Annual Report 2018development process of the Islamic banking sector. In addition, LMC continues to attract assets from governments, financial institutions and corporates in both private

Annual Report2018

His Royal Highness Prince Khalifa Bin Salman Al KhalifaThe Prime Minister of theKingdom of Bahrain

His Majesty KingHamad Bin Isa Al Khalifa The King of the Kingdom of Bahrain

His Royal Highness Prince Salman Bin Hamad Al Khalifa The Crown Prince & Deputy Supreme Commander & First Deputy Prime Minister of the Kingdom of Bahrain

5 | Liquidity Management Centre B.S.C. (c) 4 | Annual Report 2018

Vision and Mission 06

Corporate Profile 08

Chairman’s Message 12

Biographies of BOD 14

CEO’s Message 16

Executive Management 17

Corporate Governance 20

Financial Highlights 22

Shari’a Supervisory Board Report 24

Independent Auditors’ Report 25

Financial Statements 27

Public Disclosure 69

Contributing to the growth of the Islamic Capital Market

CON

TEN

TS


OUR VISION & MISSION

OUR VISION & MISSION Liquidity Management Centre B.S.C.(c) (LMC) is a

Wholesale Islamic Investment Bank incorporated in July 2002

and regulated by the Central Bank of Bahrain. It aims to provide optimal

Islamic Financing and Investment solutions which contribute to growth of

the Islamic capital market.

VISIONTo enable Islamic financial institutions to manage their liquidity mismatch through short and medium term liquid investments structured in accordance with the Shari’a principles.

MISSIONFacilitating the investment of surplus funds with Islamic banks and financial institutions into quality short and medium term financial instruments structured in accordance with Shariía principles.

LMC is committed to playing a key role in the creation of an active and geographically expansive Islamic inter-bank market which will assist Islamic financial institutions in managing their short-term liquidity. The establishment and depth of such inter-bank market will further accelerate the development process of the Islamic banking sector. In addition, LMC continues to attract assets from governments, financial institutions and corporates in both private and public sectors in key target Markets. The sourced assets are also securitized into readily transferable securities or structured into other innovative investment instruments.


Bahrain Islamic Bank:Bahrain Islamic Bank (BIsB) was established in 1979 as the first Islamic commercial

bank in the Kingdom of Bahrain. The Bank has been maintaining its leading

position in the Islamic banking sector through adopting innovative Islamic

investment and financing products, supported by superior retail and corporate

banking services. The Bank is listed on the Bahrain Bourse (previously known

as the Bahrain Stock Exchange). The major shareholders are leading local and

regional financial institutions. The Bank operates under supervision and the

regulatory framework of the Central Bank of Bahrain.

Dubai Islamic Bank:Dubai Islamic Bank, established in 1975, is the world’s first Shariah-compliant

player and the largest Islamic Bank in UAE, with growing international operations

in Asia, Middle East and Africa. The organization is increasingly being recognized

as a formidable force in the area of global Islamic finance and one of the most

progressive Islamic Financial institutions in the world. The bank is also a renowned

player in the Islamic debt capital markets where a number of historic mandates

have been won and successfully delivered.

Islamic Development Bank: The Islamic Development Bank is a multi-national financial institution

established in pursuance of the Declaration of Intent issued by the Conference

of Finance Ministers of Muslim Countries held in Jeddah in Dhul Q’adah 1393H,

corresponding to December 1973. The purpose of the Bank is to foster the

economic development and social progress of member countries and Muslim

communities individually as well as jointly in accordance with the principles of

Shari’a.

KFH Capital Investment Company: KFH Capital Investment Company is a wholly owned subsidiary of Kuwait Finance

House. KFH Capital Investment Company is considered as the main investment

arm of Kuwait Finance House. The company was launched with a paid up capital

of is 100,000,000 million Kuwaiti Dinar.

CORPORATE PROFILESHAREHOLDERS

SHAREHOLDERS COUNTRY SHAREHOLDING (%)

Bahrain Islamic Bank Kingdom of Bahrain 25%

Dubai Islamic Bank United Arab Emirates 25%

Islamic Development Bank Kingdom of Saudi Arabia 25%

KFH Capital Investment Company State of Kuwait 25%

LMC TODAY

LMC plays an active role in the primary and secondary Islamic financing market delivering innovative, adaptable and tradable

Islamic Shari’a compliant short term and medium term financial instruments to Islamic financial institutions. In addition, it

provides Islamic advisory services, including but not limited to the areas of structured finance, project finance and corporate

finance.

With an authorized capital of US$ 200 million and an equity of US$ 54 million as of 31st December 2017, LMC proudly shares

a very close working relationship with each of its shareholders who are renowned in the Islamic Financial Market for their

contribution to the industry, namely, Bahrain Islamic Bank B.S.C. (Kingdom of Bahrain), Dubai Islamic Bank P.J.S.C. (United Arab

Emirates), Islamic Development Bank (Saudi Arabia) and KFH Capital Investment Company (State of Kuwait) each of whom today

hold equal shares in LMC. The Bank has proven to be a leading arranger of sukuk instruments (Islamic bonds) having issued a

number of innovative sukuk with recognised structures that have been reflected in other sukuk issuances in the region. LMC has

also been recognized for their innovation winning an award from Euromoney for the best debt house in Bahrain “Best Domestic

Market Sukuk House” in 2005.

The Bank’s focus has not only been on bringing long term financing opportunities but also developing short term Shari’a

compliant investment opportunities. The Bank has pioneered the structure of its Short Term Sukuk Program, a tradable low

risk liquidity management product which provides investors with opportunity to invest in short term sukuk. The program is

secured by a diverse, high quality and liquid portfolio of asset backed corporate and sovereign sukuk instruments arranged and

administered by LMC and other recognized arrangers with a purchase undertaking from LMC. The Short Term Sukuk Program is

the first such repackaged Sukuk product to be offered into the Islamic banking market.

BUSINESS SERVICES AND PRODUCTS OFFERED

1. Short Term Investment ServicesLMC conducts extensive Sukuk asset sourcing and repacking as part of the offering, placement and administration of its Short

Term Sukuk (STS) Program.

2. Structured Finance ServicesLMC’s structured finance services provide an end-to-end solution tailored to meet the needs of its clients in the international

market place. Comprising services offered include the following:

• Finance Raising:LMC has extensive experience in the structuring, issuance, marketing and post-issuance administration of tradable Islamic

capital markets instruments such as Sukuk. The approach centers on structuring attractive transactions in partnership with

clients. Its role includes being an arranger, structuring advisor, documentation agent and placement agent.

• Private Equity Raising: Conducts and coordinates with its client the modelling of transactions, identifying and resolving prospective legal and

corporate issues arising from equity offerings, prepares offering documents and presentation materials, articulates all

placement related activities, and conducts the offering process. Throughout, LMC is solely focussed on ensuring the

successful completion of the equity raising transaction.

3. Strategic Advisory ServicesThese services revolve around the provision of analysis and advice to clients in relation to their business development activities.

The principal objective is to develop and evaluate strategic plans which meet the client’s needs. Additionally, LMC actively

focuses on ensuring that its clients optimise their capital structures with a view to facilitating access to new and efficient sources

of debt and/or equity and other forms of Islamic compliant financing.


• Portfolio Management: Advise and manage fixed income investments which include Sukuk in various sectors through valuation tools and factors that

influence sukuk yields. LMC also manages proprietary :investment portfolio to maximize returns through carefully examining

markets and companies while adhering to Shari’a principles.

PRIMARY MARKET ARRANGEMENT TRACK RECORD

1. Bahrain – Eskan Bank - Bahrain Property Musharaka Trust BD 40 Million issued in November 2010.

2. Bahrain – Golden Falcon Syndicated Ijara Facility – US $140 million closed in July 2009.

3. Bahrain – BFH Asset Company, Syndicated Investment Agency (Wakala) Facility - AED 367.3 million

closed in December 2008.

4. UAE – Thani Investments Limited Sukuk – US$100 Million issued in November 2007.

5. GCC – Project Finance Sukuk for Cement Plant – US$130 Million issued in September 2007.

6. Kuwait – Lagoon City Sukuk – US$200 Million issued in December 2006.

7. UAE – Bukhatir Investments Limited Sukuk – US$50 Million issued in May 2006.

8. Bahrain - Bahrain Financial Harbour Al Marfa’a Al Mali Sukuk - US$134 Million issued in July 2005.

9. Kuwait - The Commercial Real Estate Company Ijara Sukuk - US$100 Million issued in May 2005.

10. Bahrain - Durrat Khaleej Al Bahrain Sukuk - US$152.5 Million issued in January 2005.

11. Bahrain - FIRSAN Sukuk - Euro76 Million issued in October 2004.

12. UAE - EMAAR Sukuk - US$65 Million issued in June 2004.

13. Bahrain – Bahrain Monetary Agency Ijara Sukuk US$250 Million issued in June 2003.

SECONDARY MARKET DEVELOPMENT ACTIVITIES

LMC plays an active role in the secondary Islamic financing market delivering innovative, adaptable and tradable Shari’a

compliant short term, medium term and long term financial instruments to Islamic financial institutions. The Bank has

pioneered the structure of its Short Term Sukuk Program, a tradable low risk liquidity management product which actively

promotes the secondary market development activities.

Backed by its strong operating performance, LMC looks forward to maintaining a reasonable growth phase during the

current market conditions. Having said that, LMC foresees itself equipped to harness further activities and expand its services

to include a range of investment banking solutions including debt capital markets, asset management, equity capital markets

and private equity in compliance with Islamic Shari’a principles.

TRACK RECORD


2018 RESULTS AND PERFORMANCE

Global financial markets performed well especially towards the close of 2017. However, regional economies following two years of relative austerity in regional budgets have witnessed new taxes, cuts to energy and other subsidies, and slower public sector wage growth with governments in the region signaling an expansionary fiscal position for 2108; which has also marked the introduction of VAT in certain GCC states. The GCC banking industry continued to adapt to lower growth rates and higher costs along with more stringent regulatory requirements weighing on profitability for financial institutions.

With flight to quality continuing, 2017 again was a year marking issuances by sovereign and high grade issuers in the GCC as financial institutions searched for higher returns with calculated risks. Nevertheless, with the upcoming maturities of USD 31bn and looking at the projected regional deficits it is likely that most of the GCC sovereigns will continue to tap capital markets for funding.

Despite these difficult market conditions, the Bank posted a net profit of USD 2.1 million for the year ended 31st December 2017 following, the aggressive steps taken by the bank in 2016 towards managing its financial position and mitigating risks associated with legacy assets wherein the Board of Directors approved taking large provisions amounting to USD 18.45 million resulting in a net loss of USD 17.60 million for the fiscal year 2016. Operating profits stood at USD 6.55 million in 2017 in comparison with USD 5.81 million in 2016. While the bank continued to remain operationally profitable, the profits were largely a product

of the following:

a) The Short Term Sukuk Program (“STS Program”) has proven to be a relatively superior short term instrument offering risk adjusted returns.

b) In a year marked by the Sovereign and High Grade issuers, corporate issuances dried up having a negative impact on fee income from advisory services however fees from agency services continued to be the major part of investment banking fees.

c) During 2018, short term rates increased on the back of three rate hikes which have also impacted the bank’s cost of funds.

d) The bank’s operating expenses stood at USD 4.56 million for the year 2018 in comparison to USD 4.41 million in 2017. Although, there has been a slight increase in operating expenses in comparison to 2017, the prudent cost control policies adopted by the bank during the previous years are still in effect and showing the expected results.

e) During the year, the bank also successfully repaid interbank borrowings and Short Term Sukuk investors an amount of USD 19.20 million bringing the balances down from USD 93.46 million in 2017 to USD 74.27 million in 2018.Despite the challenging economic environment, we look optimistically forward to 2018 with greater confidence as further diversification through cautiously exploring and engaging in new business lines.

Chairman’s Message

In the name of Allah, the Most Compassionate, the Most Merciful, Praise be to Allah who takes all things towards perfection; Prayers and peace be upon Mohammed, His Last Prophet.

On behalf of the Board of Directors of Liquidity Management Centre B.S.C. (c) (“LMC” or the “Bank”), I am pleased to present the Report of the Board of Directors for the year ended 31 December 2018.

Hassan Amin Jarrar Chairman of the Board

st

We expect 2019 to present its own set of challenges to the region as well as the Bank.

The challenge for the Bank will be to drastically reduce costs in the face of any declining revenues.

In closing, on behalf of my colleagues on the Board of Directors, I would like to thank the Government of the Kingdom of Bahrain represented by the Central Bank of Bahrain and Ministry of Industry and Commerce for their continued commitment and support to the Islamic banking sector in general and to LMC in particular.

I would also like to thank the management and the staff of the Bank, for their outstanding dedication under some very challenging conditions throughout 2018.

Allah the Almighty is the Purveyor of all Success.

Hassan Amin Jarrar Chairman of the Board


Mr. Hassan Amin Jarrar(Chairman of the Board)Mr. Hassan Amin Jarrar is one of the most prominent banking leaders in the region with more than 30 years of international, regional and local banking experience. Prior to his appointment as Chief Executive Officer of Bahrain Islamic Bank in July, 2015, Mr. Jarrar’s diverse career in Banking includes extensive experience in retail, SME, and corporate banking in the Middle East and the US. Regionally, Mr. Jarrar served as Chief Executive Officer of Standard Chartered Bank, Head of Corporate and SME Banking at Abu Dhabi Commercial Bank, and Head of Corporate Banking, Abu Dhabi at Mashreq Bank. Internationally, he has two decades of experience in key management positions in leading banking institutions in the United States; namely with Security Pacific Bank, and Bank of America. Mr. Jarrar holds a B.Sc. in Finance from California State University, San Jose. He is Chairman of Liquidity Management Center, “LMC”, and serves on the Boards of Bahrain Bourse, the Bahrain Association of Banks, Tamkeen, and Bahrain Economic Development Board, Thomson Reuters MENA Regulatory, advisory board.

Mr. Abdullah Ashy(Deputy Chairman)Mr. Abdullah Ashy Joined ICD in April 2010 and currently is the Program Manager handling Income & Capital Markets Funds initiatives in ICD. He has over 17 years of professional experience in asset management, financial management, management accounting, and business consulting. Mr. ashy also worked as a part time undergraduate lecturer for King Abdul Aziz University and Arab Open University in Jeddah. Abdullah has an intensive track record in financial structuring, business development and managing investment funds in various sectors such as real estate and income funds.He holds a Master’s degree in commerce from Griffith University Australia and a Bachelor’s degree in Finance from George Mason University Virginia, USA. In addition to that, he holds various professional designations such as CMA (Certified Management Accountant), Certification from the Saudi Capital Market Authority (CMA) in dealing in capital markets and CIB (Certified Islamic Banker) awarded from General Council of Islamic Banks and Financial Institutions.

Ameer Abdul Ghani Dairi(Director)With over 19 years of experience in financial management. Mr. Ameer Abdul Ghani Dairi is a Certified Public Accountant (CPA) from New Hampshire Board of Accountancy, USA and a Certified Management Accountant (CMA) licensed by the Chartered Institute of Management Accountants, USA. He also holds a B.Sc. in Accounting from the University of Bahrain and has had a broad commercial banking career in Bahrain. Mr. Dairi has been with Bahrain Islamic Bank since 2007, he is the Acting Chief Financial Officer.

Dr. Adnan Chilwan (Director)Dr. Adnan Chilwan is the Group Chief Executive Officer of Dubai Islamic Bank (DIB). He has an extensive banking career spanning more than two decades in reputed Conventional and Islamic Banks in the region. Dr. Chilwan represents DIB in boards of various strategic investments, subsidiaries and associates including the prestigious post of Chairman of Panin Dubai Syariah Bank and DIB Bank Kenya Ltd, Tamweel PJSC; DIB Capital; Deyaar PJSC; Liquidity Management Centre Bahrain and Dar Al Shari’a Consultancy. He is also on the advisory council of Higher Colleges of Technology (HCT). Dr. Chilwan is an Indian national who holds a PhD and MBA in Marketing and is a Certified Islamic Banker (CeIB), a Post Graduate in Islamic Banking & Insurance and an Associate Fellow Member in Islamic Finance Professionals Board. He has over 24 years of banking experience in the gulf region.

Mr. Khalid Al Shami(Director)Mr. Khalid Alshami is the Assistant Vice President of Debt Capital Markets Department - Investment Banking at KFH Capital Investment Company. He has over a decade of experience in financial industry, focusing on corporate finance and international investment banking activities, debt capital markets and structured finance. Earlier, he had worked in Kuwait Investment Authority, the sovereign fund of the State of Kuwait and other notable institutions. Mr. Alshami holds a Bachelor’s degree in Accounting from Kuwait University and completed the Kuwait Investment Authority’s Graduate Development Program. He has over 12 years of professional experience.

Mr. Mohamed S. Al Sharif (Director)Mr. Al Sharif is currently the Chief of Investment Banking in Dubai Islamic Bank (DIB). He holds several Chairmanships and Board memberships on publicly traded companies and financial services firms on behalf of DIB Group. Starting his career with the UAE Central Bank, Al Sharif held many positions in the Financial Control and Banking Supervision departments and later transitioned to Dubai Islamic Bank where he held the position of CFO for 11 years. Mr. Al Sharif is a UAE national who is a Certified Public Accountant (CPA) from Virginia, USA; and a Master’s degree in Accounting. He is a registered accounting and banking expert by UAE Courts. Al Sharif is a banking professional with 32 years of experience in Islamic Banking and Central Banking.

Mr. Paul Mercer(Director)Paul has over 20 years of banking and Islamic finance experience with a focus on law, regulation and governance. Paul is an English law qualified lawyer and holds an English law practising certificate. Paul heads the legal, compliance and anti-financial crime departments at Kuwait Finance House (Bahrain).

Mr. Seedy Mohammad Njie (Director)Mr. Seedy Mohammad Njie is a Senior Investment Specialist at the Islamic Development Bank (Jeddah). He was previously Senior Credit Risk Specialist with the same bank and Assistant Audit Manager with Deloitte - Gambia. Mr. Njie a Gambian national, who holds MBA from School of Oriental and African Studies (University of London) and Certified Islamic Banker (CIBAFI). He is a Fellow with the Association of Chartered Certified Accountants - UK (FCCA), Chartered Management Accountant with the Chartered Institute of Management Accountants – UK. He has over 18 years of professional experience.

BIOGRAPHIES OF BOARD OF DIRECTORS


Transforming our vision into a reality


CORPORATE GOVERNANCELMC acknowledges the importance of Corporate Governance

as an application of the best management practices that are

directed towards achievement of corporate values, goals and

objective and enhancing shareholders value coupled with

high transparency and corporate responsibility. During 2018,

the Board conducted a thorough review of the Bank’s high

level policies for corporate governance, internal control, risk

management and compliance with the latest regulations and

guidelines of the Central Bank of Bahrain (CBB).

THE BOARD OF DIRECTORSThe Board is nominated by the shareholders of the Bank in

accordance with the provisions of the Article of Association

of the Bank and CBB approvals. The Board has eight

directors representing the interest of the Bank and is highly

responsible for the Management and its performance, and

provides directions and applies policies in order to ensure

strategic guidance of the Bank.

Board’s ResponsibilitiesThe Board of Directors is delegated with the responsibility to

oversee that the Bank is carrying out its duties, and enhance

the effectiveness of the Board. It serves in monitoring the

Management to ensure that the policies and processes are

in the right place to show that it is operating effectively and

taking the responsibility with regard to the financial report,

internal control and the process of monitoring compliance

with applicable laws and regulations. Each Director is

appointed for a three years term renewable at an Annual

General Meeting of the shareholders of the Bank, subject to

CBB approval.

Board MeetingsIn accordance with the applicable CBB regulations and the

Article of Association of the Bank, the Board of Directors is

required to meet at least four times per year. On a regular

basis, the Board has close contact with The Management

and are required to act within their given authority for the

benefit of the Bank.

BOARD COMMITTEESBoard of DirectorsBoard of Directors The Board of Directors is responsible

for the conduct of the general operations of the Bank

and exercises all the powers delegated by the Articles of

Association of the Bank. The Board has created four sub-

committees to assist in carrying out its duties.

Executive CommitteeThe Executive Committee is responsible for reviewing

investment proposals and implementing the Bank’s

strategy and policies approved by the Board of Directors.

It also proposes new strategies and policies to the Board of

Directors and acts as the principal forum in which members

liaise through their representatives with Management. .

Audit CommitteeThe Audit Committee is responsible for the integrity of the

Bank’s financial statements, financial reporting process and the

Bank’s systems of internal accounting and financial controls;

reviewing internal control, internal audit and external audit.

In addition, the committee is responsible for the compliance

of the Bank with legal and regulatory requirements,

including the Bank’s disclosure of controls and procedures.

Nomination, Remuneration & Corporate Governance CommitteeThe Nomination, Remuneration & Corporate Governance

Committee enables the Board to fulfill its responsibilities

in setting the appropriate composition and evaluating the

performance of the Board, individual directors and senior

management. Moreover, the Committee is responsible

for recommending remuneration policies and special

compensation plans for review and approval by the Board

of Directors. The Committee also takes a leadership role in

shaping corporate governance policies and practices, leads

the Board in its annual review of the Board’s performance,

and recommends to the Board of Directors candidates for

appointment in each committee.

Risk Management CommitteeThe Risk Management Committee is responsible for

identifying, monitoring and approving the risk management

policies of the Bank to establish the appropriate approval

level of decisions. The committee also provides a forum for

“big-picture” analysis of future risks and critically assesses the

Bank’s business strategies and plans from a risk perspective.

SHARI’A SUPERVISORY BOARDThe Shari’a Supervisory Board is entrusted to ensure the

compliance aspects of the Bank’s products and instruments.

They are also responsible for monitoring and approving the

operations, investments and activities carried out by the

Bank without violating the principles and provisions of

Islamic Shari’a. The views of the Shari’a advisor shall be

binding in the specific area of supervision.

Shari’a Board Members1. Dr. Hussain Hamed Hassan

2. Dr. Abdul Sattar Abu Ghuddah

3. Shaikh Adnan Al Qattan

MANAGEMENTLMC boasts significant achievements in a span of fifteen

years with a sound track record, acknowledged by industry

leaders around the world. LMC is led by Mr. Ahmed

Abbas, the Chief Executive Officer, and supported by a

professional technical and structured finance team and

a highly experienced and qualified management team.

The Management in LMC is responsible for working in an

effective manner combining legal and ethical manners in

its aim to increase teamwork, commitment, and to achieve

a successful decision making process through its staff and

business units in the Bank.

ORGANIZATIONAL STRUCTUREAs LMC cares about updating and maintaining its track

record, the Board has defined the organization structure

responsibilities and authorities for the Management team

and staff where they mainly respond to the changes and

needs of the Bank during the year and ensure the proper

segregation of responsibilities, accountabilities and duties

of the staff, at all levels.

COMPLIANCELMC conducts its business with separate compliance

functions in handling its works under the regulatory

requirements stipulated by the CBB. The Bank complies

under many key regulations such as Shari’a Compliance,

Legal Compliance, Financial Accounting Standards and the

CBB's Regulations and Guidelines.

Status of Compliance with the CBB Rules - Corporate Governance Guidelines (High Level Controls Module)Liquidity Management Centre “LMC” regularly reviews its

compliance with the governance requirements stipulated in

the High-Level Controls Module (HC) issued by the Central

Bank of Bahrain.

During 2018, LMC fully complied with the requirements

of the CBB’s High-Level Controls Module except for the

following:

Rule HC-1.4.4, HC-1.4.8, HC-3.2.1, HC-4.2.2, HC-6.6.14, HC-6.6.15 & Guidance HC-1.4.5, HC-1.4.6, HC-1.8.2, HC-5.3.2, and HC-9.2.4:The Bank must appoint at least one Independent

Director, majority of Independent Directors in the Audit

Committee, Risk Management Committee, and Nomination,

Remuneration & Governance Committee should be

Independent. Furthermore, the Governance Committee

should have a member from the Shariá Supervisory Board

and the Chairman must not be an Executive Director and

should be independent.

LMC’s Explanation: Due to the Bank’s ownership structure, the Bank did not

appoint any independent director yet, as all directors are

nominated by the shareholders. The Bank is owned equally

by four prominent banks with equal representation on the

Board of Directors (two seats each). All Directors are Executive

Dependent Directors and hold managerial positions in their

respective institutions. However, are not involved in the daily

management of LMC. .

