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His Royal Highness
Crown Prince Sultan Bin Abdulaziz
Al-Saud
The Deputy Premier
His Royal Highness
King Abdullah Bin Abdulaziz
Al-Saud
Custodian of the Two Holly Mosques
His Royal Highness
Crown Prince Naif Bin Abdulaziz
Al-Saud
Second Deputy Premier & Minister of Interior
1
CONTENTS
3
• Board of Directors 5
• Board of Directors’ Report 7
• Summary of Year’s Activity 17
• Consolidated Financial Statements 29
• Notes to the Financial Statements 35
• Auditor’s Report 73
• Basel II Disclosures:basel II Pillar 3 75
Qualitative Disclosures - 31 December 2008
4
BOARD OF DIRECTORS
5
SULAIMAN BIN ABDULAZIZ AL RAJHI CHAIRMAN
ABDULLAH BIN SULAIMAN AL RAJHI MANAGING DIRECTOR & CHIEF EXECUTIVE OFFICER (CEO)
• ABDULLAH BIN ABDULAZIZ AL RAJHI
SALAH BIN ALI ABA AL KHAIL
• MOHAMMED BIN IBRAHIM AL ISSA
• MOHAMMED BIN ABDULAZIZ AL RAJHI
• MOHAMMED BIN ABDULLAH AL RAJHI
SULAIMAN BIN SALEH AL RAJHI
• ALI BIN AHMED AL SHIDDI
• SAEED BIN OMAR BIN QASIM AL E-SA-EE
• MOHAMMED BIN OSMAN BIN AHMED AL BISHR
CERTIFIED PUBLIC ACCOUNTANTS
• ERNST & YOUNG
• PRICEWATERHOUSECOOPERS AL JURAID
EXECUTIVE COMMITTEE MEMBERS
6
BOARD OF DIRECTORS’ REPORT
7
Distinguished Shareholders,
Assalam Alaykom,
The Board of Directors is pleased to share with you its annual report, which highlights the activities of the Bank for the fiscal year ending on December 31, 2008. In 2008, the economic situation in the Kingdom contributed to achieving accelerated growth for the Bank’s activities, which were in line with local economic trends. Throughout the year the Bank worked diligently to take advantage of and benefit from the Kingdom’s positive growth, acting according to economic indicators reflecting the expansion and diversification of the national economic base.
Moreover, the economic projections for the year 2009 indicate continuous growth of all the various economic sectors, including the financial sector. The Bank celebrated its 21st anniversary in 2008 with many achievements that included developing banking services, providing financial products to meet the expectations of corporate and individual customers, and reinforcing the pioneering role of the Bank in its many activities. The Bank also adopted a progressive management restructuring process to provide enhanced support for its strategic objectives.
Financial Results
In 2008, the Bank realized net profits amounting to 6,525 million Saudi Riyals compared to SR 6,450 million in 2007, marking an increase/decrease at the rate of 1.16%. Net return on investment amounted to 8,494 million Riyals against SR 7,722 million in 2007, or an increase/decrease at the rate of 10%. Revenues from banking services amounted to 2,081 million Riyals or an increase/decrease at the rate of 30% over 2007 (SR 1,599 million). Income from operations amounted to 10,575 million Saudi Riyals or 13.5% over 2007 (SR 9,321 million).
Investment portfolio featured a high degree of diversification among trading, Istisnaa, Ijara, murabaha and installment sale, culminating into a net asset balance of 144 million Riyals or 37.3% rate of increase/decrease over 2007 (SR 105,875 million). At the same time, shareholders’ equity increased/decreased to SR 27 billion or 12.5% over 2007 (SR 24 billion). Total assets increased/decreased to SR 165 billion or 32% over 2007 (SR 125 billion). Customer balances amounted to SR 117 billion or 30% increase/decrease over 2007 (SR 90 billion), which confirms customer confidence in the Bank as manifested in the remarkable growth of its market share in the banking sector.
The Bank’s average return on assets amounted to 4.5%; return on shareholders equity amounted to 25.8% and a share’s profit amounted to SR 4.35 compared to SR 4.30 in 2007.
Total Assets SR Millions
2004 2005 2006 2007 2008
200,000
150,000
100,000
50,000
0
77,855
95,038105,209
124,886
164,930
Assets Growth
2004 2005 2006 2007 2008
40%
30%
20%
10%
0
20% 22%
11%
19%
32%
Board of Directors’ Report
8
Major Activities of the Bank
Following is an analysis of the Bank’s total assets and liabilities, operational income and expenses and net income for the two years ending on 31 December 2008-2007.
2008 SR’ 000
Retail Corporate Treasury Investment Total
Total Assets 63,949,630 54,869,532 46,110,639 0 164,929,801
Total Liabilities 81,567,893 43,182,806 11,527,193 1,620,110 137,898,002
Total Income from Operations 6,056,621 2,178,678 1,996,514 343,454 10,575,267
Total Operational Expenses (2,801,270) (694,159) (379,020) (176,214) (4,050,663)
Net Income 3,255,351 1,484,519 1,617,494 167,240 6,524,604
2007 SR’ 000
Retail Corporate Treasury Investment Total
Total Assets 62,455,161 30,782,506 31,648,815 0 124,886,482
Total Liabilities 68,689,370 27,352,491 5,238,509 0 101,280,370
Total Income from Operations 5,729,523 1,588,967 1,560,573 442,033 9,321,096
Total Operational Expenses (2,372,148) (169,216) (164,658) (165,417) (2,871,439)
Net Income 3,357,375 1,419,751 1,395,915 276,616 6,449,657
Return on Assets
2004 2005 2006 2007 2008
8%
6%
4%
2%
0%
4.1%
6.5%
7.3%
5.6%4.5%
Board of Directors’ Report
9
Summary net results of operations for the past five years (SR 000)
2008 2007 2006 2005 2004
Total Assets 164,929,801 124,886,482 105,208,744 95,037,981 77,854,774
Net Investments 144,003,524 104,875,445 89,563,188 80,134,684 64,771,712
Total Liabilities 137,898,002 101,280,370 85,029,268 81,568,687 67,669,769
Total Equity 27,031,799 23,606,112 20,179,476 13,469,294 10,185,005
Deposits 116,611,043 89,725,167 73,397,980 70,112,192 60,913,513
Net Profit 6,524,604 6,449,657 7,301,891 5,633,327 2,935,915
Share Profit 4.35 4.30 5.41 8.35 6.53
Geographical Analysis of Revenues
Most of the Bank’s revenues are basically generated from activities within the Kingdom of Saudi Arabia.
Subsidiary Companies:
The Bank carries out its business mainly in the Kingdom of Saudi Arabia and has seven subsidiary companies, of which five companies are registered outside the Kingdom as at 31st of December 2008.
% Ownership
2008 2007
SPC Ltd., British Virgin Islands 99% 99%
Arpent Vat Services Ltd. - UK 100% 100%
Al Rajhi Investment Ltd., London 100% 100%
ARA Co. (1) Ltd., Jersey 99% 99%
Al Rajhi Development Co. Ltd., Riyadh 99% 99%
Al Rajhi Banking Investment Company Ltd., Malaysia 100% 100%
Al Rjahi Financial Services Company Riyadh 99% 99%
2004 2005 2006 2007 2008
100%
80%
60%
40%
20%
0%
-20%
44%
92%
30%
-12%1%
Net Income Growth
2004 2005 2006 2007 2008
8,000
6,000
4,000
2,000
0
2,936
5,633
7,302
6,450 6,525
Board of Directors’ Report
Net Income SR Millions
10
Dividend Distribution
The Bank distributes net profits after deduction of all overhead expenses, Zakat and other costs in accordance with the provisions of Article (41) of the Bank’s Articles of Association and other applicable laws and regulations. As a result of outstanding performance, the Board of Directors recommends that the current year’s dividend distribution should be as follows:
SR’000
Year’s Profit 6,524,604
Interim dividend distribution during the first
half of the year, at the rate of SR1.25 per share (1,875,000)
Proposed dividend distribution during the second
half of the year, at the rate of SR “00” per share (2,625,000)
Transfer to legal reserve 1,631,151
General reserve 285,976
Zakat accruals 558,143
Total 121,286
Joint Murabaha Financing from Banks
In 2006, the Bank secured a joint Murabaha financing facility from a group of banks in a total amount of US$ 500,000,000.00 (SR 1,875,000,000.00) for a period of three years. Facility charges on this financing accrue each six months and for a period of three years. The sixth installment of returns and principal received under this facility has been paid in the course of this year.
Board of Directors
The Bank’s affairs are managed by a Board of Directors consisting of 11 members who are elected in an ordinary general assembly meeting every three years. Members who completed their term in office may be re-elected. On 14/11/2008, the Board of Directors approved the election of Mr. Abdullah bin Suleiman Al Rajhi as a Managing Director in addition to his current post of a CEO of the Bank.
Directors are classified in accordance with the definitions stated under Article (2) the Corporate Governance Act of the Kingdom of Saudi Arabia duly issued by the Capital Market Authority, as follows:
Total Liabilities SR Millions
2004 2005 2006 2007 2008
150,000
100,000
50,000
0
67,67081,569 85,029
101,280
137,898
Liabilities Growth
2004 2005 2006 2007 2008
40%
30%
20%
10%
0%
18%21%
4%
19%
36%
Board of Directors’ Report
11
Name Functions Type of Membership Membership in other joint stock companies
Suleiman bin Abdulaziz Al Rajhi Chairman , Board of Director Non Executive Member (Dependent)
Yanbu Cement Companies NADEC Agricultural Company
Abdullah bin Suleiman Al Rajhi Managing Director & CEO Executive Member (Dependent)
Suleiman bin Saleh Al Rajhi Board of Directors Member Non-Executive Member (Dependent)
Abdullah bin Abdulaziz Al Rajhi Board of Directors Member Non-Executive Member (Dependent)
Tabuk Agricultural Company
Salah bin Ali Aba Alkhail Board of Directors Member Non-Executive Member (Independent)
Mohammed bin Ibrahim Al Issa Board of Directors Member Non-Executive Member (Independent)
Hotels Company
Mohammed bin Abdulaziz Al Rajhi Board of Directors Member Non-Executive Member (Independent)
National Gypsum Company
Mohammed bin Abdullah Al Rajhi Board of Directors Member Non-Executive Member (Dependent)
Tabuk Agricultural Company
Ali bin Ahmed Al Shiddi Board of Directors Member Non-Executive Member (Independent)
Saeed bin Omar Al Issaea Board of Directors Member Non-Executive Member (Independent)
Mohammed bin Othman Al Bishr Board of Directors Member Non-Executive Member (Independent)
In 2008, the Board of Directors held 6 meetings, as follows:
Date Number Attended
1. 21/01/2008 8
2. 24/02/2008 10
3. 17/05/2008 11
4. 29/06/2008 11
5. 14/10/2008 9
6. 28/12/2008 11
The Board of Directors carries out its functions through major committees consisting of Board members, excluding the audit committee which consists of three independent non-Board members. The Executive Committee, headed by Chairman of the Board, is entrusted with the functions and authorities as may be delegated by the Board. It is also in charge of review of all matters and reporting to the Board of any recommendations or taking the necessary decisions accordingly. In 2008, the Committee held eight sessions. The Nominations and Rewards Committee, which consists of three members, is in charge of the functions assigned to it in accordance with its executive by-laws. The most significant of these functions are to recommend the selection of board members, appointment top executives and determine their remuneration. In 2008, the Committee held seven sessions. The Audit Committee plays a basic and important role in assisting the Board of Directors to meet its regulatory financial and accounting obligations in addition to the audit of accounts and coordination with external auditors. The Audit Committee was reorganized on 14/11/2008 whereby it currently consists of five instead of three members. In 2008, the current Audit Committee held one session in addition to four sessions held by the previous committee. Recommendations of this Committee have been reported to the Board of Directors.
Remunerations and Compensations
The Bank pays the expenses and remunerations to Board members for attending Board meetings and for participation in committees of the Board in accordance with the provisions of Article (19) of the Bank’s articles of association. The Bank also pays salaries, remunerations and compensation to top executives in accordance with the terms and conditions of their respective contracts. Following is a detailed account of the expenses, remunerations and salaries paid to Board members and to seven senior executives including the CEO and Financial Manager of the Bank:
Board of Directors’ Report
12
Description Executive Board Members
Non-executive Board Members
Senior Executives
Salaries & remunerations 2,598,000 - 9,769,548
Allowances 685,500 162,000 1,998,485
Periodic bonuses and annuities 433,000 2,400,000 9,958,582
Incentive plans - - 2,003,120
Other remunerations or benefits in kind paid on a monthly or annual basis - - -
Total 3,716,500 2,562,000 23,729,735
Penalties and Fines Imposed on the Bank
The Bank has not been subjected to any fines or penalties of any significance during the year 2008.
Contracts with Related Parties
Other than the data contained in Note (29) of the financial statements, neither the Board members nor the CEO, deputy CEO or the Financial manager has any material interests in any contracts with third parties.
Accrued Regulatory Payments:
Zakat accruals during the year are as follows:
SR’ 000
Zakat accruals from shareholders 558,143
Outstanding dues 0
Total 558,143
Employee Benefits and Plans
Benefits and compensation of Bank employees during or at the end of service are paid in accordance with the provisions of the Saudi Labour Law and applicable policies of the Bank. At the close of 2008, balance of End of Service allocations amounted to 474 million Saudi Riyals.
Total Owners’ Equity SR Millions
2004 2005 2006 2007 2008
30,000
25,000
20,000
15,000
10,000
5,000
0
10,185
13,469
20,180
23,606
27,032
Owners’ Equity Growth
2004 2005 2006 2007 2008
50%
40%
30%
20%
10%
0%
41%
32%
50%
17%15%
Board of Directors’ Report
13
Based on Board of Directors decision No. (9) dated 22/03/1990 and General Assembly decision dated 20/11/1410H, corresponding to 15/05/1990, 150 thousand of the Bank’s shares have been allocated to the Employees Fund in accordance with predetermined terms and conditions.
The value of these shares, estimated at 15 million Saudi Riyals, have been charged to the account of the Employees Fund and treated as part of a soft loan granted by the Bank to the Fund in the amount of SR 50 million. This loan has been repaid fully and those shares have grown through granting bonus shares that were distributed as dividends to increase the Bank’s capital over the past few years. The number of these shares, after split in accordance with the decision of the CMA, reached 30 million shares as at 31/12/2008.
On 05/11/2007, the Board of Directors authorized the Bank to grant the Employees Fund another soft loan in the amount of SR 125 million to be repaid within two years, provided, however, that the Fund’s assets and resources would be invested and returns would be allocated to financing the employees’ participation in the said Fund’s scheme, scheme for granting Bank shares to outstanding employees and scheme for offering employees personal soft loans in accordance with the respective rules and conditions of each such scheme subject to the approval of the Board of Directors as well as any other future projects relating to the Bank’s employees as may be subsequently approved by the Board of Directors. It is to be noted at this point that the Employees’ Fund is an autonomous body corporate with independent financial statements, and, accordingly, are not included in the consolidated financial statements of the Bank.
Accounting Records and Internal Control System
The Board of Directors hereby confirms that:
• Accounting records have been prepared properly in accordance with generally accepted accounting principles;• The internal control system has been prepared in accordance with sound principles and its effectiveness is
being supported through: • Having in place professional departments specialized in fields of internal audit, compliance control and
risk management;• Having in place an internal audit committee to ensure the adoption of the best practices in the field
of governance and participation in fostering the independence of both the internal and external audit functions;
• Taking notice of any notes and remarks made by the internal and external auditors to ensure that they are being handled seriously and followed up through full remedy.
• There are no doubts regarding the Bank’s capability to proceed with conducting its stated activities.
Corporate Governance Rules
In general, the Bank operates in compliance with the provisions and directives of the Corporate Governance Rules duly promulgated by the Capital Market Authority. The Bank’s management has applied the provisions of the said rules as long as they practically enforceable according to applicable laws and regulations.
Return on Shareholders’ Equity
2004 2005 2006 2007 2008
50%
40%
30%
20%
10%
0%
33.7%
47.6%
43.4%
29.5%25.8%
Board of Directors’ Report
14
Auditors
During the ordinary general assembly of shareholders duly convened on 24/02/2008, ERNST&YOUNG and Price Waterhouse Coopers have been appointed auditors of the Bank’s accounts for the fiscal year 2008. God willing, based on a recommendation of the Audit Committee, the next ordinary general assembly of shareholders will reappoint the current auditors or appoint other auditors for the fiscal year 2009.
Conclusion
The Board of Directors is pleased to express its delight and to take pride in the positive results achieved by the Bank in the course of 2008. On this occasion, the Board would like to extend its highest appreciation and gratitude to the Custodian of the Two Holy Mosques, King Abdullah bin Abdulaziz Al Saud and the Crown Prince, Deputy Premier and Minister of Defense and Aviation and Inspector General, HRH Prince Sultan bin Abdulaziz and to our prudent and rightly-guided government.
The Board also extends its sincere appreciation and gratitude to the Ministry of Finance, Ministry of Commerce and Industry, Saudi Arabian Monetary Agency and the Capital Market Authority for their constant cooperation, advocacy and support in developing the banking sector as manifested in fostering and growth of the national economy.
The Board extends it sincere appreciation and gratefulness to their eminence the chairman and members of the Shariah Board of the Bank for their sincere efforts, contributions and for expressing their juristic opinion in response to the inquiries presented to them with regard to the banking, investment activities and services that the Bank offers to its customers, and wish that Almighty Allah would best reward them for their efforts.
The Board avails itself of this opportunity to express its appreciation and gratitude to the honorable shareholders, customers and correspondents for their support, confidence and cooperation in their endeavor for further advancement and prosperity to the Bank.
Finally, the Board extends its sincere appreciation and gratitude to all employees of the Bank for their sincere efforts and devotion in carrying out their task and duties.
Board of Directors
Customer Deposits Growth
2004 2005 2006 2007 2008
30%
25%
20%
15%
10%
5%
0%
19%
15%
5%
22%
30%
Customer Deposits SR Millions
2004 2005 2006 2007 2008
120,000
100,000
80,000
60,000
40,000
20,000
0
60,914
70,11273,398
89,725
116,611
Board of Directors’ Report
15
SUMMARY OF YEAR’S ACTIVITY
17
Summary of the Year’s Activity
Shariah Group
Since its early inception, the Bank established an independent Shariah Board, formed and ratified by the Con-stituent General Assembly with the objective of ensuring that all Bank activities are subject to the approval of the said Board and subsequently exercising the necessary controls through the Shariah Control Department, which reports directly to this Board.
Secretariat of the Shariah Board is in charge of preparing subjects of discussion for presentation to the Sahriah Board, and preparing for Board meetings. During this year, more than 200 subjects were prepared for presentation and deliberation by the Shariah Board. Additionally, the Board’s Secretariat has developed the necessary tools of juristic research through implementation of a number of accounting applications software in this field.
The Juristic Control Department is in charge of supervising the activities of the Bank with regard to verifying the implementation of the Shariah Board’s decisions. In this regard, the Juristic Control Department conducted more than 150 control visits at the Bank’s Head Office and branches, transfer centers, trading rooms, dealing rooms, etc. In the course of implementing the Shariah awareness and training policy, during this year, this Department offered a large number of awareness programs.
A new “Support and Development” department has been created to take the functions of juristic development of products and search for juristic alternatives of products that have not been approved by the Sahriah Board, besides support of the Group and the bank in areas of juristic training and circulation of publications issued by the Shariah Group.
