ACHIEVING GOALS...delighted that its journey is appreciated by the global banking community. This is...

Annual Report 2018

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

ACHIEVINGGOALS

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

AHLI UNITED BANK ANNUAL REPORT 2018 1

His Highness

Sheikh Nawaf Al-AhmadAl-Jaber Al-Sabah

Crown Prince of The State of Kuwait

His Highness

Sheikh Sabah Al-AhmadAl-Jaber Al-Sabah

Amir of The State of Kuwait

Contents

06 The Chairman’s Statement

10 CEO’s Statement

12 The Board of Directors

16 Fatwa & Shari’ah Supervisory Board Report

18 Fatwa & Shari’ah Supervisory Board Members

20 Executive Management

22 Financial Performance Summary

24 Management Report & Performance Analysis

27 Executive Summary

33 Corporate Governance

52 Independent Auditor’s Report

57 Consolidated Financial Statements

63 Notes to the Consolidated Financial Statements

115 Basel III Pillar III - Disclosures

THE CHAIRMAN’S STATEMENT

Dr. Anwar Ali Al Mudhaf Chairman

Ahli United Bank K.S.C.P.

6 AHLI UNITED BANK K.S.C.P. ANNUAL REPORT 2018

Esteemed Shareholders,

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

On behalf of myself and the Board of Directors, I am honored to present to you the 53rd Ahli United Bank K.S.C.P. Annual Report which highlights the Bank’s main achievements and its financial statements for the year ending on 31 December 2018.

Ahli United Bank continued its successful journey and maintained its unique position as one of the leading Islamic banks locally and regionally.

The Bank continues to achieve an economic growth being aligned with the country wide vision (New Kuwait 2035) set by His Highness the Amir of Kuwait Sheikh Sabah Al-Ahmad Al-Jaber Al-Sabah. This growth is built on a strong business environment which calls for optimism, main characteristics of this environment are the political stabilization and the large size of the sovereign assets which highly contribute in maintaining a robust banking sector in Kuwait.

The Bank has crossed its 78th year since its initiation as the first bank in Kuwait since it was a branch of the Imperial Bank on February 28, 1942. The Bank was the pioneer in leading the process of preparing and developing and the first generation of Kuwaiti bankers who were in charge of developing the banking sector in Kuwait.

Through various centuries and throughout different political, economic and social circumstances, the Bank developed and expanded its activities under different names until it became a 100% Kuwaiti bank under the name of “Bank of Kuwait and the Middle East” in 1971, the Bank then began a new phase of its success, in 2002 when it becomes part of Ahli United Bank Group which have a sound reputation in the banking sector. The key turning point and the most important qualitative shift in the Bank’s business is the transformation of its activities to comply with the provisions of Islamic Sharia law starting from April 1, 2010.

During its seventy seven years of success, the Bank was able to deal with various challenges and to take a leading position among the other local banks; this is based on customers trust and loyalty which are earned and maintained during its years of operation.

Today, the Bank continues on capitalizing its growth opportunities based on a proven long history, the trust of its customers, the strength of its financial position, the adequacy of its capital base, and the efforts made by its Executive Management conisdering the latest leading practices in banking industry.

Financial performanceDuring the year 2018, the Bank continued to achieve good financial results, which was reflected by a 15.3% increase in

net profit to reach to KD 51.3 million compared to KD 44.5 million in the previous year.

The Bank also recorded a growth in total operating profit of KD 121.6 million for the year 2018 with a growth of 1.2% compared an operating profit of KD 120.1 million for 2017. The Shareholders’ equity of the Bank increased by 5.9% to KD 430.8 million as of 31 December 2018 which is higher than its KD 406.9 million as of 31 December 2017. The net operating profit grew by 3.3% to KD 84.4 million by the end of 2018 compared to KD 81.7 million in 2017.

In addition to the achievements, the Bank maintained a good rate of capital adequacy ratio of 16.6% as of 31 December 2018 (compared to 18% as of 31 December 2017) this is before dividends exceeds the level required by the regulators. Thereby increasing the chances of future expansion at the level of credit facilities and operations.

The Bank also achieved a return on equity and assets of 12.4%, 1.4% respectively, by the end of 2018, which is one of the highest in the market and this led to increase the earnings per share from 23.3 fils in 2017 to 27.1 fils for 2018.

Total assets, customer deposits and net financing debts are, KD 3,914 million, KD 2,425 million and KD 2,800 million respectively by the end of 2018. All of them are managed robustly and accurately to ensure maximum financial returns.

The Bank has maintained a conservative approach of risk management, which contributed to improve the quality of assets and reducing the irregular financing ratio to 1.27% (in 2017: 1.39%) and 334% coverage ratio. During the year, the Bank has implemented the Central Bank of Kuwait’s instructions regarding IFRS 9.

Based on these good results, the Board of Directors proposes to the General Assembly a cash dividend of 15% plus bonus shares of 5% of issued and paid up share capital (15 fils per share and 5 shares per 100 shares, respectively).

Corporate Governance and Risk Management The Bank , through its Board of Directors and Board Committees, was able to adopt and implement a robust governance framework aligned with the regulatory requirements and benchmarked with leading practices and international recommendations. The Bank adopts corporate governance as a business culture which is embedded in its day to day business operations serving the best interest of the Bank’s shareholders and customers.

The risk governance pillar is a key building block in the overall governance framework, this is reflected through an approved risk strategy aligned with the Bank’s business strategy and governed by a group of policies that ensures driving the Bank’s activities within an approved risk appetite statement

AHLI UNITED BANK K.S.C.P. ANNUAL REPORT 2018 7

THE CHAIRMAN’S STATEMENT (CONTINUED)

Credit RatingsIn 2018, Ahli United Bank managed to maintain its high credit ratings of international credit rating agencies, this is due to the advanced capabilities of the Bank and its commitment to the highest professional standards which support the trust of the international rating agencies by considering us as a leading Bank providing banking and financial services in Kuwait. Fitch agency has confirmed the long-term creditworthiness of the Bank at A + rating and F1 valuation for short term with a future stable overview.

Also Moody’s agency has fixed its assessment in local currency at A2 with a stable future overview. Capital Intelligence agency has fixed the long term credit assessment of the Bank in foreign currency at A+ rating with a future stable overview, also it strengthen the short-term assessment in foreign currency rating of the bank to A2. These ratings reflect the quality and the credit worthiness of the Bank’s financial position, with stability and ability to achieve good profit rates in the future.

The Year of the AwardsAs the Bank is completing its seventy-seventh year, I am delighted that its journey is appreciated by the global banking community. This is reflected by the achievement of many prestigious awards in 2018, including the Best Islamic Bank of 2018, the Islamic Banking Award of 2018 and the Award “The Best Bank in Private Banking in Kuwait for 2018 by the prestigious Islamic Finance and Business magazine under the supervision of CBI Financial, the magazine’s publishers.

