorySharia’a Adivsory replies to all inquiries from different departments or the Bank customers related to Sharia’a matters and to explain and clarify the resolutions of the Sharia’a Board. In addition to the review of the review of the contracts, engagements, letters, policies, procedures and newspapers advertisements and any other matter rasied by the respective departments in accordance with the Sharia’a Board resolutions or to present such matters to the Executive Member fo the Sharia’a Board in accordance with the Procedures approved by the Shari’a Board.


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SHARIA’A GOVERNANCE (continued)Secretariat of the Sharia’a Supervisory Board:It is a dedicated technical and administrative body that supports the Sharia’a Board in achieving its objectives and performance and includes the functions of the secretariat of the Sharia’a Board: preparing the agenda of the Sharia’a Supervisory Board, indexing and following up the work before the Sharia’a Supervisory board, inviting the regular meetings of the Sharia’a Board, preparing minutes of meetings and following up to be approved by the Sharia’a Board, all questions, inquiries and communications received from the management of the bank to be submitted to the Sharia’a Board, Communicating the Sharia’a Board resolutions to the Executive Management and to the relevant departments of the bank.

Sharia’a ViolationsViolating the Sharia’a guidelines may result in turning the underlined revenue or expense to be non- Sharia’a compliant. The financial consequence of this violation is reported to the Sharia’a 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 2019, no violation was observed at the Bank that may have a financial impact on the results of the Bank and its operations.

Violating the Sharia’a 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 Sharia’a 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 Sharia’a Department.

The amount of the Zakat for the financial year ended 31 December 2019 amounted to KD 577 thousand (31 December 2018: KD 536 thousand).

Remunerations of the Sharia’a Board MembersThe AGM endorses the appointment/ reappointment of the Sharia’a 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 Sharia’a Board amounts to approximately KD 35 thousand (31 December 2018: KD 35 thousand).

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 2019. During the year, remuneration paid/ will be paid to the members of CNC amounts to KD 6,000 (31 December 2018: KD 6,000) approximately which is subject to approval of the Board of Directors.

The remuneration policy provides the basis of determining remuneration to 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.


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REMUNERATION (continued)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 judgment 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, Sharia’a 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 Senior GM – Risk Management are specifically discussed by the committee and endorsed by the Chairman of Audit & Compliance Committee and approved by the CNC.

TABLE 24 - TYPE OF REMUNERATION 2019 2018 KD ‘000 KD ‘000

Senior management and Material risk takers Unrestricted Unrestricted

Fixed remunerations*

Cash based 2,839 2,840

Variable remunerations*

Cash based 1,045** 765**


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REMUNERATION (continued)

TABLE 25 - NUMBER OF EMPLOYEES AND REMUNERATION PAID 2019 2018 KD ‘000 KD ‘000

Number of Total Number of TotalEmployees categories employees remuneration employees remuneration

Senior management* 11 1,725 13 1,682Material risk takers* 26 2,159 30 1,923Financial and control functions* 20 1,613 28 1,471

TABLE 26 - NUMBER OF EMPLOYEES AND OTHER EMPLOYMENT BENEFITS

2019 2018 KD ‘000 KD ‘000

Number of Number of Employees categories employees Amount employees Amount

End of service benefits (Senior Management and Material Risk-takers)* 37 270 43 282

* 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 2020.

Date post:	01-Feb-2022
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NUMBERSTALK 9 - Ahli United

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