Guidance HC-7.2.2: The Bank should require all directors to attend and be

available to answer questions from shareholders at any

shareholder meeting and, in particular, ensure that the chairs

of the audit, remuneration and nominating committees are

ready to answer appropriate questions regarding matters

within their committee’s responsibility (it being understood

that confidential and proprietary business information may

be kept confidential).

LMC’s Explanation: All Directors are invited to attend the meeting. During the

AGM held in 2018, the Chairman of the Board and NRCG

Committee Mr. Hassan Jarrar chaired the meeting and the

Chairman of the Audit Committee attended as well.

It is worth noting that the Bank is a closed company and

the Board of Directors comprises of appointed shareholders

representatives and the Bank’s four shareholders are equally

represented on the Board of Directors.

1. Rule HC-1.3.4: All Individual Board members must attend at least 75% of

all Board meetings in a given financial year to enable the

Board to discharge its responsibilities effectively. Voting and

attendance proxies for Board meetings are prohibited at all

times.

All directors have met the attendance requirement except

for one director; Mr. Paul Mercer, who couldn’t attend the first

Board of Directors and Audit Committee meetings, held on

6th May 2018 due to the short notice as he was approved by

the CBB on 3rd May 2018, resulting in 67%.


2018 2017 2016 2015 2014 2013

Balance Sheet Position

Total Assets 128,590 149,413 132,732 183,394 202,003 221,045

Total Liabilities 76,443 95,272 80,708 112,427 134,524 158,088

Total Equity 52,147 54,141 52,024 70,967 67,479 62,957

Profit & Loss Statement

Operating Income 4,524 6,551 5,806 10,079 10,113 10,567

Net profit before unrealized fair value change and impairment provision (34) 2,146 841 4,817 4,604 4,849

Net Profit/(Loss) 13 2,117 (17,604) 3,558 4,224 3,577

Cash Flow Statement

Operating cash flow (11,117) 19,748 (16,833) 28,169 (6,836) (12,419)

Investing cash flow - - (39) (4,454) (4,328) (5,739)

Financing cash flow - - - - - -

Performance Ratios (%)

Return on average assets (%) 0.01 1.50 (11.14) 1.85 2.00 1.65

Return on average equity (%) 0.02 3.99 (28.63) 5.14 6.48 5.88

Liquidity Ratio (%)

Liquid asset Ratio (%)* 73.96 68 60 58 63 49

Capital Adequacy Ratio (%)

Capital adequacy (%)** 35.65 41.46 30.51 31.44 36.38 29.94

* Liquid assets ratio is a total of Cash, Short term balances with banks, Short term Murabaha and Liquid Sukuk as a percentage

of total assets.

** The calculation of the Capital Adequacy Ratio using Basel III requirements commenced from the year ended 31st December

2015, whereas Basel II requirements were applied for previous years.

2013 2014 2015 2016 2017 2018

2013 2014 2015 2016 2017 2018 2013 2014 2015 2016 2017 2018

2013 2014 2015 2016 2017 2018

132,

732

149,

413

62,9

57

67,4

79

70,9

67

52,0

24

54,1

41

202,

003

221,

045

30.5

1

31.4

4

36.3

8

29.9

4

41.4

6

35.65

(17,

604)

3,57

7

4,22

4

3,55

8 2,11

7

13

3.99

0.02

5.146.48

5.88

2.00

1.851.65

1.50

0.01

(28.

63)

(11.

14)

52,147

2013 2014 2015 2016 2017 2018 2013 2014 2015 2016 2017 2018

183,

394

128,59

0

2013 2014 2015 2016 2017 2018

2013 2014 2015 2016 2017 2018 2013 2014 2015 2016 2017 2018

2013 2014 2015 2016 2017 2018

132,

732

149,

413

62,9

57

67,4

79

70,9

67

52,0

24

54,1

41

202,

003

221,

045

30.5

1

31.4

4

36.3

8

29.9

4

41.4

6

35.65

(17,

604)

3,57

7

4,22

4

3,55

8 2,11

7

13

3.99

0.02

5.146.48

5.88

2.00

1.851.65

1.50

0.01

(28.

63)

(11.

14)

52,147

2013 2014 2015 2016 2017 2018 2013 2014 2015 2016 2017 2018

183,

394

128,59

0

FINANCIAL HIGHLIGHTSFinancial performance of Liquidity Management Centre for the year ended on 31st December, 2018

TOTAL ASSETS USD millions

TOTAL EQUITYUSD millions

2. Rule HC-6.5.49: Every five years, the Audit Committee must commission an independent external quality assurance review of the internal audit

function.

LMC’s Explanation: Due to the Bank’s current circumstances, the Bank is in the process of requesting from the CBB a one year extension. The Bank

will ensure to comply with the applicable requirements.

3.Rule HC-6.5.51: Senior management must ensure that all internal audit findings and recommendations are resolved within six months for high

risk/critical issues and 12 months for any other issues from the issue date of the subject internal audit report.

LMC’s Explanation: Due to the Bank’s current circumstances, the Bank is in the process of requesting from the CBB a one year extension. The Bank

will ensure to comply with the applicable requirements.

RELATIVE RECRUITMENT / APPOINTMENT POLICYThe Bank has in place policies that govern the recruitment / appointment of relatives in the Bank.

. Spouses and other relatives up to first cousins of LMC employees will not be permitted to work within the Bank. Exceptions

to this policy may be made only by the CEO.

. . New hire relatives of existing approved persons may be hired, provided that no potential or real conflict of interest exists

from a reporting or supervisory relationship.

. Should two employees become immediate relatives during their employment and find themselves in a direct/indirect

reporting or supervisory relationship, where a real or potential conflict of interest arises, one of the two employees will be

given ninety (90) days to find alternate employment/or alternate position within the bank.

. The approved person may not sit on any committee when his/her relative employee in the Committee. As part of

the annual reporting, the Chief Executive must disclose to the Board of Directors on an annual basis those individuals

who are occupying controlled functions and who are relatives of any other approved persons within the Bank. As of 31st

December 2018 there were no relatives of any approved persons occupying controlled functions within the bank

CORPORATE GOVERNANCE (continued)Status of Compliance with the CBB Rules - Corporate Governance Guidelines (High Level Controls Module) (continued)


EXTERNAL FACTORS AFFECTING THE BANK’S PERFORMANCE

There are many factors that affect the Bank’s business and the results of its operations, some of which are beyond the control of the bank. The following is a description of some of the important factors that may cause the actual results of the Bank’s operations in the future periods to differ materially from those currently expected or desired.

1. The Bank’s future growth rates and success are in-part dependent on continued growth and success of international markets. Although the Bank’s dealings are concentrated in areas that are deemed very safe, as is the case with most international operations, the success and profitability of the bank’s international business can be subject to numerous risks and uncertainties such as local economic and labour conditions, stage of the business cycle, political instability, a change in tax laws, new monetary policies affecting exchange rates along with other economic structures, overall business sentiment, and newly introduced or amended local and national government regulations.

2. Due to Bank’s diversified portfolio, the profit margins realized by the bank can vary somewhat among these products and services, its clientele and its geographic markets. Consequently, the overall profitability of the Bank’s operations for any given period is partially dependent on the product, clientele and geographic mix reflected in that period’s revenues.

3. Oil prices can put a strain on local economies where the Bank concludes most of its business. Although oil prices seem to have stabilized, there is no guarantee that a further deterioration in the global economy will manage to keep oil prices stable to comfortably service these economies.

4. A sudden deterioration in liquidity of the global economy and local banking institutions can cause further depreciation in asset prices, deleveraging and de-equitization which can affect the Bank’s balance sheet.

5. The Bank’s profitability will be highly dependent on the upcoming economic performance and its recovery. Three key prerequisites for sustained economic rebound internally are further enhancement of regulatory environment, a stabilization of real-estate activities and a stable political environment. Fiscal stimulus if conducted by local economies may temporarily boost GDP, but without these prerequisites, sustained economic expansion can be affected.

2013 2014 2015 2016 2017 2018

2013 2014 2015 2016 2017 2018 2013 2014 2015 2016 2017 2018

2013 2014 2015 2016 2017 2018

132,

732

149,

413

62,9

57

67,4

79

70,9

67

52,0

24

54,1

41

202,

003

221,

045

30.5

1

31.4

4

36.3

8

29.9

4

41.4

6

35.65

(17,

604)

3,57

7

4,22

4

3,55

8 2,11

7

13

3.99

0.02

5.146.48

5.88

2.00

1.851.65

1.50

0.01

(28.

63)

(11.

14)

52,147

2013 2014 2015 2016 2017 2018 2013 2014 2015 2016 2017 2018

183,

394

128,59

0

2013 2014 2015 2016 2017 2018

2013 2014 2015 2016 2017 2018 2013 2014 2015 2016 2017 2018

2013 2014 2015 2016 2017 2018

132,

732

149,

413

62,9

57

67,4

79

70,9

67

52,0

24

54,1

41

202,

003

221,

045

30.5

1

31.4

4

36.3

8

29.9

4

41.4

6

35.65

(17,

604)

3,57

7

4,22

4

3,55

8 2,11

7

13

3.99

0.02

5.146.48

5.88

2.00

1.851.65

1.50

0.01

(28.

63)

(11.

14)

52,147

2013 2014 2015 2016 2017 2018 2013 2014 2015 2016 2017 2018

183,

394

128,59

0

NET PROFIT / (LOSS)USD millions

RETURN ON AVERAGE EQUITY (%)

CAPITAL ADEQUACY (%)

RETURN ON AVERAGE ASSETS (%)

SHARI’A SUPERVISORY BOARD REPORTOn the Liquidity Management Centre activities for the year ended on 31 December, 2018

In the name of Allah, the most compassionate and the most

merciful

To M/s: The stakeholders of Liquidity Management Centre

B.S.C. (Closed)

Thanks to all mighty Allah and prayers and peace be upon

our last prophet Mohammed and his relatives and comrades.

Based on the standard principles and the assigning of Fatwa

and Shari’a Supervisory Board to supervise the group’s

activities and investments, the Fatwa and Shari’a Supervisory

Board presents the following report:

1. Fatwas and Resolutions:

The Board has answered the queries and questions received

from the group’s management, and accordingly, the Board

issued the suitable fatwas and resolutions required, which

the group abided to eventually.

2. Structured Finance and Documents Preparation:

The Board has approved all the group’s structured financing

related transactions, and has reviewed and approved the

contracts and documents related to it.

3. Approval of Amendments to Sukuk & Syndicated Facilities:

The Board has reviewed the group’s preparations /co-

preparations for the amendments to investment sukuk and

syndicated facilities and has accordingly approved those

transaction documents.

4. Product Development:

The Board, in co-operation with the group’s management is

developing a number of products.

5. Compliance and Legislative Auditing:

The Board has legislatively audited some of the group’s

accomplished transactions within the said year, and has

commented on them accordingly.

6. Reviewing of Books and Records:

The Board reviewed a set of the group’s books, records and

documents based on its own demand, and has received

the data and information in terms of enabling the board

to perform the duty of supervisory and legislative auditing.

Furthermore, all earnings, if any, which have been realized

from sources or by means prohibited by Islamic Shari’a Rules

& Principles have been disposed off to charitable causes.

7. Reviewing the Balance Sheet:

The Board has reviewed the group’s balance sheet, the

related statements and detailed notes. Accordingly, the

board concluded that this balance sheet, based on the data

and information provided by the group’s management truly

represents the group’s assets and income.

8. Zakat:

The management is not authorized to pay the Zakat on

behalf of the shareholders, and as such the responsibility

for payment of the Zakat lies with the shareholders in

accordance with the Zakat calculation approved by the

Sharia Supervisory Board, which is USD 0.0096 per share.

The Board Overall Conclusion:

The Board confirm that the group has abided towards the

compliance of Shari’a and committing on executing the

Boards’ fatwas within all the group’s activities, and based

on the received transactions, collected data, auditing,

commenting and truthful response by the group in terms of

abiding to the Board comments, the Board according to its

authorization has concluded that the group’s accomplished

activities and transactions within the said year are in total

compliance with Islamic sharia’a terms as well as the Board’s

fatwas.

We all call to Allah the almighty to realize for us the right

guidance and the good achievements as he likes and

accepts.

Peace be upon all of you, as well as God’s mercy and

blessings.

Dr. Shaikh Hussain Hamed HassanHead of Shari’a Supervisory Board

Dr. Shaikh Abdul Sattar Abu GhuddahMember

Shaikh Adnan AlqattanMember


INDEPENDENT AUDITOR'S REPORTTo the Shareholders of Liquidity Management Centre B.S.C. (c)

We have audited the accompanying consolidated financial

statements of Liquidity Management Center B.S.C. (c) (the

“Bank”) and its subsidiary (the “Group”) which comprise

the consolidated statement of financial position as at 31

December 2018, and the related consolidated statements of

income, cash flows and changes in owners’ equity for the

year then ended. These consolidated financial statements

and the Group’s undertaking to operate in accordance with

Islamic Shari’a Rules and Principles are the responsibility of

the Group’s Board of Directors. Our responsibility is to express

an opinion on these consolidated financial statements

based on our audit.

We conducted our audit in accordance with Auditing

Standards for Islamic Financial Institutions issued by the

Accounting and Auditing Organisation for Islamic Financial

Institutions (“AAOIFI”). Those standards require that we plan

and perform the audit to obtain reasonable assurance about

whether the consolidated financial statements are free of

material misstatement. An audit includes examining, on a test

basis, evidence supporting the amounts and disclosures in

the consolidated financial statements. An audit also includes

assessing the accounting principles used and significant

estimates made by management, as well as evaluating the

overall consolidated financial statements presentation. We

believe that our audit provides a reasonable basis for our

opinion.

Opinion

In our opinion, the consolidated financial statements

present fairly, in all material respects, the financial position

of the Group as of 31 December 2018 and the results of its

operations, cash flows and changes in owners’ equity for the

year then ended in accordance with Financial Accounting

Standards issued by AAOIFI.

Other Matters

As required by the Bahrain Commercial Companies Law and

the Central Bank of Bahrain (CBB) Rule Book (Volume 2), we

report that:

a) The Bank has maintained proper accounting records

and the consolidated financial statements are in agreement

therewith; and

b) The financial information contained in the Report of

the Board of Directors is consistent with the consolidated

financial statements.

Except for what has been reported in note 2 to the

consolidated financial statements, we are not aware of

any violations of the Bahrain Commercial Companies Law,

the Central Bank of Bahrain and Financial Institutions Law,

the CBB Rule Book (Volume 2 and applicable provisions

of Volume 6) and CBB directives or the terms of the Bank’s

memorandum and articles of association having occurred

during the year ended 31 December 2018 that might have

had a material adverse effect on the business of the Bank

or on its financial position. Satisfactory explanations and

information have been provided to us by management in

response to all our requests. The Bank has also complied

with the Islamic Shari’a Rules and Principles as determined

by the Shari’a Supervisory Board of the Group.

Partner’s registration no: 115

27 February 2019

Manama, Kingdom of Bahrain


Consolidated Statement of Financial Position 28

Consolidated Statement of Income 29

Consolidated Statement of Cash Flows 30

Consolidated Statement of Changes in Owners’ Equity 31

Notes to the Consolidated Financial Statements 32

FIN

ACI

AL

STAT

EMEN

TS


Notes2018

US$ '0002017

US$ '000

ASSETS

Cash and bank balances 1,206 1,823

Murabaha Receivables 4 9,502 13,004

Due from banks and financial institutions 5 8,496 15,500

Mudaraba receivables 6 2,496 5,071

Financing receivables 7 841 5,851

Investment in sukuks 8 73,405 73,461

Investment in equities and funds 8 4,771 5,651

Investment in real estate 9 26,556 27,547

Equipment 137 139

Other assets 10 1,180 1,366

TOTAL ASSETS 128,590 149,413

LIABILITIES AND OWNERS' EQUITY

Liabilities

Due to short term sukuk investors and banks 11 74,271 93,461

Staff payables 1,494 979

Other liabilities 12 678 832

TOTAL LIABILITIES 76,443 95,272

Owners' Equity

Share capital 13 59,039 59,039

Reserves 13 8,282 8,567

Accumulated losses (15,174) (13,465)

Total owners' equity 52,147 54,141

TOTAL LIABILITIES AND OWNERS' EQUITY 128,590 149,413

Hassan Amin JarrarChairman

Ameer Abdul GhaniDirector

Amer SadiqActing Chief Executive Officer

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

CONSOLIDATED STATEMENT OF FINANCIAL POSITIONAt 31 December 2018

CONSOLIDATED STATEMENT OF INCOMEFor the year ended 31 December 2018

Notes2018

US$ ‘0002017

US$ '000

INCOME

Income from:

Investment in sukuks 14 3,485 5,533

Investment in equities and funds 190 58

Due from banks and financial institutions 245 137

Financing receivables 752 329

Mudaraba receivables 56 112

Less: Return to short term sukuk investors and banks (2,180) (1,786)

2,548 4,383

Investment banking fees 15 443 531

Ijarah income 1,293 1,501

Foreign exchange (loss) gain (4) 20

Other income 244 116

OPERATING INCOME 4,524 6,551

EXPENSES

Staff costs 16 2,779 2,566

Depreciation 723 724

General and administrative expenses 17 1,056 1,115

OPERATING EXPENSES 4,558 4,405

NET (LOSS) PROFIT FOR THE YEAR BEFORE IMPAIRMENT PROVISION (34) 2,146

Net recoveries for credit losses 18 544 (29)

Unrealised fair value loss and impairment on investments in funds and real estate

(556) -

Impairment recoveries on investments - net 59 -

NET PROFIT FOR THE YEAR 13 2,117

Hassan Amin JarrarChairman

Ameer Abdul GhaniDirector

Amer SadiqActing Chief Executive Officer



Notes2018

US$ '0002017

US$ '000

OPERATING ACTIVITIES

Net profit for the year 13 2,117

Adjustments for:

Depreciation 723 724

Amortisation of discount on investments (159) (526)

Net gain (loss) from sale of investments at amortised cost 14 17 (1,731)

Unrealised fair value loss and impairment on investments in funds and real estate 556 -

Net recoveries for credit losses 18 (544) -

Impairment provision (recoveries) on investments - net (59) 29

Operating profit (loss) before changes in operating assets and liabilities 547 613

Changes in:

Mudaraba receivables 2,576 (49)

Financing receivables 3,095 1,511

Other assets 186 521

Due to short term sukuk investors and banks (19,190) 17,415

Staff payables 515 (2,944)

Other liabilities (154) 93

Purchase of investments at amortised cost (5,000) (71,586)

Sale/ redemption proceeds of investments at amortised cost 5,653 74,174

Sale/ redemption proceeds of investment at fair value through equity 655 -

Net cash (used in) from operating activities (11,117) 19,748

NET MOVEMENT IN CASH AND CASH EQUIVALENTS (11,117) 19,748

Cash and cash equivalents at 1 January 30,327 10,579

CASH AND CASH EQUIVALENTS AT 31 DECEMBER 19,210 30,327

Cash and cash equivalents at year end comprise of:

Cash and balances with banks 1,206 1,823

Murabaha receivables with original maturity of ninety days or less 9,504 13,004

Due from banks and financial institutions with original maturity of ninety days or less 8,500 15,500

19,210 30,327

CONSOLIDATED STATEMENT OF CASH FLOWSFor the year ended 31 December 2018


CONSOLIDATED STATEMENT OF CHANGES IN OWNERS' EQUITYFor the year ended 31 December 2018

Reserves

Paid-upShare

capitalUS$ '000

Statutoryreserve

US$ '000

Generalreserve

US$ '000

Investmentfair value

reserveUS$ '000

TotalreservesUS$ '000

(Accu-mulated

losses)US$ '000

Totalowners'

equityUS$ '000

Balance at 1 January 2018 59,039 3,881 2,226 2,460 8,567 (13,465) 54,141

Transition adjustment on adoption of FAS 30 as of 1 January 2018 (Note. 2.1.1)

- - - - - (2,007) (2,007)

Restated balance as of 1 January 2018 59,039 3,881 2,226 2,460 8,567 (15,472) 52,134

Net profit for the year - - - - - 13 13

Cumulative changes in fair value - - - (285) (285) 285 -

Balance at 31 December 2018 59,039 3,881 2,226 2,175 8,282 (15,174) 52,147

Balance at 1 January 2017 59,039 3,669 2,226 2,460 8,355 (15,370) 52,024

Net profit for the year - - - - - 2,117 2,117

Transfer to Statutory reserve - 212 - - 212 (212)

Balance at 31 December 2017 59,039 3,881 2,226 2,460 8,567 (13,465) 54,141

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


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2018

1. INCORPORATION AND ACTIVITIES

Liquidity Management Centre B.S.C. (c) (the “Bank”) is a closed joint stock entity incorporated in the Kingdom of Bahrain on 31 July 2002 under Commercial Registration number 49092. The Bank operates under a wholesale banking license issued by the Central Bank of Bahrain (the “CBB”). The Bank’s registered office is Building 852, Road 3618, Block 436, Seef District, Kingdom of Bahrain.

The principal activities of the Bank and its wholly owned subsidiary (the “Group”) include the following:

• Facilitating the creation of an Islamic inter-bank money market that will allow Islamic Financial Services Institutions (“IFSI”) to effectively manage their assets and liabilities.

• Providing short-term liquid, tradable asset backed treasury instruments (Sukuk) based on Islamic Shari’a principles where IFSI can invest their surplus liquidity.

• Providing short-term investment opportunities based on Islamic Shari’a principles.

The Bank is regulated by the CBB and supervised by the Shari’a Supervisory Board for compliance with Shari’a rules and principles. As of 31 December 2018, the total number of employees employed by the Bank was 22 (2017: 23).

The consolidated financial statements were approved for issue by the Board of Directors on 17 February 2019.

2. ACCOUNTING POLICIES

2.1 Basis of preparationThe consolidated financial statements have been prepared in accordance with Financial Accounting Standards (“FAS”) as issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (“AAOIFI”), the Islamic Shari’a rules and principles as determined by the Shari’a Supervisory Board of the Group, the Bahrain Commercial Companies Law, the Central Bank of Bahrain and Financial Institutions Law and the CBB regulations (Volume 2 and applicable provisions of Volume 6 of the CBB rulebook). In accordance with the requirements of AAOIFI, for matters which are not covered by AAOIFI standards, the Group uses relevant International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (the “IASB”).

Statement of ComplianceThe consolidated financial statements have been prepared on a historical cost basis, except for equity type instruments carried at fair value through equity and at fair value through statement of income that have been measured at fair value. The consolidated financial statements have been presented in United States Dollar (“US$”), being the reporting and functional currency of the Group’s operations. All values are rounded to the nearest thousand (US$ ‘000) unless otherwise indicated.

Regulatory non-complianceCBB rule book volume 2 - Licensing Requirements ModuleThe Group’s total equity as at 31 December 2018 is US$ 52.147 Million which is less than the minimum capital requirement! of US$ 100 Million required under LR Module of Volume 2 of the Central Bank of Bahrain (CBB) rule book (LR- 2.5.2B).”

Basis of consolidationThe consolidated financial statements comprise the financial statements of the Bank and its subsidiary as at and for the year ended 31 December of each year. The financial statements of the subsidiary are prepared for the same reporting year as the Bank, using consistent accounting policies. All intra-group balances, transactions, income and expenses and profits and losses resulting from intra-group transactions are eliminated in full.

The Bank’s subsidiary is fully consolidated from the date of acquisition, being the date on which the Group obtained control, and continues to be consolidated until the date that control ceases. Control is achieved where the Group has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.


2. ACCOUNTING POLICIES (continued)

2.1 Basis of preparation (continued)

Basis of consolidation (continued)

The consolidated financial statements comprise the financial statements of the Bank and its following subsidiary:

Year of Country of Nature of

2018 incorporation business

Held directly by the Bank

The Short Term

Sukuk Centre B.S.C. (c) 100% 2003 Kingdom of Bahrain

Dynamic management of sukuks portfolio

2.2 Significant accounting policies The accounting policies adopted in the preparation of the condensed consolidated financial statements are consistent with those used in the preparation of the annual consolidated financial statements for the year ended 31 December 2017, except for the early adoption of FAS 30.