Also the award of (The best bank of corporate governance in Kuwait of 2018) issued by Capital Finance International magazine.

You may agree with me that the international recognition of the prestigious awards granted to the Bank for successive years is a best proof of its success journey from year to year which lead the Bank to this prestigious position among other Islamic banks in the region.

Increased Reliance on Financial Technology (Fintech)Always we are looking to meet the expectations of our customers. In 2018, we took great strides in employing technology to facilitate the needs of our customers and pave the way for them to achieve a better life. We continue to focus on increasing customer capabilities and enriching their experience in dealing with the Bank by increasing reliance on financial technology (Fintech).

Unique Model for Attractive Business EnvironmentAhli United Bank has been able to provide a unique model for an attractive working environment for the developing its human capital, which is considered the real engine for its success. This has been demonstrated by the ability of the

Management to retain many employees who consider the real wealth of the bank for more than 30 years.

Furthermore, the Bank was able to achieve a promising program to attract the best national resources and develop their skills and qualifications to take over leadership positions through advanced training programsalso providing an attractive working environment to the national calibers. The Kuwaiti leadership positions in Ahli United Bank with the highest professional degrees from the prestigious academic and training institutions; are best example of our confidence in the capabilities and competencies of our young Kuwaiti youth.

Our social responsibility is an inherent part of our identityThe social responsibility of the Bank is an integral part of its identity being the oldest Bank established in Kuwait and which made many social contributions in various centuries and conditions. Ahli United Bank was keen to develop a premier social program aligned with the vision of His Highness the Amir of Kuwait Sheikh Sabah Al-Ahmad Al-Jaber Al-Sabah (New Kuwait 2035), which interacts with all matters affecting the Kuwaiti society and contributes to the improvement of citizens’ lives. From that aspect, the Bank was keen to support several successful events in different areas with a main focus on the Kuwaiti youth and environmental support programs.

Thanks and GratitudeAt the end, on the behalf of myself, the Board of Directors and Executive Management of Ahli United Bank I would like to express my sincere gratitude and appreciation to His Highness the Amir Sheikh Sabah Al-Ahmad Al-Jaber Al-Sabah and His Highness the Crown Prince Sheikh Nawaf Al-Ahmad Al-Jaber Al-Sabah and the Prime Minister, Sheikh Jaber Al-Mubarak Al-Sabah for his continuous support to the banking sector of Kuwait.

I would also like to express my appreciation and thanks to the Central Bank of Kuwait (CBK) and its Governor Dr. Mohammed Yousef Al Hashil, and to all regulators in the State of Kuwait for their positive role in supporting Ahli United Bank.

I would also like to thank the Bank’s Fatwa and Shari’a Supervisory Board as well as the Board of Directors and Executive Management for their outstanding efforts. Other thanks go to the shareholders and our customers for their loyalty and trust which have a major role in achieving the growth and success of this prestigious financial institution.

Dr. Anwar Ali Al MudhafChairman


BEST ISLAMIC BANKER IN KUWAIT


CEO’S STATEMENT

Tareq Muhmood Acting Chief Executive Officer

Ahli United Bank K.S.C.P.


During 2018, the Bank continued its upward momentum, achieving a return on equity and assets of 12.4%, 1.4% respectively, which is one of the highest in the market.

Our focus on operational excellence supported the solid business performance during the year, delivering a growth in total operating profit of KD 121.6 million for the year 2018 with a growth of 1.2% compared to an operating profit of KD 120.1 million for 2017.

Net operating profit grew by 3.3% to KD 84.4 million by the end of 2018 compared to KD 81.7 million in 2017. This is maintained through a strong focus on core earnings and revenue streams while maintaining sound asset quality and a strong liquidity and capital adequacy position.

Total assets grew by 6.8% to KD 3,914 million for 2018. The increase in total assets was attributable to a 4.8% growth in the loans portfolio which rose to KD 2,800 million (2017: KD 2,673 million) and a 21.7% growth in the investments portfolio to KD 264 million (2017: KD 217 million). All of them are managed robustly to ensure maximum financial returns and efficient management of our balance sheet.

Asset growth was funded through focused balance sheet management and effective liquidity deployment to optimize yields and ensure funding stability in terms of quantum and duration.

The Bank adopts a combination of prudent credit strategy and focused recovery initiatives, and this ensures our stability during volatility in market conditions. We were able to improve the quality of assets during 2018 and, as a result, the nonperforming loan ratio fell to 1.27% at year-end 2018 as compared with 1.39% at the prior year-end while the specific provision coverage ratio was maintained at the very solid level of 22.8% (2017: 14.1%). The total provision coverage, excluding existing available securities and collaterals of KD 124.1 million, stood at 333.8% (2017: 292.8%) underlining the Bank’s conservative cash based provisioning approach.

AUB’s overall performance in 2018 was testament to its focused and resilient business model, accordingly the overall credit rating was maintained at a high level by the international credit rating agencies.

The Bank continues its strategy towards innovation, partnering with local and global Fintechs, to enhance our products, services and how these are experienced through our various digital and non-digital channels. With constant upgrades to our Mobile Banking applications, active engagement on Social Media and the enhanced Business to Business (B2B) cash management platform, it demonstrates the Bank’s commitment towards providing customers with hassle-free and creative digital solutions. A significant enhancement was delivered through the B2B cash management platform being made available via the mobile application for our corporate customers.

During the year, we were recognized by the wider community through prestigious awards granted to us in 2018, including the Best Islamic Bank, the Islamic Banking Award of 2018 and the Award “The Best Bank in Private Banking in Kuwait for 2018 by the prestigious Islamic Finance and Business magazine under the supervision of CBI Financial, the magazine’s publishers. This was in addition to the Best Bank in Corporate Governance, Kuwait in 2018 issued by Capital Finance International magazine.

Looking to the future, AUB will remain focused on its core strategy to pursue business growth through business diversification and investment and trade flows. Operationally, our continued digital transformation journey will be key to enhancing the Bank’s competitive edge whilst enhancing the customer experience in using our channels.

I would like to express my gratitude to the Board of Directors for their continued support and guidance. My sincere appreciation is due to all my colleagues in the management and staff of the Bank whose commitment to excellence, dedication and team work, have been, as usual, valuable in delivering the successful performance levels of the past year.

Tareq MuhmoodActing Chief Executive Officer


BOARD OF DIRECTORS

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

Chairman of the Board, Chairman of Corporate Governance Committee

Dr. Al Mudhaf joined the Bank’s Board in March 2014.

Qualifications & Experience: Dr. Al Mudhaf holds a Ph.D. in Finance from Peter F. Drucker Graduate School of Management, Claremont Graduate University, California, U.S.A. He has more than 19 years of experience in banking and finance.