Since its inception to the close of 2008, decisions issued by the Shariah Board amounted to (851) decisions, of which (61) were issued in the course of this year only. During the year 2008, the Board also held (38) sessions to approve a large number of contracts, agreements and forms and to tackle a number of remarks besides responding to a large number of inquiries.
Retail Banking Group
The Retail Banking Group offers a wide spectrum of financing products and banking services to individual customers, including current accounts, personal financing and real estate financing products. These products and services are provided through the Bank’s network of branches. In the course of expanding the Bank’s branches network, 27 new branches were opened, 25 existing branches were renovated and developed and 20 new transfer centers were opened. In the field of online banking services, 325 ATM machines and 450 POS (Point of Sale) machines were added. In this regard, Al Rajhi Bank is considered to have the largest and widest range of channel choice and coverage relating to branches, ATM and POS terminals.
2008 2007
Number of branches 436 409
Number of transfer centers 127 107
ATMs 2,277 1,925
Points of sale 18,000 14,621
With regard to the electronic banking services and banking phone services, we have reached new levels of deal-ing with customers during this year.
The number of customers registered to deal on banking phone services amounted to approximately 1.8 million customers and the number of customers who conduct their banking transactions online number approximately 840,000 customers.
Additionally, comprehensive mobile banking services, Rajhi mobile, has recently been launched.
These facilities provide distinctive banking services which are considered to be amongst the most flexible and convenient in the Kingdom.
Summary of Year’s Activity
18
Through this service, the customer will be able to pay their bills, make transfers or obtain summary information in the form of short text messages.
This year, the following new products were launched:
• Retail Financing Scheme (instant national), whereby the customer may apply and immediately have their ap-plication processed by the branch instead of the 30-minute waiting which we still observe;
• Retail Financing Scheme (over the banking phone at a national level), whereby the customer may process his application over the banking telephone;
• Retail Financing Scheme (for residents at a national level) whereby a resident customer can file and process an application in one day through following simple procedures.
• Retail financing for the purchase of used cars;• Car financing product (daily rental) to our customers of car rental companies;• Relationship agreement with one of the major car dealing companies in the Kingdom.
To enhance and foster our communication with customers, we have followed our “We serve our customers with a smile” program which started in 2008, with a new program that puts customer service at the forefront of the banking experience with the objective of enhancing the levels of service and communication with customers.
Corporate Banking Group
Regardless of the difficulties that characterized the banking services market in the course of 2008, starting with rising severe competition during the first half of the year, emergence of indicators of shortage of cash liquidity during the third quarter of the year and finally the severe recession recently experienced at all levels of the finan-cial markets, the Corporate Banking Group of Al Rajhi Bank realized very strong financial results during this year. This is clearly manifested in the remarkable rise of assets from 28 billion to 51 billion Saudi Riyals, marking an 84% rise over last year. This rise was also accompanied with a 22% rise in corporate current accounts over last year.
This outstanding performance resulted in remarkable improvement in profits in the course of this year amount-ing to SR 2,259 million, compared to SR 1,713 million in 2007, a 25% rise over the previous year.
Additionally, the Corporate Banking Group continued to focus on implementing its announced strategy with re-gard to product development, fostering the basic structures and intensifying organizational capability, as mani-fested in launching the following major initiatives:
Trade financing through documentary credits
This year, the volume of trade financing business expanded by 50% over last year. At the same time, a large num-ber of developmental initiatives have been launched.
The most important of these initiatives are the addition of an advanced system for trade credit services that en-ables customers to obtain such services over the electronic window of the Corporate Financing Group (Corporate online) by the end of the year.
A major restructuring effort was carried out with the objective of enhancing these services in addition to launch-ing a number of new trading products.
Special outlets will be launched to serve the export sector in major industrial zones, such as the two industrial cities of Jubail and Yanbu.
Cash Management and Electronic Solutions
More enhancement and improvement has been introduced to the “Corporate online” system that resulted in launching the salary card management service, online salary service, trade payments system, check verification system, online drawing alert system (warning) system, culminating in an increase in the number of registered users by 38% and a 44% rise in the average of total transactions.
On the other hand, there was a rise in the number of subscribers to the salaries service reached 64% with similar growth (69%) in the number of transactions processed through this service since the beginning of this year and a
Summary of Year’s Activity
19
rise by 36% in the total amount of funds involved in such transitions. There was a major rise in the money collec-tion service as manifested in the increase in the number of trips from 860 to 1953 or an average of 5% growth, and similarly in revenues realized from services charges, which have also risen by 75%.
Major progress has also been achieved in the dividend distribution service, rendering this company to be a lead-ing company on the market in this field. During the previous period, our clientele base has grown from 7 to 17 companies.
Basic Setup
The banking services have been set up to render it into a smooth and comprehensive system to be fully inte-grated within Internet solutions and services. Additionally, certain branches have been launched as specialized in providing corporate services in major cities like Dammam and Jeddah, which will enable customers to enjoy a unique level of service.
Treasury Group
Treasury Group continued to play a leading role on foreign exchange markets and to have an optimal market share. In the field of currency trading, we have gone far beyond the competition. At the meantime, the Capital Market and Investment Department focused on implementing strategies of management of liquidity and dis-parity in the comparative margin of profit between accrued assets and liabilities in an effective manner with the objective of optimizing profitability. Our Bank’s client base has also been expanded to further expand our geographical spread and enhance the potentials of liquidity management.
The Treasury successfully took advantage of the opportunity availed as a result of fluctuations in the foreign ex-change markets. Regardless of the great challenge to liquidity management posed by the turmoil experienced during the global credit crisis, the Treasury was not affected by this crisis and successfully placed itself in an optimal position and managed to avoid investment risks during that period.
The Treasury sales team managed to establish long term relationships with its client base through offering them a fast and unique set of solutions, based on a philosophy of partnership that supports long term growth of cus-tomer business. This is achieved through timely supply of information on the market movement and events over E-mail and through short messages (SMS). This acquaints our customers in a constant manner with the market and assists them in taking the right decisions in a timely manner. In 2008, more emphasis was placed on improv-ing the Group’s infrastructure in order to enhance the sale and purchase functions of foreign exchange. This was achieved through creating currency points of sale in main centers that are dedicated to serving wholesale clients such as banks, exchange companies and VIP customers.
Skills and expertise of dealers in the Treasury Group continued to develop in a constant manner through offering training programs and workshops within the Kingdom and abroad. This helped those dealers to cope with the lat-est financial products and solutions that are available on the market. To introduce global experience to the Trea-sury functions, qualified professional dealers have also been recruited in the course of this year. The Currency Department manages to effectively feed its accounts that are spread over forty countries around the world. This sector is supported by the liquidity management function through planning for accurate cash flow management. During this year, emphasis was laid on coordination and fostering the existing systems. This helped transfer the Treasury from applying an old system to adopting state-of-the-art information technology capabilities to the Treasury system, i.e. TRASSET. This system resulted in large scale improvement in processing time, risk manage-ment operation and management information system. The reporting system has also been enhanced to facilitate direct and timely monitoring of the status and limits of current risks. The system also provides a comprehensive audit function.
Al Rajhi Financial Services Company
In compliance with the provisions of the Capital Market Authority (CMA) Act and in line with subsequent deci-sions to separate the securities activity from banks and to transfer this function to independent brokerage com-panies, Al Rjahi Financial Services Company (ARFS) has been established to conduct the securities business. A license was issued by the CMA to the ARFS under No. (5-34-2007) dated (04/06/1428H) corresponding to (19/06/2007). In the course of 2008, a letter was issued by the CMA to authorize the ARFS to commence business based on the license duly issued in 2007. The letter of authorization was issued after fulfilling the requirements of certain phases in line with the directives and guidelines issued by the CMA in this regard. The three specific activi-ties covered by the said license and letter of authorization to commence work are: asset management, brokerage
Summary of Year’s Activity
20
and corporate financial services. ARFS business activities, especially asset management, were directly affected by the global market conditions. On the other hand, brokerage activities improved to a great extent as reflected in enhancing the Company’s market share.
This encouraged ARFS to take strategic steps at a time when the corporate financing activity started to achieve successful results in the course of this year, as stated below in more detail.
Asset Management
Year 2008 was another year of difficult times for the asset management function. In terms of market perfor-mance, the year started the first quarter relatively better than subsequent quarters.It is well-known that the fi-nancial sector is currently going through an unprecedented historic period of difficulty, whereby fears of going into recession (which was subsequently confirmed) have been reflected on the activities of the global markets which were badly hit to the extent that certain markets have experienced a 60% set back. Notwithstanding the above, Domestic Equity Fund, GCC Fund, Cement and Petrochemical Fund have all achieved a remarkable level of performance.
Lipper, an affiliate of Reuters, has organized a unique award which is the first of its type at the level of the GCC countries for the year 2008. ARFS was granted two of these awards, as follows:
(1) Equity category: Domestic Equity Fund.(2) Mixed asset category: Second Balanced Fund.
Our consistent performance at the level of the Domestic Equity Fund has been confirmed by gaining three posi-tions of the second degree of the IPC award: for one year, three years and five years. Our power in the field of asset allocation is manifested in gaining the first, second and third positions out of the six IPC awards in the category of ‘Fund of Funds’.
Planning has been underway for development of two products in the course of 2008. However, they were not launched during this year for various reasons that are attributed to work activities or to strategic considerations, rendering postponement of this launch to be in the best interest of investors and Al Rajhi Financial Investment Company IARFS) at large.
In addition to launching new funds in the near future, focus will be on distribution of activities of the private portfolio management to assist in driving a balance in work activities between regular and affluent customers through the creation of mutual funds, and between VIP customers and corporate customers through offering portfolios that will be managed in a specialized manner.
Brokerage
Brokerage activities were directly affected by a downturn in the market for three years in a row. A variety of initia-tives have taken place in an attempt to control and manage costs in an effective manner.
Additionally, sales efforts and other measures have assisted the Brokerage Department at ARFS to increase its market share to a great extent and to foster its position in the business market, as detailed below:
• Following reorganization of the Brokerage Department that was successfully implemented in September 2007 that resulted in separation of customer services from support services, the Brokerage Department clearly fo-cused on sales, which confirms the successful trend adopted by ARFS in this field.
• Brokerage Department market share increased by 12% during the period from 2007 to 2008. This increase has taken place regardless of the severe competition on part of new or old players on the market. This contributed to the rise of the Brokerage Department of ARFS from sixth position to the third position.
• The rationalization project continued to be implemented successfully at the level of investment centers, re-sulting in the reduction of investment centers from 78 at the close of 2006 to 38 centers in 2008 (as manifested in the market share of the Brokerage Department).
• Offering new Murabaha products (gold, silver, fixed value) helped in providing customers a wider selection of options within the framework of their investment strategies.
Summary of Year’s Activity
21
Summary of Year’s Activity
Investment Growth
2004 2005 2006 2007 2008
40%
30%
20%
10%
0%
19%
24%
12%
17%
37%
• Regardless of the fluctuation on the market, with the strenuous and intensive efforts of the Brokerage Depart-ment, Murabaha sales have increased by more than 60% in the course of the year.
• Expansion in the global brokerage services that covered the GCC markets and the global markets through the use of telephone communication lines and the Internet have contributed to creating a competitive advantage and additional goodwill to the Brokerage Department.
Corporate Financial Services:
This is the first year during which the Corporate Financial Services Department achieved a great deal of progress as manifested in fostering Al Rajhi position in the corporate financial services market.
ARFS acted as an underwriter for more than SR 4 billion for initial public offerings issued in 2008, including a float manager of two issue rights.
This is considered a significant achievement in light of the difficult conditions of downturn on the market that recorded only half the volume of IPO’s duly carried out in 2007.
It is worth mentioning at this point that ARFS is authorized to conduct more underwriting operations which will hopefully be carried out in the course of 2009, depending on potential improvement in market conditions.
The Corporate Financial Services Department also played a leading role in the management and distribution of IPO’s in 2008.
It conducted all IPO’s of stocks of Shariah compliant companies, rendering ARFS to be in the first position among distribution corporations of all major subscription operations offered on the market.
It is the ARFS intention to further focus on advisory financial services within the framework of corporate financial service initiatives in the future, especially those services which involve an added value to customers and which foster our banking relationship in the field of corporate banking services.
Among the functions entrusted to ARFS in this field were merger and acquisition services and assistance of cer-tain companies in public offering of their stocks and execution of private placement operations.
Total Investment SR Millions
2004 2005 2006 2007 2008
150,000
100,000
50,000
0
64,772
80,135 89,563
104,875
144,004
22
Al Rajhi Bank – Malaysia .. First Saudi Bank in Malaysia
Al Rajhi Bank – Malaysia was opened officially in February 2007. It is the first Saudi bank to be opened in Malaysia. The bank started business by operating twelve branches and subsequently expanded to 19 branches.
During the period from January 2007 to November 2008, the Corporate Financing and Investment Group of Al Rajhi Bank – Malaysia achieved record growth of 62% in the Group’s volume of business.
A number of support services have been developed, which enabled the Group to offer a comprehensive package of services and products to the Bank’s customers. These services and products varied from direct financing to financial management and offering alternative business solutions to conventional methods of financing.
At the same time, the Group increased income from fees and other charges on investment banking operations and fund management.
In this regard, the Groups strategy focused on achieving fixed and constant income and at the same time expand-ing financial assets as well as facing the current practical challenges.
Financial Group
This year has been rich with achievements in all fields of activity of the Financial Group: Administrative Account-ing, Financial Accounting, Regulatory Reports and Financial Operations.
A full-fledged and fully integrated Management Information System (MIS) is currently in place to supply us with the required management information.
Availability of such management information in a timely manner will enhance our analytical capabilities and optimally support our decision making process in an optimal manner.
Additionally, we have integrated all the newly introduced systems into the financial and regulatory reporting mechanisms.
The third part of the Basel II agreement requirements have been successfully fulfilled. We hope that all the pay-ment cycle procedures will be transformed into an automated system.
In the course of the year, we successfully enhanced the skills of our team members and fostered our organization structure in a consistent manner, which would eventually foster our production capabilities. Professionals of this Group are most welcome at the Bank and we are proud of their achievements.
Credit & Risk Management Group
Credit and Risk Management Group (CRMG) has been at the forefront of Al Rajhi Bank’s transformation over the past few years to form an integral part of the Al Rajhi Bank’s decision making process. CRMG is now firmly en-trenched as a partner to growth and value creation whilst at the same time controlling any downside risk.
CRMG develops and maintains risk frameworks and creates associated policies for many of the risks faced by the bank including but not exclusive to: credit risk, market risk and operational risk, liquidity risk, profit rate risk, reputational and strategic risk.
The Management Committees and Board Committees guide and assist with overall management and control of the bank’s risks.
The bank has developed a more sophisticated risk management philosophy and capability much derived from Basel II to optimize the risk/return and growth of its business consistent with the risk appetite of the bank.
The year 2008 was an important milestone for the bank in not only achieving the financial targets committed but also for the significant progress made in its vision to become world-class in the management of risk. The bank continued the process of following a strategic based approach in its implementation of Basel II as well further
Summary of Year’s Activity
23
enhancing the bank’s risk management infrastructure in terms of skills, systems, policies and processes. Major specific milestones were the compliance of Pillar I and Pillar II risks according to the standardized method and development of ICAAP. The Bank has continued for the development and refinement of IRB compliant models for both Retail and Corporate which will become the foundation for subsequent approval for AIRB.
The bank has also instituted a number of enhancements to the operational risk environment by instituting a number of new policies, tools and methodologies, overseeing their implementation and use within the business units and providing ongoing monitoring and guidance across the bank.As part of the development of strong foundation in risk culture, the bank has instituted comprehensive training and awareness programme in both Operational Risk and Basel II.
Al Rajhi Bank will continue to further consolidate and enhance the levels of risk controls and ensure the bank is equipped with best risk management infrastructure in order to ensure continued market leadership and profit-ability within agreed risk parameters as determined by the Board of Directors.
Strategic Planning Group
Determining the current and future needs of customers constitutes a major and integral part of the Bank’s stra-tegic planning. In the course of 2008 and over the past years, the Bank launched new products and enhanced its services to a great extent in its endeavor to cater for the needs of its clients and front desk employees.
Examining the local market, coupled with coordinated internal planning operations and systematic workshops, is considered to be a basic tool that supports the Group in setting out and amendment of the Bank’s strategic and tactical plans year round to ensure constant development of business activity and strong presence in the market. Among the important elements for the Bank’s success is also the implementation of vital projects with guaranteed quality through exercising by the Strategic Planning Group of prudent control over quality of work.
In addition to constant development of retail banking products and services to satisfy, or even exceed, the retail customer needs, and in line with the stated strategy of the Bank that aims at diversification of the activities of the Business Groups to achieve a more balanced position, special attention has been given to further enhance the infrastructure of Corporate Banking and the products and services portfolio.
The basic – long term – objective of the Bank is manifested in fostering the Bank’s leading position in the King-dom of Saudi Arabia through developing into a comprehensive bank capable of providing cross selling services to its clients at the retail, investment, corporate and treasury levels. To support this objective, the Bank invests much effort in developing the skills and competence of its employees in order for clients to benefit from such development.
An evaluation is currently underway of the expansion opportunities at the global level in countries where the Bank can offer unique services to various market sectors which are interested in Islamic forms of products, not solely for diversification of the Group’s activities, but also to provide large scale Islamic products at a world-wide level.
Human Resources Group
The current challenge of recruiting and maintenance of quality human capital has proved to extend at all levels within the Kingdom. As a matter of fact, the technical know-how and skills that are capable of transferring banks to higher levels of competence are rare in the Kingdom of Saudi Arabia.
This challenge is also associated with the fact that the GCC countries have recently acquired a great deal of global interest at the levels of investment and growth, especially in the banking sector.
To meet these challenges, last year, we started to adopt a number of strategies for recruiting and keeping com-petent personnel. Among the most important of these strategies is the employees’ participation in the bank’s shares through the bonus share scheme.
For this reason, the Human Resources Group’s emphasis during this year was mainly on integration and support of these strategic initiatives. Additionally, various changes in the human resources policies have been adopted and implemented to ensure the creation of a framework and environment that is conducive to keeping gifted employees.
Summary of Year’s Activity
24
We are aware more than any time, that this constitutes a “beyond the target” step, and accordingly, it needs to be updated on a regular basis in order to cope with the upcoming development and enhance job opportunities at a large scale within the Bank during this year, side by side with review of salary standards and scales with the assistance of highly reputable international consultants.
These efforts have resulted in carrying out in-depth reforms in the salary structure to render it in harmony with our strategy of attracting and keeping talented personnel.
To enhance the level of awareness of our employees, a number of prudent decisions have been taken to employ a number of high-achieving graduates from a selected number of reputable universities to occupy entry level and intermediate level administrative positions.
In this manner, we expect to guarantee regular supply of Saudi youth who would occupy high ranking positions in the future.
This initiative will be added to the “Leadership” scheme in order to determine and select managers of high cali-ber and to build lines of supply of gifted employees for the coming three years and beyond.
In line with our desire to enhance our employees’ capabilities in serving customers and to improve the standards of quality of customer service, decision making, leadership and other skills that are needed at top management levels, we constantly commission training centers with wide global reputation to conduct in-house training at the Bank.
These training programs, that acquired high reputation, will eventually be of great benefit to our employees and consequently to our honorable customers.