2.2.1 Early adoption of FAS 30 - Impairment, Credit Losses and Onerous Commitments (“FAS 30”)The Group has early adopted FAS 30, effective from 1 January 2018 which has a mandatory date of initial application of 1 January 2020. The requirements of FAS 30 represent a significant change from FAS 11 “Provisions and Reserves”.

As permitted by FAS 30, the standard has been applied retrospectively and the comparative amounts have not been restated. The impact of the early adoption of FAS 30 has been recognised in retained earnings in the consolidated statement of changes in equity. The standard eliminates the use of the existing FAS 11 incurred loss impairment model approach.

TransitionChanges in accounting policies resulting from the adoption of FAS 30 have been applied retrospectively, except comparative periods which have not been restated. Differences in the carrying amounts of financial assets and financial liabilities resulting from the adoption of FAS 30 are recognised in retained earnings and reserves as at 1 January 2018. Accordingly, the information presented for 2017 does not reflect the requirements of FAS 30 and therefore is not comparable to the information presented for 2018 under FAS 30.

Impact of adopting FAS 30Following is the impact of early adoption of FAS 30:

Balance 31 December

2017Transition

adjustmentRestated balance

1 January 2018”

US$ ‚000 US$ ‚000 US$ ‚000

Accumulated losses (13,465) (2,007) (15,472)

Cash and balances with banks 1,823 (2) 1,821

Murabaha receivables 13,004 (2) 13,002 Due from banks 15,500 (329) 15,171

Mudaraba receivables 5,071 (8) 5,063

Financing receivables 5,851 (2,246) 3,605

Investment in sukuks 73,461 580 74,041 The key changes to the Group’s accounting policies resulting from its adoption of FAS 30 are summarized in note 2.2.2 (b).



2.2 Significant accounting policies(continued)

2.2.2 Summary of significant accounting policies

a. Financial contractsFinancial contracts consist of cash and balances with banks, Murabaha receivables, Due from banks, Mudaraba receivables, financing receivables, and sukuks. Balances relating to these contracts are stated net of allowance for credit losses.

b. Impairment assessment (policy applicable from 1st January 2018)Impairment of financial assetsFAS 30 replaces the ‘incurred loss’ model in FAS 11 with ECL model. The new impairment model also applies to certain financing commitments and financial guarantee contracts but not to equity investments. Credit losses approachThe Group recognizes credit losses allowances based on a forward looking Expected Credit Loss (ECL) approach for all established Islamic financing contracts, Sukuk investments and Off-balance sheet exposures. The Group categorizes its assets subject to credit losses into the following three stages in accordance with the FAS 30 methodology:

(i) Stage 1 – Performing assets: asset(s) that are not significantly deteriorated in credit quality since origination. The impairment allowance is recorded based on 12 months ECL;

(ii) Stage 2 – Underperforming assets: asset(s) that has significantly deteriorated in credit quality since origination. The credit losses is recorded based on life time ECL; and

(iii) Stage 3 – Impaired assets: For asset(s) that are impaired, the Group recognizes the impairment allowance based on life time ECL. The Group considers forward-looking information in its assessment of significant deterioration in credit risk since origination as well as the measurement of ECLs.

The forward-looking information includes elements such as macroeconomic factors (e.g., fiscal deficit, GDP growth, inflation, government spending, profit rates and oil prices) and economic forecasts obtained through internal and external sources. To evaluate a range of possible outcomes, the Group formulates various scenarios. For each scenario, the Group derives an ECL and applies a probability weighted approach to determine the impairment allowance in accordance with the accounting standards requirements. Measurement of ECLThe Group has adopted the general approach to calculate expected credit loss (ECL). The ECL amount will be computed as the unbiased and probability-weighted estimate of credit losses (i.e. present value of all cash shortfalls) over the expected life of the financial asset. Credit losses under the general approach are computed from individual risk parameters i.e. probability of default (PD), loss given default (LGD) and exposure at default (EAD). The guiding principle of the ECL model is to reflect the general pattern of changes in the credit quality of a financial instrument. The objective of calculating impairment through the ECL model is to recognize 12 month expected credit losses for financial instruments which exhibit stable credit quality (Stage 1) and lifetime expected credit losses for financial instruments for which there has been a significant increase in credit quality since initial recognition (Stage 2 and Stage 3).

These parameters are generally derived from internally developed models and other historical data. These are adjusted to reflect forward-looking information as described below.




2.2.2 Summary of significant accounting policies (continued)

b) Impairment assessment (policy applicable from 1 st January 2018) (continued)

Definition of default The Group’s definition of default Is aligned with regulatory guidelines and internal credit risk management practices. Defaulted facilities are under Stage 3 and a specific provision will be recognized against all such assets.

The Group uses 90+ Days Past Due on principal and profit repayments as a hard stop default definition along with certain other unlikeliness-to-pay indicators defined in risk management policies (if any)

Probability of defaultProbability of default (PD) is a key risk parameter in the ECL calculations. It is defined as the likelihood that a counterparty will not be able to meet its debt obligations in the future. A 12 months marginal PD is applied for all Stage 1 assets and a lifetime PD is applied for all Stage 2 assets. PD reflects the Group’s view of the future asset quality and is an unbiased estimate so as to not include any optimism or conservatism. A “point-in-time” PD (PiT PD) estimate which reflects forecasted macroeconomic conditions is used for ECL calculation purposes.

Loss Given Default Loss given default (LGD) is defined as the forecasted economic loss in case of default. LGD computation is independent of the assessment of credit quality and thus applied uniformly across all stages.

Due to the size of the Group’s portfolio, there is insufficient historical LGD data to derive statistically reliable LGD estimates. The Group shall therefore use Basel regulatory guidelines as a starting point to arrive at the LGD percentage for unsecured exposures, furthermore the exposures will be assessed individually and according to the underlying collateral value. Going forward, subject to availability of adequate default data, the Group shall revise LGD estimation methodology to derive Group specific LGD.

Exposure At DefaultExposure at default (EAD) is an estimation of the extent that the Group may be exposed to an obligor in the event of default. The estimation of EAD takes into account any expected changes in the exposure after the assessment date. This is of particular importance in the case of Stage 2 assets where the point of default may be several years in the future. EAD in the case of facilities with no limits is the outstanding exposure which will be calculated as principal plus profit less contractual prepayments. The outstanding exposure will also include undisbursed commitments, except where the terms of the contract clearly state that such commitments are cancellable for any reason, the committed amounts for such arrangements will not be considered as EAD.

Period of exposureThe period of exposure limits the period over which possible defaults are considered, and thus affects the determination of PDs and measurement of ECLs (especially for Stage 2 assets for which lifetime ECLs are to be calculated).

The maximum period over which ECL is computed correspond to the maximum contractual period of a facility commitment. However, for certain financial instruments, the maximum period over which ECL is computed over a period that the Group is exposed to credit risk even if that period extends beyond the maximum contractual period

Significant Increase in Credit RiskWhen determining whether the risk of default on a financial contracts has increased significantly since initial recognition, the Group considers reasonable and supportable information that is relevant and available without undue cost or effort. This includes both quantitative and qualitative information and analysis, based on the Group’s historical experience and expert credit assessment including forward-looking information.

The criteria for determining whether credit risk has increased significantly vary on a portfolio level and include quantitative and qualitative factors, including days past due and risk rating.

Backward transitionFAS 30 staging model is of symmetrical nature as exposures may migrate from lifetime ECL measurement (Stage 2 and Stage 3) to 12 month ECL measurement (Stage 1). However, movement across stages are not immediate once SICR indicators are no longer triggered. Once such indicators are no longer triggered, movement back to Stage 1 or Stage 2 has to be calibrated and cannot be automatic or immediate. Certain criteria like cooling off period, SICR indicators and payment history are considered for migrating customers to Stage 2 or Stage 1.







Impairment approach The Group recognizes impairment losses on all investment assets and exposures subject to risks other than credit risk (other than inventories), other than investments carried at fair value through income statement. The impairment losses are measured by which the carrying amount of an asset exceeds its recoverable amount. The recoverable amount is the higher of its fair value less costs of disposal and its value in use.

c. Cash and cash equivalentsCash and cash equivalents as referred to in the consolidated statement of cash flows comprise cash and balances with banks and amounts due from banks and financial institutions with original maturities of 90 days or less

d. Due from banks and financial institutions These comprise international commodity murabaha and wakala contracts, which are trade transaction agreements stated at cost net of deferred profit and provision for impairment. e. Mudaraba receivables A mudaraba receivable is a partnership in which the Group contributes capital. These contracts are stated at the fair value of the consideration given less provision for impairment. f. Financing receivables These represent wakala and murabaha financing to projects and are stated at the fair value of the consideration given less provision for impairment.

g. Investments These are classified as either equity type instruments carried at fair value through the statement of income or fair value through equity or debt type instruments carried at amortised cost.

Initial recognitionAll investments are recognised on the acquisition date and are recognised initially at their fair value plus transaction costs, except for investments carried at fair value through the statement of income. Transaction costs relating to investments carried at fair value through the statement of income are charged to the consolidated statement of income when incurred. Equity type instruments carried at fair value through the statement of incomeInvestments held for trading and designated at fair value through the statement of income are subsequently remeasured at fair value. All related realised and unrealised gains or losses are reported in the consolidated statement of income. Equity type instruments carried at fair value through equityInvestments designated at fair through equity are subsequently remeasured at fair value and the resultant fair value gain or loss is directly reported in equity under ‘investment fair value reserve’ until the investment is sold, realised or deemed to be impaired, at which time the realised gain or loss is reported in the consolidated statement of income. Losses arising from impairment of such investments are recognised in the consolidated statement of income in “impairment losses” and removed from the investment fair value reserve. Impairment losses recognised in the consolidated statement of income for an equity instrument classified as fair value through equity are not reversed through the consolidated statement of income. Debt type instruments carried at amortised costThese instruments are managed on a contractual yield basis and are not held for trading and have not been designated at fair value through the statement of income. Such investments are carried at amortised cost, less provision for impairment in value. Amortised cost is calculated by taking into account any premium or discount on acquisition. Any gain or loss on such investments is recognised in the consolidated statement of income when the investment is de-recognised or impaired.






h. Fair value

Fair value is determined for each investment individually in accordance with the valuation policies set out below:

(i) For investments that are traded in organised financial markets, fair value is determined by reference to the quoted market bid prices prevailing on the consolidated statement of financial position date.(ii) For unquoted investments, fair value is determined by reference to recent significant buy or sell transactions with third parties that are either completed or are in progress. Where no recent significant transactions have been completed or are in progress, fair value is determined by reference to the current market value of similar investments. For others, the fair value is based on the net present value of estimated future cash flows, or other relevant valuation methods.(iii) For investments that have fixed or determinable cash flows, fair value is based on the net present value of estimated future cash flows determined by the Group using current profit rates for investments with similar terms and risk characteristics(iv) Investments which cannot be remeasured to fair value using any of the above techniques are carried at cost, less provision for any impairment.

i. OffsettingFinancial assets and financial liabilities are only offset and the net amount reported in the consolidated statement of financial position when there is a legal or religious enforceable right to set off the recognised amounts and the Group intends to either settle on a net basis, or to realise the asset and settle the liability simultaneously. j. Derecognition of financial instruments

Financial assets A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognised when: (i) the right to receive cash flows from the asset have expired;(ii) the Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a ‘pass through’ arrangement; or(ii) 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.

Financial liabilitiesA financial liability is derecognised when the obligation under the liability is discharged, cancelled or expires. k. ProvisionsProvisions are recognised when the Group has a present obligation (legal or constructive) arising from a past event and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of obligation.

l. Revenue recognitionIncome from investments, due from banks and financial institutions and financing receivablesIncome is recognised on a time-apportioned basis over the period of the investment. Income that is 90 days or more overdue is suspended until it is received in cash.

Dividend income Dividends are recognised when the right to receive payment is established.

Ijarah income Ijarah income is accounted for on a straight line basis over the ijarah terms.

Income from mudaraba receivablesIncome on mudaraba receivables is recognised when the right to receive payment is established or on distribution by the mudarib.

Investment banking feesThese comprise fees for structuring, arranging and underwriting deals. Investment banking fees are recognised when the services are provided and income is earned. This is usually when the Bank has performed all significant acts in relation to a transaction and it is highly probable that the economic benefits from the transaction will flow to the Bank. Significant acts in relation to a transaction are determined based on the terms agreed in the private placement memorandum/contracts for each transaction.







m. Return to short term sukuk investorsReturn to short term sukuk investors is recognised in accordance with the underlying contracts.

n. Foreign currenciesTransactions in foreign currencies are recorded at the rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated into US Dollars at the rate of exchange ruling at the reporting date. All differences are taken to the consolidated statement of income.

Translation gains or losses on non-monetary items are included in equity as part of the fair value adjustment.

o. ZakahIn accordance with its Articles of Association, the Group is not required to pay Zakah on behalf of its shareholders.

p. Fiduciary assetsAssets held in a fiduciary capacity are not treated as assets of the Group.

q. Employees’ end of service benefitsProvision is made for end of service indemnity payable under the Bahraini Labour Law applicable to non-Bahraini employees’ accumulated periods of service at the statement of financial position date.

Bahraini employees of the Bank are covered by contributions made to the Social Insurance Organization of the Kingdom of Bahrain as a percentage of the employees’ salaries. The Bank’s obligations are limited to these contributions, which are expensed when due.

r. Earnings prohibited by Shari’aThe Group is committed to avoid recognising any income generated from non-Islamic sources. Accordingly, all non-Islamic income is credited to a charity account where the Group uses these funds for various social welfare activities.

s. DividendsDividends to shareholders are recognised as a liability when they are approved by the shareholders.

t. Trade and settlement date accountingAll “regular way” purchases and sales of financial assets are recognised on the trade date, i.e. the date that the Group commits to purchase or sell the asset.

u. Investment in real estateProperties held for rental, or for capital appreciation purposes, or both, are classified as investment in real estate. Investments in real estate are initially recorded at cost, being the fair value of the consideration given and acquisition charges associated with the property. Subsequent to initial recognition, an entity has the option to adopt either the fair value model or the cost model and shall apply that policy consistently to all of its investment in real estate. The Group has opted to use the cost model.

Investment in real estate remeasured using the cost model is stated at cost less depreciation and any impairment provisions. Depreciation is the systematic allocation of the cost of an asset over its estimated useful life. Major expenditure incurred by the entity related to additions to and improvements in real estate subsequent to its acquisition shall be added to the carrying amount of investment in real estate in the consolidated statement of financial position, provided that the entity expects that such expenditure will increase the future economic benefits to the entity from the real estate. However, if such economic benefits are not expected to occur, the entity shall recognise this expenditure in the consolidated statement of income in the financial period in which it is incurred.


2.2.3 Estimates and judgements

In the process of applying the Group’s accounting policies, management has made estimates and judgements in determining the amounts recognised in the consolidated financial statements. The most significant use of estimates and judgements are as


follows:Going concernThe Group’s management has made an assessment of the Group’s ability to continue as a going concern and is satisfied that the Group has the resources to continue in business for the foreseeable future. Furthermore, management is not aware of any material uncertainties that may cast significant doubt upon the Group’s ability to continue as a going concern. Therefore, the consolidated financial statements continue to be prepared on the going concern basis.

Impairment The Group assesses at each statement of financial position date whether there is objective evidence that a specific asset or a group of assets may be impaired. An asset or a group of assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that have occurred after the initial recognition of the asset (an incurred “loss event”) and that loss event(s) has an impact on the estimated future cash flows of the asset or the group of the assets that can be reliably estimated.

Impairment of fair value through equity investments The Group treats fair value through equity investments as impaired when there has been a significant or prolonged decline in the fair value below its cost or where other objective evidence of impairment exists. The determination of significant or prolonged decline and other objective evidence involves judgment. In addition, the Group evaluates other factors, including normal volatility in share price for quoted equities, the future cash flows and the present value calculation factors for unquoted equities. Fair valuation of investmentsThe determination of fair values of unquoted investments requires management to make estimates and assumptions that may affect the reported amount of assets at the date of the consolidated financial statements. The valuation of such investments is based on the fair value criteria explained above.

The actual amount that is realised in a future transaction may differ from the current estimate of fair value and may still be outside management estimates, given the inherent uncertainty surrounding valuation of unquoted investments.

LiquidityThe Group manages its liquidity through consideration of the maturity profile of its assets and liabilities which is set out in the liquidity risk disclosures in note 18 (b). This requires judgment when determining the maturity of assets and liabilities with no specific maturities.

In the process of applying the Group’s accounting policies, management has made the following judgments, apart from those involving estimations, which affect the amounts recognised in the consolidated financial statements:

Classification of investmentsManagement decides on acquisition of a equity type financial asset whether it should be classified as “equity-type instruments at fair value through the statement of income” or “’equity-type instruments at fair value through equity”. A similar decision is taken by management on acquisition of a debt type financial asset as to whether it should be classified as a “debt-type instrument through the statement of income” or a ‘’debt-type instrument at amortised cost”.

2.2.4 Shari’a Supervisory Board The Group’s Shari’a Supervisory Board consists of three members appointed by the general assembly. They review the Group’s compliance with general Shari’a principles and specific fatwas, rulings and guidelines issued. Their review includes examination of evidence relating to the documentation and procedures adopted by the Group to ensure that its activities are conducted in accordance with Islamic Shari’a principles.


3. PROSPECTIVE CHANGES IN ACCOUNTING POLICIESNew standards and interpretations issued but not yet effective

Standards issued but not yet effective up to the date of issuance of the Group’s consolidated financial statements are listed

below. This listing is of the relevant standards and interpretations issued, which the Group reasonably expects to be applicable

at a future date. The Group intends to adopt those standards (where applicable) when they become effective:

FAS 28 Murabaha and other deferred payment sales

This standard prescribes the accounting and reporting principles and requirements for Murabaha and deferred payment sales

transactions and different elements of such transaction. This standard supersedes the earlier FAS 2 “Murabaha and Murabaha to

the Purchase Orderer” and FAS 20 “Deferred Payment Sale”. This standard shall be effective beginning on or after 1 January 2019,

with early adoption permitted.

FAS 31 Investment Agency (Al-Wakala Bi Al-Istithmar)

This standard intends to define the accounting principles and reporting requirements for investment agency (Al-Wakala Bi

Al-Istithmar) transactions and instruments, in the hands of both the principal and the agent. This standard shall be effective

beginning on or after 1 January 2020, with early adoption permitted.

The Board of Directors expects that the adoption of the above standards will have no material impact on the financial statements

of the Bank in the year of initial application.

4. MURABAHA RECEIVABLES

2018 2017

Stage1US$ '000

Stage2US$ ‘000

Stage3US$ ‘000

TotalUS$ ‘000 US$ '000

Murabaha receivables 9,504 - - 9,504 13,004

Less: Allowance for credit losses (2) - - (2) -

9,502 - - 9,502 13,004

5. DUE FROM BANKS AND FINANCIAL INSTITUTIONS

2018 2017

Stage1US$ '000

Stage2US$ ‘000

Stage3US$ ‘000


Wakala contracts 1,000 7,500 - 8,500 15,500

Less: Allowance for credit losses - (4) - (4) -

1,000 7,496 - 8,496 15,500

All balances have original maturities of 90 days or less.

6. MUDARABA RECEIVABLES

2018 2017

Stage1US$ '000

Stage2US$ ‘000

Stage3US$ ‘000


Mudaraba receivables - 2,497 - 2,497 5,071

Less: Allowance for credit losses - (1) - (1) -

- 2,496 - 2,496 5,071


7. FINANCING RECEIVABLES

2018 2017

Stage1US$ '000

Stage2US$ ‘000

Stage3US$ ‘000


Wakala receivable - - - - 2,888

Murabaha receivable - 2,756 - 2,756 2,963

Less: Allowance for credit losses - (1,915) - (1,915) -

- 841 - 841 5,851

8. INVESTMENTS

2018 Amortisedcost

US$ '000

Fair valuethrough

equityUS$ '000

Fair valuethrough the

statementof income

US$ '000Total

US$ '000

Debt typeQuoted investments - Sukuk

Unquoted investments - Sukuk

73,681

21,435

-

-

-

-

73,681

21,435

Equity type

Unquoted investments - Funds - 3,173 4,650 7,823

95,116 3,173 4,650 102,939

Less: Allowance for credit losses / impairment (21,711) (3,052) - (24,763)

At 31 December 2018 73,405 121 4,650 78,176

2017 Amortisedcost

US$ '000

Fair valuethrough

equityUS$ '000

Fair valuethrough the

statementof income

US$ '000Total

US$ '000

Debt typeQuoted investments - SukukUnquoted investments - Sukuk

71,793 23,840

- -

71,793 23,840

Equity type

Unquoted investments - Funds -

3,828

4,935 8,763

95,633 3,828 4,935 104,396

Less: Impairment provision (22,172) (3,112)-

(25,284)

At 31 December 2017 73,461 716 4,935 79,112

The Group’s investments in sukuk held at amortised cost have a fair value of US$ 70 million (31 December 2017: US$ 72 million).




8. INVESTMENTS (continued)

Under unquoted investments which are held at fair value through equity are investments amounting to US$ 0.121 million (2017: US$ 0.716 million) which are held at cost less provision for impairment due to the unpredictable nature of their future cash flows and the lack of other suitable methods for arriving at a reliable fair value for these investments.

The table below shows the credit quality and the maximum exposure to credit risk based on the Bank’s internal credit rating system and period-end stage classification. The amounts presented are gross of impairment allowances.

2018 31 Dec 2017

Stage1US$ '000

Stage2US$ ‘000

Stage3US$ ‘000


Good (1-4) 40,900 - - 40,900 64,425

Satisfactory (5-7) 14,995 17,786 - 32,781 9,775 Default (8-10) - - 21,435 21,435 21,433

55,895 17,786 21,435 95,116 95,633

8.1 Movements in allowance for credit losses on investments at amortised cost

2018 31 Dec 2017

Stage 1: 12-month

ECL

Stage 2: Lifetime ECL not

credit-impaired

Stage 3: Lifetime

ECL credit-impaired

Total ECL Total

US$ ‘000 US$ ‘000 US$ ‘000 US$ ‘000 US$ ‘000

Balance at 1 January on adoption of FAS 30 80 77 21,435 21,592 19,949

Net remeasurement of loss allowance

(43) 162 - 119 2,223

Balance at the end of the period/ year 37 239 21,435 21,711 22,172

Investments which are impaired as of 31 December 2018 amounted to US$ 24.5 million (2017: US$ 24.4 million).

Investments include an amount of US$ 73.1 million (2017: US$ 71.8 million) representing the underlying assets of the secured Short Term Sukuk Program (STS Program) of The Short Term Sukuk Centre B.S.C. (c) managed by the Bank. The maturities of these investments range from 1 to 25 years and the effective profit rate on these investments range between 2.8% to 7.9% per annum (2017: 2.8% to 7.9% per annum).

The Group has been party to a long term financing arrangement with a third party international financial institution for which certain of the Group’s investments in sukuk amounting to US$ 48 million (2017: US$ 48 million) have been pledged as collateral as of 31 December 2018. In accordance with the financing arrangement, the Group is required to increase the amount of Sukuk pledged as collateral to equal the amount of financing, when the existing Sukuk pledged as collateral decline in value.

9. INVESTMENT IN REAL ESTATE This mainly represents the Bank’s Headquarters’ building, the majority of which is leased under an operating ijara:

2018US$ '000

2017US$ '000

Cost 31,963 31,963

Addition - -

31,963 31,963

Accumulated depreciation and impairment (5,407) (4,416)

26,556 27,547


9. INVESTMENT IN REAL ESTATE (continued)

As at 31 December 2018, the Bank’s headquarters had a fair value of US$ 23.8 million (2017: US$ 24.2 million) and its other investment properties had a fair value of US$ 3.4 million (2017: US$ 3.7 million) .

10. OTHER ASSETS

2018US$ '000

2017US$ '000

Accrued profit 706 1,065

Prepaid expenses 128 137

Fee income receivable 11 120

Others 610 319

1,455 1,641

Less: provision for credit losses (275) (275)

1,180 1,366

11. DUE TO SHORT TERM SUKUK INVESTORS AND BANKS

Due to short term sukuk investors and banks represents amounts due under the secured Short Term Sukuk Program (STS program) owned by the investors in the secured STS Program of The Short Term Sukuk Centre B.S.C. (c) managed by the Bank. The investors are the legal owners of the underlying investments of US$ 73.7 million (2017: US$ 71.8 million) of the STS program as disclosed in note 8.