Current Positions: Chairman & CEO of Al-Razzi Holding Company; Chairman of Banco ABC Brasil S.A.; Chairman of Sama Educational Company; Director of the Board of Governors of the Oxford Institute for Energy Studies; Director of the Board for Arab Banking Corporation-Bahrain; Member of the Board of Directors of the Public Authority for Applied Education.

Former Positions: Dr. Al Mudhaf has formerly served as a Lecturer in Corporate Finance, Investment Management and Financial Institutions at Kuwait University; Chairman of the International Bank of Asia in Hong Kong; Director of the Board of Directors of the Public Institution for Social Security (PIFSS); Advisor to the Finance and Economic Affairs Committee at Kuwait’s Parliament; Member of the Economic Task Force dealing with the implications of the 2008 Global Financial Crisis on Kuwait; Vice Chairman in Al Mal Investment Company; and a Director of Al Ahli Bank in Kuwait.

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

Member of Governance Committee, Member of Audit & Compliance Committee

Mr. Jamal Shaker Al Kazemi joined the Bank’s Board in May 2004.

Qualifications & Experience: Mr. Al Kazemi holds a Diploma in Applied Business Sciences (Accounting). He has experience in the commercial and investment sectors.

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

SHEIKH ABDULLAH JABER AL-AHMAD AL-SABAH (Non-Executive Director)

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

Sheikh Abdullah Jaber Al-Ahmad Al-Sabah joined the Bank’s Board in March 2009.

Qualifications & Experience: Sheikh Abdullah holds a Bachelor of Arts degree from Brown University, USA and Master’s Degree in Business Administration from University of Colombia, NY.

He has experience in the banking industry and investment sector.

Current Positions: Deputy Director General for Investment and Operations-the Public Institution for Social Security (Kuwait); Vice Chairman of Bank of London & Middle East UK

Former Positions: Chairman - Kuwait Financing Services Co., Board Member - Ahli Bank of Kuwait; Vice President - Wafra Investment Advisory Group (New York - USA); Board Member – Global Investment House (Kuwait); Chairman - Housing Finance Company (Kuwait).*Sheikh Abdullah’s membership has ended in January 2019


BOARD OF DIRECTORS (CONTINUED)

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

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

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

Qualifications & Experience: Mr. El-Labban holds a Bachelors degree in Economics (Highest Honors) from American University, Cairo and a Master’s degree in Economics (Highest Honors) from the American University of Cairo. He has extensive experience in commercial and investment banking with a particular focus on the GCC countries and Egypt.

Current Positions:- Group Chief Executive Officer &

Managing Director - Ahli United Bank BSC, Bahrain

- Deputy Chairman - United Bank for Commerce & Investment LSC, Libya

- Deputy Chairman - Middle East Financial Investment Co. (Saudi Arabia)

- Director - Ahli United Bank PLC, UK- Director - Ahli United Bank Ltd, United

Arab Emirates

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

MR. SANJEEV BAIJAL(Non-Executive Director)

Member of Audit & Compliance Committee

Mr Sanjeev Baijal joined the Bank’s Board on March 2016.

Qualifications & Experience: Mr. Sanjeev Baijal is a senior banking and finance professional with 33 years of international experience in the financial services and auditing industry covering areas of finance, accounting, taxation, value addition, advisory, and strategic planning and development includingmergers and acquisitions. Mr. Baijal is a Chartered Global Management Accountant under Association of International Certified Professional Accountants; Member of the American Institute of Certified Public Accountants (AICPA), and Associate Member of the Institute of Chartered Accountants of India (ACA).

Current Positions: Deputy Group CEO Finance & Strategic Development, Ahli United Bank B.S.C.; Chairman Al Hilal Life B.S.C.(c) & Al Hilal Takaful B.S.C.(c), Bahrain; Director, Ahli Bank S.A.O.G.,Oman.

Former Positions: Group Head of Finance, Ahli United Bank B.S.C., Bahrain; Financial Controller, Al-Ahli Commercial Bank, Bahrain; and has held various positions at Ernst & Young, Bahrain and Price Waterhouse in India

MR. KEITH HENRY GALE (Non-Executive Director)

Chairman of Board Risk Committee, Member of the Executive Committee

Mr. Keith Gale joined the Bank’s Board in March 2009.

Qualification & Experience: Mr. Keith Gale holds a Bachelor’s degree in Accounting & Finance from Lancaster University and is a Qualified Accountant and member of the Institute of Chartered Accountants for England and Wales. He has vast experience in the banking sector and risk management.

Current Position: Deputy Group CEO - Risk, Legal and Compliance, Ahli United Bank B.S.C. - Bahrain. Director, Ahli Bank SAOG - Oman; Ahli United Bank S.A.E - Egypt; Ahli United Bank Plc, UK

Former Positions: Group Head of Risk Management, Ahli United Bank B.S.C. - Bahrain; Head of Credit and Risk at ABC International Bank PLC; Assistant Vice President, Arab Banking Corporation, B.S.C. - Bahrain.


14 AHLI UNITED BANK ANNUAL REPORT 2018

BOARD OF DIRECTORS (CONTINUED)

ABDULLA ALRAEESI(Non-Executive Director)

Member of Board Risk Committee, Member of Corporate Governance Committee

Mr. Abdulla AlRaeesi joined the Bank’s Board in March 2015

Qualifications & Experience: Mr. Abdulla AlRaeesi is a senior banking professional with over 30 years of international experience in managing retail banking, operations, finance, strategic planning, conventional and Islamic banking, mergers, and acquisitions and restructuring for banking institutions in Bahrain, Kuwait, Qatar, Oman, Egypt, Libya, Iraq and UK. Mr. AlRaeesi holds a MBA in Business and Management from the UK.

Current Positions: Deputy Chairman of Alhilal Life B.S.C; Deputy Chairman of Alhilal Takaful B.S.C; Chairman of Ahli United Bank Group IT Steering Committee; Member of Group Assets and Liabilities Committee, Member of Group Management Committee and Member of Group Operation Risk Committee.

Former Positions: Deputy Group CEO- Retail Banking of Ahli United Bank B.S.C; Board Director of Ahli Bank Qatar; Board Director of Ahli United Bank SAE Egypt; Board Director of International Chamber of Commerce; Board Director of Benefit Company; Chairman of Ahli Man Investment Committee; Vice Chairman of Charity Committee of Ahli United Bank; Head of Business Consulting Group of Arthur Andersen and Assistant General Manager of Commercial Bank of Qatar.

MOHAMED TAREQ MOHAMEDSADEQ MOHAMED AKBAR (Independent Director)

Chairman of Audit & Compliance Committee

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

Qualification & Experience: Mr. Tareq is a Fellow Chartered Accountant from the Institute of Chartered Accountants in England and Wales. He has significant experience in the fields of financial advisory consultancy, audit services and business development.