Shared Services Group
1- Information Technology
The Bank continued to develop electronic solutions to maintain a forefront leading position among banks at a regional level. This includes development of computer systems to enable customers to have access to immediate personal refinancing at the branch level without having to refer to the management; family solidarity scheme for real estate financing, and used car installment or ijara financing scheme. Additionally, “Swift” correspondence system, E-salary corporate system have also been developed besides implementation of a new ledger system for Al Rajhi Financial Services Company and separation of its activities from those of the Bank. In the field of elec-tronic channels, a new version on retail online channel has been developed in which a new set of services have been added to maintain a leading competitive edge of the bank. As a result of this improvement, the number of subscribers to these services increased from 500,000 subscribers in 2007 to 900,000 subscribers this year.
With regard to the electronic payment system, it has been fully connected with “Sadad” payment system and the respective connection portal has been upgraded to support payments at a high level of efficiency and responsive-ness. Currently, two million bills are paid monthly on this portal.
In the field of Bank Phone system, the automated trading system over the phone has been launched besides adding new features to the Bank Phone, such as transfers of all types. On the other hand, executive capabilities of the system have been enhanced, especially those related to operating systems or infrastructure of the existing hardware. All the necessary commissioning tests have been completed successfully, rendering all these system to be fully functional.
2- Administration Services
In 2008, the various divisions and departments of the administration Group completed a large number of proj-ects, including 135 construction and development projects, transfer centers, branches, points of sale in com-mercial complexes, special services units inside branches, cash centers and company branches in addition to 326 ATM locations. Reporting to the administration Group is the Contracts and Purchasing Division which is in charge of supplying the Bank’s needs for goods and services of the highest quality as well as monitoring and management of ex-penses related to the Bank’s operations.
Summary of Year’s Activity
25
The administration Group also overseas the medical services function, which serves more than 24,000 persons of the Bank’s personnel and their dependent family members Kingdom-wide. The Security and Safety Department is in charge of ensuring full compliance with security standards in line with the stated requirements of the Saudi Arabian Monetary Agency with regard to guard services, registration ma-chines, monitoring and control.
Compliance Control Department
The Compliance Control Department is in charge of following up the implementation of the compliance policy as applied to the systems and guidelines which were subsequently developed into a mandatory guide for all Bank departments in the conduct of their business in order to ensure the proper and legal implementation applicable procedures in the Bank and correcting any omissions which may be encountered in the course practical applica-tion, in coordination with the respective departments.
Through participation in a number of committees at the level of the Saudi Arabian Monetary Agency, the Compli-ance Control Department, in collaboration with other local banks, endeavors to highlight the Bank’s efforts and sincere desire to achieve the highest levels of compliance through implementation of relevant banking systems at the local and global levels.
Anti-money Laundering Department
Top management of Al Rajhi Bank is concerned with safeguarding the Bank’s relations against any illegal or sus-picious dealings. This concern is in line with Bank’s conviction of the necessity to protect the integrity of the national economy and to protect the interests of Bank clientele.
For this reason, the Anti-money Laundering Department, through constant direction from the Bank’s top man-agement and competent authorities in the Kingdom of Saudi Arabia, endeavors to prevent any illegal dealings through study and analysis of suspicious transactions. In the course of the second half of this year, the Anti-mon-ey Laundering Department adopted a number of high-tech systems to assist in uncovering of suspicious dealings within a short period of time.
The Anti-money Laundering Department also endeavors to develop similar systems and adapt them to any future developments in the processes of money laundering. Because of the great significance of training in this regard, the Anti-money Laundering Department endeavors to train its personnel in the field of combating money laun-dering in a constant and professional manner.
Community Service
Al Rajhi Bank is a leading bank in adopting Islamic banking concepts, which make it imperative to take full social responsibility in terms of community service. Within the framework of the Bank’s endeavors to achieve this ob-jective, a new department that is fully dedicated to community service was created in 2007.
This department is in charge of implementing this policy and participating in community growth and development. Al Rajhi Bank provides community services on an annual basis through sponsoring a package of programs in all fields of activity including social initiatives to enhance various community service schemes in service of the des-titute and jobless members of the community.
The Bank also channeled disbursement from the “Purging Account” to channels dedicated to community service in coordination with competent charities within the framework of the following schemes:
• Creation of an Anti-Smoking Clinic: In collaboration with the Anti-Smoking Clinic, a fully equipped clinic was created and operated for a period of three years in Al Hasa governorate at a cost of SR 4,500,000.00. The agree-ment for creation of this clinic was signed with HRH Prince Sattam bin Abdulaziz.
• Providing residence and medical equipment for needy patients, this was made in conjunction with the pa-tient’s friends committee, where 600 machines have been provided for the patients on a yearly basis, as well as furnished residence for the needy patients for SR 5,000,000.
• Patient Evacuation Scheme: In collaboration with King Fahad Medical City, round trip evacuation services were provided to 600 patients at a cost of SR 500,000 annually.
Summary of Year’s Activity
26
• Mobile Diabetic Blindness Combat Campaign Scheme: In collaboration with Patient Care Society, a mobile health campaign was launched in all regions of the Kingdom to combat diabetic blindness at a cost of SR 4,000,000.
• Orientation program for children covered by Social Security: A contract was signed with the Ministry of Social Welfare to train 40 boys and girls in banking services and subsequently employing them with the Bank at an approximate cost of SR 2,000,000.
Housing
In collaboration with Prince Salman’s Charitable Housing Project, 20 residential units were financed in Muzahi-mia and Kharj governorates at a cost of SR 6,000,000. The agreement was signed with HRH Prince Salman bin Abdulaziz.
Orphan Welfare
In coordination with the Ministry of Social Welfare, the Bank formed an Orphan Welfare Fund in which the Bank matches investments dedicated to orphan welfare equivalent to SR 6,000,000.
Awards and Certificates of Appreciation
The Bank was granted the following awards and certificates of appreciation:
• Distinction in Retail Financial Services;• Asian Banker, Best Retail Bank in the GCC Region;• Asian Banker, Best Retail Bank in Saudi Arabia:• Euro money Award for Financing of Financial Projects: Best financing deal for financing a transportation project in the Middle East – Red Sea Port Station• Euro money Award for Project Financing: Best financing deal for financing a communications project in the
Middle East – Ittihad Itisalat Company (Mobily) • Euro money Award for Project Financing: Best financing deal for financing a IWPP project in the Middle
East – Jubail Water and Power• Islamic Financing News Award: Best Ijara Financing – Red Sea Port Station• Islamic Financing News Award: Best Islamic Financing – Red Sea Port Station• Islamic Financing News Award: Best Innovative Financing – Red Sea Port Station• Islamic Financing News Award: Best financing deal in Saudi Arabia - Ittihad Itisalat Company (Mobily)• Islamic Financing News Award: Best Tawarruq Financing – Kuwait Mobile Telephone Company• Euro money Award for Islamic Financing: Best financing deal of the year – Jubail Water and Power• Euro money Award for Islamic Financing: Best financing deal of the year – Shoaiba Plant• Euro money Award for Islamic Financing: Best financing deal of the year – Shaqiq Water and Power• PFI Best financing deal of the year - Jubail Water and Power
Summary of Year’s Activity
27
CONSOLIDATED FINANCIAL STATEMENTS
29
AL RAJHI BANKING AND INVESTMENT CORPORATIONCONSOLIDATED BALANCE SHEET AS
AT 31 DECEMBER 2008 AND 2007 (SR ‘000)
(SR ‘000)
Notes 2008 2007
ASSETS
Cash 3 3,629,777 3,486,046
Balances with Saudi Arabian Monetary Agency (“SAMA”) 4 7,672,252 9,655,153
Due from banks 5 2,891,765 790,645
Investments, net:
Mutajara 67,456,290 41,586,899
Installment sale 59,070,283 55,989,774
Istisnaa 1,290,412 1,630,014
Murabaha 13,019,556 4,078,388
Other 7 3,166,983 1,590,370
Total investments, net 6 144,003,524 104,875,445
Customer debit current accounts, net 8 754,410 909,918
Property and equipment, net 9 2,868,160 2,591,101
Other assets, net 10 3,109,913 2,578,174
Total Assets 164,929,801 124,886,482
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Due to banks 11 7,901,630 2,593,090
Syndicated murabaha financing from banks 12 1,875,000 1,875,000
Customer deposits 13 116,611,043 89,725,167
Other customer accounts (including margins
on letters of credit, third party funds,
certified checks and transfers) 3,686,576 3,030,969
Other liabilities 14 7,823,753 4,056,144
Total liabilities 137,898,002 101,280,370
Shareholders’ equity
Share capital 15 15,000,000 13,500,000
Statutory reserve 16 8,727,370 7,096,219
General reserve 16 - 197,650
Retained earnings 121,286 1,588,326
Proposed gross dividends 23 3,183,143 1,223,917
Total shareholders’ equity 27,031,799 23,606,112
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 164,929,801 124,886,482
The accompanying notes from 1 to 39 form an integral part of these consolidated financial statements.
Consolidated Financial Statements
30
AL RAJHI BANKING AND INVESTMENT CORPORATIONCONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED
DECEMBER 31, 2008 AND 2007 (SR ‘000)
(SR ‘000)
Notes 2008 2007
INCOME:
Investments income (expense):
Mutajara 3,048,554 2,797,651
Installment sale 5,740,385 5,467,749
Istisnaa 150,913 194,092
Murabaha 483,420 108,089
Other (2,222) 15,535
Total income from investments 9,421,050 8,583,116
Income paid to customers and banks on time investments (819,453) (751,593)
Income paid on syndicated murabaha financing from banks (107,156) (109,711)
Income from investments, net 19 8,494,441 7,721,812
Mudaraba fees 76,489 71,249
Fees from banking services, net 20 1,241,267 980,625
Exchange income, net 483,459 470,872
Other operating income 21 279,611 76,538
Total operating income 10,575,267 9,321,096
EXPENSES:
Salaries and employee related benefits 1,648,657 1,451,180
Rent and premises related expenses 136,830 117,918
Impairment charge for investments and other 6-2 & 17 1,274,419 443,240
Depreciation and amortization 383,401 288,159
Other general and administrative expenses 604,281 567,831
Board of directors’ remuneration 29 3,075 3,111
Total operating expenses 4,050,663 2,871,439
NET INCOME 6,524,604 6,449,657
Weighted average number of shares outstanding 15 & 22 1,500 million 1,500 million
EARNINGS PER SHARE (IN SR) 22 4,35 4.30
The accompanying notes from 1 to 39 form an integral part of these consolidated financial statements.
Consolidated Financial Statements
31
AL RAJHI BANKING AND INVESTMENT CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’
EQUITY FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007 (SR ‘000)
(SR ‘000)
Notes Share capital
Statutoryreserve
General reserve
Retained earnings
Proposed gross
dividends
Total
2008
Balance at January 1, 2008 13,500,000 7,096,219 197,650 1,588,326 1,223,917 23,606,112
Dividends paid for prior year - - - - (675,000) (675,000)
Bonus share issue 15 1,500,000 - - (1,500,000) - -
Transfer to general reserve 16 - - 88,326 (88,326) - -
Net income - - - 6,524,604 - 6,524,604
Transfer to statutory reserve - 1,631,151 - (1,631,151) - -
Interim dividends paid for the first half of the current year 23 - - - (1,875,000) - (1,875,000)
Proposed gross dividends 16&23 - - (285,976) (2,897,167) 3,183,143 -
Transfer to accrued zakat 23 - - - - (548,917) (548,917)
Balance at December 31, 2008 15,000,000 8,727,370 - 121,286 3,183,143 27,031,799
2007
Balance at January 1, 2007 6,750,000 5,483,805 1,400,000 5,547,650 998,021 20,179,476
Dividends paid for prior year - - - - (675,000) (675,000)
Bonus share issue 15 6,750,000 - (1,202,350) (5,547,650) - -
Net income - - - 6,449,657 - 6,449,657
Transfer to statutory reserve 16 - 1,612,414 - (1,612,414) - -
Interim dividends paid for the first half of the current year - - - (2,025,000) - (2,025,000)
Proposed gross dividends 23 - - - (1,223,917) 1,223,917 -
Transfer to accrued zakat 23 - - - - (323,021) (323,021)
Balance at December 31, 2007 13,500,000 7,096,219 197,650 1,588,326 1,223,917 23,606,112
The accompanying notes from 1 to 39 form an integral part of these consolidated financial statements.
Consolidated Financial Statements
32
AL RAJHI BANKING AND INVESTMENT CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 2008 AND 2007 (SR ‘000)
(SR ‘000)
2008 2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 6,524,604 6,449,657
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 383,401 288,159
Impairment charge for investments and other 1,274,419 443,240
Net (increase) decrease in operating assets:
Statutory deposit with SAMA (Note 4) (593,227) (2,682,599)
Customer debit current accounts 70,074 (197,531)
Other assets (572,017) (341,685)
Net increase (decrease) in operating liabilities:
Due to banks 5,308,540 (880,156)
Customer deposits 26,885,876 16,327,187
Other customer accounts 655,607 546,527
Other liabilities 3,171,695 (73,068)
Net cash provided by operating activities 43,108,972 19,879,731
CASH FLOWS FROM INVESTING ACTIVITIES:
Mutajara (26,171,605) (7,342,682)
Installment sale (3,878,615) (4,899,689)
Istisnaa 339,602 534,139
Murabaha (8,972,836) (2,873,189)
Other investments (1,576,613) (1,159,486)
Purchase of property and equipment (630,182) (885,451)
Net cash used in investing activities (40,890,249) (16,626,358)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (2,550,000) (2,700,000)
Net cash used in financing activities (2,550,000) (2,700,000)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (331,277) 553,373
Cash and cash equivalents at the beginning of year 6,853,268 6,299,895
Cash and cash equivalents at the end of year (Note 24) 6,521,991 6,853,268 The accompanying notes from 1 to 39 form an integral part of these consolidated financial statements.
Consolidated Financial Statements
33
NOTES TO THE FINANCIAL STATEMENTS
35
AL RAJHI BANKING AND INVESTMENT CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
1. GENERAL
a) Incorporation and operations
Al Rajhi banking and investment corporation, a Saudi Joint Stock Company, (the “Bank”), was formed and licensed pursuant to Royal Decree No. M/59 dated 3 Dhul Qadah 1407H (corresponding to June 29, 1987) and in accordance with Article 6 of the Council of Ministers’ Resolution No. 245, dated 26 Shawal 1407H (corresponding to June 23, 1987).
The Bank operates under Commercial Registration No. 1010000096 and its Head Office is located at the following address:
Al Rajhi BankP.O. Box 28Riyadh 11411Kingdom of Saudi Arabia
The objectives of the Bank are to carry out banking and investment activities in accordance with its Articles of Association and By-Laws, the Banking Control Law and the Council of Ministers’ Resolution referred to above.
The Bank is engaged in banking and investment activities inside and outside the Kingdom of Saudi Arabia for its own account and on behalf of others through 451 branches including the branches outside the kingdom as at 31 December 2008 (2007: 421 branches) and number of employees 8,299 as at December 31, 2008 (2007: 8,365 employees). The Bank has established a number of wholly or substantially owned subsidiaries as set out in Note 2-c.
b) Shari’a Authority
As a commitment from the Bank for its activities to be in compliance with Islamic Shari’a legislations, the Bank has, since inception, established a Shari’a Authority to ascertain that the Bank’s activities are subject to its approval and control. The Shari’a Authority had reviewed several of the Bank’s activities and issued the required decisions thereon. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies used in preparing these consolidated financial statements are set out below. The accounting policies used in the preparation of these consolidated financial statements are consistent with those of the prior year.
a) Basis of Presentation
The consolidated financial statements are prepared in accordance with the Accounting Standards for Financial Institutions promulgated by the Saudi Arabian Monetary Agency (“SAMA”) and International Financial Reporting Standards (IFRS).
The Bank also prepares its consolidated financial statements to comply with the Banking Control Law and the Regulations of Companies in the Kingdom of Saudi Arabia.
The consolidated financial statements are prepared under the historical cost convention as modified for the measurement at fair value of investments held as fair value through income statement (FVIS).
The consolidated financial statements are presented in Saudi Riyal (SR) and are rounded off to the nearest thousand.
Notes to the Financial Statements
36
b) Critical accounting judgments, estimates and assumptions
The preparation of consolidated financial statements in conformity with IFRS requires the use of certain critical accounting estimates and assumptions that affect the reported amounts of assets and liabilities. It also requires management to exercise its judgments in the process of applying the Bank’s accounting policies. Such estimates, assumptions and judgments are continually evaluated and are based on historical experience and other factors, including obtaining professional advice and expectations of future events that are believed to be reasonable under the circumstances. c) Basis of the preparation of the consolidated financial statements
These consolidated financial statements include the accounts of Al Rajhi Bank and its subsidiaries in which the Bank’s shareholdings exceed 50% of their share capital and have the power to govern their financial and operational policies.
Significant balances and transactions between the Bank and its subsidiaries and those among subsidiaries are eliminated upon consolidation.
Subsidiaries are consolidated from the date on which control is transferred to the Bank till the date control ceases. The financial statements of the subsidiaries are prepared for the same reporting year as that of the Bank, using consistent accounting policies.
The consolidated subsidiaries as at December 31 are as follows:
Shareholding %
SUBSIDIARIES 2008 2007
SPC Limited - British Virgin Islands 99% 99%
Arpent VAT Services Ltd. - UK 100% 100%
Al Rajhi Investment Corporation Limited - London 100% 100%
ARA 1 Company Limited – Jersey 99% 99%
Al Rajhi Company for Development Limited - Riyadh 99% 99%
Al Rajhi Corporation Limited-Malaysia 100% 100%
Al Rajhi Financial Services Company 99% 99%
To comply with Capital Market Authority requirements, in 2007 the Bank established a new company for brokerage business under the name of “Al Rajhi Financial Services Company” by spinning off all the brokerage business from the Bank.
d) Zakat
Zakat is calculated based on the zakat rules and regulations in the Kingdom of Saudi Arabia and is considered as a liability on the shareholders to be deducted from dividends. In case of any differences between the Bank’s calculation and the Department of Zakat and Income Tax’s (DZIT) assessment, such differences will be charged to the general reserve.
e) Trade date
All regular purchases and sales of financial assets are recognized on the trade date (i.e. the date that the Bank commits to purchase or sell the assets).
Regular way purchases or sales of financial assets require delivery of those assets within the time frame generally established by regulation or convention in the market place.
Notes to the Financial Statements
37
f) Foreign currencies
Transactions in foreign currencies are translated into Saudi Riyals at exchange rates prevailing on the dates of the transactions.
Monetary assets and liabilities at the year-end, denominated in foreign currencies, are translated into Saudi Riyals at exchange rates and prices of prevailing at the consolidated balance sheet date.
Realized and unrealized gains or losses on exchange are credited or charged to the consolidated statement of income.
The monetary assets and liabilities of foreign subsidiaries are translated at rates of exchange prevailing at the consolidated balance sheet date.
The statements of income of foreign subsidiaries are translated at the average exchange rates for the year.
Exchange differences, if material, arising on monetary items that form part of net investments in subsidiaries, are included as a separate component in the shareholders’ equity.
g) Offsetting of financial assets and liabilities
Financial assets and liabilities are offset and are reported net in the consolidated balance sheet when there is a legally enforceable right to set off the recognized amounts, and when the Bank intends to settle on a net basis, or to realize the asset and settle the liability simultaneously.
h) Revenue recognition
• Income from mutajara, murabaha, musharaka after the sale of shares, installment sale and istisnaa financing, is recognized based on effective yield basis on the outstanding balances. No additional income is charged on the overdue balances.