12. OTHER LIABILITIES

2018US$ '000

2016US$ '000

Board and Shari'a fees payables 88 216

Professional fees payables 100 61

Unearned revenue 92 143

Others 398 412

678 832



13. OWNERS’ EQUITY

(a) Share Capital

2018US$ '000

2017US$ '000

Authorised200,000,000 ordinary shares of US$ 1 each

200,000 200,000

Issued, subscribed and paid-up:At the beginning of the year: 59,038,875 (2017: 59,038,875) ordinary shares of US$ 1 (2017: US$ 1) each

59,039 59,039

Issued during the year: nil (2017: nil)ordinary shares of US$ 1 (2017: US$ 1) each

- -

At the end of the year: 59,038,875 (2017: 59,038,875)ordinary shares of US$ 1 (2017: US$ 1) each

59,039 59,039

(b) Reserves

Statutory reserveIn accordance with the requirements of the Bahrain Commercial Companies Law, 10% of the net profit is transferred to a statutory reserve. The Bank may resolve to discontinue such annual transfers when the reserve totals 50% of the paid up share capital. The reserve is not distributable but can be utilised for the purpose of a distribution in such circumstances as stipulated in the Bahrain Commercial Companies Law and following the approval of the CBB.US$ Nil (2017: US$ 212 thousand) was transferred during the year.

General reserveIn accordance with the Bank’s articles of association, the Group may transfer any amount, as approved by the directors, out of net profit for the year to the general reserve after transfer to statutory reserve. The general reserve is distributable, subject to the approval of the CBB and Board of Directors.

Investment fair value reserve Investment fair value reserve represents unrealised gains and losses, excluding impairment, resulting from re-measurement of investments at fair value through equity. This reserve is distributable upon value realisation, which takes place at the time of actual exit or derecognition of investments.

(c) Additional information on shareholding

(i) The Group has only one class of equity shares and the holders of these shares have equal voting rights.

(ii) Names and nationalities of the major shareholders and the percentage of equity shares held as at 31 December 2018 and 2017 are as follows:

Country of incorporation

% ofholding

2018Share

capitalUS$ ‚000

2017Share

capitalUS$ ‚000

KFH Capital Investment Company Kuwait 25% 14,760 14,760

Bahrain Islamic Bank Kingdom of Bahrain 25% 14,760 14,760

Dubai Islamic Bank United Arab of Emirates 25% 14,760 14,760

Islamic Development Bank Kingdom of Saudi Arabia 25% 14,760 14,760


14. INCOME FROM INVESTMENTS IN SUKUK2018

US$ '0002017

US$ '000

Income from sukuk 3,502 3,802

(Loss) gain on sale of sukuk (17) 1,731

3,485 5,533

15. INVESTMENT BANKING FEES

2018US$ '000

2017US$ '000

Fees and commission income 326 512

Others 117 19

443 531

16. STAFF COSTS2018

US$ '0002017

US$ '000

Staff salaries and related benefits 2,346 2,216

Staff indemnity and related provision 321 234

Others 112 116

2,779 2,566

17. GENERAL AND ADMINISTRATIVE EXPENSES

2018US$ '000

2017US$ '000

Legal and professional fees 250 224

Premises expenses 263 269

Board sitting fees 150 250

Board and Shari'a expenses 15 36

Advertising and marketing expenses 12 11

Others 366 325

1,056 1,115


18. NET RECOVERIES (ALLOWANCES) FOR CREDIT LOSSES

The impairment allowance recovered (charged) in the statement of income is as follows:

2018US$ '000

2017US$ '000

Cash and balances with banks 2 -

Due from banks 325 -

Mudaraba receivables 7 -

Financing receivables 331 -

Investment in sukuks (121) (17)

Other receivables - (12)

544 (29)

19. RELATED PARTY BALANCES AND TRANSACTIONS

Parties are considered to be related if one party has the ability to control the other party or exercise significant influence or joint control over the other party in making financial and operating decisions. Related parties comprise major shareholders, directors, shari’a supervisory board, external auditors and executive management of the Group and/or entities over which they exercise control and/or significant influence.

The related party balances included in these consolidated financial statements are as follows:

Boardmembers/ keymanagement

personnel/Shari'a board

members/external auditorsUS$ '000

Significantshareholders /

entities inwhich

directors areinterested

US$ '000

As at31 December

2018US$ '000





entities inwhich

directors are interested

US$ '000

As at31 December

2017US$ '000

Assets

Cash and bank balances - 313 313 - 268 268

Investment in Sukuk - 5,241 5,241 - 5,275 5,275

Other assets 216 148 364 - 148 148

Liabilities

Due to short term sukuk investors and banks - 13,004 13,004 - 20,004 20,004

Staff payables 845 - 845 715 - 715

Other liabilities 162 - 162 259 - 259


19. RELATED PARTY BALANCES AND TRANSACTIONS (continued)

The related party transactions included in these consolidated financial statements are as follows:


personnel/Shari’a board



entities inwhich

directors areinterested

US$ '000

31 December2018

US$ '000





entities inwhich

directors are interested

US$ '000

31 December2017

US$ '000

Income

Income from investments in sukuk - 361 361 - 684 684

Return to Short Term Sukuk

investors and banks - (425) (425) - (388) (388)

Expenses

Staff costs 2,032 - 2,032 1,552 - 1,552

General and administrative expenses 166 - 166 408 - 408

Key management personnel of the Group comprise of the key members of management having authority and responsibility for planning, directing and controlling the activities of the Bank. The key management personnel compensation is as follows:

2018US$'000

2017US$'000

Salary and other benefits 2,032 1,552



20. RISK MANAGEMENT

IntroductionRisk is inherent in the Group’s activities and is managed through a process of ongoing identification, measurement and monitoring, subject to risk limits and other controls. This process of risk management is critical to the Group’s continuing profitability and each individual within the Group is accountable for the risk exposures relating to his or her responsibilities. These risks and the processes to mitigate these risks have not significantly altered from the previous year. The Group is exposed to credit, liquidity, market and operational risk. The independent risk control process does not include business risks such as changes in the environment, technology and industry. They are monitored through the Group’s strategic planning process. Risk management structureThe Board of Directors is responsible for the overall risk management approach and for approving the risk strategies and principles. The Board has delegated the oversight responsibilities of risk management to the Risk Management Committee and senior management (comprising the Chief Executive Officer and Senior Managers). They are responsible for carrying out the policies laid down by the Board by ensuring that there are adequate and effective operational procedures, internal controls and systems for measuring, monitoring and controlling risks. Risk Management CommitteeIIn line with the Group’s expansion and growth plans, the Board established a Risk Management Committee (RMC) to further strengthen the Group’s risk management process. The RMC has the overall responsibility for the development of the risk strategy and implementing principles, frameworks, policies and limits. It is responsible for the fundamental risk issues, managing and monitoring relevant risk decisions. All the members of this Committee are from the Board. The RMC meets quarterly with the objective of assisting the Board in carrying out its responsibilities in relation to managing the Group’s range of inter-related risks in an integrated manner. The Committee is supported by the Group’s risk management function which assists with the establishment of policies on credit, liquidity, market and operational risk, reviews compliance with set risk limits approved by the Board and identifies emerging risk issues. The RMC is responsible for providing oversight and management of all risks in the Group and to ensure that there is an ongoing process to continuously manage the Group’s risks proactively.

The following are the management committees that support the risk management of the Group: Risk Management UnitThe Risk Management Unit (RMU) is responsible for implementing and maintaining risk related procedures to ensure an independent control process. The RMU is set up to centralise the management of risks and to assist senior management and the risk committees in the controlling, monitoring and reporting of risks. Asset/Liability Management Committee The Asset/Liability Management Committee (ALCO) is responsible for the Group’s asset and liability management, pricing and funding strategies, management of market and liquidity risks, as well as ensuring that investments are made in accordance with the policies approved by the Board of Directors. Credit and Investment Risk CommitteeThe Credit and Investment Risk Committee (CICOM) is responsible for the management of credit risk in compliance with Board decisions on acceptable levels of risk and minimum pricing levels. The function of CICOM includes appraisal and approval of credit applications based on limits set by the Board and also monitoring and reviewing non-performing portfolio and ensuring that adequate loss provisions are held against delinquent accounts in accordance with Group's policies. Internal AuditRisk management processes throughout the Group are audited annually by the Internal Audit function that examines both the adequacy of the procedures and the Group’s compliance with the procedures. Furthermore, overseeing the management of operational risk is the responsibility of Internal Audit which regularly reports to the Audit Committee to provide independent assurance that risks have been identified and there are sufficient and effective controls on all aspects of the Group’s operations. Internal Audit discusses the results of all assessments with management, and reports its findings and recommendations to the Audit Committee.


20. RISK MANAGEMENT (continued)

Risk measurement and reporting systemsMonitoring and controlling risks is primarily performed based on limits established by the Group. These limits reflect the business strategy and market environment of the Group as well as the level of risk that the Group is willing to accept, with additional emphasis on selected industries. In addition, the Group monitors and measures the overall risk bearing capacity in relation to the aggregate risk exposure across all risk types and activities. The principal risks associated with the Group’s business and the related risk management processes are as follows:

(a) Credit riskCredit risk is the risk that any counterparty, to a financial instrument, will fail to fulfill an obligation and cause the other party to incur a financial loss. The Group attempts to control credit risk by monitoring credit exposures, limiting transactions with specific counterparties, and assessing the creditworthiness of counterparties. In addition to monitoring credit limits, the Group manages credit exposures by entering into collateral arrangements with counterparties in appropriate circumstances, and limiting the duration of exposure. According to the terms of the STS program, the Sukukholders bear the credit risk arising from investments on account of default. However, the Bank bears the risk of a rating downgrade of its holding in sukuk assets.

The Group has established a credit quality review process to provide early identification of possible changes in the creditworthiness of counterparties, including regular collateral reviews. Counterparty limits are established by the use of a credit risk classification system, which assigns each counterparty a perceived risk rating. Risk ratings are subject to regular revision. The credit quality review process allows the Group to assess the potential loss as a result of the risks to which it is exposed and take corrective action.

Maximum exposure to credit riskThe table below shows the gross maximum exposure to credit risk for the components of the consolidated statement of financial position. The figures represent gross exposure net of any provision for impairment, without taking into account any collateral held and other credit mitigants:

Gross maximum exposure

2018US$ '000

2017US$ '000

Bank balances 1,198 1,817

Murabaha Receivables 9,502 13,004

Due from banks and financial institutions 8,496 15,500

Mudaraba receivables 2,496 5,071

Financing receivables 841 5,851

Investment in sukuks 73,405 73,461

Other assets 1,052 1,229

96,990 115,933




(a) Credit risk (continued)

Concentration RiskConcentrations of credit risk arise 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. Concentrations of credit risk indicate the relative sensitivity of the Group’s performance to developments affecting a particular industry or geographic location.

The Group’s financial assets with credit risk, before taking into account any collateral held or other credit enhancements, can be analysed by the following geographical regions:

2018Bahrain

US$ '000

Other GCCcountriesUS$ '000

Others US$ '000

ECL US$ ‚000

TotalUS$ '000

Bank balances 546 - 652 - 1,198

Murabaha receivables 5,000 - 4,504 (2) 9,502

Due from banks and financial institutions 8,500 - - (4) 8,496

Mudaraba receivables 2,497 - - (1) 2,496

Financing receivables - 2,756 - (1,915) 841

Investment in sukuks 15,519 71,356 8,241 (21,711) 73,405

Other assets 740 439 148 (275) 1,052

32,802 74,551 13,545 (23,908) 96,990

2017Bahrain

US$ '000


OthersUS$ '000

TotalUS$ '000

Bank balances 1,232 - 585 1,817

Murabaha Receivables - - 13,004 13,004

Due from banks and financial institutions 15,500 - - 15,500

Mudaraba receivables 5,071 - - 5,071

Financing receivables 2,888 2,963 - 5,851

Investment in sukuks 17,803 50,443 5,215 73,461

Other assets 478 603 148 1,229

42,972 54,009 18,952 115,933




Maximum exposure to credit risk (continued)The Group's financial assets with credit risk, before taking into account any collateral held or other credit enhancements, can be analysed by the following industry sectors:

2018

Banks andfinancial

institutionsUS$ '000

GovernmentUS$ '000

Real EstateUS$ '000

OthersUS$ '000

ECLUS$ ‘000

TotalUS$ '000

Bank balances 1,198 - - - - 1,198

Murabaha receivables 9,504 - - - (2) 9,502

Due from banks and financial institutions

8,500 - - - (4) 8,496

Mudaraba receivables 2,497 - - - (1) 2,496

Financing receivables 2,756 - - - (1,915) 841

Investment in sukuks 46,794 19,540 18,542 10,240 (21,711) 73,405

Other assets 364 197 395 371 (275) 1,052

71,613 19,737 18,937 10,611 (23,908) 96,990

2017

Banks andfinancial


GovernmentUS$ '000

Real EstateUS$ '000

OthersUS$ '000

TotalUS$ '000

Bank balances 1,817 - - - 1,817

Murabaha receivables 13,004 - - - 13,004


15,500 - - - 15,500

Mudaraba receivables 5,071 - - - 5,071

Financing receivables 2,963 - 2,888 - 5,851

Investment in sukuks 39,101 19,317 4,888 10,155 73,461

Other assets 579 132 383 135 1,229

78,035 19,449 8,159 10,290 115,933

As of 31 December 2018, the Group had an exposures to banks and non banks which exceed 15% of the Group’s consolidated capital of US$ 39 million (31 December 2017: US$ 33 million).

Credit quality per class of financial assetsThe Group’s financial assets are either asset backed or asset based. It is the Group’s policy to maintain consistent perceived risk ratings across the investment portfolio. This facilitates management focus on the applicable risks and the comparison of investment exposures across all lines of business, geographic regions and products. For quoted investments, the Group uses external renowned third party ratings when available, whereas for unquoted investments or where third party ratings are not available, the Group uses an internal rating system. The internal 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 attributable risk ratings are assessed and updated regularly.





Credit quality per class of financial assets (continued)The risk ratings used by the Group are defined as follows: (i) High investment grade: These counterparties are rated between AAA and A-. These are of high credit quality and

considered as low risk.

(ii) Investment grade: These counterparties are rated between BBB+ and BBB-. These are of good credit quality and considered higher risk than the high investment grade counterparties. (iii) Unrated: These counterparties are not rated. They are higher risk than investment grade but full repayments are expected. (iv) Past due or individually impaired: These counterparties are expected to be total loss.

The table below analyses the credit quality by class of financial asset, based on the Group’s internal credit rating system:

Neither past due nor impaired

2018

Highinvestment

grade US$ '000

Investment grade

US$ '000Unrated US$ '000

Past due orindividually

impairedUS$ ’000

TotalUS$ '000

Bank balances 662 - 536 - 1,198

Murabaha Receivables 4,504 - 4,998 - 9,502

Due from banks and financial institutions - - 8,496 - 8,496

Mudaraba receivables - - 2,496 - 2,496

Financing receivables - - 841 - 841

Investment in sukuks 23,349 12,777 37,279 - 73,405

Other assets 123 180 749 - 1,052

28,638 12,957 55,395 - 96,990


Neither past due nor impaired

2017

Highinvestment

grade US$ '000

Investment grade

US$ '000Unrated US$ '000

Past due orindividually

impairedUS$ ’000

TotalUS$ '000

Bank balances 612 1,205 - - 1,817

Murabaha Receivables 13,004 - - - 13,004

Due from banks and financial institutions - 15,500 - - 15,500

Mudaraba receivables - 5,071 - - 5,071

Financing receivables - - 5,851 - 5,851

Investment in sukuks 23,074 50,387 - - 73,461

Other assets 260 543 426 - 1,229

36,950 72,706 6,277 - 115,933




Collateral and other credit enhancements The amount and type of collateral depends on an assessment of the credit risk of the counterparty. The types of collateral mainly include charges over real estate properties. Management monitors the market value of collateral during its review of the adequacy of the allowance for impairment losses.

(b) Liquidity risk

Liquidity risk is defined as the risk that the Group will encounter difficulty in meeting obligations associated with financial liabilities that are to be settled by delivering cash or another financial asset. The Group’s approach to managing liquidity is through money market lines from financial institutions.

Details of the Group’s liquid assets to total assets as of the reporting date were as follows:

Liquid assets/ Total assets

2018 2017

At 31 December

Liquidity Ratio 15% 12%

Including sukuk* 72% 60%

* The management is of the view that certain sukuk are tradable or liquid and this ratio is calculated after including the tradable sukuk as liquid assets.



(b) Liquidity risk (continued)The table below summarises the maturity profile of the Group’s assets and liabilities as of 31 December 2018 based on contractual maturities from the consolidated statement of financial position date:

Up to 1 monthUS$ '000

1 to 3months

US$' 000

3 to 6months

US$ '000

6 months to 1 yearUS$ '000

1 to 3years

US$ '000

Over3 years

US$ '000

No fixedmaturityUS$ '000

ECLUS$ '000

TotalUS$ '000

Assets

Cash and bank balances 1,206 - - - - - - - 1,206

Murabaha receivables 9,504 - - - - - - (2) 9,502

Due from banks and financial institutions 8,500 - - - - - - (4) 8,496

Mudaraba receivables 2,497 - - - - - - (1) 2,496

Financing receivables - - - - 2,756 - - (1,915) 841

Investment in sukuks - - - 5,036 19,826 48,819 21,435 (21,711) 73,405

Investment in equities and funds - - 4,732 - 39 - - - 4,771

Investment in real estate - - - - 1,633 - 24,923 - 26,556

Equipment - - - - - - 137 - 137

Other assets - 377 564 212 302 - - (275) 1,180

Total assets 21,707 377 5,296 5,248 24,556 48,819 46,495 (23,908) 128,590

Liabilities and owners' equity

Due to short term sukuk investors and banks 64,804 9,467 - - - - - - 74,271

Staff payables 473 - 158 604 259 - - - 1,494

Other liabilities - 116 482 80 - - - - 678

Owners' equity - - - - - - 52,147 - 52,147

Total liabilities and owners' equity 65,277 9,583 640 684 259 - 52,147 - 128,590

Liquidity gap (43,570) (9,206) 4,656 4,564 24,297 48,819 (5,652)

Cumulative liquidity gap (43,570) (52,776) (48,120) (43,556) (19,259) 29,560 23,908

The net funding requirement with respect to the cumulative liquidity gap is managed through money market lines amounting to US$ 74 million as at 31 December 2018, with various banks and financial institutions.



20.RISK MANAGEMENT (continued)

(b) Liquidity risk (continued)The table below summarises the maturity profile of the Group’s assets and liabilities as of 31 December 2017 based on contractual maturities from the consolidated statement of financial position date:

Up to 1 monthUS$ '000

1 to 3months

US$' 000

3 to 6months

US$ '000

6 months to 1 yearUS$ '000

1 to 3years

US$ '000

Over3 years

US$ '000


TotalUS$ '000

Assets

Cash and bank balances 1,823 - - - - - - 1,823

Murabaha receivables 13,004 - - - - - - 13,004

Due from banks and financial institutions 15,500 - - - - - - 15,500

Mudaraba receivables 5,071 - - - - - - 5,071

Financing receivables - - 674 675 1,538 2,964 - 5,851

Investment in sukuks - - - 2,469 12,384 58,608 - 73,461

Investment in equities and funds - - - - 5,651 - - 5,651

Investment in real estate - - - - - 27,547 27,547

Equipment - - - - - - 139 139

Other assets - 455 706 172 33 - - 1,366

Total assets 35,398 455 1,380 3,316 19,606 61,572 27,686 149,413

Liabilities and owners' equity

Due to short term sukuk investors and banks 93,461 - - - - - - 93,461

Staff payables - - 224 - 82 673 - 979

Other liabilities - 182 650 - - - - 832

Owners' equity - - - - - - 54,141 54,141

Total liabilities and owners' equity 93,461 182 874 - 82 673 54,141 149,413

Liquidity gap (58,063) 273 506 3,316 19,524 60,899 (26,455)

Cumulative liquidity gap (58,063) (57,790) (57,284) (53,968) (34,444) 50,299 -

The net funding requirement with respect to the cumulative liquidity gap is managed through money market lines amounting to US$ 93.5 million as at 31 December 2017, provided by the shareholders.



(b) Liquidity risk (continued)The table below summarises the maturity profile of the Group’s financial liabilities based on contractual undiscounted repayment obligations:

2018

OndemandUS$ '000

Less than3 monthsUS$ '000

3 to 12months

US$ '000

1 to 5years

US$ '000Total

US$ '000

Due to Short Term Sukuk - investors - 13,007 - - 13,007

Due to banks - 23,049 38,359 - 61,408

Total undiscounted financial liabilities - 36,056 38,359 - 74,415

2017

OndemandUS$ '000

Less than3 monthsUS$ '000

3 to 12months

US$ '000

1 to 5years

US$ '000Total

US$ '000

Due to Short Term Sukuk - investors - 20,008 - - 20,008

Due to banks - 73,753 - - 73,753

Total undiscounted financial liabilities - 93,761 - - 93,761

(c) Market riskMarket risk is the risk that changes in market prices, such as profit rates, equity prices, foreign exchange rates and commodity prices will affect the Group’s income or the value of its holdings of financial instruments. Market risk comprises equity position risk, profit rate risk, currency risk and other price risk. The Group’s policy guidelines for market risk have been vetted by the Board of Directors in compliance with the rules and guidelines provided by the CBB.

The Group’s principal investment activity focuses on the GCC countries, a region whose dynamics the Group comprehends well and where the Group has a better understanding of the inherent risks. Investments are made after rigorous qualitative and quantitative analysis, and where the desired risk-return objectives are met. A healthy diversification across industry sectors is maintained within the investments.

Currency riskCurrency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Group’s major exposure is in GCC currencies, which are primarily pegged to the US Dollar. The Group considers the US Dollar as its functional currency. The Group had no significant exposures denominated in foreign currencies (other than GCC currencies which are pegged to the US Dollars) as of 31 December 2018 and 2017. Profit rate riskProfit rate risk refers to the potential impact on the Group’s net profit and equity caused by unexpected changes in rates of return. Profit rate risk is mitigated by adopting the floating-profit rate approach through close monitoring of the secondary market trading of sukuks and prevailing market expectations on profit rates and yields. The Group’s policy is to measure and manage its profit rate sensitive positions to ensure that the Group’s profit rates are optimised and its long-run earning power sustained. The Group reviews the volatility of its assets and liabilities portfolio using appropriate tools and techniques.


20 RISK MANAGEMENT (continued)

(c) Market risk (continued)

Profit rate risk (continued)The effects on profit solely due to reasonably possible immediate and sustained changes in profit return rate, affecting both

floating rate assets and liabilities and fixed rate assets and liabilities are as follows:

Effect on net profit

Change in rate

2018US$'000

2017US$'000

-1% 120 39

The effect of an increase in profit return rates is expected to have an equal and opposite effect on the net profit.


Equity price riskEquity price risk is the risk that the fair value of equity decreases as a result of changes in the levels of equity indices and the value of individual stocks. Equity positions are marked to market prices and monitored by RMU and reported to RMC. Risks arising from dealing and investment activities are managed by the establishment of limits that include trading limits, counterparty limits, as well as product and sub-product limits, i.e. minimum permissible acquisition of non investment rate sukuk. Equity price risk arises from the change in fair values of equity investments. The Bank has investments of Nil (2017: Nil) whose fair values are determined through equity indices.

(d) Operational RiskThis risk is defined as the risk of loss arising from inadequate or failed internal processes, people and systems and external events. Operational risk also includes shari’a non-compliance risk but excludes strategic and reputational risks. In managing this risk, a dedicated team has been established within the Bank to undertake the identification, assessment and measurement, establishing a control framework, monitoring and reporting of operational risks.