Current Positions: Managing Director, Keystone Consulting, Inc. W.L.L.; Independent Director and Chairman of the Audit & Compliance Committee of Ahli United Bank Limited, Dubai; Independent Director and Member of the Audit & Compliance Committee, Ahli United Bank S.A.E., Egypt. Non—independent director and member of the Audit & Compliance Committee of National Bank of Bahrain B.S.C. Bahrain, He is also the Independent Director of Al Zayani Investments B.S.C. © and advisor to various family offices in the Kingdom of Bahrain. He is also the Chairman of Ibdar Bank B.S.C.; Chairman of Audit Committees and Advisor to several FamilyOffices; Independent Director of Bahrain Golf Course Company B.S.C.

Former Positions:• Area Leadership Team Member and

Head of Advisory Practice Ernst & Young Middle East and North Africa

• Area Leadership Team Member and Head of Accounts & Business Development Ernst & Young Middle East & North Africa

• Office Managing Partner of the Bahrain practice of Ernst & Young Middle East & North Africa responsible for Assurance, Advisory, Tax and Transaction service lines. Staff partner in addition to providing audit and advisory services to a cross section of industries, including banking and financia services sector, government and public sector, real estate and hospitality, retail and healthcare.

MICHAEL GERALD ESSEX (Independent Director)

Member of Compensation & Nominating Committee, Member of the Risk Committee

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

Qualification and Experience: Mr. Essex holds an Executive Development Program Certificate from Harvard Business School - Boston, USA, 1997; a Masters in Public Administration from Carleton University of Ottawa, Canada, 1975; and a Bachelors Degree. Economics and Political Science from University of Western Ontario - London, Canada, 1972. He has extensive experience in Asia & Pacific, Africa and MENA regions in investment, portfolio management, risk and finance in the banking, infrastructure, energy, industrial and service sectors.

Other Current Positions: Board Director, and Chairman, Audit Committee and Nomination & Compensation Committee Ahli United Bank BSC Bahrain; Board Director, Chairman - Audit Committee, Compensation & Nomination Committee and Corporate Governance Committee Ahli United Bank SAE Egypt; Board Director, Chairman of Audit Committee Kuwait & Middle. East Financial Investment Company Kuwait; Member, Investment Committee, APIS Growth Funds (UK);

Former Positions: Board Director, Macquarie Bank, SBI India Infrastructure Fund (Singapore & India). Director, Investment & Advisory Operations, MENA Region (20 countries-Pakistan-Morocco) for International Finance Corporation (IFC); Deputy Director, IFC Global Industry & Service sector investments; Managing Director, Corporate Banking, NZI Securities, Australia; and Risk Supervisor, Asia, Bank of Nova Scotia.

BEST ISLAMIC BANK IN KUWAIT


FATWA & SHARI’AH SUPERVISORY REPORT


FATWA & SHARI’AH SUPERVISORY REPORT (CONTINUED)


FATWA & SHARI’AH SUPERVISORY BOARD MEMBERS

DR. ABDULAZIZ KHALIFA AL QASSARExecutive Member - Ph.D. in Shari’ah at Shari’ah and Law College- Al Azhar University, Cairo.- Professor of Comparative Fiqh at the Shari’ah and Islamic Studies College, Kuwait University- Member of Fatwa and Shari’ah Supervision in several Islamic banks and Financial Institutions both in

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

DR. KHALED MATHKOUR AL MATHKOURChairman- Ph.D. in Shari’ah and Law at Al-Azhar University- Cairo.- Faculty member at Kuwait University, Comparative Fiqh and Shari’ah Policy at Shari’ah and Islamic

Studies College.- Head of Fatwa Committee at the Islamic Studies College.- Member of the Scientific Committee for the Fiqh Encyclopedia at the Ministry of Awqaf and

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

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

- Amiri Diwan - State of Kuwait.

DR. ESSAM KHALAF AL ENEZIEMember- Ph.D. in Shari’ah- The University of Jordan, (Fiqh Major).- Faculty Member at Kuwait University, Comparative Fiqh Section- Shari’ah and Islamic StudiesCollege- Member of the Shari’ah Council at the Accounting and Audit Board for Islamic Financial Institutions.- Member of Fatwa and Shari’ah Supervision Board in several banks and Islamic FinancialInstitutions.- Author of a number of studies and research works.

DR. ALI IBRAHIM AL RASHEDMember- Ph.D. in Shari’ah- The University of Cairo, Dar Alolom collage- Professor of Comparative Fiqh at the Shari’ah and Islamic Studies College, Kuwait University-

Member of the Shari’ah Council at the Accounting and Audit Board for Islamic Financial Institutions.- Member of Shari’ah Supervision Board in several banks and Islamic Financial Institutions.- Author of a number of studies & researches in Islamic Fiqh


EXECUTIVE MANAGEMENT

Richard W L GrovesChief Executive Officer

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

Resigned on 14 December 2018

Hisham Zaghloul Deputy CEO - Corporate Banking and Financial Institutions

Mr. Hisham Zaghloul joined the Bank in 2007. and has extensive experience in Corporate Banking, Treasury, and Trade Finance, having worked for various banks and financial institutions including BNP Paribas (Egypt), Commercial International Bank (Egypt) and United Bank for Commerce & Investment(Libya). Mr. Zaghloul is also the Chairman of Kuwait & Middle East Financial Investment Company (KMEFIC) in Kuwait, a Board Member of Commercial Bank of Iraq (Iraq), a Board Member of United Bank of Commerce and Investment (UBCI) in Libya and a Board Member of Middle East Financial Investment Company (MEFIC) in Saudi Arabia. Mr. Hisham holds a Bachelor of Arts Degree in Economics from Faculty of Economics & Political Science - Cairo University

Abdullah AlLangawy Deputy General Manager-Treasury

Abdullah Al-Langawy joined the bank in 2006 and he is the Deputy General Manager-Treasury at Ahli united Bank of Kuwait. His experience lies in Assets & Liabilities management, Investments and Treasury Sales and derivative desks.

Al-Langawy obtained certificate of investment management and earned his MBA degree from Maastricht Business School of Management and his MBA thesis published in the Journal of Innovation Entrepreneurship and Management. He also graduated from “PLD program” from the prestigious “Harvard Business School in USA. He also completed many Banking programs and most notably the “Investment Strategies Program” and “Certified Investment Management analyst ” from Wharton University of Pennsylvania, USA. He is a board member and member of Audit committee in Mefic Capital based in KSA , in addition he is board member in Kuwait Financial market association. Al-Langawy Achieved the National Winner of financial Global management challenge representing Kuwait, and also won the prestigious Best Broker prize from the United Kingdom.