• Income from istisnaa arises from execution and financing of projects. Income from the executed part of istisnaa contract under progress is recognized using the percentage of completion method.
However, if the cost to complete the contract cannot be reasonably estimated, then income is recognized upon the completion of the contract. Such income is included under istisnaa income in the consolidated statement of income.
• Fees from banking services are recognized as and when the related services are rendered on the accrual basis of accounting.
i) Investments and provisions for impairment,
The Bank classifies its major investments as follows:
i. Held at amortized cost - such investments are measured at amortized cost, and comprise mutajara, installment sale, istisnaa and Murabaha accounts balances.
ii. Held as FVIS - such investments are measured at fair value, and comprise real estate, mutual funds, and other investments.
Investments held at amortized cost are initially recognized at cost and subsequently measured at cost less any amounts written off, and provision for impairment.
Investments held as FVIS are initially recognized at cost and are subsequently measured at fair value. Any change in fair value is charged to the consolidated statement of income. Investments, where fair value cannot be reliably measured, are carried at cost.
Provision for investments, including those arising from sovereign credit risk exposure, if any, are determined according to management’s assessment of the adequacy of the recorded provision on a periodic basis. Such assessment takes into account the composition and volume of the related accounts, the historical pattern of losses, the credit rating of the customers, and the economic environment in which the customers operate.
Notes to the Financial Statements
38
For presentation purposes in the consolidated financial statements, provision for investments is deducted from the related investment account.
j) Impairment of financial assets
An assessment is made at each consolidated balance sheet date to determine whether there is objective evidence
that a financial asset or a group of financial assets may be impaired.
If such evidence exists, the estimated recoverable amount of that asset is determined and any impairment loss,
based on the net present value of the future anticipated cash flows, is recognized for changes in the asset’s
carrying amount.
The carrying amount of the financial assets held at amortized cost, is adjusted either directly or through the use
of a provision account, and the amount of the adjustment is included in the consolidated statement of income.
Specific provisions are evaluated individually for all different types of investments. Considerable judgement by
management is required in the estimation of the amount and timing of future cash flows when determining the
level of provision required. Such estimates are necessarily based on assumptions about several factors involving
varying degrees of judgment and uncertainty, and actual results may differ resulting in future changes to such
provisions.
In addition to the specific provisions described above, the Bank also makes collective impairment provisions,
which are evaluated on a group basis and are created for losses, where there is objective evidence that a group of
investments has greater risk of impairment than when originally initiated.
The amount of the provision is estimated based on the historical default patterns of the investment counter-
parties as well as their credit ratings, taking into account the current economic climate.
The criteria that the Bank uses to determine that there is objective evidence of an impairment loss include:
• Delinquency in contractual payments of principal or profit.
• Cash flow difficulties experienced by the customer.
• Breach of repayment covenants or conditions.
• Initiation of bankruptcy proceedings against the customer.
• Deterioration of the customer’s competitive position.
• Deterioration in the value of collateral.
When an investment amount is uncollectable, it is written off against the related provision for impairment. Such
investments are written off after all necessary procedures have been completed and the amount of the loss has
been determined.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related
objectively to an event occurring after the impairment was recognized (such as an improvement in the customer’s
credit rating), the previously recognized impairment loss is reversed by adjusting the provision account. The
amount of the reversal is recognized in the income statement in impairment charge for investments.
Financial assets are written off only in circumstances where effectively all possible means of recovery have been
exhausted.
Notes to the Financial Statements
39
k) De-recognition of financial assets and liabilities
A financial asset is derecognized when the contractual rights to the cash flows from the financial asset expire or
if the bank has not retained control on the financial asset.
A financial liability can be only derecognized when it is extinguished, that is when the obligation specified in the
contract is either discharged, cancelled or expires.
l) Customer debit current accounts
All non-commission bearing customer debit current accounts are stated at cost, less doubtful amounts and
provision for impairment, if any.
m) Property and equipment
Property and equipment are stated at cost, net of accumulated depreciation and amortization. Land is not
depreciated. The cost of other property and equipment is depreciated or amortized using the straight-line
method over the estimated useful lives of the assets, as follows:
Leasehold land improvements Over the period of the lease
Buildings 33 years
Leasehold building improvements 3 years
Equipment and furniture 3 to 10 years.
n) Customer deposits
Non-commission bearing customer deposits are initially recognized at cost, being the fair value of the
consideration received, and are subsequently measured at amortized cost.
o) Provisions
Provisions are recognized when the Bank has present legal, or constructive, obligation as a result of past events,
it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation,
and a reliable estimate of the amount of the obligation can be made.
p) Guarantees
In ordinary course of business, the Bank gives financial guarantees, consisting of letters of credit, guarantees
and acceptances. Financial guarantees are initially recognized in the financial statements at fair value in other
liabilities, being the value of the premium received.
Subsequent to the initial recognition, the Bank’s liability under each guarantee is measured at the higher of the
amortized premium and the best estimate of expenditure required to settle any financial obligations arising as
a result of guarantees.
Any increase in the liability relating to the financial guarantee is taken to the income statement in “credit loss
expenses”.
Notes to the Financial Statements
40
The premium received is recognized in the income statement in “Net fees and commission income” on a straight
line basis over the life of the guarantee.
q) Accounting for leases
Leases entered into by the Bank as a lessee are all operating leases. Accordingly, payments are charged to the consolidated statement of income on straight-line basis over the period of the lease. Leases entered into by the Bank as a lessor are all operating leases.
r) Cash and cash equivalents
For the purposes of the consolidated statement of cash flows, cash and cash equivalents are defined as those
amounts included in cash and precious metals, balances with SAMA (excluding the statutory deposit) and due
from banks maturing within ninety days on acquisition.
s) Special commission excluded from the consolidated statement of income
In accordance with the Shari’a Authority’s resolutions, special commission income received by the Bank is
excluded from the determination of income, and is recorded as other liabilities in the consolidated balance sheet
to be paid as charities.
t) Mudaraba funds
The Bank carries out mudaraba transactions on behalf of its customers, and are treated by the Bank as being
restricted investments. These are included as off balance sheet items. The Bank’s share of profits from managing
such funds is included in the consolidated statement of income.
u) Investment management services
The Bank provides investment management services to its customers, which include management of certain
mutual funds. Assets held in trust or in a fiduciary capacity are not treated as assets of the Bank and, accordingly,
are not included in the consolidated financial statements.
3. CASH
Cash as of December 31 comprise the following:
(SR ‘000)
2008 2007
Cash on hand 3,629,138 3,485,408
Precious metals 639 638
Total 3,629,777 3,486,046
Notes to the Financial Statements
41
4. BALANCES WITH SAMA
The balances with SAMA as of December 31 comprise the following:
(SR ‘000)
2008 2007
Statutory deposit 7,671,803 7,078,576
Current accounts 449 2,576,577
Total 7,672,252 9,655,153
In accordance with the Banking Control Law and Regulations issued by SAMA, the Bank is required to maintain a statutory deposit with SAMA at stipulated percentages of its customer deposits and other customer accounts, calculated at the end of each Gregorian month.
5. DUE FROM BANKS
Due from banks as of December 31, comprise current accounts as follows:
(SR ‘000)
2008 2007
Inside the Kingdom 2,500 1,500
Outside the Kingdom 2,889,265 789,145
Total 2,891,765 790,645
6. INVESTMENTS, NET
6 – 1 Investments
a) Investments, net as of December 31, comprise the following:
(SR‘000)
2008 2007
Gross Provision Net Net
Held at amortized cost
Mutajara 68,112,321 (656,031) 67,456,290 41,586,899
Installment sale 61,336,735 (2,266,452) 59,070,283 55,989,774
Istisnaa 1,290,412 - 1,290,412 1,630,014
Murabaha 13,534,508 (514,952) 13,019,556 4,078,388
Total 144,273,976 (3,437,435) 140,836,541 103,285,075
Held as FVIS
Other (see Note 7) 3,166,983 - 3,166,983 1,590,370
Total 3,166,983 - 3,166,983 1,590,370
Grand total 147,440,959 (3,437,435) 144,003,524 104,875,445
Notes to the Financial Statements
42
b) The net investments by location, inside and outside the Kingdom, as of December 31 are as follows:
(SR‘000)
2008 2007
Description Mutajara Installment sale
Istisnaa Murabaha Other Total Total
Inside the Kingdom 35,728,667 61,336,735 1,290,412 8,846,274 2,123,702 109,325,790 99,408,907
Outside the Kingdom 32,383,654 - - 4,688,234 1,043,281 38,115,169 8,880,074
Total 68,112,321 61,336,735 1,290,412 13,534,508 3,166,983 147,440,959 108,288,981
Provision (656,031) (2,266,452) - (514,952) - (3,437,435) (3,413,536)
Net 67,456,290 59,070,283 1,290,412 13,019,556 3,166,983 144,003,524 104,875,445
The effective yield on investments amounted to 6.8% for the year ended December 31, 2008 (2007: 7.9%).Investments held at amortized cost are disclosed net of cumulative deferred income amounting to SR 24,324 million as at December 31, 2008 (2007: SR 23,537million).
Other investments include unquoted equity investments amounting to SR 173 million as at December 31, 2008 (2007: SR 40 million) carried at cost as their fair values cannot be reliably measured. Also, they include investments in mutual funds amounting to SR 162 million as at December 31, 2008 (2007: SR 130 million) carried at fair value (Note 7).
Istisnaa:
At the beginning of 1993, the Bank signed istisnaa contracts with the Ministry of Education, under the guarantee of the Ministry of Finance, for the construction of 400 schools within approximately 24 months.
The value of the contracts is payable in quarterly installments over 10 years from the date of the initial handover of each school, or the date of the completion of the construction contract period, whichever comes later.
As of December 31, 2008 and 2007, the Bank had finally handed over 399 schools. The outstanding balance on these contracts as at December 31, 2008 amounted to SR 12,563 thousand (2007: SR 13,123 thousand).
The istisnaa balance as shown in the consolidated balance sheet as at December 31, 2008, also includes an amount of SR 1,276,761 thousand (2007: SR 1,616,891 thousand), representing the cost of erection of power plant in the Kingdom of Saudi Arabia under an istisnaa contract with the Saudi Electricity Company.
The project was completed in November 2002, and the balance is payable by the Saudi Electricity Company in monthly installments over 10 years, with effect from January 15, 2002.
Notes to the Financial Statements
43
c) The net investments concentration risks and the related provision, by major economic sectors at December 31, are as follows:
2008 (SR‘000)
Description Performing Non-Performing
Provision Net
Banks and other financial institutions 7,718,886 - - 7,718,886
Commerce 35,951,089 453,811 (453,811) 35,951,089
Industry 5,536,800 - - 5,536,800
Public (Government) 25,053,646 9,420 (8,933) 25,054,133
Services 3,520,339 - - 3,520,339
Agriculture and fishing 1,772,022 - - 1,772,022
Building and construction 8,133,026 24,954 (16,827) 8,141,153
Personal 52,988,860 1,309,438 (952,409) 53,345,889
Other 4,968,668 - - 4,968,668
Total 145,643,336 1,797,623 (1,431,980) 146,008,979
Additional portfolio provision (2,005,455) (2,005,455)
Balance (3,437,435) 144,003,524
2007 (SR‘000)
Description Performing Non-Performing
Provision Net
Banks and other financial institutions 7,892,765 - - 7,892,765
Commerce 17,462,853 1,249,718 (823,221) 17,889,350
Industry 3,653,088 - - 3,653,088
Public (Government) 11,504,952 8,204 - 11,513,156
Services 2,645,657 - - 2,645,657
Agriculture and fishing 1,247,092 - - 1,247,092
Building and construction 4,914,101 16,321 (16,321) 4,914,101
Personal 53,189,979 1,816,430 (1,717,572) 53,288,837
Other 2,650,341 37,480 (37,480) 2,650,341
Total 105,160,828 3,128,153 (2,594,594) 105,694,387
Additional portfolio provision (818,942) (818,942)
Balance (3,413,536) 104,875,445
d) The table below depicts the categories of investments as shown in the balance sheet as per main business segments at December 31, excluding other investments:
(SR‘000)
2008 Retail Corporate Treasury Total
Mutajara - 36,728,640 31,383,681 68,112,321
Installment sale 57,607,442 3,729,293 - 61,336,735
Istisnaa - 1,290,412 - 1,290,412
Murabaha 3,938,452 8,255,348 1,340,708 13,534,508
Total 61,545,894 50,003,693 32,724,389 144,273,976
Less: Provision (2,756,828) (680,607) - (3,437,435)
Investment, net 58,789,066 49,323,086 32,724,389 140,836,541
Notes to the Financial Statements
44
(SR‘000)
2007 Retail Corporate Treasury Total
Mutajara - 22,977,693 18,963,022 41,940,715
Installment sale 56,760,158 1,741,372 - 58,501,530
Istisnaa - 1,630,014 - 1,630,014
Murabaha 3,581,861 1,007,011 - 4,588,872
Total 60,342,019 27,356,090 18,963,022 106,661,131
Less: Provision (2,997,664) (277,633) (100,759) (3,376,056)
Investments, net 57,344,355 27,078,457 18,862,263 103,285,075
e) The table below summarizes Investment balances at December 31, that is neither past due nor impaired, past due but not impaired and impaired, except for other investments as per the main business segments in the Bank: -
(SR‘000)
2008 Neither past due nor
impaired
Past due but not impaired
Impaired Total Provision Net
Retail 59,716,086 34,331 1,795,477 61,545,894 (2,756,828) 58,789,066
Corporate 48,994,500 71,394 937,799 50,003,693 (680,607) 49,323,086
Treasury 32,724,389 - - 32,724,389 - 32,724,389
Total 141,434,975 105,725 2,733,276 144,273,976 (3,437,435) 140,836,541
(SR‘000)
2007 Neither past due nor
impaired
Past due but not impaired
Impaired Total Provision Net
Retail 58,021,648 34,536 2,285,835 60,342,019 (2,997,664) 57,344,355
Corporate 26,550,148 101,863 704,079 27,356,090 (277,633) 27,078,457
Treasury 18,862,263 - 100,759 18,963,022 (100,759) 18,862,263
Total 103,434,059 136,399 3,090,673 106,661,131 (3,376,056) 103,285,075
Investments past due for less than 90 days are not treated as impaired, unless other available information provides otherwise.
Notes to the Financial Statements
45
f) The tables below depicts the quality of investments past due (up to 90 days) but not impaired at 31 December:
(SR‘000)
2008 Retail Corporate Treasury Total
Standard 28,137 64,884 - 93,021
Special mention 6,194 6,510 - 12,704
Total 34,331 71,394 - 105,725
(SR‘000)
2007 Retail Corporate Treasury Total
Standard 32,189 90,003 - 122,192
Special mention 2,347 11,860 - 14,207
Total 34,536 101,863 - 136,399
g) The tables below set out the aging of investments past due but not impaired as of 31 December:
(SR‘000)
2008 Retail Corporate Treasury Total
Age
up to 30 days 19,722 58,480 - 78,202
30 -60 days 8,415 6,404 - 14,819
60-90 days 6,194 6,510 - 12,704
Total 34,331 71,394 - 105,725
Fair value of collateral - 37,464 - 37,464
(SR‘000)
2007 Retail Corporate Treasury Total
Age
up to 30 days 26,409 74,907 - 101,316
30 -60 days 5,780 15,096 - 20,876
60-90 days 2,347 11,860 - 14,207
Total 34,536 101,863 - 136,399
Fair value of collateral - 92,860 - 92,860
Upon initial recognition of Investments, the fair value of collateral is based on valuation techniques commonly used for the corresponding assets. In subsequent periods, the fair value is updated by reference to market price.
Notes to the Financial Statements
46
h) The table below sets out gross balances of individually impaired Investments, together with the fair value of related collaterals held by the Bank as at 31 December:
(SR‘000)
2008 Retail Corporate Treasury Total
Individually impaired loans - 937,799 - 937,799
Fair value of collateral - 93,310 - 93,310
(SR‘000)
2007 Retail Corporate Treasury Total
Individually impaired loans - 704,079 - 704,079
Fair value of collateral - 157,125 - 157,125
6 – 2 Impairment charge for investments:
The movement in the impairment provision for Investments for the years ended 31 December is as follows:
(SR‘000)
2008 Retail Corporate Treasury Total
Balance at the beginning of the year 2,997,664 315,113 100,759 3,413,536
Provided during the year 736,884 402,974 - 1,139,858
Recoveries of amounts previously provided - - (100,759) (100,759)
Disposals (bad debts written off) (977,720) (37,480) - (1,015,200)
Balance at the end of the year 2,756,828 680,607 - 3,437,435
(SR‘000)
2007 Retail Corporate Treasury Total
Balance at the beginning of the year 2,293,633 276,253 199,167 2,769,053
Provided during the year 772,296 38,860 - 811,156
Recoveries of amounts previously provided - - (98,365) (98,365)
Disposals (bad debts written off) (68,265) - (43) (68,308)
Balance at the end of the year 2,997,664 315,113 100,759 3,413,536
7. OTHER INVESTMENTS, NET
Other investments, net comprise the following as of December 31:
(SR‘000)
2008 2007
Investments in land, real estate, vehicles and others 2,126,299 1,457,313
Investment in sukuk 705,785 -
Equity investments 172,978 40,150
Investments in mutual funds 161,921 130,387
Total 3,166,983 1,627,850
Less: provision - (37,480)
Other investments, net 3,166,983 1,590,370
Notes to the Financial Statements
47
8. CUSTOMER DEBIT CURRENT ACCOUNTS, NET
Customer debit current accounts, net comprise the following as of December 31:
(SR‘000)
2008 2007
Customer debit current accounts (inside the kingdom) 1,267,305 1,526,609
Less: provision (see Note 17) (512,895) (616,691)
Customer debit current accounts, net 754,410 909,918
9. PROPERTY AND EQUIPMENT, NET
Property and equipment, net comprise the following as of December 31:
(SR‘000)
Land Leasehold land
improvements
Buildings Leasehold building
improvements
Equipment and
furniture
Total
Cost
At December 31, 2007 1,261,335 2,328 700,536 287,648 1,788,386 4,040,233
Additions 16,926 - 260,812 145,676 206,768 630,182
Disposals - - - - (7,072) (7,072)
At December 31, 2008 1,278,261 2,328 961,348 433,324 1,988,082 4,663,343
Accumulated epreciation & amortization
At December 31, 2007 - 1,236 141,384 67,671 1,238,841 1,449,132
Charge for the year - 61 12,435 100,588 240,039 353,123
Disposals - - - - (7,072) (7,072)
At December 31, 2008 - 1,297 153,819 168,259 1,471,808 1,795,183
Net book value
At December 31, 2008 1,278,261 1,031 807,529 265,065 516,274 2,868,160
At December 31, 2007 1,261,335 1,092 559,152 219,977 549,545 2,591,101
Buildings include work-in-progress amounting to SR 443 million as at December 31, 2008 (2007: SR 307 million).
The Bank has transferred the legal ownership of the assets acquired from Al Rajhi Company for Currency Exchange and Commerce (under liquidation), with the exception of certain assets with a net book value approximating SR 5.8 million as at December 31, 2008 (2007: SR 5.9 million), which are currently in the process of being transferred to the Bank.