21. SEGMENTAL INFORMATION

(a) Industry sectorThe industrial distribution of the Group's assets and liabilities as of 31 December 2018 is as follows:

Banks andfinancial


GovernmentUS$ '000

RealEstate

US$ '000Others

US$ '000ECL

US$ ‘000Total

US$ '000

Assets

Cash and bank balances 1,198 - - 8 - 1,206



8,500 - - - (4) 8,496


Financing receivables 2,756 - - - (1,915) 841


Investment in equities and funds 39 - 4,732 - - 4,771

Investment in real estate - - 26,556 - - 26,556

Equipment - - - 137 - 137

Other assets 364 197 395 499 (275) 1,180

Total assets 71,653 19,737 50,224 10,884 (23,908) 128,590

Liabilities

Due to short term sukuk investors and banks

74,271 - - - - 74,271

Staff payables - - - 1,494 - 1,494

Other liabilities 1 - - 677 - 678

Total liabilities 74,272 - - 2,171 - 76,443



21. SEGMENTAL INFORMATION(continued)

(a) Industry sector (continued)The industrial distribution of the Group's assets and liabilities as of 31 December 2017 is as follows:

Banks andfinancial


GovernmentUS$ '000

RealEstate

US$ '000Others

US$ '000Total

US$ '000

Cash and bank balances 1,817 - - 6 1,823

Murabaha receivables 13,004 - - - 13,004


15,500 - - - 15,500

Mudaraba receivables 5,071 - - - 5,071

Financing receivables 2,963 - 2,888 - 5,851

Investment in sukuks 39,101 19,317 4,888 10,155 73,461

Investment in equities and funds 497 - 5,154 - 5,651

Investment in real estate - - 27,547 - 27,547

Equipment - - - 139 139

Other assets 579 132 383 272 1,366

Total assets 78,532 19,449 40,860 10,572 149,413

Liabilities

Due to short term sukuk investors banks

93,461 - - - 93,461

Staff payables - - - 979 979

Other liabilities 3 5 1 823 832

Total liabilities 93,464 5 1 1,802 95,272


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

At 31 December 2018

21. SEGMENTAL INFORMATION (continued)

(a) Industry sector (continued)The industrial distribution of the Group’s income and expense as of 31 December 2018 is as follows:

Banks andfinancial


GovernmentUS$ '000

RealEstate

US$ '000Others

US$ '000Total

US$ '000

Income

Income from:

Investment in sukuk 1,951 880 204 450 3,485

Investment in equities and funds 71 - 9 110 190

Due from banks and financial institutions 245 - - - 245

Financing receivables 111 - 641 - 752

Mudaraba receivables 56 - - - 56

Less: Return to Short Term Sukuk - investors

(426) - - - (426)

Less: Return to banks (1,754) - - - (1,754)

Investment banking fees - - 428 15 443

Ijarah income - 813 - 480 1,293

Foreign exchange losses (4) - - - (4)

Other Income - - - 244 244

Total Income 250 1,693 1,282 1,299 4,524

Expense

Staff costs - - - 2,779 2,779

Depreciation - - - 723 723

General and administrative expenses 9 117 - 930 1,056

Total expenses 9 117 - 4,432 4,558

Unrealised fair value change and impairment provisions

436 - (389) -

47


(a) Industry sector (continued)The industrial distribution of the Group’s income and expense as of 31 December 2017 is as follows:

Banks andfinancial


GovernmentUS$ '000

RealEstate

US$ '000Others

US$ '000Total

US$ '000

Income

Income from:

Investment in sukuks 2,783 840 1,043 867 5,533

Investment in equities and funds 40 - 18 - 58

Due from banks and financial institutions 137 - - - 137

Financing receivables 120 - 209 - 329

Mudaraba receivables 112 - - - 112

Less: Return to Short Term Sukuk investors

(388) - - - (388)

Less: Return to banks (1,398) (1,398)

Investment banking fees 100 - 412 19 531

Ijarah income - 938 - 563 1,501

Foreign exchange gain 20 - - - 20

Other Income 26 - 62 28 116

Total Income 1,552 1,778 1,744 1,477 6,551

Expense

Staff costs - - - 2,566 2,566

Ijarah expense - - - - -

Depreciation - - - 724 724

General and administrative expenses 21 121 - 973 1,115

Total expenses 21 121 - 4,263 4,405


(24)

-

(5)

-

(29)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTAt 31 December 2018



(b) Geographic sectorThe geographical distribution of the Group’s assets and liabilities as of 31 December 2018 is as follows:

BahrainUS$ '000


OthersUS$ '000

ECLUS$ ‘000

TotalUS$ '000

Assets

Cash and bank balances 546 - 660 - 1,206


Due from banks and financial institutions 8,500 - - (4) 8,496




Investment in equities and funds 4,051 81 639 - 4,771

Investment in real estate 26,556 - - - 26,556

Equipment 137 - - - 137

Other assets 593 714 148 (275) 1,180

Total assets 63,399 74,907 14,192 (23,908) 128,590

Liabilities

Due to short term sukuk investors and banks 32,491 13,004 28,776 - 74,271

Staff payables 1,494 - - - 1,494

Other liabilities 678 - - - 678

Total liabilities 34,663 13,004 28,776 - 76,443




(b) Geographic sector (continued)The geographical distribution of the Group’s assets and liabilities as of 31 December 2017 is as follows:

BahrainUS$ '000


OthersUS$ '000

TotalUS$ '000

Assets

Cash and bank balances 1,238 - 585 1,823

Murabaha receivables - - 13,004 13,004

Due from banks and financial institutions 15,500 - - 15,500

Mudaraba receivables 5,071 - - 5,071

Financing receivables 2,888 2,963 - 5,851

Investment in sukuks 17,803 50,443 5,215 73,461

Investment in equities and funds 4,335 219 1,097 5,651

Investment in real estate 27,547 - - 27,547

Equipment 139 - - 139

Other assets 615 603 148 1,366

Total assets 75,136 54,228 20,049 149,413

Liabilities

Due to short term sukuk investors and banks 35,268 20,004 38,189 93,461

Staff payables 979 - - 979

Other liabilities 830 - 2 832

Total liabilities 37,077 20,004 38,191 95,272




(b) Geographic sector (continued)The geographical distribution of the Group’s income and expense for the year ended 31 December 2018 is as follows:

BahrainUS$ '000


OthersUS$ '000

TotalUS$ '000

Income

Income from:

Investments in sukuk 867 2,257 361 3,485

Investments in equities and funds 110 9 71 190

Due from banks and financial institutions 197 - 48 245

Financing receivables 641 111 - 752

Mudaraba receivables 56 - - 56

Less: Return to Short Term Sukuk - investors and banks (533) (426) (1,221) (2,180)

Investment banking fees 443 - - 443

Ijarah income 1,293 - - 1,293

Foreign exchange losses (4) - - (4)

Other income 244 - - 244

Total income 3,314 1,951 (741) 4,524

Expense

Staff costs 2,779 - - 2,779

Depreciation 723 - - 723

General and administrative expenses 993 - 63 1,056

Total expense 4,495 - 63 4,558

Unrealised fair value change and impairment provisions (116) 161 2 47



(b) Geographic sector (continued)The geographical distribution of the Group’s income and expense for the year ended 31 December 2017 is as follows:

BahrainUS$ '000


OthersUS$ '000

TotalUS$ '000

Income

Income from:

Investments in sukuk 966 3,752 815 5,533

Investments in equities and funds - 18 40 58

Due from banks and financial institutions 129 - 8 137

Financing receivables 209 120 - 329

Mudaraba receivables 112 - - 112

Less: Return to Short Term Sukuk - investors and banks (443) (388) (955) (1,786)

Investment banking fees 531 - - 531

Ijarah income 1,501 - - 1,501

Foreign exchange gain 20 - - 20

Other income 28 62 26 116

Total income 3,053 3,564 (66) 6,551

Expense

Staff costs 2,566 - - 2,566

Depreciation 724 - - 724

General and administrative expenses 1,068 - 47 1,115

Total expense 4,358 - 47 4,405


(6) (17) (6) (29)


22. ACCOUNTING CLASSIFICATION OF FINANCIAL INSTRUMENTS

Financial instruments Financial assets and financial liabilities carried on the consolidated statement of financial position include cash and bank balances, financing receivables, mudaraba receivables, due from banks and financial institutions, investments, other assets, due to short term sukuk investors, due to banks and financial institutions and other liabilities. Set out below is an overview of financial instruments, other than cash and cash equivalents, held by the Group as at 31 December 2018:

Amortisedcost

US$ '000

Fair valuethrough

equityUS$ '000

Fair valuethrough

statementof income

US$ '000

Financial assets:

Mudaraba receivables 2,496 - -

Financing receivables 841 - -

Investment in sukuks 73,405 - -

Investment in equities and funds - 121 4,650

Other assets* 1,052 - -

77,794 121 4,650

Financial liabilities:

Due to short term sukuk investors and banks 74,271 - -

Other liabilities* 678 - -

74,949 - -

Set out below is an overview of financial instruments, other than cash and cash equivalents, held by the Group as at 31 December

2017:

Amortisedcost

US$ '000

Fair valuethrough

equityUS$ '000

Fair valuethrough

statementof income

US$ '000

Financial assets:

Mudaraba receivables 5,071 - -

Financing receivables 5,851 - -

Investment in sukuks 73,461 - -

Investment in equities and funds - 716 4,935

Other assets* 1,229 - -

85,612 716 4,935

Financial liabilities:

Due to short term sukuk investors and banks 93,461 - -

Other liabilities* 832 - -

94,293 - -

*Other assets exclude prepayments.


23. FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value is the amount for which an asset could be exchanged or a liability settled between knowledgeable and willing parties in an arm’s length transaction. Consequently, differences can arise between carrying values and fair value estimates. Fair value hierarchy Fair values of quoted securities are derived from quoted market prices in active markets, if available. For unquoted securities, fair value is estimated using appropriate valuation techniques. Such techniques may include using recent arm’s length market transactions; reference to the current fair value of another instrument that is substantially the same; discounted cash flow analysis or other valuation models. The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique: Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities; Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly; and Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data. The following table shows an analysis of financial instruments recorded at fair value by level of the fair value hierarchy at 31 December 2018:

Level 2US$ '000

Level 3US$ '000

TotalUS$ '000

Investments carried at fair value through statement of income

Equities and funds 4,650 - -

4,650 - -

Investments carried at fair value through equity

Equities and funds 121 - 121

121 - 121

4,771 - 121

The following table shows an analysis of financial instruments recorded at fair value by level of the fair value hierarchy at 31 December 2017:

Level 2US$ '000

Level 3US$ '000

TotalUS$ '000

Investments carried at fair value through statement of income

Equities and funds 4,935 - -

4,935 - -

Investments carried at fair value through equity

Equities and funds 270 - 270

270 - 270

5,205 - 270



23 FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

Under unquoted investments which are held at fair value through equity are investments amounting to US$ 0.121 million (31 December 2017: US$ 0.716 million) which are held at cost less provision for impairment due to the unpredictable nature of their future cash flows and the lack of other suitable methods for arriving at a reliable fair value for these investments (note 8).

The fair values of the Group’s other financial instruments are not significantly different from their carrying values as at 31 December 2018 and 2017.

24. CAPITAL ADEQUACY

The primary objective of the Group’s capital management is to ensure that the Group complies with externally imposed capital requirements and that the Group maintains strong credit ratings and healthy capital ratios in order to support its business and to maximise shareholders’ value. The Group manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of its activities. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividend payment to shareholders, return capital to shareholders or issue capital securities. No changes were made in the objectives, policies and processes from previous years.

The classification of the Group’s capital Core Equity Tier 1 [“CET 1“] in accordance with regulatory requirements is as follows:

CET 1US$ ‘000

Components of capital

Issued and fully paid ordinary shares 59,039

General reserves 2,226

Legal / statutory reserves 3,881

Retained earnings (15,174)

Unrealized gains arising from fair valuing equities 2,175

Total CET 1 Capital prior to regulatory adjustments 52,147

Investment in financial entities where ownership is < 10% of the issued common share capital (amount above 10% CET1a) AT1 and T2 (12,402)

Expected Credit Loss (1,196)

Total Capital 38,549

To assess its capital adequacy requirements in accordance with CBB requirements, the Group adopts the standardised approach for Credit Risk, the Basic Indicator Approach for Operational Risk and the Standardised Measurement Approach for Market Risk.

2018US$ '000

2017US$ '000

Total credit risk weighted assets 95,648 118,554

Total market risk weighted assets - 2

Total operational risk weighted assets 10,551 14,023

Regulatory Risk Weighted Assets 106,199 132,579

Capital Adequacy Ratio 36.30% 41.46%


25 EARNINGS AND EXPENSES PROHIBITED BY SHARI’A During the year no earnings were realised by the Group from transactions which were not permitted by Shari’a.

26 COMMITMENTS Financing and Investment related commitments Financing and Investment related commitments represent contractual commitments to fund certain financing arrangements and investment deals. These commitments may expire without being drawn upon and do not necessarily represent future cash flows. As of 31 December 2018, the Group has no financing related commitment (2017: US$ Nil) and no investment related commitment (2017: US$ Nil).

27 SOCIAL RESPONSIBILITY The Group discharges its social responsibilities through donations for charitable causes and to organisations.

28 COMPARATIVES

Certain prior year amounts have been reclassified to conform to the presentation in the current year. Such reclassifications do not affect previously reported net profit or owners’ equity.



PUBL

IC D

ISCL

OSU

REBA

SEL

III, P

ILLA

R III

DIS

CLO

SURE

S

1 Background 71

2 Capital adequacy 71

3 Risk Management 73

3.1 Bank-wide risk management objectives 73

3.2 Strategies, processes and internal controls 74

3.3 Structure and organisation of risk management function 74

3.4 Risk measurement and reporting system 75

3.5 Credit risk 75

3.6 Market risk 83

3.7 Operational risk 84

3.8 Equity positions in the banking book 85

3.9 Liquidity risk 85

3.10 Profit rate risk 87

3.11 Corporate governance and transparency 89

4 Remuneration related disclosures 10031 D

ecem

ber 2

018

1. BACKGROUNDThe Public Disclosures under this section have been prepared in accordance with the Central Bank of Bahrain (“CBB”) requirements outlined in its Public Disclosure Module (“PD Module”), CBB Rule Book, Volume 2 for Islamic Banks. Rules concerning the disclosures under this section are applicable to Liquidity Management Centre B.S.C. (c) (the “Bank”) being a locally incorporated bank with a Wholesale Islamic Investment Banking license and its subsidiary The Short Term Sukok Center B.S.C. (c) (the “Company”) (together known as the “Group”).

The Company is a special purpose company wholly owned by the Bank. The Company has appointed the Bank to act as an agent on behalf of the STS Program, issue short term sukuks and manage the STS Program. The Board of Directors seeks to optimize the Bank’s performance by enabling the various group business units to realize the Group’s business strategy and meet set business performance targets by operating within the agreed capital and risk parameters within the Group risk policy framework.

2. CAPITAL ADEQUACYThe primary objectives of the Group’s capital management are to ensure that the Group complies with externally imposed capital requirements and that it maintains healthy capital ratios in order to support its business and to maximize shareholders’ value. The Group manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of its activities. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividend payment to shareholders, return capital to shareholders or issue capital securities. The Bank’s capital adequacy policy is to maintain a strong capital base to support the development and growth of the business. Current and future capital requirements are determined on the basis of growth expectations of the business and future sources of and uses of funds. To assess its capital adequacy requirements in accordance with CBB regulations, the Group adopts the Standardized Approach for its Credit Risk, Basic Indicator Approach for its Operational Risk and Standardized Measurement Approach for its Market Risk. There are no restrictions on the transfer of funds or regulatory capital within the Group and all investments are fully complying with the CBB approval and related instructions. There are no differences in the basis of consolidation for accounting and regulatory purposes for the subsidiary within the Group. Table – 1. Capital Structure (PD-1.3.12, 1.3.13, 1.3.15)

The following table summarizes the eligible capital after deductions for Capital Adequacy Ratio (CAR) calculation:

CET 1US$ '000

AT1US$ ‘000

T2US$ '000

Components of Capital

Issued and fully paid ordinary shares 59,039 - -

General reserves 2,226 - -

Legal / statutory reserves 3,881 - -

Accumulated deficit (15,187) - -

Current interim profits 13 - -

Unrealized gains arising from fair valuing equities 2,175 - -

Total CET 1 Capital prior to regulatory adjustments 52,147 - -

Other Capital

Expected Credit Losses (ECL) Stages 1 & 2 - - 1,221

Additional deduction to absorb deficiency in AT1 13,574 -

Net Available Capital after applying haircut 38,573 - -

Total Tier 1 - 38,573 -

Total Capital 39,794

BASEL III, PILLAR III DISCLOSURESYear ended 31 December 2018


2. CAPITAL ADEQUACY (continued)Table – 2. Capital requirements by type of Islamic financing contracts (PD-1.3.17)

The following table summarises the amount of exposures subject to standardized approach of credit risk and related capital requirements by type of Islamic financing contracts gross of expected credit losses:

Gross exposures

US$ '000

Risk weighted

assetsUS$ '000

Capital requirements

@ 12.5%US$ '000

Murabaha receivables 9,503 3,252 407

Due from banks 8,497 1,699 212

Mudaraba receivables 2,496 499 62

Financing receivables 1,927 1,927 241

Investment in sukuks 73,538 38,292 4,787

95,961 45,669 5,709

Table – 3. Capital requirements for Market Risk (PD-1.3.18)

The following table summarises the amount of exposures subject to standardized approach of market risk and related capital requirements:

Self financedUS$ '000

Market Risk - Standardised Approach - Foreign exchange risk 0.0309

Multiplier 12.5

Eligible Portion for the purpose of the calculation 100%

RWE to be used in CAR Calculation 0.386

The minimum capital requirement for the above market risk exposure at 12.5% is US$ 0.048 thousand.

Table – 4. Capital Requirements for Operational Risk (PD-1.3.19) and (PD-1.3.30 (a & b))

The following table summarises the amount of exposures subject to basic indicator approach of operational risk and related capital requirements:

Capital charge US$ '000

Indicators of operational risk

Average gross income 5,627

Multiplier 12.5

70,342

Eligible Portion for the purpose of the calculation 15%

10,551

The minimum capital requirement for the above operational risk exposure at 12.5% is US$ 1,319 thousand.


2. CAPITAL ADEQUACY (continued)

Table – 5. Capital Adequacy Ratios (PD-1.3.20)

The following table summarises the CAR as of 31 December 2018 for total capital and Tier 1 capital at the top consolidated level in the Group:

Total capital ratio

Tier 1 capital ratio

Top consolidated level 35.65% 35.65%

The CBB’s minimum capital adequacy ratios for banks incorporated in Bahrain at a consolidated level are as follows:

Minimum Ratio Required

Capital Conservation Buffer (CCB)

CARS including CCB

CET 1 6.5% 2.5% 9.0%

Tier 18.0% 2.5% 10.5%

Total Capital 10.0% 2.5% 12.5%

3. RISK MANAGEMENT

3.1 Bank-wide risk management objectives

Risk management is an integral part of the Group’s decision-making process. The ALCO and Risk Managment and Compliance Committees guide and assist with overall management of the Group’s balance sheet risks. The Group manages exposures by setting limits/strategies approved by the Board of Directors. The risk management philosophy of the Bank is to identify, capture, monitor and manage the various dimensions of risk with the objective of protecting asset values and income streams such that the interest of the Bank’s shareholders are safeguarded, while maximizing the returns intended to optimize the Bank’s shareholder return while maintaining risk exposure within self-imposed parameters.

In addition to satisfying the minimum regulatory capital requirements of CBB, the Bank seeks to constantly identify and quantify, to the extent possible, the various risks that are inherent in the normal course of its business and maintain appropriate internal capital levels and consequently has developed an Internal Capital Adequacy Assessment Process (“ICAAP”) framework. The objective of the Bank’s ICAAP is to ensure that adequate capital is retained at all times to support the risks the Bank undertakes in the course of its business. 3.2 Strategies, processes and internal controls

3.2.1 Credit riskCredit risk is the risk that one party to a financial contract will fail to discharge an obligation and cause the other party to incur a financial loss. The Group controls credit risk by monitoring credit exposures and continually assessing the creditworthiness of counterparties. 3.2.2 Market riskThe Bank proactively measures and monitors the market risk in its portfolio using appropriate measurement techniques. The Bank carries out stress testing to assess the impact of adverse market conditions on its market risk sensitive portfolio. 3.2.3 Operational riskThe Bank has established a self assessment process necessary for identifying and measuring its operational risks. In addition to that, the Bank has conducted a Risk and Control Self Assessment (“RCSA”) exercise, which has undertaken the Bank’s business lines and their critical activities. The Bank has established clear segregation of duties, through documentation and implementation of policies and procedures. This ensures objectivity, security and avoids conflicts of interest. Maker checker concept and dual eye principles are applied across the Bank, where applicable. 3.2.4 Equity risk in the banking bookEquity price risk is the risk of decline in the value of a security or portfolio and is the biggest risk faced by all investors. The equity price risk exposure arises from the Group’s investment portfolio and can be minimised through diversification. The Group manages and monitors its equity risk using investment limits.




3.2 Strategies, processes and internal controls (continued)

3.2.5 Profit rate riskProfit rate risk arises from the possibility that changes in profit rates will affect future profitability or the fair values of financial instruments. The Group measures the profit rate risk by carrying out re-pricing gap analysis. This is further supported by limits put in place by the Bank. 3.2.6 Displaced commercial risk (“DCR”)DCR refers to the market pressure to pay returns that exceeds the rate that has been earned on the assets financed by the liabilities, when the return on assets is under performing as compared with the competitor’s rates. The Group does not accept deposits from investors or open profit sharing investment accounts and therefore displaced com-mercial risk is not currently applicable for the Group.

3.2.7 Review of internal control process and proceduresThe Group aims to manage and control the risks it is exposed to by strengthening its internal controls, continuing its efforts to identify, assess, measure and monitor its risks, evolving in its risk management sophistication and promoting a strong control culture within the Group. Each business unit head is responsible for ensuring that the internal controls relevant to its operations are complied with on a day-to-day basis. The Bank’s policies and procedures were applicable throughout the period. The Audit Committee reviews and evaluates the effectiveness of the Group’s procedures and internal control systems for assessing risks or exposures through reviewing policy and procedures of each department. It assists the Board in fulfilling its oversight duties by reviewing the financial information provided to shareholders and others. The Group has engaged an external professional firm for internal audit of its internal control, procedures and process. Reports issued by the professional firm are reviewed by the Audit Committee. All the above strategies used have been effective throughout the reporting period. 3.3 Structure and organization of the risk management function

Risk management includes all levels of authorities, organizational structure, people and systems required for the smooth functioning of risk management processes in the Bank. The responsibilities associated with each level of risk management structure and authorities include the following:

a. The Board retains ultimate responsibility and authority for all risk matters.

b. Delegating authority to the Risk Management and Compliance Committee, Credit and Investment Committee, the Chief Executive Officer and further delegation to the management to review various transactions prior to approval and execution of those transactions.


Market RiskOperational Risk

Board of Directors

Chief Executive OfficerRisk Management and Compliance Committee

Risk Department

Credit Risk Market Risk Operational Risk

Shari’a Supervisory Board

Shari’a Compliance Unit

Board of Directors

Chief Executive Officer

Risk Management & Compliance Committee

Executive Committee

Audit CommitteeNomination, Remuneration &

Corporate Governance Committee

Internal Audit Function Credit & Investment Committee

Investment Division

Structured Finance Division Risk DivisionSupport Services

DivisionLegal Affairs Department


Board of Directors


Risk Department


Shari’a Supervisory Board

Shari’a Compliance Unit

Board of Directors



Executive Committee

Audit CommitteeNomination, Remuneration &

Corporate Governance Committee

Internal Audit Function Credit & Investment Committee

Investment Division




3.4 Risk measurement and reporting system

Based on its risk appetite, the Bank has put in place various limits. These limits have been approved by the Board of Directors. Any limit breaches are reported to the respective committees and the Board by the Credit and Risk Management Department (“CRMD”). These limits are reviewed and revised at least, on annual basis or, when is deemed required.

The Bank has developed a risk reporting process that generates various reports to enhance the monitoring process of the Bank.

3.5 Credit Risk

3.5.1 IntroductionCredit risk is the risk of financial loss if a customer or counterparty fails to meet an obligation under a contract. It arises principally from lending and investment activities. The Group controls credit risk by monitoring credit exposures, and continually assessing the creditworthiness of counterparties. Financing contracts are mostly secured by collateral in form of mortgage financing or other tangible securities.