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

Mr. Muhmood holds a Bachelor of Science degree in Management Sciences from the University Of Manchester, United Kingdom.

Jehad Soud Al-Humaidhi Deputy CEO - Banking Support Group

Ms. Jehad Al-Humaidhi joined the Bank in 1984 as an IT Programmer and has held several managerial positions related to operations, administration, electronic systems, data processing and system development. Since 2011, she has held the position of General Manger of IT & Operations rising to Senior General Manager in 2016 before she got promoted to her current position June 2018. She is a Board Member of KNET and a Board Member of Gulf Custody Company. Ms. Jehad holds a Bachelor of Science degree in Mathematics (Major) and Economics (Minor) from Kuwait University.

Medhat Tawfik Senior General Manager - Private Banking & Wealth Management

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


EXECUTIVE MANAGEMENT (CONTINUED)

Alok Misra General Manager – Internal Audit

Mr. Alok joined AUBK as a General Manager-Internal Audit in 2018.

He has held various positions in the financial services industry in India since 1992, has been in internal audit since 2004 in leading banks in India, Oman and Bahrain and has been a Head of Audit of BMI Bank in Bahrain from 2010 to 2015 and Bahrain Development Bank in Bahrain from 2015 to 2018.

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

Amgad Younes Senior General Manager - Finance

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

Ranjan Sen General Manager - Retail Banking

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

Osama El Fouli Senior General Manager – Legal and Compliance

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

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

Naqeeb Hamed Amin General Manager - Human Resources

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

Leen Kumar Senior General Manager - Risk Management

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


22 AHLI UNITED BANK ANNUAL REPORT 2018

FINANCIAL PERFORMANCE SUMMARY

KD THOUSANDS Dec 18 Dec 17 Dec 16

Net Profit 51,255 44,463 40,348

Net Financing Income 100,402 104,132 88,402

Financing Receivables 2,799,906 2,672,832 2,706,054

Total Assets 3,913,653 3,665,579 3,692,161

Total Deposits 3,343,167 3,135,148 3,194,023

Shareholders Equity 430,762 406,948 385,048

Total Equity 491,402 467,588 445,688

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

Return on Average Equity (ROAE) 12.4% 11.4% 11.0%

Cost to Income 30.6% 32.0% 30.5%

Capital Adequacy Ratio 15.7% 17.2% 17.5%

Earnings Per Share (Fils) 27.1 23.3 22.8


FINANCIAL PERFORMANCE SUMMARY (CONTINUED)

2016 2017 2018

NET FINANCING INCOME KD’000s

100,402

100

,40

2

104

,13

2

88

,40

2

2016 2017 2018

TOTAL ASSETS KD’000s

3,913,653

3,9

13,6

53

3,6

92

,16

1

3,6

65

,579

2016 2017 2018

TOTAL DEPOSITS KD’000s

3,343,1673

,34

3,1

67

3,1

35

,14

8

3,1

94

,02

32016 2017 2018

FINANCING RECEIVABLES KD’000s

2,799,906

2,7

99

,90

6

2,6

72,8

32

2,7

06

,05

4

MANAGEMENT REPORT & PERFORMANCE ANALYSIS

Overview of Bank StrategyThe Bank’s performance in 2018 highlighted the continued ability of the Bank to sustain its strong growth track record and reinforce its financial standing. The Bank is committed towards providing innovative products and services, sustainable returns, exceptional customer experience, and balancing the growth with a disciplined management of costs and risks, while keeping a firm grip on both liquidity and equity values. These commitments reinforced the leading position of AUB in the local market.

The Bank is continuing the journey of adopting digital solutions, partnering with local and global fintechs, to enhance our products, services and how these are experienced through our various digial and non-digital channels. With constant upgrades to our Mobile Banking applications, active engagement on Social Media and the enhanced Business to Business (B2B) cash management platform, it demonstrates the Bank’s commitment towards providing customers with hassle-free and creative digital solutions. A significant enhanced was delivered through the B2B cash management platform being relaunched via the mobile application for corporate customers.

AUB initiated and opened its first ‘digital concept’ branch in the Avenues Shopping Mall. The branch offers the latest in touch screen and ATM experiences and benefits from being constantly upgraded and will soon be offering video chat services. In addition, the online rent collection “Ajar Online” partnership provides the Bank’s real-estate clients with a faster way to collect the rent from tenants solving a real pain point for the landlords and providing easy reconciliation. The application also allows tenants to pay their rent conveniently and securely in few seconds.

In 2018, Bank customers’ engagement with AUB’s social media was in a very positive way. Since January 2018, AUB has recorded the highest customer engagement among the banks in Kuwait. The Bank’s Ramadan campaign, launched in social media, reached over a million views within the first 10 days of launching with the highest positive ranking amongst all banks which attained winning Advertising Creativity Award of the year from Arab Media Forum.

In addition to all the digital initiatives, For the more traditional channels, the Bank has successfully opened two new branches as planned in Bayan & Rumaithiah districts and merged few other branch businesses with the nearby branches to optimize costs and enhance operations.

Building on the success and as part of the Bank’s Business Excellency Recognition Strategy for 2018, The Bank has been presented several awards including “The Best

Islamic Bank in Kuwait 2018” by Islamic Business & Finance Magazine which recognized AUB’s leading position as one of the safest Islamic banks offering innovative products, creative customer services, effective cost management and generating earnings and values to the shareholders. In addition AUB won the Best Retail Bank in Kuwait 2018’ and the ‘Best Retail Marketing in Kuwait 2018’ awards from Global Banking and Finance Review. These awards are a testament to the Bank’s achievements across Retail Banking that facilitated the customer experiences.

AUB won also the ‘Best Private Banking Bank in Kuwait 2018’ award from The Banker Middle East publication. This award reflects the Bank’s overall vision as a strong financial organization and optimal hub for private bankers and private banking clients.

The Bank further has won the ‘Best Human Resources Award in Kuwait’ from CPI Financial Banker Middle East, one of the region’s leading financial magazines. The award came in recognition of the Bank’s achievements in different fields of Human Resources. More awards have been achieved including the Health, Safety and Environment (HSE) 2018 Award, from the American Society of Safety Engineers, Citibank Straight-Through-Processing (STP) Award, for the sixth consecutive year, Best Corporate Digital Bank of Distinction, Best Corporate On-line Cash Management award, Best Bank Governance Kuwait 2018 and Most Innovative Strategic Domestic Treasury.

Moreover, the prominent Islamic Business & Finance International Magazine awarded the Bank the Best Premium Banking Award in Kuwait 2018 and Islamic Banker of the Year 2018 in Kuwait, for Mr. Tareq Muhmood, the Acting Chief Executive Officer of the Bank.