Notes to the Financial Statements
48
10. OTHER ASSETS, NET
Other assets, net comprise the following as of December 31:
(SR‘000)
2008 2007
Accrued income on mutajara investments 1,252,692 1,059,039
Accrued income on murabaha investments 85,853 32,835
Accrued income on other investments 134,556 78,991
Advances to others 361,282 315,053
Cheques under collection 573,740 447,028
Other receivables 394,064 176,795
Others 384,844 543,461
Total 3,187,031 2,653,202
Less: provision (see Note 17) (77,118) (75,028)
Other assets, net 3,109,913 2,578,174
11. DUE TO BANKS
Due to banks comprise the following as of December 31:
(SR‘000)
2008 2007
Current accounts 3,806,705 2,478,209
Banks’ time investments 4,094,925 114,881
Total 7,901,630 2,593,090
Due to banks by location, inside and outside the Kingdom, as of December 31, are as follows:
(SR‘000)
2008 2007
Inside the Kingdom 2,217,936 142,751
Outside the Kingdom 5,683,694 2,450,339
Total 7,901,630 2,593,090
12. SYNDICATED MURABAHA FINANCING FROM BANKS
Syndicated murabaha financing from banks represents facilities in the amount of USD 500 million (SR 1,875 million) for three years obtained from consortium of banks and matures on May 2009. The facilities accrue profit which is payable on six semi-annual installments over three years. The final sixth installment of profit is payable together with the principal amount according to the facility agreement.
Notes to the Financial Statements
49
13. CUSTOMER DEPOSITS
Customer deposits by currency comprise the following as of December 31:
(SR‘000)
2008 2007
Saudi Riyals 111,589,544 87,284,828
Foreign currencies 5,021,499 2,440,339
Total 116,611,043 89,725,167
Customer deposits by type comprise the following as of December 31:
(SR‘000)
2008 2007
Demand deposits 98,907,914 81,210,589
Customer time investments 17,703,129 8,514,578
Total 116,611,043 89,725,167
14. OTHER LIABILITIES
Other liabilities comprise the following as of December 31:
(SR‘000)
2008 2007
Due to SAMA 3,041,000 -
Accounts payable 2,418,625 1,988,326
Provision for employees’ end of service benefits 474,822 413,663
Charities (see Note 32) 64,810 55,449
Other (see Note 17) 1,824,496 1,598,706
Total 7,823,753 4,056,144
The balance due to SAMA represents the amount utilized by the bank for short term period as per the agreement with SAMA.
15. SHARE CAPITAL
The shareholders have agreed in the Extraordinary General Assembly meeting held on 13 Safar 1428H (corresponding to March 3, 2007), to increase the share capital of the Bank from SR 6,750 million to SR 13,500 million by transferring SR 6,750 million from the retained earnings and general reserve through the issuance of one bonus share for each share held.
At the Extraordinary General Assembly meeting held on 17 Safar 1429H (corresponding to February 24, 2008), the shareholders approved an increase in the share capital of the Bank from SR 13,500 million to SR 15,000 million, by transferring SR 1,500 million from the retained earnings through the issuance of one -for nine bonus share dividend.
Notes to the Financial Statements
50
16. STATUTORY AND GENERAL RESERVES
The Banking Control Law in Saudi Arabia and the Articles of Association of the Bank require a transfer to statutory reserve at a minimum of 25% of net income for the year.
The Bank may discontinue such transfers when the reserve equals the paid up share capital. This reserve is presently not available for distribution.
In addition, the Bank makes an appropriation to general reserve for general banking risks, zakat and others, if any. At the Extraordinary General Assembly meeting held on 17 Safar 1429H (corresponding to February 24, 2008), the shareholders approved to transfer SR 88.3 million from the retained earnings to the general reserve.
The board of directors in its meeting held on January 19, 2009 proposed transferring 286 Million from the general reserve to the retained earning. 17. PROVISION FOR DOUBTFUL ACCOUNTS AND OTHER
The movements in the provision for doubtful accounts and other for the years ended December 31, are summarized as follows:
(SR‘000)
2008 2007
Balance at the beginning of the year 1,287,469 1,646,757
Additions (reversed provision) 235,320 (269,551)
Disposals, net (335,303) (89,737)
Balance at the end of the year 1,187,486 1,287,469
The provision for doubtful accounts and other as at December 31, 2008 includes an amount of SR 512,895 thousand (2007: SR 616,691thousand) netted off from customer debit current accounts, and SR 597,473 thousand (2007: SR 590,051 thousand) included in other liabilities, and an amount of SR 77,118 thousand (2007: SR 75,028 thousand) netted off from other assets, and SR 5,699 thousand netted off from due from banks for 2007.
18. COMMITMENTS AND CONTINGENCIES
a) Legal proceedings
As at December 31, 2008, there were legal proceedings outstanding against the Bank. Provisions have been made for some of these legal cases based on the assessment of the Bank’s legal advisors.
b) Capital commitments
As at December 31, 2008, the Bank had capital commitments of SR 95.5 million (2007: SR 110.2 million) relating to contracts for computer software update and development.
c) Credit related commitments and contingencies
The primary purpose of these instruments is to ensure that funds are available to customers as required. Credit related commitments and contingencies mainly comprise of letters of guarantee, standby letters of credit, acceptances and unused commitments to extend credit.
Guarantees and standby letters of credit, which represent irrevocable assurances that the Bank will make payments in the event that a customer cannot meet his obligations to third parties, carry the same credit risk as investments.
Notes to the Financial Statements
51
Letters of credit, which are written undertakings by the Bank on behalf of a customer authorizing a third party to draw drafts on the Bank up to a stipulated amount under specific terms and conditions, are collateralized by the underlying shipments of goods to which they relate, and therefore, carry less risk. Acceptances comprise undertakings by the Bank to pay bills of exchange drawn on customers.
Cash requirements under guarantees and letters of credit are considerably less than the amount of the commitment because the Bank does not expect the third party to draw funds under the agreement.
Commitments to extend credit represent unused portions of authorization to extended credit, principally in the form of investments, guarantees and letters of credit. With respect to credit risk relating to commitments to extend unused credit, the Bank is potentially exposed to a loss in an amount which is equal to the total unused commitments.
The likely amount of loss, which cannot be reasonably estimated, is expected to be considerably less than the total unused commitments, since most commitments to extend credit are contingent upon customers maintaining specific credit standards.
The total outstanding commitments to extend credit do not necessarily represent future cash requirements, as many of these commitments could expire or terminate without being funded. 1. The contractual maturities of commitments and contingencies liabilities are as follows at December 31:
2008 (SR‘000)
Less than 3 months
From 3 to 12 months
From 1 to 5 years
Over 5 years Total
Letters of credit and acceptances 1,890,553 1,235,811 373,271 1,098,107 4,597,742
Letters of guarantee 414,633 4,149,105 3,162,881 278,221 8,004,840
Irrevocable commitments to extend credit 2,255,712 3,429,890 2,746,027 1,062,280 9,493,909
Total 4,560,898 8,814,806 6,282,179 2,438,608 22,096,491
2007 (SR‘000)
Less than 3 months
From 3 to 12 months
From 1 to 5 years
Over 5 years Total
Letters of credit and acceptances 1,761,433 2,109,661 463,580 1,101,107 5,435,781
Letters of guarantee 644,980 3,615,353 1,623,056 575,559 6,458,948
Irrevocable commitments to extend credit 765,051 3,971,514 1,974,911 122,561 6,834,037
Total 3,171,464 9,696,528 4,061,547 1,799,227 18,728,766
The unused portion of non firm commitments, which can be revoked at any time, that is outstanding as at December 31, 2008, amounted to SR 9,320 million (2007: SR 3,286 million).
Notes to the Financial Statements
52
2. The analysis of commitments and contingencies by counter-party is as follows as at December 31:
(SR‘000)
2008 2007
Government and quasi Government 4,369,074 3,212,598
Corporate 4,049,784 2,625,226
Banks and other financial institutions 11,996,528 11,100,598
Other 1,681,105 1,790,344
Total 22,096,491 18,728,766
d) Operating lease commitments
The future minimum lease payments under non-cancelable operating leases, where the Bank is the lessee, are as follows:
(SR‘000)
2008 2007
Less than one year 19,825 47,479
One year to five years 76,070 39,437
Over five years 33,798 27,752
Total 129,693 114,668
19. INCOME FROM INVESTMENTS, NET
Income from investments, net for the years ended December 31, comprises the following:
(SR‘000)
2008 2007
Income from investments held at amortized cost, net
Mutajara 3,048,554 2,797,651
Installment sale 5,740,385 5,467,749
Istisnaa 150,913 194,092
Murabaha 483,420 108,089
Total income from investments held at amortized cost 9,423,272 8,567,581
Income paid to customer time investments (819,453) (751,593)
Income paid to syndicated murabaha financing from banks (107,156) (109,711)
Income from investments held at amortized cost, net 8,496,663 7,706,277
(Expense) income from investments held as FVIS
Other (2,222) 15,535
Total (expense) income from investments held as FVIS (2,222) 15,535
Income from investments, net 8,494,441 7,721,812
Notes to the Financial Statements
53
20. FEES FROM BANKING SERVICES, NET
Fees from banking services, net for the years ended December 31, comprise the following:
(SR‘000)
Fee income 2008 2007
Fees from share trading services 543,176 498,892
Fees from payment service systems 257,769 164,375
Fees from remittance business 218,690 167,065
Fees from credit cards 117,991 107,934
Other 718,411 448,214
Total fee income 1,856,037 1,386,480
Fee expense
Fees for share trading services (289,130) (128,079)
Fees for payment service systems (325,640) (277,776)
Total fee expense (614,770) (405,855)
Fees from banking services, net 1,241,267 980,625
21. OTHER OPERATING INCOME
Other operating income for the years ended December 31, comprises the following:
(SR‘000)
2008 2007
Income from sale of other investments (vehicles) 6,939 8,882
Other income, net 272,672 67,656
Total fees income 279,611 76,538
22 EARNINGS PER SHARE
Earnings per share are calculated by dividing the net income for the year by the weighted average number of shares outstanding during the year.
Earnings per share for the year ended December 31, 2007 have been retrospectively restated to reflect the effect of the issuance of the bonus shares (Note 15), in accordance with IAS 33 – Earnings Per Share.
23. PAID AND PROPOSED GROSS DIVIDENDS AND ZAKAT
The Bank has distributed dividends for the first half of 2008 amounting to SR 1,875,000 thousand (i.e. SR 1.25 per share), net of zakat on shareholders. Also proposed gross dividends for the second half of 2008 amounting to SR 3,183,143 thousand (2007: SR 1,223,917 thousand) of which SR 558,143 thousand (2007: SR 548,917 thousand) was deducted for zakat from the proposed gross dividends, resulting in a net dividend of SR 3 per share for 2008 (2007: SR 2 per share). The Department of Zakat and Income Tax (DZIT) has issued zakat assessments for the years up to 2001. The Bank appealed against these assessments. The assessments and the Zakat status have been finalized up to 1997.
The Tax Appellate Committee has issued its final rulings for the years 1991 to 1998 mostly in the Bank’s favour. Accordingly, the Bank has reversed the excess zakat provisions and recognized them as revenue in the consolidated statement of income during the previous years.
Notes to the Financial Statements
54
The Bank’s management believes that adequate provisions have been made for zakat differences, if any, for the prior years up to December 31, 2000. The Bank has not received any assessment for the years subsequent to 2001.
Effective January 1, 2001, the Bank has changed its zakat accounting policy to consider it as a liability of the shareholders, rather than as an expense to be charged to consolidated statement of income. Differences, if any, between the Bank’s calculation and the DZIT’s assessment will be charged to the general reserve.
24. CASH AND CASH EQUIVALENTS
Cash and cash equivalents included in the consolidated statement of cash flows comprise the following as of December 31:
(SR‘000)
2008 2007
Cash 3,629,777 3,486,046
Due from banks (current accounts) 2,891,765 790,645
Balances with SAMA (current accounts) 449 2,576,577
Total 6,521,991 6,853,268
25. SEGMENTAL INFORMATION
For management purposes, the Bank is organized into the following main businesses segments:
Retail segment: Incorporates customer credit current accounts relating to individuals, credit facilities, and customers debit current accounts (overdrafts), and fees from banking services and remittances.
Corporate segment: Incorporates deposits of VIP, corporate customer deposits, credit facilities, and debit current accounts (overdrafts).
Treasury segment: Incorporates treasury services, financial and international trading portfolios.
Investment services and Brokerage segments: Incorporates investments of individuals and corporate in mutual funds, local and international share trading services, and investment portfolios.
Transactions between the above segments are on normal commercial terms and conditions. There are no material items of income or expenses between the above segments.
Assets and liabilities for the segments comprise operating assets and liabilities, which represents the majority of the Bank’s assets and liabilities.
The Bank carries out its activities principally in the Kingdom of Saudi Arabia, and has six subsidiaries, six of which are registered outside the Kingdom of Saudi Arabia as of December 31, 2008, as listed in Note 2-c.
The total assets, liabilities, commitments, contingencies and results of operations of these subsidiaries are not material to the Bank’s consolidated financial statements as a whole.
Notes to the Financial Statements
55
a) The Bank’s total assets and liabilities, together with its total operating income and expenses, and net income, for the years ended December 31, for each segment are as follows: Net income
2008 (SR‘000)
Retail segment
Corporate segment
Treasury segment
Investment services and
Brokerage segment
Total
Total assets 63,949,630 54,869,532 46,110,639 - 164,929,801
Capital expenditure 298,429 8,449 60,947 - 367,825
Total liabilities 81,567,893 43,182,806 11,527,193 1,620,110 137,898,002
Total operating income 6,056,621 2,178,678 1,996,514 343,454 10,575,267
Provision for impairment of investments, net (532,061) (441,906) (300,452) - (1,274,419)
Deprecation and amortization (298,698) (14,010) (46,685) (24,008) (383,401)
Other operating expense (1,970,511) (238,243) (31,883) (152,206) (2,392,843)
Total operating expenses (2,801,270) (694,159) (379,020) (176,214) (4,050,663)
Net income 3,255,351 1,484,519 1,617,494 167,240 6,524,604
2007 (SR‘000)
Retail segment
Corporate segment
Treasury segment
Investment services and
Brokerage segment
Total
Total assets 62,455,161 30,782,506 31,648,815 - 124,886,482
Capital expenditure 219,977 - - - 219,977
Total liabilities 68,689,370 27,352,491 5,238,509 - 101,280,370
Total operating income 5,729,523 1,588,967 1,560,573 442,033 9,321,096
Provision for impairment of investments, net (558,996) 164,004 (48,248) - (443,240)
Deprecation and amortization (253,897) (11,930) (1,729) (20,603) (288,159)
Other operating expense (1,559,255) (321,290) (114,681) (144,814) (2,140,040)
Total operating expenses (2,372,148) (169,216) (164,658) (165,417) (2,871,439)
Net income 3,357,375 1,419,751 1,395,915 276,616 6,449,657
b) The Bank’s credit exposure by business segments as of December 31, is as follows:
2008 (SR‘000)
Retail segment
Corporate segment
Treasury segment
Investment services and
Brokerage segment
Total
Consolidated balance sheet assets 56,675,607 54,352,355 36,621,737 - 147,649,699
Commitments and contingencies 1,667,580 5,548,999 5,386,003 - 12,602,582
Notes to the Financial Statements
56
2007 (SR‘000)
Retail segment
Corporate segment
Treasury segment
Investment services and
Brokerage segment
Total
Consolidated balance sheet assets 55,448,000 30,857,000 20,271,008 - 106,576,008
Commitments and contingencies 1,780,982 4,052,977 6,060,770 - 11,894,729
Credit risks comprise the carrying value of the consolidated balance sheet assets, except for cash and balances with SAMA, investment properties, property and equipment and other assets.
26. FINANCIAL RISK MANAGEMENT
The Bank’s activities are exposed it to a variety of financial risks and those activities involve the analysis, evaluation, acceptance and management of some degree of risk or combination of risks. Taking risk is core to the banking business, and these risks are an inevitable consequence of participating in financial markets.
The Bank’s aim is therefore to achieve an appropriate balance between risk and return and minimize potential adverse effects on the Bank’s financial performance.
The Bank’s risk management policies, procedures and systems are designed to identify and analyze these risks and to set appropriate risk mitigants and controls. The Bank reviews its risk management policies and systems on an ongoing basis to reflect changes in markets, products and emerging best practice.
Risk management is performed by the Credit and Risk Management Group (CRMG) under policies approved by the Board of Directors. The CRMG identifies and evaluates financial risks in close co-operation with the Bank’s operating units. The most important types of risks identified by the Bank are credit risk, operational risk, liquidity risk and market risk. Market risk includes currency risk, profit rate risk and price risk.
26-1 Credit risk
Credit Risk is considered to be the most significant and pervasive risk for the Bank. The Bank takes on exposure to credit risk, which is the risk that the counter-party to a financial transaction will fail to discharge an obligation causing the Bank to incur a financial loss. Credit risk arises principally from investments (credit facilities provided to customers and from cash and deposits held with other banks).
Further, there is credit risk in certain off-balance sheet financial instruments, including guarantees for the sale or purchase of currencies, letters of credit, Fx transaction acceptances and commitments to extend credit. Credit risk monitoring and control is performed by the CRMG which sets parameters and thresholds for the Bank’s investment activities.
a. Credit risk measurement
Investments
The Bank has structured a number of financial products which are in accordance with Shariah Law in order to meet the customer demand. These products are all classified as Investments in the Bank’s consolidated balance sheet. In measuring credit risk of Investments at a counterparty level, the Bank considers the overall credit worthiness of the customer based on a proprietary risk methodology.
For corporate customers, this risk rating methodology utilizes a 10 point scale based on quantitative and qualitative factors with 7 performing categories. The risk rating process is intended to advise the various independent approval authorities of the inherent risks associated with the counterparty and assist in determining suitable pricing commensurate with the associated risk.
Notes to the Financial Statements
57
This process also enables the Bank to detect any weakness in the portfolio quality and make appropriate adjustments to credit risk allowances, where credit quality has deteriorated and where losses are likely to arise.
The Bank evaluates individual corporate customer balances which are past due to make appropriate allowances against investments. For the remaining (performing) corporate loan portfolio, the Bank applies a loss rate to determine an appropriate collective allowance. The loss rate is determined based on historical experience of credit losses.
For retail customers, credit risk is determined using a detailed credit program with well defined parameters. In order to monitor credit risk in the retail portfolio, the Bank has formulated guidelines for each retail product. These guidelines provide for various quantitative and qualitative factors for critically scrutinizing, sanctioning and monitoring credit risks.
Settlement Risk
The Bank is also exposed to settlement risk in its dealings with other financial institutions. These risks arise when the Bank pays away its side of the transaction to the other bank or counterparty before receiving payment from the third party.
The risk is that the third party may not pay its obligation. While these exposures are short in duration but they can be significant. This risk is mitigated by dealing with highly rated counterparties, holding collateral and limiting the size of the exposures according to the risk rating of the counterparty.
b. Risk limit control and mitigation policies
The responsibility for credit risk management is enterprise wide in scope. Strong risk management is integrated into daily processes, decision making and strategy setting, thereby making the understanding and management of credit risk the responsibility of every business segment.
In order to ensure objectivity, accountability and to reinforce ownership, the following business units within the Bank assist in the credit control process:
• Corporate Credit Unit• Credit Administration Monitoring and Control Unit• Remedial Unit• Credit Policy Unit• Retail Credit Unit
The monitoring and management of credit risk associated with these Investments are made by setting approved credit limits. The Bank manages limits and controls concentrations of credit risk wherever they are identified – in particular, to individual customers and groups, and to industries and countries.