3.5.2 Past due and impaired Islamic financing contractsThe Group defines non-performing facilities as those facilities that are overdue for a period of 90 days or more. These exposures are placed on a non-accrual status with income only being recognized to the extent that it is actually received. It is the Group’s policy that when an exposure is overdue for a period of 90 days or more, the whole financing facility extended is considered as past due, not only the overdue instalments / payments. 3.5.3 External Credit Assessment InstitutionsThe Bank relies on external ratings for rated counterparties and issuances. The Bank uses Standard & Poor’s, Fitch, Moody’s and Capital Intelligence ratings for such counterparties. These ratings are used for risk assessment and calculation of risk weighted equivalents. 3.5.4 Concentration riskConcentration risk is the credit risk stemming from not having a well diversified credit portfolio, i.e. being overexposed to a single customer, industry sector or geographic region. As per CBB’s single obligor regulations, banks incorporated in Bahrain are required to obtain prior approval from the CBB for any planned exposure to a single counterparty, or group of connected counterparties, exceeding 15% of the regulatory capital base. In order to avoid excessive concentrations of risk, the Group’s policies and procedures include specific guidelines to focus on maintaining a diversified portfolio. Identified concentrations of credit risk are controlled and managed accordingly. 3.5.5 Credit risk mitigationCredit risk mitigation refers to the use of a number of techniques, like collaterals to mitigate the credit risks that the Bank is exposed to. Credit risk mitigants reduce/transfer the credit risk by allowing the Bank to protect itself and reduce its loss in case of non-performance by counterparty. Generally, the Bank participates in syndicated credit facilities / extends credit facilities only where supported by adequate tangible collateral security or audited financial statements. Facilities may be considered without adequate tangible collateral security, when audited financial statements reveal satisfactory financial position / repayment ability and the facilities are properly structured and supported by assignments as appropriate. The majority of the Bank’s portfolio is collateralized by real estate properties, where the collateral is for all sukukholders and not specific to the Bank.




3.5 Credit Risk (continued)

3.5.5 Credit risk mitigation (continued)

3.5.5.1 General policy guidelines of collateral managementAcceptable Collateral: The Bank has developed guidelines for acceptable collateral. Assets offered by obligor must meet the following criteria to quantify as acceptable collateral:

a. Assets must maintain their value, at the level prevalent at inception, until maturity date of the facility granted.b. Such assets should be convertible into cash, if necessary.c. There should be a reasonable market for the assets.d. The Bank should be able to enforce its rights over the asset, if necessary.

Ownership: Prior to valuation or further follow up on the offered collateral, the credit administration department ensures satisfactory evidence of the borrower’s ownership of the assets though due diligence.

Valuation: All assets offered as collateral are valued by reputable external appraisers.

a. Valuation of shares: shares are valued based on latest quotes available from respective stock exchanges.b. Valuation of funds: funds are valued based on NAV received from the fund manager.c. Valuation of real estate: real estate collateral is valued, on an annual basis, by external real estate valuation experts.

3.5.5.2 Custody / collateral managementThe asset, or title to the asset, is maintained in the Bank’s custody or with custodian approved by the Bank. The CRMD obtains confirmation of the assets held with each custodian. 3.5.6 Counterparty credit riskThe Bank has adopted the Standardized Approach to allocate capital for counterparty credit risk. The Bank has put in place an internal counterparty limit structure which is based on internal / external ratings for different types of counterparties and in line with CBB guidelines. 3.5.7 Restructured facilitiesNo islamic financing contracts or facilities were restructured during the twelve months period ended 31 December 2018.




Table – 6. Credit Risk Exposures (PD-1.3.23 (a))

The following table summarises the amount of gross funded and unfunded credit exposures and average gross funded and unfunded exposures allocated in own capital. The average gross funded and unfunded exposures are calculated based on month end balances.

Own capital

Total grosscredit

exposureUS$ '000

Averagegross

exposureUS$ '000

Funded

Cash and balances with banks 1,206 4,204

Murabaha Receivables 9,502 6,187

Due from banks 8,496 8,410

Mudaraba receivables 2,496 3,091

Financing receivables 841 2,855

Investment in sukuks 73,405 73,369

Investment in equities and funds 4,771 5,098

Investment in real estate 26,556 27,135

Equipment 137 138


128,590 132,557

The majority of the Bank’s portfolio is collateralized by real estate properties, where the collateral is for all sukukholders and not specific to the Bank.

The Bank did not maintain any unfunded exposures during the period ended 31 December 2018.





Table – 7. Credit Risk – Geographic Breakdown (PD-1.3.23(b))

The following table summarises the geographic distribution of exposures, broken down into significant areas by types of credit exposure.

Own capital

*Geographic area

BahrainUS$ '000

GCC US$ '000

OthersUS$ '000

ECL US$ '000

TotalUS$ '000

Cash and balances with banks 546 - 660 - 1,206


Due from banks 8,500 - - (4) 8,496




Investment in equities and funds 4,051 81 639 - 4,771

Investment in real estate 26,556 - - - 26,556

Equipment 137 - - - 137

Other assets 593 714 148 (275) 1,180

63,399 74,907 14,192 (23,908) 128,590

* Geographical distribution of exposure is based on counterparty / obligor country of incorporation.




Table – 8. Credit Risk – Industry Sector Breakdown (PD-1.3.23(c))

The following table summarises the distribution of credit exposures by industry, broken down into types of credit exposure:

Own capital

Industry sector

Banks andfinancial

institutions US$ '000

GovernmentUS$ '000

Real estateUS$ '000

OthersUS$ '000

ECLUS$ ‘000

Total US$ '000

Funded

Cash and balances with banks 1,198 - - 8 - 1,206


Due from banks 8,500 - - - (4) 8,496


Financing receivables 2,756 - - (1,915) 841


Investment in equities and funds 39 - 4,732 - - 4,771

Investment in real estate - - 26,556 - - 26,556

Equipment - - - 137 - 137

Other assets 364 197 395 499 (275) 1,180

Total 71,653 19,737 50,224 10,884 (23,908) 128,590





Table – 9. Credit Risk – Related party and intra-group transactions (PD-1.3.23(d))

The balances and transactions with the related parties are disclosed in the consolidated financial statements and all related party transactions have been made on an arm’s length basis.

The balances of the Bank’s major transactions with its subsidiary are as follows:

Own capital

US$ '000

Statement of financial position

Investment in the Short Term Sukuk Centre 28,610

Agency fee receivable from the Short Term Sukuk Centre 4,518

Income receivable - STS Investment Sukuk 35

Receivable from STS Centre - SPV 9,430

Wakala payable-STS (3,004)

Statement of income

Income from investment in the Short Term Sukuk Centre 534

Agency Fee Income 1,169

Expense on wakala payable-STS (92)

The Bank has policies and procedures for handling related party transactions including loans and advances to directors, senior management and their related parties, as well as transactions and agreements in which a director or an employee has a mate-rial interest. Bank’s policy of related party transaction is aligned with CBB guidelines on such transactions. A process is in place by which all related party transactions will be reported to the Board on a quarterly basis.

As per the Bank’s policy, the Directors concerned do not participate in decisions in which they have or may have a potential conflict of interest except for the inter- banks limits, which is reviewed on annual basis based on management valuation and recommendation, includes a number of financial institutions including shareholders and their closely related financial institutions. Management, have reviewed all such transactions during 2018, it was concluded that there were no transactions involving potential conflict of interest which need to be brought to the attention of the shareholders. Refer to note 19 of the consolidated financial statement for the year ended 31 December 2018 for complete details. All related party transactions are reported to the Bank’s Board of Directors and relevant committees. Table – 10. Credit Risk – Concentration of Risk (PD-1.3.23(f))

Below are exposures to counterparties in excess of the 15% individual obligor limit:

Own capitalUS$ '000

Counterparty 1* 10,060

Counterparty 2** 7,257

Counterparty 3** 7,022

Total 24,339

* Included in the exposure is an amount of US$ 7,564 thousand which is exempted as per CBB guidelines, as it is a money market exposure with a not connected counterparty denominated in USD with a maturity of less than 3 months.

** The exposures are exempted as per CBB guidelines, as they are exposures with GCC governments and their public sector entities which are not connected to the Bank.




Table – 11. Credit Risk – Residual Contractual Maturity Breakdown (Own Capital) (PD-1.3.23(g))

The following table summarises the residual contractual maturity of own capital breakdown of the whole credit portfolio, broken down by types of credit exposures.

Own capital

Maturity breakdown

Up to1 monthUS$ '000

1 to 3months

US$ '000

3 to 6months

US$ '000

6 months to

1 yearUS$ '000

1 to 3years

US$ '000

Over 3 years

US$ ‘000

Over 5 years

US$ ‘000


ECLUS$ ‘000

TotalUS$ '000

Cash and balances with banks 1,206 - - - - - - - - 1,206

Murabaha receivables 9,504 - - - - - - - (2) 9,502

Due from banks 8,500 - - - - - - - (4) 8,496

Mudaraba receivables 2,497 - - - - - - - (1) 2,496

Financing receivables - - - - 2,756 - - - (1,915) 841

Investment in sukuks - - - 5,036 19,826 13,038 35,781 21,435 (21,711) 73,405

Investment in equities and funds - - 4,732 - 39 - - - - 4,771

Investment in real estate - - - - 1,633 - - 24,923 26,556

Equipment - - - - - - - 137 137

Other assets - 377 564 212 302 - - (275) 1,180

Total assets 21,707 377 5,296 5,248 24,556 13,038 35,781 46,495 (23,908) 128,590

Due to short term sukuk inves-tors and banks

64,804 9,467 - - - - - - -

74,271

Other liabilities 473 116 640 684 259 - - - - 2,172

Total liabilities 65,277 9,583 640 684 259 - - - - 76,443

Liquidity gap (43,570) (9,206) 4,656 4,564 24,297 13,038 35,781 46,495 (23,908) 54,141

Cumulative liquidity gap

(43,570) (52,776) (48,120) (43,556) (19,259) (6,221) 29,560 76,055 52,147 -





Table – 12. Credit Risk – Impaired financing contracts, past due financing contracts and allowances (Own capital by industry and geographic sector) (PD-1.3.23(h&i))

The following table summarises the own capital impaired financing contracts and allowances disclosed by major industry and geographic sector:

Aging of past due but not impaired Expected credit losses (Stages 3)

Impaired financingcontractsUS$ '000

Past duenot

impairedfinancingcontractsUS$ '000

3 months

to 1 yearUS$ '000

1 year to3 years

US$ '000

Over3 years

US$'000

Balance at

1 January2018

US$ '000

Chargefor the

yearUS$ '000

Re-classification

US$ '000Write-offUS$ '000

Balance at31 December

2018US$ '000

Impaired Islamic financing contracts

Banks and financial institutions (GCC countries) 6,842 - - - - 6,842 - - - 6,842

Real Estate (GCC countries) 11,593 - - - - 11,593 - - - 11,593

Banks and financial institutions (Other countries)

3,000 - - - - 3,000 - - - 3,000

Total 21,435 - - - - 21,435 - - - 21,435

Table – 13. Credit Risk – Restructured Islamic financing contracts (PD-1.3.23(j))The following table summarises the restructured islamic financing contracts as of 31 December 2018:

US$ '000

Restructure islamic contracts 2,756

No islamic financing contracts or facilities were restructured during the year ended 31 December 2018. Further, there is no significant impact of the restructured islamic contracts on the provisions as well as present and future earnings.



3.6 Market risk

Market risk is the risk that arises from fluctuations in market risk factors that include, inter alia, profit rates, currency risk and equity prices and will have a negative impact on the Bank’s income and may influence the value of its portfolios. Profit rate riskProfit rate risk arises from a) mismatch of maturities of assets and liabilities b) Basis Value Risk and c) Profit rate curve risk. The Bank measures profit rate risk using the following methodologies:

a) Gap analysis: where the assets and liabilities are classified into time bands based on the maturity in case of fixed rate instruments or re-pricing dates for floating rate instruments.b) Economic value of equity-duration gap: this measures the loss in value of the portfolio due to change in profit rates.

The Bank manages such risk by ensuring that minimum maturity mismatch is achieved between its assets and liabilities and through fixed rates on its assets and liabilities. The Treasury department monitors profit rate risk regularly and submits reports to the Asset and Liability Committee and CIC.

Currency risk Currency risk represents fluctuations in exposures held by the Group in currencies other than the US dollar. The Group may engage, in normal course of business, in transactions denominated in currencies other than its functional currency.

Equity price risk The Bank has guidelines in place to manage equity price risk. Examples of these guidelines include:

a) Equity investment is managed at the preacquisition stage by understanding its performance through different scenarios. b) Specific deal structure to maximise investment rate of return. c) Portfolio approach through geographical and industrial diversification.

3.6.1 Market risk strategyThe Board is responsible for approving and reviewing (at least annually), the risk strategy and significant amendments to the risk policies and procedures. The Bank’s senior management is responsible for implementing the risk strategy approved by the Board, and continually enhancing the policies and procedures for identifying, measuring, monitoring and controlling risks.

In line with the Bank’s risk management objectives and risk tolerance levels, strategies for market risk management include:

1. Managing its market risk exposure by evaluating each new product / activity with respect to the market risk introduced by it;2. Proactively measuring and continually monitoring the market risk in its portfolio;3. Holding sufficient capital in line with the Basel and CBB regulatory capital requirements;4. Establishing a limit structure to monitor and control the market risk in its portfolio, these limits shall include position limits and maturity limits;5. Matching the amount of floating rate assets with floating rate liabilities; and6. Identifying the foreign currencies in which it wishes to deal in and actively manage its market risk in all foreign currencies in which it has significant exposure.

3.6.2 Limits monitoringThe Treasury Department and Credit and Risk Management Department (“RCD”) monitor the risk limits for each transaction, ensure that the exposures are well within set parameters and report periodically to senior management.

3.6.3 Breach of limitsAdherence to internal and regulatory limits is ensured before incurring any exposure and approvals from the respective approving authority is obtained. In case limits are breached, it will be brought to the appropriate authority, as per Discretionary Authority Limit, for their action. The limits are revised at least annually or when deemed required.




3.6 Market risk (continued)

Table – 14 Market risk capital requirements (PD-1.3.27 (b))The following table summarises the capital requirement by each category of market risk;

Foreign Exchange riskRisk weighted assets

US$ '000Capital requirement

US$ '000

Maximum market risk - Foreign exchange risk 0.3863 0.0483

Maximum market risk - Foreign exchange risk 0.3863 0.0483

3.7 Operational risk

3.7.1 IntroductionOperational risk is the risk of loss arising from inadequate information systems, technology failures, breaches in internal controls, fraud, unforeseen catastrophes, or other operational problems that may result in unexpected losses or damage the Bank’s reputation.

3.7.2 Sources of operational riskThe different sources of operational risks faced by the Bank can be classified broadly into the following categories:

(a) People risk which arises due to staffing inadequacy, unattractive remuneration structure, lack in staff development policies, lack in procedures for appointment, unhealthy professional working relationship and unethical environment.

(b) Processes risk which arises due to inadequate general controls, inadequate application controls, improper business and market practices and procedures, inappropriate/inadequate monitoring and reporting.

(c) Systems (Technology) risk which arise due to integrity of information - lacking in timelines of information, omission and duplication of data, hardware failures due to power surge, obsolescence and low quality programmes.

3.7.3 Operational risk management strategyAs a strategy, the Bank has identified the sources of operational risks in coordination with each business unit. The Bank completed the RCSA to identify the operational risks it is exposed to and has taken steps to monitor and minimize this risk. On a continuous basis, the Bank:

a. assesses the effectiveness of controls associated with identified risks.b. regularly monitors operational risk profiles and material exposures to losses.c. identifies stress events and scenarios to which it is vulnerable and assess their potential impact, and the probability of aggregated losses from a single event leading to other risks.

3.7.4 Operational risk monitoring and reportingThe internal monitoring and reporting process ensures a consistent approach for providing pertinent information to senior management for the quick detection and correction of deficiencies in the policies, processes and procedures for managing operational risk through ongoing, periodic reviews.

The objective of the reporting process is to ensure relevant information is provided to senior management and the Board to enable the proactive management of operational risk. The process ensures a consistent approach for providing information that enables appropriate decision making and action taking. During the period, the Bank paid a penalty amounting to BD 400 for the delay in submitting AGM minutes of meeting to the CBB.

3.7.5 Operational risk mitigation and controlThe business units, in consultation with CRD will determine all material operational risks and decide the appropriate procedures to be used to control and mitigate the risks. For those risks that cannot be controlled, the business units in conjunction with the CRD will decide whether to accept the risks, reduce the level of business activity involved, transfer the risk outside the Bank or withdraw from the associated activity completely. The CRD facilitates the business units in co-developing the mitigation plans.



3.7 Operational risk (continued)

3.7.6 Business continuity plan ("BCP")The Bank has developed a comprehensive business continuity plan detailing the steps to be taken in the event of extreme conditions to resume the Bank’s operations with minimum delay and disturbance. Elements of contingency plans and disaster recovery processes include operating systems, physical space, telecommunications and resources.

The CRD ensures that the BCP is kept up-to-date and is tested once a year in a simulated environment to ensure that it can be implemented in emergency situations. They also ensure that management and staff understand how it is to be executed. Results of this testing and evaluation conducted by CRD is presented to the Risk Management and Compliance Committee and Board for evaluation. The plan is reviewed periodically to assess and incorporate changes in the business and market conditions. 3.8 Equity positions in the banking book

Equity price risk is the risk of decline in the value of a security or portfolio and is the biggest risk faced by all investors. The equity price risk exposure arises from the Group’s investment portfolio and can be minimised through diversification. The Group man-ages and monitors its equity risk using investment limits. The equity position that the Group is holding is for capital gain pur-poses. The Group has no holdings for any other reason except for capital gain.

The accounting policies, including valuation methodologies and their related key assumptions, are disclosed in the Group’s consolidated financial statements for the period ended 31 December 2018.

Table – 15. Equity position risk in banking book (PD-1.3.31 (b) (c) and (f))

The following table summarises the amount of total and average gross exposure of equity based financing structures by types of financing contracts and investments.

Total gross

exposure US$ '000

* Average gross

exposureUS$ '000

Publicly traded

US$ '000

Risk weighted

assetsUS$ '000

Capital Requirement

US$ '000

Equity investments 4,771 5,098 - 9,542 1,193

*Average balances are computed based on month end balances.

Table – 16. Equity gains or losses in banking book (PD-1.3.31 (d) and (e))

US$ '000

Total unrealized gains recognized in the balance sheet but not through P&L

2,175

3.9 Liquidity risk

3.9.1 IntroductionLiquidity risk is defined as the risk that the Bank will be unable to meet its obligations as they come due because of an inability to obtain adequate funding or to liquidate assets.

3.9.2 Sources of liquidity risk The sources of liquidity risk can broadly be categorized in the following:

a. Funding risk is the risk of not being able to fund net outflows due to unanticipated withdrawal of credit lines;

b. Call risk is the risk of crystallization of a contingent liability; and

c. Event risk is the risk of rating downgrades or other negative public news leading to a loss of market confidence in the Bank.




3.9 Liquidity risk (continued)

3.9.3 Bank’s liquidity strategyThe Board reviews the liquidity strategy on an annual basis and amends the existing strategy, as deemed required. For this purpose, all business units advise the Treasury Department of their projected liquidity requirements and contributions at the start of each year as part of annual budgeting process.

The liquidity strategy highlights any anticipated liquidity shortfalls, the Shari’a compliant funding requirements to finance these shortfalls and their impact on the balance sheet. The Bank also has a liquidity contingency plan that deals with stressed scenarios and outlines an action plan that can be taken in the event of a loss of market liquidity.

3.9.4 Liquidity risk strategyThe Bank monitors the liquidity position by comparing maturing assets and liabilities in different time buckets of up to 1 month, 1-3 months, 3-6 months, 6 months to 1 year, 1-3 years, 3-5 years, 5-10 years and no fixed maturity. The Bank carries out stress testing periodically using the worst case scenarios to assess the effects of changes in market conditions on the liquidity of the Bank.

The Bank has established a contingency liquidity plan to meet urgent liquidity requirements in stressed conditions that addresses how funding liquidity would be managed if either their specific financial conditions were to decline or broader conditions created a liquidity problem. The plan is reviewed on a regular basis and updated as required. The Treasury Department, in conjunction with RCD periodically reviews, at least on an annual basis, the liquidity risk strategy before presenting to the RMC and subsequently the Board for approval. The Bank uses a combination of different limits to ensure that liquidity is managed and controlled in an optimal manner. The Bank has set the following limits for monitoring liquidity risks:

a. Liquidity gap limits; andb. Liquidity ratio limits.

3.9.5 Contingency Funding PlanThe Bank has developed a contingency funding plan which details procedures to be followed by the Bank, in the event of a liquidity crisis or a situation where the Bank faces stressed liquidity conditions. The contingency funding plan is an extension of day-to-day liquidity management and involves maintenance of adequate amount of liquid assets and management of access to funding resources. The CIC discuss and monitor the situation over regular time-intervals to ensure sufficient liquidity in the Bank.

The Group’s funding guidelines include: (a) The mobilization and placements of short-term funds, Mudaraba and Murabaha transactions which is the responsibility of the Treasury Department; (b) Ensuring all funding objectives are aligned to the strategic objectives of the Bank; (c) The composition, characteristics and diversification of the Bank’s funding structure are monitored by CIC and executed by the Treasury Department; (d) Treasury Department maintains the counterparty relationships to obtain the necessary lines of funding; (e) The CIC monitors the concentration of funding sources across products and counterparties and effect measures to mitigate undue concentrations; and (f ) Treasury Department implements the deals within the approved guidelines, including the approved products and the counterparties.



3.9 Liquidity risk (continued)

Table – 17. Equity position in banking book liquidity ratios (PD-1.3.37)

The following table summarises the liquidity ratios:

31 December

2018 2017 2016 2015 2014

(a) Short term assets (maturity of less than 1 year) / short term liabilities (maturity of less than 1 year)

43% 43% 31% 35% 14%

(b) Commodities Murabaha / Total Assets 7% 9% - - -

(c) Liquid Assets / Total Assets 15% 20% 8% 15% 2%

(d) Liquid Assets / Total Assets * 72% 68% 60% 58% 63%

(e) Due to Short Term Sukuk - investors / Total Assets

10% 13% 15% 11% 20%

* Management evidenced that certain sukuks are tradable or liquid and accordingly, this ratio is calculated after including the tradable sukuks as liquid assets.

3.10 Profit rate risk

3.10.1 IntroductionProfit rate risk is the potential impact of the mismatch between the rate of return on assets and the expected rate of funding due to the sources of finance.

3.10.2 Sources of profit rate riskThe different profit rate risks faced by the Bank can be classified broadly into the following categories:

a. Re-pricing risk which arises from timing differences in the maturity (for fixed rate) and re-pricing risk (for floating rate) of assets, liabilities and off-balance sheet positions. As profit rates vary, these re-pricing mismatches expose the Bank’s income and underlying economic value to unanticipated fluctuations.b. Yield curve risk which arises when unanticipated shifts of the yield curve have adverse effects on the Bank’s income and/ or underlying economic value.c. Basis risk which arises from imperfect correlation in the adjustment in the rate earned on products priced and the rate paid on different instruments with otherwise similar re-pricing characteristics. When profit rates change, these differences can give rise to unexpected changes in the cash flows and earnings spread between assets, liabilities and off-balance sheet instruments of similar maturities or re-pricing frequencies.d. Displaced commercial risk refers to the market pressure to pay returns that exceeds the rate that has been earned on the assets, financed by the liabilities, when the return on assets is under performing as compared with competitors rates.

3.10.3 Profit rate risk strategyThe fair value of financial assets may be affected by current market forces including profit rates. The Bank recognizes income on certain of its financial assets on a time-apportioned basis. As a strategy, the Bank: a. has identified the profit rate sensitive products and activities it wishes to engage in; b. has established a limit structure to monitor and control the profit rate risk of the Bank; c. measures profit rate risk through establishing maturity/re-pricing schedule that distributes profit rate sensitive assets, liabilities and off-balance sheet items in pre-defined time bands according to their maturity; andd. makes efforts to match the amount of floating rate assets with floating rate liabilities in the banking book.