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

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

• Provide innovative Shari’ah compliant financial solutions, competitive products and quality services to its customers.

• Maintain high standards of corporate governance and risk management and a solid capital base whilst also achieving maximum returns for shareholders on a sustainable basis.

• Keeping the Bank’s position among the top Islamic Banks in Kuwait by focusing on market-share, having a


MANAGEMENT REPORT & PERFORMANCE ANALYSIS (CONTINUED)

balanced and diversified growth plan, in addition to the efficient use of internal and external resources.

• Retain and develop its human resources through a meritocratic management structure with a view to becoming the employer of choice in the financial services sector in Kuwait. The Bank focused on effective training programs related to business areas and the development of key managerial skills for staff through effective leadership programs.

• Adopting the latest technology in order to meet the needs of the Bank’s customers whilst introducing process efficiencies and reducing costs. In addition to moving toward digitalization.

• Monitor the cost to income ratio to place the Bank as one of the most efficient operating banks in Kuwait.

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

Business ProfileFollowing the conversion to Shari’ah compliant banking services, the Bank has conducted its businesses in accordance with Islamic Shari’ah provisions under the oversight of its Fatwa & Shari’ah Supervisory Board. This

switch to the Islamic Banking Model has been successful resulting in achieving growth in AUBK’s businesses both in terms of deposits and financing assets. The progress achieved since conversion has laid the foundation to target further growth within the risk appetite framework defined by the Board of Directors.

Financial & Performance OverviewThe Bank’s asset base comprises mainly of net financing constituting 72% of the total asset base. The cash balances, including inter-bank deposits, account for 19% of the total assets, thereby reflecting the rising liquidity levels within the Bank. Investments securities mainly consist of short term and long term investments in Sukuk which reached 7% of total assets. The Bank’s liabilities mainly comprise customer deposits, and deposits from banks and financial institutions at 71% and 27% respectively of the total liabilities.

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

The following table shows comparison of growth rates of AUBK from 2016 to 2018:

Main Indicators 2018 2017 2016

Total Assets (million KD) 3,914 3,666 3,692

Total Financing (million KD) 2,800 2,673 2,706

Total Customer Deposits (million KD) 2,425 2,426 2492

Total Equity 491 468 446

Main Indicators 2018 2017 2016

Total Operating Income (million KD) 121.6 120.1 111.1

Net Profit for Shareholders (million KD) 51.3 44.5 40.3

Earnings Per Share (fils) 27.1 23.3 22.8

Net Profit Trends Attributable to Shareholders


MANAGEMENT REPORT & PERFORMANCE ANALYSIS (CONTINUED)

The Bank recorded a total operating income of KD 121.6 million in 2018 in comparison to KD 120.1 million in the previous year. The net operating profit recorded KD 84.4 million after considering additional precautionary provisions to mitigate any unforeseen impairment that comes on the account of the declined oil prices.

The Bank’s return on average equity (ROAE) and return on average assets (ROAA) recorded 12.4% and 1.4% in 2018 which are not only sustainable but amongst the highest in Kuwait. The Bank enjoys a solid capital adequacy ratio of 16.6% (before dividends) under the Basel-III accord being higher than the regulatory requirement of 13% as of 31 December 2018.

The Bank continued to receive high credit ratings from the International Credit Rating Agencies, such as Fitch, Moody’s and Capital Intelligence. The Bank maintained a credit rating of “A+” on the long term and “F1” on the short term with stable outlook by Fitch Ratings Agency, and “A2” on the local currency with stable outlook by Moody’s. Capital Intelligence affirmed the Bank’s long term credit rating of foreign currency to “A+” and enhanced the short term foreign currency rating to “A2”. All these ratings underscore the credit standing, capital quality and stability of the Bank now and for future growth.

Future OutlookAUBK track record for achieving sustainable strong performance, gives it a unique vantage point for ambitious plans for growth in the coming years. Going forward, the Bank will continue to progress with a sense of purpose in developing and delivering solutions that support our customers, whilst ensuring we continue to manage our risks and adopt opportunities to simplify and improve internal efficiencies.

For 2019, the Bank will remain resilient and will be meeting all challenges coupled with further actions of:

• Deploying technology that is easy accessible and readily understood with mass appeal to attract the generation of tech savvy youth

• Adapting smart branch network to further enhance customer convenience through specialized services, high technology and strategic location

• Maintain Operational backbone which embraces digital opportunities to improve efficiencies and reduce operational risk

• Enhance customer touch points (mobile, internet, ATM, call center and branches) to embrace relevant digital opportunities

• Ensure adhere to evolving privacy and compliance requirements, and maximize the relationships with our customers


INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS OF AHLI UNITED BANK B.S.C. (CONTINUED)


EXECUTIVE SUMMARY


EXECUTIVE SUMMARY

Corporate BankingDuring 2018, Corporate Banking has continued to achieve satisfactory growth in terms of credit portfolio size and profitability, whilst ensuring the quality of the portfolio and diversification in targeted economic sectors under a conservative credit policy. This has contributed to maintaining the Bank’s strong position and achieving growth ratios that are considered amongst the highest in the Kuwaiti-banking sector.

As a result of its pursuit for excellence, Corporate Banking through its Cash Management Unit & B2B Unit has won the prestigious ‘Best Digital Bank’ 2018 award for the second consecutive year, along with the ‘Best On-Line Cash Management’ award 2018 across the same sector. The Cash Management & B2B Unit has continued to offer its customized services to corporate clients, leading to growth in the number of clients benefiting from the Business-to-Business (B2B) which integrates with the client’s Enterprise Planning System (ERP) and the Bank’s system.

During 2018, Ahli United Bank has become one of the first banks in Kuwait to offer the Business-to-Business (B2B) banking service-allowing diverse modules and bulk payments - on a mobile device through the “AUBK B2B” which allows Corporates to approve transactions on the go.

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

Corporate Banking continues to grow its contribution to the Bank and is well positioned to maintain its leading position in Kuwait.

Private Banking Building on the last year milestone achievement of wining the double accolade of Best private banking in Kuwait from the PWM The Banker and Banker middle east respectively, Private Banking and Wealth Management retained these

honors for the second year in a row. Such honors clearly demonstrates the confidence industry experts places in the Private Banking Division and its unmatched service offering. More importantly, the awards reinforces the ongoing efforts to remain in the lead ahead of market competitors.

Achieving such awards was the result of the continued & ongoing improvement of the Private banking services on many levels. Focusing on the core objectives set by AUBK management, the division set on developing its assets portfolio to the highest standards by developing new and growing existing relationships. Furthermore , the division maintained and improved its existing advisory role and estate planning services with a key highlight being the UK trust taxation workshop held in Kuwait.