Concentrations of credit risks arise when a number of customers are engaged in similar business activities, 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 risks indicate the relative sensitivity of the Bank’s performance to developments affecting a particular industry or geographical location.
The Bank seeks to manage its credit risk exposure through diversification of its investments to ensure there is no undue concentration of risks with to individuals or groups of customers in specific geographical locations or economic sectors.
The Bank manages credit risk by placing limits on the amount of risk accepted in relation to individual customers and groups, and to geographic and economic segments. Such risks are monitored on a regular basis and are subject to an annual or more frequent review, when considered necessary. Limits on the level of credit risk by product, economic sector and by country are reviewed at least annually.
Notes to the Financial Statements
58
Exposure to credit risk is also managed through regular analysis on the ability of customers and potential customers to meet financial and contractual repayment obligations and by revising credit limits where appropriate.
Some other specific control and mitigation measures are outlined below.
b-1) Collateral
The Bank implements guidelines on the level and quality of specific classes of collateral. The principal collateral types are:
• Mortgages over residential and commercial properties.• Cash, shares, and general assets for customer• Shares for Murabaha (collateralized share trading) transactions
b-2) Collateralized Credit - related commitments
The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit carry the same credit risk as traditional banking products of the Bank.
Documentary and commercial letters of credit – which are written undertakings by the Bank on behalf of a customer authorizing a third party to draw drafts on the Bank up to a stipulated amount under specific terms and conditions, are collateralized by the underlying goods to which they relate, and therefore, risk is partially mitigated.
Commitments to extend credit represent unused portions of authorizations to extend credit in the form of further investment products, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Bank is potentially exposed to loss in an amount equal to the total unused commitments.
However, the likely amount of loss is less than the total unused commitments, as most commitments to extend credit are contingent upon customers maintaining specific credit standards.
c. Impairment and provisioning policies
Impairment provisions are recognized for financial reporting purposes only for losses that have been incurred at the balance sheet date based on objective evidence of impairment, and management judgment.Management determines whether objective evidence of impairment exists under IAS 39, based on the following criteria as defined by the Bank:
• Delinquency in contractual payments of principal or profit.• Cash flow difficulties experienced by the customer.• Breach of repayment covenants or conditions.• Initiation of bankruptcy proceedings against the customer.• Deterioration of the customer’s competitive position.• Deterioration in the value of collateral.
The Bank’s policy requires the review of each individual corporate customer at least annually or more regularly when individual circumstances require. Impairment allowances on individually assessed accounts are determined by an evaluation of incurred losses at the balance sheet date on a case-by-case basis, and by using management judgment.
The assessment normally encompasses collateral held (including re-confirmation of its enforceability) and the anticipated receipts for that individual account.
Notes to the Financial Statements
59
Collectively assessed impairment allowances are provided for:
• Portfolios of homogenous assets mainly relating to the retail investment portfolio that is individually not significant.
• On the corporate portfolio for investments where losses have been incurred but not yet identified, by using historical experience, judgment and statistical techniques.
The table below sets out the maximum exposure to credit risk at the reporting date without considering collateral or other credit enhancements and includes the off-balance sheet financial instruments involving credit risks.
(SR‘000)
2008 2007
On-balance sheet items:
Due from banks 2,891,765 790,645
Investments, net
- Corporate 49,323,086 27,078,457
- Retail 58,789,066 57,344,355
- Treasury 32,724,389 18,862,263
Customer debit current accounts, net 754,410 909,918
Other assets, net 3,109,913 2,578,174
Total on-balance sheet items 147,592,629 107,563,812
Off-balance sheet items:
Letter of credit and acceptances 4,597,742 5,435,781
Letters of guarantee 8,004,840 6,458,948
Irrevocable commitments to extend credit 9,493,909 6,834,037
Total off-balance sheet items 22,096,491 18,728,766
Maximum exposure to credit risk 169,689,120 126,292,578
The above table represents a worse case scenario of credit risk exposure to the Bank at December 31, 2008 and 2007, without taking account of any collateral held or other credit enhancements attached. For on-balance-sheet assets, the exposures set out above are based on net carrying amounts as reported in the consolidated balance sheet.
26-2 Liquidity risks
Liquidity risk is the risk that the Bank will be unable to meet its payment obligations associated with its financial liabilities when they fall due and to replace funds when they are withdrawn. The consequence may be the failure to meet obligations to repay depositors and lenders and fulfill commitments to lend. Liquidity risk can be caused by market disruptions or by credit downgrades, which may cause certain sources of funding to become unavailable immediately.
Diverse funding sources available to the Bank help mitigate this risk. Assets are managed with liquidity in mind, maintaining a conservative balance of cash and cash equivalents.
Notes to the Financial Statements
60
Liquidity risk management process
The Bank’s liquidity management process is monitored by the Bank’s Asset and Liabilities Committee (ALCO),
includes:
• Day-to-day funding, managed by Treasury to ensure that requirements can be met and this includes
replenishment of funds as they mature or are invested
• Monitoring balance sheet liquidity ratios against internal and regulatory requirements
• Managing the concentration and profile of debt maturities
• Maintain diversified funding sources
• Liquidity management and asset and liability mis-matching
Monitoring and reporting take the form of analyzing cash flows of items with both contractual and non-
contractual maturities. The net cash flows are measured and ensured that they are within acceptable ranges.
The Treasury / ALCO also monitors, the level and type of undrawn lending commitments, usage of overdraft
facilities and the potential impact contingent liabilities such as standby letters of credit and guarantees may
have on the Bank’s liquidity position.
The tables below summarize the maturity profile of the Bank’s assets and liabilities, on the basis of the remaining
maturity as of the consolidated balance sheet date to the contractual maturity date.
All customer deposits are assumed to be on demand without regard to depositor behavior and retention rates.
Management monitors the maturity profile to ensure that adequate liquidity is maintained. Assets available to
meet all of the liabilities and to cover outstanding loan commitments include cash and precious metals, balances
with SAMA and due from banks and Investments.
Further, in accordance with the Banking Control Law and Regulations issued by SAMA, the Bank maintains a
statutory deposit equal to a sum not less than 7% (2007:not less 9%) of total customer deposits, and 4%(2007:2%)
of total other customer accounts.
In addition to the statutory deposit, the Bank maintains a liquid reserve of not less than 20% of the deposit
liabilities, in the form of cash, gold or assets which can be converted into cash within a period not exceeding
30 days. Also, the Bank has the ability to raise additional funds through special investment arrangements with
SAMA including deferred sales transactions.
Notes to the Financial Statements
61
The contractual maturities of assets, liabilities and shareholders’ equity as of December 31, 2008 and 2007 based on discounted cash flows are as follows:
2008 (SR‘000)
Less than 3 months
3 to 12 months
1 to 5 years Over 5 years
No fixed maturity
Total
Assets
Cash and cash equivalents 6,521,991 - - - - 6,521,991
Statutory deposit with SAMA - - - - 7,671,803 7,671,803
Investments, net
-Mutajara 17,166,856 36,973,650 10,217,966 3,097,818 - 67,456,290
-Installment sale 4,647,010 10,416,079 37,311,011 6,696,183 - 59,070,283
-Istisnaa 115,816 319,190 851,174 4,232 - 1,290,412
-Murabaha 1,749,462 522,697 8,680,917 2,066,480 - 13,019,556
-Other - - - - 3,166,983 3,166,983
Customer debit current accounts, net 634,069 18,126 102,215 - - 754,410
Property and equipment, net - - - - 2,868,160 2,868,160
Other assets, net - - - - 3,109,913 3,109,913
Total 30,835,204 48,249,742 57,163,283 11,864,713 16,816,859 164,929,801
Liabilities and Shareholders’ equity
Due to banks 7,187,635 713,995 - - - 7,901,630
Syndicate murrabaha financing from banks 251,108 1,623,892 - - - 1,875,000
Customer Deposits 108,335,177 8,137,952 135,415 2,499 - 116,611,043
Other customer account 3,686,576 - - - - 3,686,576
Other liabilities - - - - 7,823,753 7,823,753
Shareholders> equity - - - - 27,031,799 27,031,799
Total 119,460,496 10,475,839 135,415 2,499 34,855,552 164,929,801
Notes to the Financial Statements
62
2007 (SR‘000)
Less than 3 months
3 to 12 months
1 to 5 years Over 5 years
No fixed maturity
Total
Assets
Cash and cash equivalents 6,853,268 - - - - 6,853,268
Statutory deposit with SAMA - - - - 7,078,576 7,078,576
Investments, net
-Mutajara 9,081,000 12,989,000 9,728,810 9,788,089 - 41,586,899
-Installment sale 3,983,000 8,951,000 39,483,000 3,572,774 - 55,989,774
-Istisnaa 111,000 304,000 1,213,000 2,014 - 1,630,014
-Murabaha 1,108,000 106,000 734,000 2,130,388 - 4,078,388
-Other - - - - 1,590,370 1,590,370
Customer debit current accounts, net 894,460 15,458 - - - 909,918
Property and equipment, net - - - - 2,591,101 2,591,101
Other assets, net - - - - 2,578,174 2,578,174
Total 22,030,728 22,365,458 51,158,810 15,493,265 13,838,221 124,886,482
Liabilities and Shareholders equity
Due to banks 2,593,090 - - - - 2,593,090
Syndicate Murrabaha financing from banks - - 1,875,000 - - 1,875,000
Customer deposits 82,313,000 6,866,000 409,000 137,167 - 89,725,167
Other customer accounts 3,030,969 - - - - 3,030,969
Other liabilities - - - - 4,056,144 4,056,144
Shareholders> equity - - - - 23,606,112 23,606,112
Total 87,937,059 6,866,000 2,284,000 137,167 27,662,256 124,886,482
The following tables disclose the maturity of contractual financial liabilities on undiscounted cash flows as at 31 December:
2008 (SR‘000)
Less than 3 months
3 to 12 months
1 to 5 years Over 5 years
No fixed maturity
Total
Due to banks 3,806,705 - - - - 3,806,705
Direct Investment (banks) 3,392,030 752,747 - - - 4,144,777
Syndicate murrabaha financing from banks 251,985 1,633,265 - - - 1,885,250
Direct Investment (Customer) 9,550,776 8,408,174 146,713 2,855 - 18,108,518
Customer deposits 98,907,914 - - - - 98,907,914
Other customer accounts 3,686,576 - - - - 3,686,576
Other liabilities - - - - 7,823,753 7,823,753
Total 119,595,986 10,794,186 146,713 2,855 7,823,753 138,363,493
Notes to the Financial Statements
63
2007 (SR‘000)
Less than 3 months
3 to 12 months
1 to 5 years Over 5 years
No fixed maturity
Total
Due to banks 2,478,209 - - - - 2,478,209
Direct Investment (banks) - 116,041 - - - 116,041
Syndicate murrabaha financing from banks - 107,955 1,929,126 - - 2,037,081
Direct Investment (Customer) 4,265,047 4,431,977 - - - 8,697,024
Customer deposits 81,210,589 - - - - 81,210,589
Other customer accounts 3,030,969 - - - - 3,030,969
Other liabilities - - - - 4,056,144 4,056,144
Total 90,984,814 4,655,973 1,929,126 - 4,056,144 101,626,057
26-3 Market risks
The Bank is exposed to market risks, which is the risk that the fair value of future cash flows of a financial instrument will fluctuate due to changes in market prices.
Market risks arise on profit rate products, foreign currency and mutual fund products, all of which are exposed to general and specific market movements and changes in the level of volatility of market rates or prices such as profit rates, foreign exchange rates and quoted market prices.
Market risk exposures are monitored by Finance and reported to ALCO on a monthly basis. ALCO deliberates on the risks taken and ensure that they are appropriate.
a. Foreign currency risks
The Bank is exposed to the effects of fluctuations in foreign currency exchange rates on its financial position, results of operations and cash flows.
The Bank’s management sets limits on the level of exposure by currency and in total for both overnight and intra day positions, which are monitored daily.
The tables below summarize the Bank’s exposure to foreign currency exchange rate risk at December 31, 2008 and 2007 and the concentration of currency risks. Included in the table are the Bank’s financial instruments at carrying amounts, categorized by currency.
Notes to the Financial Statements
64
2008 (SR‘000)
UAE DIR-HAM
BANGLA-DESH TAKA
JAPA-NESE YEN
EURO LEBA-NESE LIRA
MALAY-SIAN
RINGGIT
US DOL-LAR
POUND STERLING
OTHER TOTAL
ASSETS
Cash and cash equivalent 14,156 - 8 40,046 176 655 132,374 4,892 89,673 281,980
Due from banks 237,041 45,670 167,681 70,909 8,657 - 1,775,507 7,953 241,928 2,555,346
Investments
Mutajara - - - 523,944 - - 2,185,811 - - 2,709,755
Installment sale - - - - - - 964,622 - - 964,622
Murabaha - - - - - - 6,611 - - 6,611
Other 2,781 - 5,259 315,520 - 628,827 6,584,668 5,568 112,197 7,654,820
Customer debit current account, net - - - - - - 688 54,034 - 54,722
Other assets, net (1,336) - (199) 284 - - 42,009 - 101 40,859
Total Assets 252,642 45,670 172,749 950,703 8,833 629,482 11,692,290 72,447 443,899 14,268,715
LIABILITIES
Due to banks 50,513 - - 27,681 - - 1,500,249 2,742 113,191 1,694,376
Syndicate murabaha financing from banks - - - - - - 1,875,000 - - 1,875,000
Customer deposits 165 - 1,090 386,498 12,195 - 6,559,832 6,358 6,569 6,972,707
Other customer accounts 7,975 - 186,189 568,535 - - 1,233,989 5,731 119,441 2,121,860
Other liabilities 4,222 73,980 909 6,610 60,296 1 119,678 3,990 79,967 349,653
Total Liabilities 62,875 73,980 188,188 989,324 72,491 1 11,288,748 18,821 319,168 13,013,596
Net 189,767 (28,310) (15,439) (38,621) (63,658) 629,481 403,542 53,626 124,731 1,255,119
2007 (SR‘000)
UAE DIR-HAM
BANGLA-DESH TAKA
JAPA-NESE YEN
EURO LEBA-NESE LIRA
MALAY-SIAN
RINGGIT
US DOL-LAR
POUND STERLING
OTHER TOTAL
ASSETS
Cash and cash equivalents 33,966 2 44 80,624 150 2,838 136,006 20,605 166,054 440,289
Due from banks 107,470 21,971 34,400 148,992 5,769 - 199,132 3,598 214,492 735,824
Investments
Mutajara - - - 294,540 - - 5,087,438 50,832 - 5,432,810
Installment sale - - - - - - 251,967 - - 251,967
Murabaha - - - - - - 6,599 - - 6,599
Other - - - 512 - 680,786 4,939,303 2,907 - 5,623,508
Customer debit current account, net - - - 1,239 - - 628 77,608 - 79,475
Other assets, net (1,333) - (161) 1,013 - - 108,974 371 21 108,885
Total Assets 140,103 21,973 34,283 526,920 5,919 683,624 10,730,047 155,921 380,567 12,679,357
LIABILITIES
Due to banks 71,492 63,488 - 90,370 - - 626,182 66,213 102,188 1,019,933
Syndicate murabaha financing from banks - - - - - - 1,875,000 - - 1,875,000
Customer deposits 1,114 - 7,091 339,751 12,348 2 5,534,281 4,207 26,973 5,925,767
Other customer accounts 1,355 - 8,932 73,222 - - 290,643 3,137 5,690 382,979
Other liabilities 5,028 52,745 740 12,523 59,949 1 206,249 5,862 86,191 429,288
Total Liabilities 78,989 116,233 16,763 515,866 72,297 3 8,532,355 79,419 221,042 9,632,967
Net 61,114 (94,260) 17,520 11,054 (66,378) 683,621 2,197,692 76,502 159,525 3,046,390
Notes to the Financial Statements
65
A substantial portion of the net foreign currency exposure to the Bank is in US Dollars, where the SR is pegged to the US Dollar. The other currency exposures are not considered significant to the Bank’s foreign currency risks and as a result the Bank is not exposed to major foreign currency risks.
The Bank has performed a sensitivity analysis for the reasonably possible changes in foreign exchange rates, other than US Dollars, using historical average exchange rates and has determined that there is no significant impact on its net foreign currency exposures.
b. Profit rate risk
Cash flow profit rate risk is the risk that the future cash flows of a financial instrument will fluctuate due to changes in market profit rates.
The Bank does not have any significant exposure to the effects of fluctuations in prevailing level of market profit rates on its future cash flows as a significant portion of profit earning financial assets and profit bearing liabilities are at fixed rates and are carried in the financial statements at amortized cost. In addition to this, a substantial portion of the Bank’s financial liabilities are non-profit bearing.
c. Price risk
The Bank has certain investments which are carried at fair value through the income statement and includes investments in quoted mutual funds and other investments. Price risk arises due to changes in quoted market prices of these mutual funds.
As these investments are in a limited number of funds and are not significant to the total investment portfolio, the Bank monitors them periodically and determines the risk of holding them based on changes in market prices.
Other investments have little or no risks as these are bought for immediate sales. Investments are made only with a confirmed sale order and therefore involve minimal risk.
Operational Risk
Operational Risk is the risk of loss resulting from inadequate or failed internal processes, people, systems, and external events.
Operational Risk is inherent in most of the Bank’s activities this necessitates an integrated approach to the identification, measurement and monitoring operational risk. An Operational Risk Management Unit (ORMU) has been established within the Credit and Risk Management Group which facilitates the management of Operational Risk within the Bank.
ORMU facilitates the management of Operational Risk by setting policies, developing systems, tools and methodologies, overseeing their implementation and use within the business units and providing ongoing monitoring and guidance across the Bank.
Three primary operational risk management processes in the Bank are: Risk Control Self Assessment, Operational Loss Database and eventual implementation of Key Risk Indicators which are designed to function in a mutually reinforcing manner.