3.10 Profit rate risk (continued)

3.10.4 Profit rate risk measurement toolsThe Bank uses the following tools for profit rate risk measurement in the banking book:

a. Re-pricing gap analysis which measures the arithmetic difference between the profit-sensitive assets and liabilities of the banking book in absolute terms; and b. Basis Point Value (“BPV”) analysis which is the sensitivity measure for all profit rate priced products and positions. The BPV is the change in net present value of a position arising from a 1 basis point shift in the yield curve. This quantifies the sensitivity of the position or portfolio to changes in profit rates.

3.10.5 Profit rate risk monitoring and reportingThe Treasury department monitors these limits regularly. The Exective Management reviews the results of gap limits and exceptions, if any, and recommends corrective action to be taken according to authority parameters approved by the Executive Committee.

Table – 18. Profit rate risk in banking book (PD-1.3.40 (b))The following table summarises the effect on the value of assets, liabilities and economic capital for a benchmark change of 200bp in profit rates:

Up to1 monthUS$ '000

1 to 3months

US$ '000

3 to 6months

US$ '000

6 months to

1 yearUS$ '000

Over 1 years

US$ ‘000

Due from banks 8,496 - - - - Murabaha receivables 9,502 - - - -

Mudaraba receivables 2,496 - - - -

Financing receivables - 841 - - -

Investment in sukuks - - - 5,036 68,369

Profit rate sensivtive assets 20,494 841 - 5,036 68,369

Due to short term sukuk investors and banks 64,804 9,467 - - -

Profit rate sensivtive liabilities 64,804 9,467 - - -

Profit rate gap (44,310) (8,626) - 5,036 68,369

Profit rate sensitivity (200BPS) (886) (173) - 101 1,367

Effect onvalue of

assetUS$ ‘000

Effect onvalue ofliability

US$ ‘000

Effect on value of

economiccapital US$ ‘000

Effect of an increase of 200 basis points 1,895 1,485 410

The impact of a similar decrease in profit rate will be approximately opposite to the impact disclosed above. Table – 19. Quantitative indicators of financial performance and position (PD-1.3.9 (b))The following table summarises the basic quantitative indicators of financial performance for the past 5 years:

31 December

2018 2017 2016 2015 2014

Return on average equity* 0.02% 3.99% -28.63% 5.00% 6.00%

Return on average assets* 0.01% 1.50% -11.14% 1.85% 2.00%

Cost to income ratio** 99.71% 67.68% 403.20% 65.00% 58.00%

*Annualized *Cost includes operating costs plus provisions and unrealized losses on fair value through statement of income.



3.11 Corporate governance and transparency

3.11.1 Board Members' ProfileAs of 31 December 2018, the Board of Directors consist of eight members. No Board member has more than one directorship of a retail bank or a wholesale bank.

Table – 20. Corporate governance and transparency – Board members’ profile (PD-1.3.10(b))The following table summarises the information about the profession, business title, experience in years, start date and the qualifications of the current Board members.

Name of Board Member Profession Representative of Business

Title Type Experience in years

Directorship period Qualification Directorship on other

entities

Hassan Jarrar BankerBahrain Islamic

Bank B.S.C.Chairman

Non-Independent /

Executive31

May 2018- April 2021

BSC in Finance from

California state university,

San Jose, USA.

- Tamkeen – Chairman of Audit & Government Committee

- Bahrain Bourse – Chairman of Audit & Government Committee

Abdullah Ashy Banker

Islamic Development Bank Group

Deputy Chairman

Non-Independent /

Executive17


Bachelor of Science in Finance, George Mason, Fairfax Virginia, USA.

Master of Commerce, Griffith Business School, Queensland , Australia

Certified Management Accountant (CMA)

None

Adnan Chilwan BankerDubai Islamic Bank

P.J.S.C.Board

Member

Non-Independent /

Executive24


PhD and MBA in Marketing and a Certified Islamic Banker

-Tamweel PJSC- Deyaar PJSC - Board member

Mohammed Al Sharif Banker

Dubai Islamic Bank P.J.S.C.

Board Member

Non-Independent /

Executive32


BSC in Accounting and Economics from UAE and CPA, Virginia USA

None

Paul Mercer BankerKFH Investment Company K.S.C.

Board Member

Non-Independent /

Executive23 May 2018-

April 2021

Master inl Law from University of Cambridge.

Postgraduate Diploma in Legal Practice from the College of Law

- Bazaar properties W.L.L. Director- Depolar Properties W.L.L. - Caspian Investments Ltd - Director - Sinwan Ltd - Director - Baytik Advisory Ltd- Director - Liberty Assets LLC - Director

Khalid Al Shami BankerKFH Investment Company K.S.C.

Board Member

Non-Independent /

Executive12


Bachelor’s degree in Accounting from Kuwait University.

Kuwait Investment Authority’s Graduate Development Program.

None

Seedy Mohammad Njie Banker

Islamic Development Bank Group

Board Member

Non-Independent /

Executive19


Associate Professional Risk Manager(APRM).

Member Chartered Institute of Management Accountant-UK (CIMA).

Fellow Association of Chartered Certified Accountatnt-UK (FCCA).

None

Ameer A.Ghani BankerBahrain Islamic

Bank B.S.C.Board

Member

Non-Independent /

Executive18


Certified Management Accountant (CMA).

Certified Public Accountant (CPA)

Bachelor›s & Diploma from University of Bahrain

- Abaad Real Estate – Board member

BASEL II, PILLAR III DISCLOSURESYear ended 31 December 2018



3.11 Corporate governance and transparency (continued)

3.11.2 Changes in Board structureExcept as mentioned below, there were no changes in the structure of the committees of the Board and management committees. On 28th March 2018, Nawaf Al Menayakh has resigned and Seedy Njie’s reappointment was not approved until 22nd May 2018 and therefore he was not eligible to attend the meeting on 6th May 2018.

Table – 21. Corporate Governance and Transparency – Board Member appointed in 2018 (PD-1.3.10(g))

Below are details about the new Board member appointed during the year:

Name of Board Member Profession Representative of Business

Title Type Experience in years

Board Terms

Paul Mercer Banker KFH Investment Company K.S.C.

Excutive Manager

Non-Independent /

Executive23





3.11.3 Board CommitteesAt a minimum the Audit Committee is required to meet four times during the year. During the year ended 31 December 2018, the Audit Committee met four times. The following table summarises the information about Audit Committee meeting dates and attendance of directors at each meeting:

Table – 22. Corporate governance and transparency – Board of Directors meetings in 2018 (PD-1.3.10(t and u))

Date Location of Meeting Directors PresentDirectors Present through conference call

Directors Absent

15 February 2018 LMC 1) Mr. Hassan Jarrar None None

Headquarters, 2) Mr. Abdullah Ashy

Bahrain 3) Mr. Khalid Al Shami

4) Dr. Adnan Chilwan

5) Mr. Mohammed Al Sharif

6) Mr. Ameer AbdulGhani

7) Mr. Seedy Njie

8) Mr. Nawaf Al Menayekh

6 May 2018 LMC 1) Mr. Hassan Jarrar None 1) Mr. Paul Mercer






2 August 2018 LMC 1) Mr. Hassan Jarrar 1) Mr. Paul Mercer None






7) Mr. Seedy Njie

1 Novermber 2018 LMC 1) Mr. Hassan Jarrar None None






7) Mr. Paul Mercer

8) Mr. Seedy Njie





3.11.3 Board Committees (continued)At a minimum the Audit Committee is required to meet four times during the year. During the year ended 31 December 2018, the Audit Committee met four times. The following table summarises the information about Audit Committee meeting dates and attendance of directors at each meeting: Table – 23. Corporate governance and transparency – Audit committee meetings held during 2018 (PD-1.3.10(b))

Date Directors Present Directors Present through conference call

Directors Absent

15 February 2018 1) Mr. Ameer AbdulGhani None None


3) Mr. Nawaf Al Menayakh

4) Mr. Seedy Njie

6 May 2018 1) Mr. Ameer AbdulGhani None 1) Mr. Paul Mercer


2 August 2018 1) Mr.Ameer AbdulGhani 1) Mr. Paul Mercer None

2) Mr.Seedy Njie


1 November 2018 1) Mr.Ameer AbdulGhani None None


3) Mr.Seedy Njie

4) Mr. Paul Mercer

At a minimum the Risk Management and Compliance Committee is required to meet four times during the year. During the year ended 31 December 2018, the Risk and compliance committee met four times. The following table summarises the information about Risk and compliance committee meeting dates and attendance of directors at each meeting:

Table – 24. Corporate governance and transparency – Risk Management and Compliance Committee meetings held during 2018 (PD-1.3.10(b))

Date Directors Present Directors Present through conference call Directors Absent

15 February 2018 1) Dr. Adnan Chilwan None None

2) Mr. Abdulla Ashy

3) Mr. Khalid Al Shami


6 May 2018 2) Dr. Adnan Chilwan None None


3) Mr. Abdulla Ashy






3.11.3 Board Committees (continued)

Table – 24. Corporate governance and transparency – Risk Management and Compliance Committee meetings held during 2018 (PD-1.3.10(b))(continued)


2 August 2018 1) Dr. Adnan Chilwan None None


3) Mr. Abdulla Ashy


1 November 2018 1) Dr. Adnan Chilwan None None


3) Mr. Abdulla Ashy


Table – 25. Corporate governance and transparency – Nomination, Remuneration & Corporate Governance Committee meetings in 2018 (PD-1.3.10(b)) At a minimum the Nomination, Remuneration & Corporate Governance Committee is required to meet two times during the year. During the year ended 31 December 2018, the Nomination, Remuneration & Corporate Governance committee met two times. The following table summarises the information about Nomination, Remuneration & Corporate Governance committee meeting dates and attendance of directors at each meeting:


13 February 2018 None 1) Mr. Hassan Jarrar None



4) Mr. Abdulla Ashy

27 December 2018 1) Mr. Hassan Jarrar 1) Mr. Mohammed Al Sharif None


3) Mr. Abdulla Ashy





Table – 26 Corporate governance and transparency – Board committees profile (PD-1.3.10(a))

The following table summarises the information about Board committees, their members and objectives.

Board Committee Members Objective

Board of DirectorsChairman:1. Hassan Jarrar

Members:

1 Abdulla Ashy

2 Ameer A.Ghani

3 Adnan Chilwan

4 Paul Mercer

5 Mohammed Al Sharif

6 Khalid Al Shami

7 Seedy Mohammad Njie


a) The Board of Directors is responsible for overseeing the management and business affairs of the Bank and making all major policy decisions of the Bank. The ultimate responsibility of the preparation, review and approval of financial statements lies with the Board of Directors.

b) Oversight, Performance Evaluation, and Succession Planning of Executive Management;

c) Review the Bank’s long term strategic plans and the principle issues that the Bank may face in the future. It shall annually approve a business plan, an operating budget and a financing plan;

d) Review, approve and monitor fundamental financial and business strategies and major Bank actions;

e) Review and discuss reports by executive management on the performance of the Bank, its plans and products;

f ) Assess major risks facing the Bank by reviewing and approving strategies for addressing such risks.

g) Establishing a systems and controls framework that will mitigate risks existing in the Bank’s business environment

h) Employ and dismiss independent legal, financial or other advisors, as they deem necessary, without first consulting or obtaining the approval of the Bank’s senior management.




Table – 26. Corporate governance and transparency – Board committees profile (PD-1.3.10(a)) (continued)

Board Committee Members Objective

Executive Committee

This Committee has been put on hold by the Board of Directors for the year 2018

The Executive Committee of the Board considers specific matters delegated to it by the full Board and makes recommendations thereon to the Board or decisions based on authorities specifically delegated by the Board. Responsibilities and authorities of the committee are reviewed annually by the Board of Directors. The responsibilities of the Executive Committee is being carried out by the BOD.

Audit Committee Chairman:Ameer A. Ghani

Assists the Board in discharging its oversight responsibilities relating to the integrity of the Group’s financial statements and financial reporting process and the Bank’s systems of internal accounting and financial controls, the annual independent audit of the Bank’s financial statements and all matters related to external and internal auditors, compliance by the Banks with legal and regulatory requirements and compliance with the Bank’s code of conduct.

Members:

• Adnan Chilwan

• Paul Mercer

• Seedy Mohammad Njie

Nomination, Remuneration and Corporate Governance Committee

Chairman:Hassan Jarrar

Responsible for identifying individuals to become Board members, developing procedure for remuneration policy for the Board senior management, ensure that compensation offered is competitive, in line with the market and consistent with the responsibilities assigned, leads the Board in its annual review of the Board performance, and recommend to the Board the remuneration policy and special compensation plans.

Members:

• Abdulla Ashy

• Mohammed Al Sharif

• Khalid Al Shami

Risk and Compliance Committee

Chairman:Adnan Chilwan

Assist the Board in discharging its oversight responsibilities related to establishment of an effective Risk Management and Compliance Framework.

Members:

• Ameer A. Ghani

• Khalid Al Shami

• Abdulla Ashy

Shari’a Supervisory Board (“SSB”)

Chairman:Dr. Hussain Hassan

The SSB is an independent body of specialised jurists in Shari’a compliant banking. The SSB is entrusted with the duty of directing, reviewing and supervising the activities of the Group in order to ensure that the Bank is in compliance with Shari’a rules and AAOIFI. The Fatwas and rulings of the SSB is binding on the Bank.

Members:

• Dr. A. Sattar Abu Guddah

• Shaikh Adnan Al Qattan



The Bank’s organization chart which is communicated to the CBB defines the reporting lines and segregation of duties among different departments of the Bank. Review of segregation of duties is generally part of the scope of audits conducted by the outsourced internal auditors, as an independent party. There were no changes to either the managerial structure or the organizational chart during 2018. As the Bank is a closed joint stock company, no shares were traded during the year. Directors and senior managers do not own any shares in the Bank.


BASIC ORGANIZATION STRUCTURE

Basic Organizational Structure

Shari’a Supervisory Board Board of Directors



Executive CommitteeAudit Committee

Nomination, Remuneration & Corporate Governance Committee

Internal Audit Function Investment & Credit Committee

Investment Division

Shari’a Complience Unit



Shari’a Compliance


Board of Directors


Risk Department


Compliance



3.11.4 Executive members' Profile

Table – 27. Corporate governance and transparency – Executive members’ profile (PD-1.3.10(b))

The following table summarises the information about the profession, business title, experience in years and the qualifications of each executive member as at 31 December 2018.

Name of Executive Member Designation Profession Business Title Experience in

years Qualification

Ahmed Abbas* CEO BankerChief Executive

Officer32 years

Bachelor's Degree in Business and Finance from University of Bahrain.

Amer Sadiq**EVP -

Structured Finance

BankerExecutive

Vice President22 years

Bachelor's Degree in Accounting from University of Denver, Colorado, USA.

Hussain Merza*SVP -

Financial Controls

BankerSenior

Vice President17 years

FCCA, Bachelor's Degree in Accounting from University of Bahrain and CIPA.

*Subsequent to the year end, On 2nd January 2019 and 1st February 2019 respectively, the Bank’s Chief Executive officer and Chief Financial officer (Senior Vice President) have resigned.

**Currently the key management positions continue to be vacant with the key functions of the Bank being currently managed by Amer Sadiq as the Acting CEO.





The following table summarises the information about management committees, their members and objectives. Table – 28. Corporate governance and transparency – management committees profile (PD-1.3.10(b))

Committee Members Objective

Management Committee

Chairman:Ahmed Abbas

The Bank has established key management committees to oversee all aspects of the business.

Members:• Amer Sadiq• Hussain Merza• Leena Sharif• Nadia Jabur• AbdulAziz AbdulQader • Amina Al Asiri

Credit and Investment Committee (CIC)


The CIC is established to oversee an efficient and comprehensive due diligence transition of an investment transaction from the point of origination to the point of closing, including all internal and external approval requirements and financial and legal due diligence. The CIC also ensures that management’s handling of credit risk complies with Board decisions about acceptable levels of risk and minimum pricing levels. The functions of this committee with regard to credit activities include appraisal and approval of credit applications based on limits set by the Board. The CIC also monitors and reviews non-performing portfolio and ensures that adequate loss provisions are held against delinquent accounts in accordance with the guidelines issued by the CBB and the Board and provides monthly reporting to the Board.

Members:• Amer Sadiq• Hussain Merza• Leena Sharif• Nadia Jabur• AbdulAziz AbdulQader

ALCO Committee Chairman:Ahmed Abbas

ALCO which is established to manage the asset and liability structure, the liquidity and the funding strategy of the Bank. This involves monitoring and reviewing the Bank’s financial risks, including liquidity, market and counterparty risk and ensuring that appropriate strategies exist for management of the Bank’s assets, liabilities and capital.

Members:• Amer Sadiq• Hussain Merza• Leena Sharif• Nadia Jabur• AbdulAziz AbdulQader• Bader Al Abbasi

Human Resource Committee


The objective of the Human Resources Committee is to assist the CEO in discharging his duty to oversee the establishment of appropriate Human Resources policies and strategies that provides the Bank with the capability to achieve its short and long term business objectives.Members:

• Amer Sadiq• Hussain Merza• Nadia Jabur• Amina Al Asiri


•



Authorities signatoriesOutlines the required approval authorities for all activities and matters related to the Bank. The level of designated approval authority is set by the Board covers the authority given to the management, executive management, Board sub-committees, board of directors and shareholders where applicable, taking into consideration the amount, size, nature and complexity of the matter, applicable regulations and market best practice.

HC ModuleCorporate governance is a fundamental part of the culture and the Bank is fully committed to compliance with the requirements under the Corporate Governance Code (CGC) issued by the Ministry of Industry and Commerce and the CBB’s High Level Controls Module (HC Module), as updated from time to time. The Board also adopted a detailed Corporate Governance Framework, which is based on the rules and guidelines of the HC Module and it covers in detail all aspects of the Directors’ roles, duties and responsibilities.

3.11.5 Code of business conduct and ethics for members of the Board of Directors

Induction of directors:The new Board members were given proper induction and background regarding their rules and responsibilities as a member of the Board and its committees. The Board members have approved the code of business conduct and ethics (the “Code”). On joining the Group, all directors are provided with an Induction Package which includes the Bank’s Memorandum and Articles of Association, key policies, terms of reference of the Board and its sub-committees and Corporate Governance guidelines. Election of directors:The Board is comprised of 8 directors appointed for a term of three years. The appointment and termination of the Board is covered by the Bank’s Articles of Association, which is in accordance with the Commercial Companies Law. The present Board of Directors were elected at the Annual General Meeting in 2018. Purpose of the Code:The primary objectives of the Code are to enable each Director to focus on areas of ethical risks, to help him / her to recognize and deal with ethical issues, to provide mechanisms for reporting unethical conduct, and to foster a culture of honesty and accountability within the Group. Conflict of interest: Directors shall disclose to the Board any potential conflict of interest in their activities with other organisations. All Board members and members of executive management must declare to the Board in writing, on an annual basis, all of their other interests in other institutions, whether as a shareholder of five percent (5%) or more of the voting capital of the company, a manager or other form of significant participation. Any decision to enter into transactions, under which Board members or any member of executive management may have a conflict of interest that is material, shall be formally and unanimously approved by the Board. Board’s responsibility for disclosureThe Board shall oversee the process of disclosure and communications with internal and external stakeholders. The Board shall ensure that disclosures made by the Group are fair, transparent, comprehensive and timely and reflect the character of the Group and the nature, complexity and risks inherent in the Group’s business activities and that they are in compliance with the disclosure requirements set out by the CBB. New product information, Bank’s new announcement and information related to stakeholders are made available in timely manner through various channels of communication which may include publications, website (www.lmcbahrain.com), direct mailers, electronic mail and local media. In addition, the consolidated financial statements of the past 3 years are available on the Bank’s website. 3.11.6 Assessment of Board Performance

Evaluation of Board PerformanceThe Board shall, through the Nomination, Remuneration and Corporate Governance Committee (“NRCGC”), conduct an annual review of the Board’s performance. This review shall include an overview of the talent base of the Board as a whole as well as individual assessment of each director under corporate governance rules and all other applicable laws, rules and regulations regarding directors, consideration of any changes in a director’s responsibilities that may have occurred since the director was first elected to the Board and such other factors as may be determined by the Committee to be appropriate for review.



Remuneration of Board members is approved in the AGM after being discussed at the Board level. For all Bank staff there is a performance bonus. Performance bonus is based on staff performance and recommendation of respective departmental heads. The NRCGC recommends performance bonus for all staff and management, which is subsequently approved by the Board of Directors. Remuneration for members of the SSB is approved by the Board of Directors. Chairman and CEO PerformanceThe Board of Directors shall review the performance of the Chairman and the CEO in order to ensure they are providing the best leadership for the Group.

4. REMUNERATION RELATED DISCLOSURES

4.1 IntroductionThe Bank’s total compensation approach, which includes the variable remuneration (“policy”) sets out the Bank’s policy on remuneration for Directors and senior management and the key factors that are taken into account in setting the policy. The remuneration policy is reviewed on a periodic basis to reflect changes in market practices, the business plan and risk profile of the Bank, in line with the applicable CBB rules and guidelines. The key features of the proposed remuneration framework are summarised below.

4.2 Remuneration strategyIt is the Bank’s basic compensation philosophy to provide a competitive level of total compensation to attract and retain qualified and competent employees. The Bank’s variable remuneration policy will be driven primarily by a performance based culture that aligns employee interests with those of the shareholders of the Bank. These elements support the achievement of our objectives through balancing rewards for both short-term results and long-term sustainable performance. Our strategy is designed to share our success, and to align employees’ incentives with our risk framework and risk outcomes.

The quality and long-term commitment of all of our employees is fundamental to our success. We therefore aim to attract, retain and motivate the very best people who are committed to maintaining a career with the Bank, and who will perform their role in the long-term interests of our shareholders. The Bank’s reward package is comprised of the following key elements:

1. Fixed pay 2. Benefits 3. Annual performance bonus

A robust and effective governance framework ensures that the Bank operates within clear parameters of its compensation strategy and policy. All compensation matters, and overall compliance with regulatory requirements, are overseen by NRCGC. The Bank’s remuneration policy in particular, considers the role of each employee and has set guidance on whether an employee is a Material Risk Taker and/ or an Approved Person in a business line, control or support function. An Approved Person is an employee whose appointment requires prior regulatory approval because of the significance of the role within the Bank and an employee is considered a Material Risk Taker if they are the Head of a significant business line or any individuals within their control who has a material impact on the Bank’s risk profile. In order to ensure alignment between what we pay our people and our business strategy, we assess individual performance against annual and long-term financial and non-financial objectives summarised in our performance management system. This assessment also takes into account adherence to the Bank’s values, risks and compliance measures and above all integrity. Altogether, performance is therefore judged not only on what is achieved over the short and long-term but also importantly on how it is achieved, as the NRCGC believes the latter contributes to the long-term sustainability of the business.




3.11.5 Code of business conduct and ethics for members of the Board of Directors (continued)

4.3 NRCGC role and focusThe NRCGC has oversight of all reward policies for the Bank’s employees. The NRCGC is the supervisory and governing body for compensation policy, practices and plans. It is responsible for determining, reviewing and proposing variable remuneration policy for approval by the Board. It is responsible for setting the principles and governance framework for all compensation decisions. The NRCGC ensures that all persons must be remunerated fairly and responsibly. The remuneration policy is reviewed on a periodic basis to reflect changes in market practices, the business plan and risk profile of the Bank.

The responsibilities of the NRCGC with regards to the Bank’s variable remuneration policy, as stated in its mandate, include but are not limited to, the following:-

• Approve, monitor and review the remuneration system to ensure the system operates as intended.

• Propose the remuneration policy and amounts for each Approved Person and Material Risk-Taker, as well as total variable remuneration to be distributed, taking account of total remuneration including salaries, fees, expenses, bonuses and other employee benefits.

• Ensure remuneration is adjusted for all types of risks and that the remuneration system takes into consideration employees that earn same short-run profit but take different amount of risk on behalf of the Bank.

• Ensure that for Material Risk Takers, variable remuneration forms a substantial part of their total remuneration.

• Review the stress testing and back testing results before approving the total variable remuneration to be distributed including salaries, fees, expenses, bonuses and other employee benefits.

• Carefully evaluate practices by which remuneration is paid for potential future revenues whose timing and likelihood remain uncertain. The NRCGC will question pay outs for income that cannot be realized or whose likelihood of realization remains uncertain at the time of payment.