Finally, in line with Private Banking fundamental critical mission to increase customers awareness and knowledge relevant to business topics & investments. The Division hosted several advisory and investment events. These events ranged from general investment overview by Goldman Sacks in JACC, a Real Estate event in London, to country related investment workshops.

The Private Banking division is positioned well for continued growth in 2019 and beyond. Retail Banking In 2018 the Retail Banking journey of intensified customer engagement though enhanced products and services and stronger communication with our customers.

Retail Banking strengthened the deposit offering to customers by adding the unique Afaaq account with superior Wekaala profit rates and an attached initial draw for customers. In addition, a youth segment offering, the “Go” account, was launched to attract students and was marketed with initial success in various universities in Kuwait.

The Retail real estate portfolio was proactively streamlined during the year to mitigate risk concerns, while a Musawama product suite was launched successfully with a notable luxury auto dealer and with a major hospital.The 100% cashback campaign for credit cards was successfully continued in peak travel periods. A strong card architecture repositioning was finalised whereby Gold and Classic cardholders could gain the benefits of Platinum cards at unchanged costs, thus enhancing the customer experience while driving additional revenues. A unique pricing feature “Free For Life” was introduced


EXECUTIVE SUMMARY (CONTINUED)

where customers spending over a defined threshold would have their fees waived, to drive usage and retention of AUB cards.

Customer acquisition and sales were further developed through a refreshed and sharpened campaign offering tremendous benefits to new salary transfers. The Direct Sales team was enlarged to better address acquisition opportunities and drive market share in retail finance, whilst making it easier for customers to bank with us

There were ongoing process automation and improvements to drive greater efficiency, including a completely revamped and improved account opening process and the implementation of an automated broking platform for the retail financing business, both of which reduced turnaround times dramatically. In addition, the entire functionality of prepaid cards was enabled in Internet and Mobile banking, greatly enhancing usage amongst customers.

Continued optimisation of the network led to the closure of branches in Gharnata and Al Refaie during the year, with their business shifted seamlessly to Sulaibhikat and Hawalli branches respectively; along with the opening of two new branches at Bayan and Rumaithiyya and a new ‘smart’ branch at The Avenues mall. Detailed plans were also initiated to merge the aged Salmiya branch with the new branch st Salmiya Boulevard and to relocate the Demna branch to a much more visible and vibrant location in Dalal Mall.

The robust performance of the Retail Banking division earned a number of accolades and awards during the year, including Best Retail Bank and Best Marketing from Global Finance, the “Best Premium Banking in Kuwait 2018” award from the prominent Islamic Business & Finance International Magazine and the Runner Up award for Social Media Campaigns from Arab Media forum, demonstrating recognition and acknowledgement of the significant progress made.

In 2019, there are exciting plans to continue grow Retail Banking with a specific focus on further enhancements to our mobile delivery.

Treasury In 2018, Treasury Department continued to ensure it maintained proper liquidity in the Bank while supporting the needs of various customer segments. This was achieved though ensuring strict adherence to regulatory

and internal limits. A diversified approach toward stability and growth was achieved through a mixture of fixed income instruments, Sukuk, reliance on different sources of funding and high quality assets. Risk control was another key component in this year’s success via hedging tools and active market monitoring which led to desired outcome.

Working within BASEL III rules and Central Bank guidelines, the Treasury Department ensured the Bank’s liquidity was sufficient to meeting any changes in market conditions including severe stress cases.

Additional Treasury tools were introduced through innovation and the adoption of some new technology platforms, alongside the hiring of experienced individuals to further strengthen the team and expand the Bank’s client base.

Treasury was awarded the “Most Innovative Strategic Domestic Treasury – Kuwait 2018” by “ the International Finance Magazine (IFM)” based in London, UK.

The robust performance of the Treasury Department throughout the years has contributed significantly to the Bank’s profitability. The total assets have grown substantially unlocking new limits for inter-bank placements and investments. The results have been a higher Return on Equity, minimized cost of funds and higher yield on assets. Following the prudent Risk Management approach, Treasury has been effective in achieving diversification of Banks deposit base leading to reduced concentration levels and improved overall score of the liquidity management indicators.

In 2019, Treasury will build on the achievements of 2018 and ensure we guide the Bank and the Bank’s customers through the ongoing changes in the market place.

Risk Management Risk is inherent in all of the Bank’s activities and is managed through a process of ongoing identification, measurement, analysis, evaluation, monitoring and management of all financial and non-financial risks that could have an impact on the Bank’s performance. The Bank is exposed principally to credit risk, market risk, liquidity risk and operational risk. Other risks such as reputational risk, legal risk and the various risks defined by the Basel accord are also monitored and managed.



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

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

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

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

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

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

are rated internally based on internal credit rating model - which is reviewed regularly and enhanced to meet changing market dynamics.

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

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

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

Liquidity RiskLiquidity risk is the risk that the Bank may not be able to meet its net funding requirements. Liquidity risk can also be caused by market disruptions or credit downgrades, which may cause certain sources of funding to dry up immediately.

To guard against liquidity risk, Bank has diversified its funding sources and assets, while maintaining an adequate balance of cash, cash equivalents and readily marketable securities.

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

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

Bank’s Operational Risk Self-Assessment (ORSA) lays down the principles of how operational risk is to be identified, assessed, monitored and controlled or mitigated within the



Bank. The bank tracks key risk indicators (KRI) on regular basis to assess the internal trends in risk levels and take corrective action as warranted. Bank’s Risk Management Committee evaluates the frequency and severity of various operational risk events and prescribes the necessary course of action based on root cause analysis.

Information Technology (IT)Information Technology Division (IT) is committed to delivering a strategic advantage to Ahli United Bank by using creative and innovative technology to achieve bank’s business objectives.

The division provides a secure, reliable technology infrastructure along with high quality, customer oriented services & support, to meet the ever-changing expectations of banking ecosystem. IT undertook several customer focused projects to support the digitalization strategy of the bank by enhancing several types of payments. Some of the major payments that were added to ease customer experience were the real-time third party bill payments, real-time and instantaneous transfers within the AUB member bank countries, enabling the customers to pay their financing dues using any of their debit cards, and several others.

IT also delivered a bank’s flagship technology loaded branch in Avenues which is distinguished with the fresh and open design, to reflect the digital age. There are a number of features that make this Branch one of the most advanced in the region. In addition, the Branch empowers our customers to manage their finances using our latest ATMs and Kiosks, whilst also benefiting from the availability of our Branch Relationship Officers. The Branch is designed in a way that will allow it add new technology to be added over the coming months and years.