Notes to the Financial Statements
66
27. GEOGRAPHICAL CONCENTRATION a) The distribution by the geographical region of the major categories of assets, liabilities, commitments, contingencies and credit exposure accounts as of December 31, is as follows:
2008 (SR‘000)
Kingdom of Saudi Arabia
Other GCC and Middle
East
Europe North America
Latin America
South East Asia
Other Countries
Total
ASSETS
Cash and balances with SAMA 11,273,256 - - - - 28,773 - 11,302,029
Due from banks 2,500 525,363 97,369 1,556,498 - 447,897 262,138 2,891,765
Investments, net: -
Mutajara 35,072,636 32,382,029 - - - 1,625 - 67,456,290
Installment sale 59,070,283 - - - - - - 59,070,283
Istisnaa 1,290,412 - - - - - - 1,290,412
Murabaha 8,389,369 - - - - 4,630,187 - 13,019,556
Other 2,123,702 733,912 17,071 117,869 - 174,429 - 3,166,983
Total 117,222,158 33,641,304 114,440 1,674,367 - 5,282,911 262,138 158,197,318
LIABILITIES
Due to banks 2,217,936 2,783,009 109,764 1,245,290 - 1,502,737 42,894 7,901,630
Syndicated murabaha financing from banks - 1,875,000 - - - - - 1,875,000
Customer deposits 113,641,658 - - - - 2,969,385 - 116,611,043
Total 115,859,594 4,658,009 109,764 1,245,290 - 4,472,122 42,894 126,387,673
Commitments and contingencies 15,852,123 768,436 51,230 1,128,341 968,814 987,019 2,340,528 22,096,491
Credit exposure (stated at credit equivalent value) Commitments and contingencies 7,297,481 768,436 50,617 1,128,341 31,314 985,865 2,340,528 12,602,582
2007 (SR‘000)
Kingdom of Saudi Arabia
Other GCC and Middle
East
Europe North America
Latin America
South East Asia
Other Countries
Total
Assets
Cash and balances with SAMA 13,118,131 - - - - 23,068 - 13,141,199
Due from banks 1,500 99,319 71,317 325,251 - 282,809 10,449 790,645
Investments, net:
Mutajara 35,599,666 4,599,686 1,331,297 - - 56,250 - 41,586,899
Installment sale 55,989,774 - - - - - - 55,989,774
Istisnaa 1,630,014 - - - - - - 1,630,014
Murabaha 1,434,089 - - - - 2,644,299 - 4,078,388
Other 1,514,231 12,446 37,117 26,576 - - - 1,590,370
Total 109,287,405 4,711,451 1,439,731 351,827 - 3,006,426 10,449 118,807,289
Liabilities
Due to banks 142,751 1,119,998 32,128 - - 1,058,037 240,176 2,593,090
Syndicated murabaha financing from banks - 1,875,000 - - - - - 1,875,000
Customer deposits 88,305,356 - - - - 1,419,811 - 89,725,167
Total 88,448,107 2,994,998 32,128 - - 2,477,848 240,176 94,193,257
Commitments and contingencies 12,607,704 923,918 55,028 982,044 186,596 992,123 2,981,353 18,728,766
Credit exposure (stated at credit equivalent value) Commitments and contingencies 5,828,532 923,918 53,810 982,044 186,596 938,476 2,981,353 11,894,729
Notes to the Financial Statements
67
Credit equivalent amounts reflect the amounts that result from conversion of the Bank’s off-balance sheet liabilities relating to commitments and contingencies into the risk equivalent of investments, using credit conversion factors prescribed by SAMA. Credit conversion factor is meant to capture the potential credit risk related to the exercise of that commitment. b) The distributions by geographical concentration of non-performing investments and provisions for investments losses as of December 31, are as follows:
2008 (SR‘000)
Non-performing
Provisions for investment
losses
Net
Kingdom of Saudi Arabia 1,797,623 (1,431,980) 365,643
Europe - - -
North America - - -
Total 1,797,623 (1,431,980) 365,643
2007 (SR‘000)
Non-performing
Provisions for investment
losses
Net
Kingdom of Saudi Arabia 2,989,914 (2,456,355) 533,559
Europe 37,480 (37,480) -
North America 100,759 (100,759) -
Total 3,128,153 (2,594,594) 533,559
28. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties, in an arm’s length transaction. Consequently, differences can arise between carrying values and estimated fair value. The estimated fair values of the on-balance sheet financial instruments, excluding istisnaa, murabaha and installment sale held at amortized cost, are not significantly different from their carrying values included in the consolidated financial statements. 29. RELATED PARTY TRANSACTIONS In the ordinary course of business, the Bank transacts business with related parties. The related party transactions are governed by limits set by the Banking Control Law and the regulations issued by SAMA. The nature and balances resulting from such transactions as at December 31, are as follows:
Notes to the Financial Statements
68
(SR‘000)
Related parties Type of transaction 2008 2007
Debit Credit Debit Credit
Letters of credit 309,512 - 222,233 -
Musharaka bills 905,437 - 657,213 -
Mutajara 2,833,175 - 3,200,764 -
Murabaha bills 2,063 - 74,089 -
Members of the Board of Directors Current accounts 44,833 236,817 44,334 301,854
Letters of guarantee 312,464 - 291,057 -
Direct investment - 17,884 - -
Guarantees 66,000 - 66,000 -
Companies and establishments guaranteed by members of the Board of Directors
Mutajara 677,031 - 21,601 -
Letters of guarantee 46,968 - 42,081 -
Current accounts - 211,687 - 36,711
Mudaraba funds (see Note 33) Mudaraba - 2,453,245 - 2,593,397
Investment in mutual funds 161,921 - 130,387 -
Other major shareholders with shareholding of more than 5% of the Bank’s share capital
Direct investment - 1,544,359 - 1,505,327
Current accounts - 7,327
Investment in mutual funds - 62,638
Other liabilities - 12,906 - 12,393
Income and expenses pertaining to transactions with related parties included in the consolidated financial statements for the years ended December 31, are as follows:
(SR‘000)
2008 2007
Income from investments 178,977 247,682
Other operating income 1,019 1,536
Employees’ salaries and benefits (air tickets) 10,257 9,373
Rent and premises related expenses 2,396 2,329
Board of Directors’ remunerations 3,075 3,111
The amounts of compensations recorded in favour of or paid to the Board of Directors and the executive management personnel during the years ended December 31, are as follows:
(SR‘000)
2008 2007
Short-term benefits 27,346 20,392
Provision for end of service benefits 1,209 1,043
Notes to the Financial Statements
69
The executive management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Bank directly or indirectly. 30. MUDARABA FUNDS Mudaraba funds as of December 31, comprise the following:
(SR‘000)
2008 2007
Customers’ investments 313,356 429,882
Current accounts, metals 11,399 21,610
Total 324,755 451,492
31. EMPLOYEES’ FUND
In accordance with the General Assembly’s resolution dated 20 Shawwal 1410H (corresponding to May 15, 1990),
150 thousand shares at par value of SR 15 million were granted to the Employees’ Fund (the “Fund”). The Board
of Directors (the “Board”) issued various resolutions in this respect, the last of which was resolution No. 9 dated
March 22, 1990, in which the Board designated the abovementioned shares to the Fund under certain conditions.
The par value of these shares is considered as a loan to be repaid to the Bank as part of a permanent loan of SR 50
million extended by the Bank, without any charge, of which SR 7 million was repaid during 1994. Also, the Fund
received additional 150 thousand shares in a one for one bonus issue during 1991, representing the fund’s share
of dividends distributed for 1991. The Fund also received an additional 150 thousand bonus shares representing
the Fund’s share of the dividends distributed during 1998.
The total number of shares, after the share split, amounted to 900 thousand shares as at December 31, 1998.
The Fund also received additional 900 thousand bonus shares representing the Fund’s share of the dividends
distributed during 2005.
Further, the Fund received another 900 thousand bonus shares representing its share in the dividends distributed
to shareholders during 2006. Consequently, the total number of the shares after share split per CMA’s resolution
of 5 shares for each share held is 13,500 thousand shares as of December 31, 2006. Also, the fund received 13,500
thousand bonus shares representing its shares in the dividends distributed to shareholders during 2007.
The Fund also received an additional 3,000 thousand bonus shares representing the Fund’s share of the dividends
distributed during 2008, the total number of shares amounted to 30,000 thousand as of December 31, 2008.
The Fund’s income from subscriptions, investments and others, excluding share of profits, amounted to SR 2,620
thousand, and expenses amounted to SR 55 thousand for 2008.
The market value of the shares designated to the Fund, as per SAMA’s Circular at December 31, 2008, amounted
to SR 1,680,000 thousand.
Separate financial statements are prepared for the Fund, which are not included in the accompanying
consolidated financial statements.
Notes to the Financial Statements
70
32. SPECIAL COMMISSIONS EXCLUDED FROM THE CONSOLIDATED STATEMENTS OF INCOME The following represents the movements in charities account, which is included in otherliabilities (see Note 14):
(SR‘000)
2008 2007
Balance, beginning of the year 55,449 570
Additions during the year 30,198 55,879
Payments during the year (20,837) (1,000)
Balance, end of the year 64,810 55,449
33. INVESTMENT MANAGEMENT SERVICES The Bank offers investment services to its customers. The Bank has established a number of mudaraba funds in different investment aspects (the Commodities Mudaraba Fund – USD, the Commodities Mudaraba Fund - EURO, the Global Equity Fund, the Egyptian Equity Fund, First and Second Al Rajhi Balanced Fund, the Al Rajhi Small Capitalization Fund, the Commodities Mudaraba Fund - Saudi Riyal, the European Equity Fund, the Al Jawhara Ladies Fund, the Children Fund - USD, the Local Shares Fund, the Al Rajhi GCC Equity Fund, India and China Equity Fund, and First Real Estate Fund and Al Rajhi Cement and Petrochemical equity fund).
These funds are managed by the Bank’s Investment Department, and a portion of the funds is also invested in participation with the Bank. Mutual funds’ financial statements are not included in the consolidated financial statements of the Bank.
The Bank’s share of investments in these funds is included under other investments, and is disclosed under related party transactions. Funds invested in participation with the Bank amounted to SR 2,453,245 thousand at December 31, 2008 (2007 SR 2,593,397 thousand).
34. CAPITAL ADEQUACY The bank’s objectives when managing capital are, to comply with the capital requirements set by SAMA to safeguard the bank’s ability to continue as a going concern; and to maintain a strong capital base.
Capital adequacy and the use of regulatory capital are monitored daily by the bank’s management. SAMA requires to hold the minimum level of the regulatory capital of and maintain a ratio is 8% of total regulatory capital to the risk-weighted asset .
The Bank monitors the adequacy of its capital using ratios established by SAMA. These ratios measure capital adequacy by comparing the Bank’s eligible capital with its consolidated balance sheet assets, commitments and contingencies, to reflect their relative risk as of 31 December 2008 .
SR’000
Credit Risk weighted Assets 9,381,841
Operation risk weighted assets 1,434,591
Market risk weighted assets 126,104
Total Pillar I – risk weighted assets 10,942,536
Tier I – capital 20,468,640
Tier II capital 9,506,962
Total tier I & II capital 29,975,602
Capital Adequacy Ratio %
Tier I ratio 14.60%
Tier II ratio 21.39%
Notes to the Financial Statements
71
35. COMPARATIVE AMOUNTS Certain prior year amounts have been reclassified to conform with the current year presentation.
36. POST BALANCE SHEET EVENTS
The Bank’s Board of directors proposed in its meeting dated January 19, 2008 distribution of dividends to the shareholders for the second half of the current fiscal year, for an amount of SR 2,625 million, net of zakat attributable to shareholders, at SR 1,75 per share.
This is subject to approval of the Extraordinary General Assembly in its next meeting.
37. PROSPECTIVE CHANGES IN INTERNATIONAL FINANCIAL REPORTING FRAMEWORK
The Bank has chosen not to early adopt IFRS 8 - Operating Segments which has been published and is mandatory for compliance for the Bank’s accounting year beginning January 1, 2009.
38. APPROVAL OF THE BOARD OF DIRECTORS
The consolidated financial statements were approved by the Board of Directors on 22 Muharram 1430H (corresponding to January 19, 2009).
39. BASEL II PILLAR 3 DISCLOSURES
Within 60 days of the end of the current year the Bank will disclose on the website (www.alrajhibank.com.sa) about extra quantity information related to Basel II pillar 3 disclosures in accordance with the requirements of SAMA .Noted that such data shall not be subject to audit by the auditors of the Bank.
Notes to the Financial Statements
72
73
BASEL II DISCLOSURES:BASEL II PILLAR 3 QUALITATIVE DISCLOSURES
31 DECEMBER 2008
75
BASEL II DISCLOSURES:
BASEL II PILLAR 3 QUALITATIVE DISCLOSURES
31 DECEMBER 2008
TABLE 1
SCOPE OF APPLICATION
a) This applies to Al Rajhi Banking and Investment Corporation, Saudi Arabia.
b) The financial results of all subsidiaries are fully consolidated in publishing the results of Al Rajhi Banking
and Investment Corporation, Saudi Arabia. Brief descriptions of the entities in the group are as follows:
1) Al Rajhi Financial Services Limited:
The company was incorporated in 2007 in KSA, as a wholly owned subsidiary of Al Rajhi Bank. The subsidiary
engages in Mutual Fund Management, Brokerage and Corporate Finance.
2) SPC LTD:
The company was incorporated in 1989, as a limited liability company registered in the British Virgin Islands.
Its activities were in the areas of investment in real estate in London, England. It is 99% owned by Al Rajhi
Bank.
3) Arpent VAT Services Ltd.
The company was incorporated in the UK and acts as an agent to collect rent & VAT payment services in
London. It is 100% owned by Al Rajhi Bank.
4) Al Rajhi Investment Corporation, London
The company was incorporated in 1993, and acted as a Head Office, offering consultancy services to the
parent and SPC’s. It is 100% owned by Al Rajhi Bank.
5) ARA1 Company Ltd.
The company was incorporated in 1988, as a holding company of ARA2 and registered in Jersey. It is 99%
owned by Al Rajhi Bank.
6) Al Rajhi Company for Development, Riyadh
The company was incorporated in 2000, for investment in Land, Building and Real estate. It is 99% owned
by Al Rajhi bank.
7) Al Rajhi Banking and Investment Corporation BHD Malaysia
The company was incorporated in 2006 providing Islamic banking services in Malaysia and is 100% owned
by Al Rajhi Bank.
c) There are no restrictions, or other major impediments, on transfer of funds or regulatory capital within
the group. However, this is subject to the satisfaction of all internal and external approval by relevant
authorities.
Basel Ii Disclosures: Basel II Pillar 3 Qualitative Disclosures - 31 December 2008
76
TABLE 2
CAPITAL STRUCTURE
Capital of Al Rajhi Bank consists of:
1. 1,500,000,000 Fully paid up ordinary shares of SAR 10 each.
TABLE 3
CAPITAL ADEQUACY
Capital adequacy indicates the ability of the Bank in meeting any contingency without compromising the interest
of the depositors and to provide credit across the business cycles. Sufficient capital in relation to the risk profile
of the Bank’s assets helps promote financial stability and the confidence of the shareholders.
The Bank aims to maximize the shareholder’s value through an optimal capital structure that protects the
stakeholder’s interests under most extreme stress situations, provides sufficient room for growth while meeting
the regulatory requirements and at the same time gives reasonable return to shareholders.
The ultimate objectives of capital management are threefold:
1.Ensure stability of the Bank by holding enough capital to cover unexpected loss.
2.Promote the efficient use of capital by optimizing risk adjusted return.
3.Incentivized decision making and pro-active risk management through an efficient and effective allocation
of capital across the businesses.
The Bank measures various types of capital:
1. Regulatory Capital: Measure of capital needed to protect banks against insolvency. The regulator provides
guidelines on how banks should measure regulatory capital and typically sets minimum standards for
banks (e.g., 8% is set by SAMA). This approach is used for regulatory reporting and is in compliance with
SAMA’s rules.
2. Accounting Capital: This measures the equity capital as defined by accounting rules. Accordingly, this
measurement is essentially the sum of paid-up capital, eligible reserves, interim profits and revaluation
reserve.
3. Statutory/Legal Capital: This measures the required capital for the bank to be able to legally operate. The
minimum statutory capital is set by the regulator and usually incorporates share capital as well as retained
earnings.
Al Rajhi Bank currently uses the standardized method for calculation of the capital adequacy ratio and this
methodology will be used until such time the Bank moves towards Economic Capital.
Basel Ii Disclosures: Basel II Pillar 3 Qualitative Disclosures - 31 December 2008
77
RISK EXPOSURE AND ASSESSMENT
GENERAL QUALITATIVE DISCLOSURE REQUIREMENTS
Structure & Organization of the Relevant Risk Management FunctionCorporate Governance (Policies, Procedures & Governance Structure) The risk management framework is integral to the operations and culture of Al Rajhi Bank. Risks are proactively managed within the Bank, while the framework is flexible to incorporate new businesses the Bank undertakes. The framework is comprehensive and has been communicated from the Board of Directors down to the individual business lines. Al Rajhi Bank’s business strategy is to achieve the objective of being a strong financial partner with insight and transparency in risk-taking. The Risk Governance framework supports this objective.
The Risk Governance structure is comprised of the following Committees: Board of Directors, Executive Committee of the Board, Audit Committee of the Board, High Management Committee, Asset and Liability Management Committee (ALCO), Credit Committee, Remedial Management Committee, Risk Management Committee, IT Steering Committee, Purchasing Committee, Human Resources Committee and High Sharia Committee.
The following guiding principles apply to all Credit and Risk Management activities:
1. Independence: A clear separation exists between Credit and Risk Management and the business divisions. All activities which commit the Bank either legally or morally to a position of risk require prior approval by authorized individuals or committees at the appropriate level from both Risk and the Business.
2. Transparency:Credit and Risk Management structures, policies and procedures are transparent, based on consistent principles which are well communicated at all levels.
3. Approval Authority: Committee and Individual approval authorities are delegated by the Board of Directors.
4. Dual Signature: Risk taking commitments require the approval of at least two authorized individuals.
5. Accountability: Risk and reward from a transaction are borne by the same business unit and which form an integral part of the key performance objectives of the business.
The functional management of risk across the Bank is undertaken by the Credit and Risk Management Group headed by the Chief Risk Officer who reports to the CEO. The Credit and Risk Management Group compromises of: Corporate Credit Management, Risk Control, Portfolio & Risk Analytics and Capital Management, Credit Policy & IT Projects and Credit Administration Monitoring & Control.
The Credit and Risk Management Group activities comprise the following:
• Evaluation and Approval of risk limits/exposures within delegated authorities (or recommendation to higher approval authorities in case of large exposures), independent of the business.
• Development, communication, guidance and monitoring of adherence to comprehensive risk policies.
• Recommendation, jointly with the Business Units of the Bank’s risk appetite across all types and categories of risks, to the Board of Directors.
• Daily management of all other risk functions, including the control, monitoring and reporting of risk limits and exposures for internal control and regulatory compliance purposes.
Basel Ii Disclosures: Basel II Pillar 3 Qualitative Disclosures - 31 December 2008
78
1) Credit Risk
Credit Risk is the potential risk of loss of revenue, principal and capital as a result of default or the inability of a
borrower or counterparty to meet the terms of a contract through financing, dealing and investment activities.
The Bank addresses Credit Risk, which is the largest risk faced by the Bank, through the following process:
• All Credit Processes – approval, disbursements, administration, classification, recoveries, write offs are
governed by the Banks Credit Policy which is reviewed by Risk Management and approved by the Board.
• All Lending Proposals – where the proposed credit limit for a borrower or related group exceeds a threshold
are submitted for approval/renewal to the appropriate authority after an independent review by Credit Risk
Management.
• All Corporate Lending Accounts – are reviewed minimum on an annual basis.
• Concentration of exposures to counterparties, geographies and sectors are governed and monitored by
regulatory guidelines and limits prescribed by the Credit Policy.
• Corporate Borrowers are risk rated using an internal risk rating methodology to provide support for credit
decisions.
2) Market Risk
Market Risk is the risk of loss resulting from on and off balance sheet positions as a result of adverse movements
in market prices. The management of market risk is achieved by the analysis, identification, monitoring,
control and reporting of all activity that results from transactional exposures. Market Risk components are
profit rate risk, foreign exchange risk, equity price risk and commodity price risk.
a) Profit Rate Risk
Profit Rate risk refers to the potential impact on the Bank’s net income margin caused by the changes in
market rates of return.
The Bank manages the profit rate risk by incorporating ALCO values pertaining to pricing risk by evaluating the
potential impact of a 200 bps movement in market rates.
b) Foreign Exchange Risk
Foreign Exchange Risk refers to the impact of adverse exchange rate movements on foreign currency
exposures arising out of customer transactions undertaken by the Bank. Foreign currency positions are
marked to market on a daily basis and are monitored against predetermined position limits.