• Ensure that for approved persons in risk management, internal audit, operations, financial control and compliance functions the mix of fixed and variable remuneration is weighted in favour of fixed remuneration.

• Recommend Board member remuneration based on their attendance and performance and in compliance with Article 188 of the Bahrain Commercial Companies Law.

• Ensure appropriate compliance mechanisms are in place to ensure that employees commit themselves not to use personal hedging strategies or remuneration and liability related insurance to undermine the risk alignment effects embedded in their remuneration arrangements.

As outlined in the Corporate Governance section of the Annual Report, the Board is aware that all directors are non-independent including the NRCGC members. Please refer table 25 within section 3.11.3 for details of members of the NRCGC and meetings held during the year. The total setting fee paid to NRCGC members during the year amounted to US$ 9,500 [2017: US$16,000]. During the year ended 31 December 2018, remuneration paid to external auditors amounted to USD 53,050 (2017: USD 51,724) for audit and USD 67,639 (2017 :USD 67,639) for non audit services to the Group. The non-audit services provided by the external auditors incuded quarterly reviews and review of Prudential returns, Public Disclosures, Anti Money laundering policies and procedures, CBB license fees and the bank compliance with the remuneration policies and procedures.


4. REMUNERATION RELATED DISCLOSURES (continued)



4.4 External consultantsConsultants were appointed during the year 2014 to advise the Bank on amendments on the variable remuneration policy to ensure the Bank is in line with the CBB’s Sound Remuneration Practices and industry norms. This included assistance in designing an appropriate Share-based Incentive Scheme for the Bank.

4.5 Scope of application of the remuneration policyThe variable remuneration policy has been adopted by the entire Group.

4.6 Board remunerationThe Bank’s Board remuneration is determined in line with the provisions of Article 188 of the Bahrain Commercial Companies Law, 2001 (“BCCL”). The Board of Directors’ remuneration will be capped so that total remuneration (excluding sitting fees) does not exceed 10% of the Bank’s net profit after all required deductions as outlined in Article 188 of the BCCL, in any financial year. Board remuneration is subject to approval of the shareholders in the Annual General Meeting. Remuneration of Directors does not include performance-related elements such as grants of shares, share options or other deferred stock-related incentive schemes, bonuses or pension benefits.

The Bank provides fixed sitting fees to the Shari’a Board and does not provide any performance linked incentives.

4.7 Variable remuneration for staff

Variable remuneration is performance related and consists primarily of the annual performance bonus award. As a part of our staff’s variable remuneration, the annual bonus rewards delivery of operational and financial targets set each year, the individual performance of the employees in achieving those targets, and their contribution to delivering the Bank’s strategic objectives. The Bank has adopted a Board approved framework to develop a transparent link between variable remuneration and performance. The framework is designed on the basis of meeting both satisfactory financial performance and the achievement of other non-financial factors, that will, all other things being equal, deliver a target bonus pool for employees, prior to consideration of any allocation to business lines and employees individually. In the framework adopted for determining the variable remuneration pool, the NRCGC aims to balance the distribution of the Bank’s profits between shareholders and employees. Key performance metrics at the bank level include a combination of short term and long term measures and include profitability, solvency, liquidity and growth indicators. The performance management process ensures that all goals are appropriately cascaded down to respective business units and employees. In determining the amount of variable remuneration, the Bank starts from setting specific targets and other qualitative performance measures that result in a target bonus pool. The bonus pool is then adjusted to take account of risk via the use of risk-adjusted measures (including forward-looking considerations). The Bank uses a formalized and transparent process to adjust the bonus pool for quality of earnings. It is the Bank’s objective to pay out bonuses out of realized and sustainable profits. If the quality of earnings is not strong, the profit base could be adjusted based on the discretion of the NRCGC. For the overall Bank to have any funding for distribution of a bonus pool; threshold financial targets have to be achieved. The performance measures ensure that total variable remuneration is generally, considerably contracted where subdued or negative financial performance of the Bank occurs. Furthermore, the target bonus pool as determined above is subject to risk adjustments in line with the risk assessment and linkage framework.



4.7 Variable remuneration for staff (continued)

Remuneration of control functions The remuneration level of staff in the control and support functions allows the Bank to employ qualified and experienced personnel in these functions. The Bank ensures that the mix of fixed and variable remuneration for control and support function personnel, such as risk management, operations, financial control, AML and compliance functions, should be weighted in favour of fixed remuneration. The variable remuneration of control functions is to be based on function-specific objectives and is not be determined by the financial performance of the business areas they monitor.

The Bank’s performance management system plays a major role in deciding the performance of the support and control units on the basis of the objectives set for them. Such objectives are more focused on non-financial targets that include risk, control, compliance and ethical considerations as well as the market and regulatory environment apart from value adding tasks which are specific to each unit.

Variable compensation for business unitsThe variable remuneration of the business units is primarily determined by key performance objectives set through the per-formance management system of the Bank. Such objectives contain financial and non-financial targets, including risk control, compliance and ethical considerations as well as market and regulatory requirements. The consideration of risk assessments in the performance evaluation of individuals ensures that any two employees who generate the same short-run profits but take different amounts of risk on behalf of the bank are treated differently by the remuneration system.

4.8 Risk assessment frameworkThe purpose of risk linkages is to align variable remuneration to the risk profile of the Bank. In its endeavour to do so, the Bank considers both quantitative measures and qualitative measures in the risk assessment process. Both quantitative measures and human judgment play a role in determining any risk adjustments. The risk assessment process encompasses the need to ensure that the remuneration policy as designed reduces employees’ incentives to take excessive and undue risks, is symmetrical with risk outcomes and delivers an appropriate mix of remuneration that is risk aligned.

Risk adjustments take into account for all types of risk, including intangible and other risks such as reputation risk, liquidity risk and the cost of capital. The Bank undertakes risk assessments to review financial and operational performance against business strategy and risk performance prior to distribution of the annual bonus. The Bank ensures that total variable remuneration does not limit its ability to strengthen its capital base. The extent to which capital needs to be built up is a function of the bank’s current capital position and its ICAAP.

The bonus pool takes into account the performance of the Bank which is considered within the context of the Bank’s risk management framework. This ensures that the variable pay pool is shaped by risk considerations and bank-wide notable events.




4.8 Risk assessment framework (continued)

The size of the variable remuneration pool and its allocation within the Bank takes into account the full range of current and potential risks, including:

(a) The cost and quantity of capital required to support the risks taken; (b) The cost and quantity of the liquidity risk assumed in the conduct of business; and (c) Consistency with the timing and likelihood of potential future revenues incorporated into current earnings.

The NRCGC keeps itself abreast of the Bank’s performance against the risk management framework. The NRCGC will use this information when considering remuneration to ensure returns, risks and remuneration are aligned.

Risk adjustments

The Bank has an ex-post risk assessment framework which is a qualitative assessment to back-test actual performance against prior risk assumptions.

In years where the Bank suffers material losses in its financial performance, the risk adjustment framework will work as follows:

• There will be considerable contraction of the Bank's total variable remuneration.

• At an individual level, poor performance by the Bank will mean individual KPIs are not met and hence employee performance ratings will be lower.

• Reduction in the value of deferred shares or awards.

• Possible changes in vesting periods and additional deferral applied to unvested rewards.

• Lastly, if the qualitative and quantitative impact of a loss incident is considered significant, a malus or claw back of previous variable awards may be considered.

The NRCGC, with the Board’s approval, can rationalize and make the following discretionary decisions:

• Increase/ reduce the ex-post adjustment.

• Consider additional deferrals or increase in the quantum of non-cash awards.

• Recovery through malus and claw back arrangements.

Malus and Claw back frameworkThe Bank’s malus and claw back provisions allow the Bank’s Board to determine that, if appropriate, unvested elements under the deferred bonus plan can be forfeited/ adjusted or the delivered variable remuneration recovered in certain situations. The intention is to allow the Bank to respond appropriately if the performance factors on which reward decisions were based turn out not to reflect the corresponding performance in the longer term. All deferred compensation awards contain provisions that enable the Bank to reduce or cancel the awards of employees whose individual behaviour has had a materially detrimental impact on the Bank during the concerned performance year.

Any decision to take back an individual’s award can only be made by the Bank’s Board of Directors.

The Bank’s malus and claw back provisions allow the Board to determine that, if appropriate, vested /unvested elements under the deferred bonus plan can be adjusted/ cancelled in certain situations. These events include the following:

• Reasonable evidence of wilful misbehaviour, material error, negligence or incompetence of the employee causing the Bank/the employee’s business unit to suffer material loss in its financial performance, material misstatement of the Bank’s financial statements, material risk management failure or reputational loss or risk due to such employee’s actions, negligence, misbehaviour or incompetence during the concerned performance year.

• The employee deliberately misleads the market and/or shareholders in relation to the financial performance of the Bank during the concerned performance year.

Claw back can be used if the malus adjustment on the unvested portion is insufficient given the nature and magnitude of the issue.



4.9 Components of variable remunerationVariable remuneration has following main components:

Upfront cashThe portion of the variable compensation that is awarded and paid out in cash on conclusion of the performance evaluation process for each year.

Deferred CashThe portion of variable compensation that is awarded and paid in cash on a pro-rata basis over a period of three years.

Upfront share awardsThe portion of variable compensation that is awarded and issued in the form of shares on conclusion of the performance evaluation process for each year.

Deferred sharesThe portion of variable compensation that is awarded and paid in the form of shares on a pro-rata basis over a period of three years.

All deferred awards are subject to malus provisions. All share awards are released to the benefit of the employee after a six month retention period from the date of vesting. The number of equity share awards is linked to the Bank’s share price as per the rules of the Bank’s Share Incentive Scheme. Any dividend on these shares is released to the employee along with the shares (i.e. after the retention period).

4.10 Deferred compensation

All staff earning in excess of BD 100,000 are subject to the following rules of deferral:

1. The CEO is subject to the following deferral rules:

Element of variableremuneration

Payoutpercentages

Vestingperiod Retention Malus* Clawback*

Upfront cash 40% immediate - - Yes

Deferred Cash 10% 3 years - Yes Yes

Deferred share awards 50% 3 years 6 months Yes Yes

2. All other covered staff (if any) are subject to the following deferral rules:

Element of variableremuneration

Payoutpercentages

Vestingperiod Retention Malus* Clawback*

Upfront cash 50% immediate - - Yes

Upfront share awards 10% immediate 6 months Yes Yes

Deferred share awards 40% 3 years 6 months Yes Yes

The NRCGC, based on its assessment of role profile and risk taken by an employee could increase the coverage of employees that will be subject to deferral arrangements.



Balance sheet as in published financial

statements

Consolidated PIRI data

31-Dec-2018 31-Dec-2018

US$ 000 US$ 000

AssetsCash and balances with central banks 1,206 1,206

Murabaha Receivables 9,502

Due from banks and other financial institutions 8,496 20,501

Mudaraba Receivables 2,496 -

Financing Receivables 841 2,756

Investment in equities and funds 4,771 4,771

Investment in sukuk 73,405 73,681


Investment properties 26,556 26,556

Property and equipment 137 137

Total Assets 128,590 130,788

Liabilities

Due to banks and other financial institutions 74,271 74,271

Deposits from Customers - -

Term borrowings - -

Subordinated debt - -

Other liabilities 2,172 2,172

Liabilities of disposal group classified as held for sale - -

Total liabilities 76,443 76,443

EquityShare capital 59,039 59,039

Treasury shares - -

Share premium - -

Statutory reserve 3,881 3,881

General reserve 2,226 2,226

Treasury shares reserve - -

Cumulative changes in fair values 2,175 2,175

Foreign currency translation adjustments - -

Retained earnings (15,174) (15,174)

Expected credit losses (Stages 1&2) - 2,198

Subordinated debts

Attributable to the owners of the Bank 52,147 54,345

Non-controlling interests - -

Total equity 52,147 54,345

Total Liabilities and equities 128,590 130,788

Liquidity Management Centre B.S.C. (c) CBB - Composition of Capital Disclosure RequirementsStatement of Financial PositionAppendix PD-2Step - 1

Step 1: Disclose the reported Balance sheet under the regulatory scope of consolidation

Balance sheet as in

published financial

statements

Consolidated PIRI data Ref.

31-Dec-2018 31-Dec-2018

US$ 000 US$ 000

AssetsCash and balances with central banks 1,206 1,206

Murabaha Receivables 9,502

Due from banks and other financial institutions 8,496 20,501

of which Murabaha Receivables - 9,502

of which Mudaraba Receivables - 2,496

Expected credit losses (Stages 1&2) - (7) g Mudaraba Receivables 2,496 -

Financing Receivables 841 2,756

Expected credit losses (Stages 1&2) - (1,915) h Investments in equities and funds 4,771 4,771

Investments in sukuk 73,405 73,681

Expected credit losses (Stages 1&2) - (276) f

Interest receivable and other assets 1,180 1,180

Investment properties 26,556 26,556 Property and equipment 137 137

Total Assets 128,590 130,788

LiabilitiesDue to banks and other financial institutions 74,271 74,271 Interest payable and other liabilities 2,172 2,172

Total liabilities 76,443 76,443

Equity

Share capital (net of Treasury shares) 59,039 59,039 a

of which amount eligible for CET 1 59,039 59,039

Share premium - -

Statutory reserve 3,881 3,881 c

General reserve 2,226 2,226 d

Cumulative changes in fair values 2,175 2,175 e

of which Cumulative changes in fair values - -

of which gains and losses on available for sale investments - -

of which foreign currency transalation adjustments - -

Retained earnings (15,174) (15,174) b

of which net profit/(loss) - 13

of which Retained earnings (15,174) (15,187)

Expected credit losses (Stages 1&2) - 2,198 f+g+h

Attributable to the owners of the Bank 52,147 54,345

Non-controlling interests - - Total equity 52,147 54,345

Total Liabilities and equities 128,590 130,788

Liquidity Management Centre B.S.C. (c) CBB - Composition of Capital Disclosure RequirementsStatement of Financial PositionAppendix PD-2Step - 2

Step 2: Expand the lines of the regulatory Balance sheet to display all of the components used in the definition of capital disclosure template


Disclosure of template for main features of regulatory capital instruments

1 Issuer Liquidity Management Centre

2 Unique identifier (e.g. CUSIP, ISIN or Bloomberg identifier for private placement) Not applicable

3 Governing law(s) of the instrumentLaws and regulations of Kingdom of Bahrain

Regulatory treatment

4 Transitional CBB rules Common Equity Tier 1

5 Post-transitional CBB rules Common Equity Tier 1

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

7 Instrument type (types to be specified by each jurisdiction) Common shares

8 Amount recognised in regulatory capital (Currency in mil, as of most recent reporting date)

52,147

9 Par value of instrument 1.00

10 Accounting classification Shareholders' Equity

11 Original date of issuance July -2002

12 Perpetual or dated Perpetual

13 Original maturity date No maturity

14 Issuer call subject to prior supervisory approval No

15 Optional call date, contingent call dates and redemption amount Not applicable

16 Subsequent call dates, if applicable Not applicable

Coupons / dividends

17 Fixed or floating dividend/coupon Floating dividends

18 Coupon rate and any related index Not applicable

19 Existence of a dividend stopper Not applicable

20 Fully discretionary, partially discretionary or mandatory Fully discretionary

21 Existence of step up or other incentive to redeem No

22 Noncumulative or cumulative Noncumulative

23 Convertible or non-convertible Not applicable

24 If convertible, conversion trigger (s) Not applicable

25 If convertible, fully or partially Not applicable

26 If convertible, conversion rate Not applicable

27 If convertible, mandatory or optional conversion Not applicable

28 If convertible, specify instrument type convertible into Not applicable

29 If convertible, specify issuer of instrument it converts into Not applicable

30 Write-down feature No

31 If write-down, write-down trigger(s) Not applicable

32 If write-down, full or partial Not applicable

33 If write-down, permanent or temporary Not applicable

34 If temporary write-down, description of write-up mechanism Not applicable

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

Not applicable

36 Non-compliant transitioned features No

37 If yes, specify non-compliant features Not applicable

Liquidity Management Centre B.S.C. (c) CBB - Composition of Capital Disclosure RequirementsMain features of regulatory capital instrumentsAppendix PD-3

Component of regulatory

capital

Source based on reference letters

of the balance sheet under the

regulatory scope of consolidation

Common Equity Tier 1: Instruments and reserves

1 Directly issued qualifying common share capital plus related stock surplus 59,039 a

2 Retained earnings (15,174) b

3 Accumulated other comprehensive income and losses (and other reserves) 8,282 c+d+e

4 Not applicable -

5 Common shares issued by subsidiaries and held by third parties (amount allowed in group CET1)

-

6 Common Equity Tier 1 capital before regulatory adjustments 52,147

Common Equity Tier 1 capital: regulatory adjustments

7 Prudential valuation adjustment -

8 Goodwill (net of related tax liabilities) -

9 Other intangibles other than mortgage servicing rights (net of related tax liabilities) -

10 Deferred tax assets that rely on future profitability excluding those arisng from tempo-rary differences (net of related tax liabilities)

-

11 - 12 Shortfall of provisions to expected losses -

13 Securitization gain on sale (as set out in paragraph 562 of Basel II framework) -

14 Not applicable

15 Defined benefit pension fund net assets -

16 Investments in own shares -

17 Reciprocal cross holdings in Common equity -

18 Investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions, where the bank does not own more than 10% of the issued share capital (amount above 10% thresh-old)

-

19 Significant investments in the common stock of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions (amount above 10% threshold)

-

20 Mortgage servicing rights (amount above 10% ofCET1c) -

21 Deferred tax assets arising from temporary differences (amount above 10% threshold, net of related tax liability)

-

22 Amount exceeding the 15% threshold -

23 of which: significant investments in the common stock -

24 of which: mortgage servicing rights -

25 of which: deferred tax assets arising from temporary differences -

26 CBB specific regulatory adjustments - Regulatory Adjustments applied to Common Equity Tier 1 in respect of amounts subject to pre-2015 treatments

-

of which: Positive or negative adjustments due to aggregation of CET1 -

27 Regulatory adjustments applied to Common Equity Tier 1 due to insufficient Additional Tier 1 and Tier 2 to cover deductions

-

28 Total regulatory adjustments to Common equity Tier 1 -

29 Common Equity Tier 1 capital (CET1) 54,147

Liquidity Management Centre B.S.C. (c)

CBB - Composition of Capital Disclosure RequirementsRegulatory Capital ComponentsAppendix PD-4

Regulatory Capital ComponentsStep 3: Map each of the components that are disclosed in Step 2 to the composition of capital disclosure templates



CBB - Composition of Capital Disclosure RequirementsRegulatory Capital ComponentsAppendix PD-4 (continued)


capital

Source based on reference letters of

the balance sheet under the regulato-ry scope of consoli-

dation

Additional Tier 1 capital: instruments

30 Directly issued qualifying Additional Tier 1 instruments plus related stock surplus -

31 of which: classified as equity under applicable accounting standards -

32 of which: classified as liabilities under applicable accounting standards -

33 Directly issued capital instruments subject to phase out from Additional Tier 1 - 34 Additional Tier 1 instruments (and CET1 instruments not included in row 5) issued by

subsidiaries and held by third parties (amount allowed in group AT1) -

35 of which: instruments issued by subsidiaries subject to phase out -

36 Additional Tier 1 capital before regulatory adjustments -

Additional Tier 1 capital: regulatory adjustments

37 Investments in own Additional Tier 1 instruments -

38 Reciprocal cross-holdings in Additional Tier 1 instruments - 39 Investments in the capital of banking, financial and insurance entities that are outside

the scope of regulatory consolidation, net of eligible short positions, where the bank does not own more than 10% of the issued common share capital of the entity (amount above the 10% threshold)

-

40 Significant investments in the capital banking, financial and insurance entities that are outside the scope of regulatory consolidation (net of eligible short positions)

-

41 CBB specific regulatory adjustments - 42 Regulatory adjustments applied to Additional Tier 1 due to insufficient Tier 2 to cover

deductions -

43 Total regulatory adjustments to Additional Tier 1 capital -

44 Additional Tier 1 capital (AT1) -

45 Tier capital (T1 = CET1 + AT1) 54,147

Tier 2 capital: instruments and provisions46 Directly issued qualifying Tier 2 instruments plus related stock surplus -

47 Directly issued capital instruments subject to phase out from Tier 2 - 48 Tier 2 instruments (and CET1 and AT1 instruments not included in rows 5 or 34) issued

by subsidiaries and held by third parties (amount allowed in group Tier 2) -

49 of which: instruments issued by subsidiaries subject to phase out -

50 Provisions 2,198 f+g+h

51 Tier 2 capital before regulatory adjustments 2,198

Tier 2 capital: regulatory adjustments52 Investments in own Tier 2 instruments -

53 Reciprocal cross-holdings in Tier 2 instruments - 54 Investments in the capital of banking, financial and insurance entities that are outside

the scope of regulatory consolidation, net of eligible short positions, where the bank does not own more than 10% of the issued common share capital of the entity (amount above the 10% threshold)

-

55 Significant investments in the capital banking, financial and insurance entities that are outside the scope of regulatory consolidation (net of eligible short positions)

-

56 National specific regulatory adjustments -

57 Total regulatory adjustments to Tier 2 capital 977

Expected Credit losses (Stage1 and 2) is $2,198, CAP for inclusion in Tier 2 is $1,221, the excess of

CAP is $977.


capital

Source based on reference letters

of the balance sheet under the

regulatory scope of consolidation

58 Tier 2 capital (T2) 1,221 59 Total capital (TC = T1 + T2) 53,368 60 Total risk weighted assets 108,200 Capital ratios and buffers61 Common Equity Tier 1 (as a percentage of risk weighted assets) 48.20%

62 Tier 1 (as a percentage of risk weighted assets) 48.20%

63 Total capital (as a percentage of risk weighted assets) 49.32%64 Institution specific buffer requirement (minimum CET1 requirement plus capital

conservation buffer plus countercyclical buffer requirements plus G-SIB buffer requirement, expressed as a percentage of risk weighted assets)

9.00%

65 of which: capital conservation buffer requirement 2.50%

66 of which: bank specific countercyclical buffer requirement N/A

67 of which: G-SIB buffer requirement N/A68 Common Equity Tier 1 available to meet buffers (as a percentage of risk weighted

assets)48.20%

National minima (where different from Basel II)69 CBB Common Equity Tier 1 minimum ratio 6.50%

70 CBB Tier 1 minimum ratio 8.00%

71 CBB total capital minimum ratio 10.00%

Amounts below the thresholds for deduction (before risk weighting)72 Non-significant investments in the capital of other financials -

73 Significant investments in the common stock of financials -

74 Mortgage servicing rights (net of related tax liability) -

75 Deferred tax assets arising from temporary differences (net of related tax liability) -

Applicable caps on the inclusion of provisions in Tier 276 Provisions eligible for inclusion in Tier 2 in respect of exposures subject to

standardised approach (prior to application of cap) 2,198 f+g+h

77 Cap on inclusion of provisions in Tier 2 under standardised approach 1,221

78 N/A -

79 N/A -

Capital instruments subject to phase-out arrangements (only applicable between 1 Jan 2019 and 1 Jan 2023)80 Current cap on CET1 instruments subject to phase out arrangements - 81 Amount excluded from CET1 due to cap (excess over cap after redemptions and

maturities) -

82 Current cap on AT1 instruments subject to phase out arrangements - 83 Amount excluded from AT1 due to cap (excess over cap after redemptions and

maturities) -

84 Current cap on T2 instruments subject to phase out arrangements -85 Amount excluded from T2 due to cap (excess over cap after redemptions and

maturities) -


CBB - Composition of Capital Disclosure RequirementsRegulatory Capital ComponentsAppendix PD-4 (continued)

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L i q u i d i t y M a n a g e m e n t C e n t r e B . S . C . ( c ) A n n u a l R e p o r t 2 0 1 5

14

Annual Report2015

Liquidity Management Centre B.S.C. (c) 9th Floor, LMC Building - P.O. Box 11567Seef District, Kigdom of Bahrain

Tel : (973) 17568568 - Fax : (973) 17568569

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Liquidity Management Centre B.S.C. (c) 9th Floor, LMC Building - P.O. Box 11567Seef District, Kigdom of Bahrain

Tel : (973) 17568568 - Fax : (973) 17568569

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