FX customer transactions are driven primarily by remittances. Total exposures are small relative to market
volumes.
c) Equity Price Risk/Commodity Price Risk
Equity Price Risk is the impact of adverse price movements in the price of equities on equity positions.
Equity open positions are marked to market against prevailing market prices on a regular basis.
The Bank has no material direct exposure to equities; its exposures are in the form of mutual funds. The mutual
fund exposure arises when the Bank issues new funds that are administered by an asset manager. External asset
managers typically require the Bank to commit that it will gather a certain number of mutual funds. While the
Basel Ii Disclosures: Basel II Pillar 3 Qualitative Disclosures - 31 December 2008
79
Bank is selling the funds to a customer, it holds the difference between the committed amount and the amount
sold to the customer on its books. These equities are considered long term investments are Shariah compliant.
The Bank is exposed to volatility in the price of the mutual funds it has on its books. The values of the investments
are updated regularly by Finance and are not considered material.
Commodity Risk refers to the risk of loss arising from movements in commodity prices. The commodity portfolio
will be revalued on a regular basis to capture the changes in market value due to changing economic conditions.
As an Islamic bank, the Bank buys and sells commodities to facilitate customer transactions to ensure compliance
with Sharia. The Bank does not conduct proprietary trading in commodities for its own profit. The Bank’s
exposure to a commodity pricing volatility is usually limited to 1-2 hours which is considered to be not significant.
3) Liquidity Risk
Liquidity risk refers to the Bank’s potential inability to pay its debts and obligations (funding requirements)
when due because of failure to convert assets into cash, or its inability to procure enough funds or if it can,
that the funds comes with an exceptionally high cost that may affect the institutions incomes and capital (cash
flow mismatches at a reasonable cost). In addition, liquidity risk may result of the Bank’s inability to unwind
or offset underlying risks from assets it currently holds, which may force the Bank to sell its assets at a loss as
the assets are illiquid or the market is suffering liquidity crunch. Under Liquidity Risk, the Bank considers the
following the three main risk types:
a) Term Liquidity and Call Risk:
Term liquidity risk arises when there is a mismatch between incoming and outgoing payments. There may
be unexpected delays in repayments (term liquidity risk) or unexpectedly high payment outflows (call risk).
b) Structural Liquidity Risk:
This type of liquidity risk refers to the fact that the cost of liquidity for the purpose of closing liquidity gaps
can change if refinancing becomes more expensive due to a decline in the Bank’s creditworthiness.
c) Market Liquidity Risk:
Market liquidity risks arise when a position cannot be sold within a desired time period or only at a discount.
This is especially the case with securities in illiquid markets.
4) Operational Risk
Operational Risk is the risk of loss resulting from inadequate or failed internal processes, people, systems,
and external events. An Operational Risk Management Unit (ORMU) has been established within the
Credit and Risk Management Group which facilitates the management of Operational Risk within the Bank.
ORMU facilitates the management of Operational Risk by setting policies, developing systems, tools and
methodologies, overseeing their implementation and use within the business units and providing ongoing
monitoring and guidance across the Bank.
Basel Ii Disclosures: Basel II Pillar 3 Qualitative Disclosures - 31 December 2008
80
CREDIT RISK
Default/Counter Party Risk
The Bank has already quantified its default risk as part of Pillar I using the Standardized Approach. This approach
will continue to be used to determine the amount of capital the Bank will hold for default/counterparty risk.
In this method, risk weights are defined for certain types of credit exposures primarily on the basis of external
rating provided by rating agencies for obligors with no external rating. The default risk is then equated to the
resulting capital requirements.
While calculating capital requirements, various credit risk mitigation techniques are used in order to limit credit
risk. These include financial collateral such as cash and shares, certain forms of physical collateral such as real
estate, as well as guarantees.
Overall, the Bank uses the Standardized Approach to calculate the associated capital however, any additional
capital required under Pillar 2 is calculated using proprietary developed internal models.
Capital Treatment of Exposures
Under the guidelines of SAMA of the Standardized Approach the bank categorizes as follows:
1. Sovereigns: SAMA requires that the Bank operating in Saudi Arabia with exposures to other sovereigns (meeting
the guidance criteria prescribed by Basel II) use the preferential risk weight assigned to the sovereign by the
relevant national supervisory authority.
2. Claims on Banks and Securities Firm are to use Option 2 under the Basel II Guidelines.
3. MDB’s, Claims on Corporates, Claims included in the regulatory non-mortgage retail portfolios, Claims secured
by residential mortgages, claims secured by commercial real estate, past due loans, off balance sheet items all
follow SAMA guidelines on Basel II.
TABLE 4
CREDIT RISK: GENERAL DISCLOSURES
FOR ALL BANKS
1. Definitions of past due and impaired (for accounting purposes)
Investments where repayment is overdue for 90 days or less are considered as past due, while investments
where repayment is overdue for more than 90 days are considered as impaired.
2. Description of approaches followed for specific and general allowances and statistical methods.
a. Portfolios that are considered individually significant, i.e. Corporate Bank assets, are reviewed individually
for impairment, and any asset with specific impairment is afforded a specific reserve taking into account
potential future cash flow recoveries net of collateral
b. Unimpaired individually significant assets are grouped together and a provision afforded, based on a study
undertaken on the historical performance of the portfolio.
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c. Portfolios that are not considered individually significant, i.e. Retail Bank assets, are provisioned based on a
behavioral analysis of the underlying portfolio
3. Discussion Of The Bank’s Credit Risk Management Policy
Credit Risk is considered to be the most significant and pervasive risk for the Bank. The Bank takes on exposure
to credit risk, which is the risk that the counter-party to a financial transaction will fail to discharge an
obligation when due causing the Bank to incur a financial loss. Credit risk arises principally in Investments and
from cash and deposits held with other banks. Further, there is credit risk in certain off-balance sheet financial
instruments, including guarantees, letters of credit, acceptances and commitments to extend credit. Credit
risk monitoring and control is performed by the Credit risk Management Group which sets parameters and
thresholds around the Bank’s investment activities.
4. Credit risk measurement
The Bank has structured a number of financial products which are in accordance with Shariah Law in order to
meet customer demand. These products are all classified as Investments in the Bank’s consolidated balance
sheet. In measuring credit risk of Investments at a counterparty level, the Bank considers the overall credit
worthiness of the customer based on a proprietary risk methodology. For corporate customers, this risk
rating methodology utilizes a 20 point scale based on quantitative and qualitative factors with 17 performing
categories. The risk rating process is intended to reflect counterparty credit quality and assist in determining
suitable pricing commensurate with the associated risks.
The risk rating process enables the Bank to detect any weakness in the portfolio quality and make appropriate
adjustments to credit risk allowances, where credit quality has deteriorated and where losses are likely to arise.
The Bank evaluates individual corporate customer balances, which are past due to make appropriate allowances
against investments. For the remaining corporate loan portfolio, the Bank applies a loss rate to determine an
appropriate collective allowance. The loss rate is determined based on historical experience of credit losses.
For retail customers, credit risk is determined using a detailed credit program with well defined parameters. In
order to monitor credit risk in the retail portfolio, the Bank has formulated guidelines for each retail product.
These guidelines provide for various quantitative and qualitative factors for critically scrutinizing, sanctioning
and monitoring credit risks.
5. Risk Limit Control and Mitigation Policies
The responsibility for credit risk management is enterprise wide in scope. Strong risk management is
integrated into daily processes, decision making and strategy setting, thereby, making the understanding and
management of credit risk the responsibility of every business segment.
In order to ensure objectivity, accountability and to reinforce ownership, the following Units within the Bank
assist in the credit control process.
• Corporate Credit Unit (Credit Evaluation and Assessment).
• Credit Administration Monitoring and Control Unit.
• Remedial Unit.
• Credit Policy Unit.
• Retail Credit Unit (Credit Evaluation and Assessment).
The monitoring and management of credit risk associated with these Investments are made by setting approved
credit limits. The Bank manages limits and controls concentrations of credit risk wherever they are identified – in
particular, to individual customers and groups, and to industries and countries.
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Concentrations of credit risks arise when a number of customers are engaged in similar business activities, 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 risks indicate the relative sensitivity of the Bank’s performance to developments affecting a particular industry or geographical location.The Bank seeks to manage its credit risk exposure through diversification of its investments to ensure there is no undue concentration of risks with individuals or groups of customers in specific geographical locations or economic sectors.
The Bank manages credit risk by placing limits on the amount of risk accepted in relation to individual customers and groups, and to geographic and economic segments. Such risks are monitored on a regular basis and are subject to an annual or more frequent review, when considered necessary. Limits on the level of credit risk by product, economic sector and by country are reviewed at least annually.
Exposure to credit risk is also managed through regular analysis of the ability of customers and potential customers
to meet financial and contractual repayment obligations and by revising financial limits where appropriate.
TABLE 5
STANDARDIZED APPROACH AND SUPERVISORY RISK WEIGHTS
IN THE IRB APPROACHES
The Bank uses the following ECAIs:• S&P• Moody’s• Fitch
The types of exposures for which each agency is used is for Corporate, Banks, Public Sector Entities (PSE’s) & Sovereign
Per The Basel ll guidelines we map the ECAIs rating to the standardized risk weight outlined by Basel ll
TABLE 6
CREDIT RISK: DISCLOSURES FOR PORTFOLIOS SUBJECT TO IRB APPROACHES
NOT APPLICABLE
TABLE 7
CREDIT RISK MITIGATION: DISCLOSURES FOR STANDARDIZED AND IRB APPROACHES
The general qualitative disclosure requirement with respect to credit risk mitigation includes:
• Policies and processes for, and an indication of the extent to which the bank makes use of, on- and off- balance sheet netting• Policies and processes for collateral valuation and management• A description of the main types of collateral taken by the bank• The main types of guarantor and their creditworthiness and
• Information about (market or credit) risk concentrations within the mitigation taken.
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Risk Management and Mitigation
Management and mitigation of credit risk is core to the way the Bank operates and the way it does business. Listed below are some of the ways the Bank manages and mitigates credit risk:
Limit setting: The Bank has set different limits to protect itself. These include limits on how credit facilities granted to companies are based on their capital and reserves, the maximum total loan granted is based on the Bank’s capital as well as the rating of the customer, restrictions on allowable loan tenure for different customer rating, limits on sector concentration, etc.
Collateral and guarantees: Different requirements have been set depending on the type of loan product for the type of acceptable collateral (e.g., shares, real-estate, other pledges, third party guarantees, etc.). In addition, rules have been developed on how the collateral should be valued and how often the value of the collateral should be revalued and when the Bank would need to ask for additional collateral.
Credit Approval Authorities: Different authorities and limits have been defined for individuals or approval committees across the Bank and are dependent on rating and size of limit recommended.
Credit Evaluation Process: A clear credit evaluation process has been designed for the Bank to ensure that a consistent and robust method is followed.
Measuring the quality of credit: There are various models for both the retail and corporate portfolio which ascertains a risk rating on the client. These models take into consideration both quantitative and qualitative factors to ascertain a risk rating. These rating models have been developed using Al Rajhi specific data where applicable.
Appropriate legal documentation is executed to ensure that the Bank has recourse to protect itself in case of default on a loan. There are different variations depending on the product, type, and credit quality of the of
customer.
TABLE 8
GENERAL DISCLOSURE FOR EXPOSURE RELATED TO COUNTERPARTY CREDIT RISK
NOT APPLICABLE
TABLE 9
SECURITIZATION: DISCLOSURE FOR STANDARDIZED AND IRB APPOACHES
NOT APPLICABLE
TABLE 10
MARKET RISK: DISCLOSURE FOR BANKS USING THE STANDARDIZED APPROACHES
Market Risk
The Bank is exposed to market risks, which is the risk that the fair value of future cash flows of a financial
instrument will fluctuate due to changes in market prices. Market risks arise on profit rate products, foreign
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currency and mutual fund products, all of which are exposed to general and specific market movements and
changes in the level of volatility of market rates or prices such as profit rates, foreign exchange rates and quoted
market prices. The Banks uses the standardized Model to calculate the capital for Market Risk.
Foreign Currency Risk
The Bank is exposed to the effects of fluctuations in foreign currency exchange rates on its financial position,
results of operations and cash flows. The Bank’s management sets limits on the level of exposure by currency and
in total, which are monitored daily.
A substantial portion of the net foreign currency exposure to the Bank is in US Dollars, where Saudi Riyal is pegged
to the US Dollar. The other currency exposures are not considered significant to the Bank’s foreign currency risks
and as a result the Bank is not exposed to major foreign currency risks.
Market Risk components are profit rate risk, foreign exchange risk, equity risk and commodity risk.
a) Profit Rate Risk (Profit Rate Risk on the Banking Book – Earnings at Risk).
Profit rate risk arises more in the Bank’s assets than its liabilities in the current structure of its balance sheet.
If the Bank increases the profit bearing liabilities especially to the corporate clients, the risk structure would
change.
Profit Rate risk refer to the potential impact on the Bank’s net income margin or market value of equity caused by
the unexpected changes in rate of returns.
The Bank manages the profit rate risk by incorporating ALCO values and forecasted asset and liability run off rates
into the Profit Rate Risk Model.
There is a core assumption for the Profit Rate Risk Model that a 200 basis point shift in Profit rates is the largest
shock that can be experienced in the near term. Whilst recent market activity has resulted in increasingly higher
one off shifts in Profit rates, however, none have come close to 200 bps.
b) Equity/Asset Risk
Equity Risk is the impact of adverse price movements in the price of equities on equity positions. Equity open
positions are marked to market against prevailing market prices on a regular basis.
The Bank has a very insignificant exposure to equities; its exposures are in the form of mutual funds (~ SAR 125
million). The mutual fund exposure arises when the Bank issues new funds that are administered by an external
asset manager. External asset managers typically require the Bank to commit that it will gather a certain number
of mutual funds (e.g., SAR 100 million). While the Bank is selling the funds to a customer, it holds the difference
between the committed amount and the amount sold to customer on its book . These equities are considered
long term investments and are Sharia compliant. The Bank is exposed to volatility in the price of the mutual funds
it has on its books. The value of the investments is updated daily by Finance and is not considered material.
c) Commodity Risk
Commodity Risk refers to the risk of loss arising from movements in commodity prices. The commodity
portfolio will be revalued on a regular basis to capture the changes in market value due to changing economic
conditions.
As an Islamic bank, the Bank buys and sells commodities to facilitate customer transactions to ensure
compliance with Sharia. The Bank does not conduct proprietary trading in commodities for its own profit. The
Bank’s exposure to a commodity pricing volatility is usually limited to 1-2 hours.
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TABLE 11
MARKET RISK: DISCLOSURES FOR BANKS USING THE INTERNAL MODELS APPROACH (IMA)
FOR TRADING PORTFOLIOS
NOT APPLICABLE
TABLE 12
OPERATIONAL RISK
Operational Risk Overview
Al Rajhi Bank has adopted the Standardized Approach for calculating capital adequacy covering operational risk and defines operational risk as: the risk of loss resulting from inadequate or failed Internal processes, people and systems or from external events. This definition includes legal risk, but excludes strategic and reputational risk.”
Sources of RiskOperational Risk for the Bank arises from various different areas including:
• Internal fraud: An act of a type intended to defraud, misappropriate property or circumvent regulations, the law or company policy, excluding diversity/discrimination events, which involves at least one internal party.
• External fraud: An act of a type intended to defraud, misappropriate property or circumvent the law by a third party.
• Employment practices and workplace safety: An act inconsistent with employment, health or safety laws and agreements (e.g., payment of personal injury claims, or from diversity/discrimination events)
• Clients, products, and business practices: A failure to meet a professional obligation to specific clients (including fiduciary and suitability requirements) either unintentionally or through negligence, or from the nature or design of a product.
• Damage to physical assets: The loss or damage to physical assets from a natural disaster or other events.• Business disruption and system failures: Disruption of business or system failures.• Execution, delivery, and process management: Failed transaction processing or process management, from
relations with trade counterparties and vendors
The Bank currently uses the Standardized Approach to calculate the minimum regulatory capital for Operational Risk.
TABLE 13
EQUITIES: DISCLOSURES FOR BANKING BOOK POSITIONS
NOT APPLICABLE
TABLE 14
INTEREST RATE RISK IN THE BANKING BOOK (IRRBB)
The IRRBB at AL Rajhi Bank is referred to as Profit Rate Risk In The Banking Book.
Profit rate risk arises more in the Bank’s assets than its liabilities in the current structure of its balance sheet. If the
Bank increases the profit bearing liabilities especially to the corporate clients, the risk structure would change.
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Liabilities: The majority of the Bank’s customer deposits are in non-profit bearing current accounts. Changes to
the Profit rate have no bearing on these accounts. However, the Bank has a smaller number of corporate deposits
and retail term deposits that are rate sensitive.
Assets: The Bank charges different profit rates according to the maturity of loans (longer term loans usually
require a higher profit rate). To determine the profit rate, the Bank uses a current market rate (e.g., SAIBOR) as a
proxy to determine what to charge given market conditions.
We have provided a description of each of the sources for each subtype of profit rate risk.
Re-pricing risk: Most of the risk that the Bank experiences are in lost earnings when Profit rates decrease. This
is due to the composition of the book which is made up of mostly non-profit bearing current account liabilities
and fixed rate assets. In other words, the Bank is an asset-sensitive bank that benefits from a rise in rates and is
disadvantaged by a fall in rates because the amount of re-pricing assets is larger than the re-pricing liabilities.
An Profit rate decrease has an inverse effect on the equity value of the Bank’s fixed rate assets (increase) versus
earnings (decrease) since the assets still hold a higher profit rate compared to the decreased market rate.
Assets: There are different profit rates and re-pricing terms for the Bank’s assets. Since the market rate
(SAIBOR for SAR, LIBOR for US$) is used as a benchmark for the profit rate, a drop in interest rate can result in
lost earnings.
Basis risk: Because most of the Bank’s assets and liabilities are dependent on the SAIBOR rate and not on other
rates, the risk is low. For US$ assets and liabilities, the rate is based on LIBOR, and any loans are squared off with
liabilities that closely match both the amount and tenure. This minimizes any basis risk.
Profit Rate Risk – This is a risk that exists in two areas – profit re-pricing and yield curve shifts. Re-pricing risk lies
in the fluctuations in interest rates that have differing impact on bank assets while yield curve risk is posed by the
change in portfolio values caused by unanticipated shifts in the slope and shape curves. They include:
a) Displaced commercial risk
when the Bank is required to pay a return greater than the income it generates on any underlying asset. This
is captured when the Bank experiences a change in Profit rates which drives the difference in the variable and
fixed payments. The Bank currently has a minimal number of variably priced assets and liabilities.
b) Rate of return risk occurs when profit rates change (profit re-pricing) and there is a mismatch between the
return of assets and liabilities.
Approach
For measuring overall sensitivity in the banking book, the Bank measures the Profit at Risk, also referred to as
Earnings-at-Risk (EAR) approach. The EAR perspective considers how changes in Profit rate will affect a bank’s
reported earnings. This methodology focuses on the risk to earnings in the near term, typically the next one or
two years. Fluctuations in Profit rates generally have the greatest impact on reported earnings through changes
in a bank’s net investment income. It uses 200 basis point change as a stress test. The approach of measurement
is as follows (but not limited to):
• Estimate expected run-off rate of assets at different tenors (i.e., determine tenor versus maturity matrix);
• Assess expected change in yield curve given short term change of 200 basis points;
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