On the infrastructure front, keeping future growth in consideration, IT upgraded the SAN storage system to a new state of the art system which will be accommodating bank’s data in-line with the future business growth. Maintaining a high level of security is critical for today’s evolving cyber threat landscape. Sentinel One Endpoint Protection Platform, which is focused on protecting the enterprise through the endpoint, was rolled out throughout the bank. Implementation of Privileged Access Management solution reduced considerable risk of any wrong doing by privileged accounts. Complex nightly end of day processes were automated in order to eliminate any human errors and to simplify the operations. In addition and in order to continue to deliver on the business requirements, it is imperative to

keep the underlying technology up to date and with that in mind the retail and corporate core systems were upgraded to the latest versions.

In 2019, IT along with the other departments in the Bank, have a clear list of priorities to execute on whilst ensuring the infrastructure, controls, security and governance of our systems remains robust.

Complaints & Customer ProtectionThe Complaints & Customer Protection department focusses on enhancing customer satisfaction through three main units: the Service quality Unit, the complaints unit, and the Customer Protection Unit. The Department has strengthened the role of these units by obtaining the accreditation of quality witness ISO 9001:2015 by SGS, United Kingdom.

Service Quality UnitService quality management methodology focuses on using technology to measure and monitor the quality of service provided to our customers. This supports the creation of a culture of excellence leading to improved customer satisfaction, increased productivity and an improved overall performance levels.

Complaints Unit The Complaints Unit is responsible for ensuring that the complaint is followed up with the customer from the time it is received until resolution. The Complaints Unit has enhanced the complaint system with a new feature to inform customers of their complaints number for easier customer follow-up. Furthermore the complaint form have been updated with the complaint registration steps. The same steps have been published on the website and also communicated via posts in the AUB Instagram. In 2019, Mobile banking is also being prepared to accept complaints increasing channels as per customer preference.

Customer Protection UnitThe Customer Protection Unit ensures that all the requirements of the Customer Protection manual are applied, to provide the right environment for the preservation of the rights of the clients and to enhance their confidence through the development of regulatory frameworks of policies, procedures and applications that ensures customers access to various services, where the Customer Protection Unit produces an annual report for the Board of Directors in this regard.


Human ResourcesSimilar to the previous year attracting and retaining competent Kuwaiti graduates remained one of the key measures in 2018.

Kuwaitization requirements remained a top priority, and Graduate Trainees are systematically placed in various Business areas within the Bank and received specialized training to prepare them for other roles in the Bank.

During 2018 AUB participated in several job fairs for recruiting fresh, potentially talent graduates and induct them in the Bank’s Graduate Training Program for Kuwaitis. The Talent Acquisition Team participated in the “Because you Deserve” event, organized by the MGRP (Manpower and Government Restructuring Program), which has the underlying objective of providing 400 employment opportunities in the Kuwait Banking Sector.

AUB has the one of the best cost to income ratio in Kuwait Banks (32.0%). Which is a result of work efficiency and higher productivity. The turnover ratio has improved over the past 3years due to high level of employee engagement. AUB is also witnessing improvement in the turnover of the Kuwaiti youths due to a stronger sense of belonging. The recruitment budget has been reduced as the cost of hiring has been reduced as a result of higher efficiency.

Over 4,700 hours of in-class training over 86 programs were facilitated for staff to enhance their advancement. An online training platform containing 106 programs is being consistently utilized contributing in leveraging the staff knowledge and experience. Such programs included Risk Management, Islamic Banking Certification, Compliance, Finance, Corporate Governance, International Financial Management, International Financial Reporting Standards and Basel III Accord.Learning and Development (‘L&D’) team and other selected employees have attended customized training programs on emotional intelligence and human behavior to enhance their understanding of different character types and capitalize on human profiling skills previously gained through Thomas International’s Personal Profile Analysis (PPA) and its related instruments.

All Bank employees were provided with E-Awareness programs on the regulatory requirements including Customer Protection, Combatting Money Laundering and Terrorism Financing and the Bank’s general policies, procedures, security alerts and code of conduct.

In addition, L&D has been supporting summer internships for high schoolers through National platforms such as LOYAC, amongst others, to help them shape a clearer vision of potential careers and studies. Internships for university students have been also facilitated from local & international universities. This is foreseen an a good investment in future potential fellow colleagues.

Human Resources is continuing to drive AUB’s aim at attaining the “Employer of Choice” status within next 2 years, with continued focus on: IFurther utilizing ‘Success Factors’ – one of the best Internationally recognized HR Systems which is used by the most renowned blue-chip companies across the Globe.

I. Kuwaiti Leadership Development initiatives focuses on investing on the Bank’s objective for hiring and retaining the highly talented and skilled local workforce, supported by individual coaching and customized training programs.

(ii) Improved Employee Well-being through encouraging employees to build a stress free and organized work environment. Each line manager takes responsibility that all employees get enough time to consume their eligible number of annual leave days and are able to maintain work-life balance.

(iii) Enhancing Communication, with AUB HR working as an enabler when it comes to transparent communication between the leaders, employees and across organizational hierarchy through technology and behavioral transformation.

Keeping our people first, HR has acquired the trust of the employees and became a successful business partner. In recognition of this AUB Human Resources Team has been awarded as the Best Human Resources Development 2018 by Banker ME.





CORPORATE GOVERNANCE


BEST BANK GOVERNANCE IN KUWAIT


CORPORATE GOVERNANCE

CORPORATE GOVERNANCE FRAMEWORK

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

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

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

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

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

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

The Shari’ah Supervisory Board oversees the Shari’ah governance implementation rules issued by CBK in addition to reviewing the Bank’s products and service offerings to ensure its compliance with the applicable Islamic Shari’ah provisions.

The governance structure ensures effective handshaking between the Board of Directors, its Committees and Shari’ah Supervisory Board, and Executive Management. This integration demonstrates a crystal clear mandate of each party and avoidance of any overlapping.

Graph 1: Corporate Governance Structure

Shareholders

Electing

Appointing

ExecutiveManagement

GeneralAssembly

ControlFunctions

Internal Shari’a Audit

Oversight

Board of Directors

CEO

Shari’ah Supervisory Board

ManagementCommittees

Oversightarms

Compensation and Nominating

Committee

Executive Committee

Governance & Disclosure

Corporate Governance Committee

Risk Committee Risk Management

Audit and Compliance Committee

Internal Audit

Regulatory Compliance


CORPORATE GOVERNANCE (CONTINUED)

Our Governance Transformation JourneyThe Bank started its governance transformation journey after the CBK issued the new Corporate Governance rules in June 2012, the Bank took significant steps during the year 2013 until the year 2018. This journey showed a substantive progression in terms of the governance culture, Board of Directors effectiveness, Stakeholders engagement in addition

to disclosure and transparency. Furthermore, the Bank has adopted several steps toward developing governance implementation tools and dashboards that reflect quantitative and qualitative measures of the governance implementation and its impact on the Bank. A summary of the governance transformation journey is shown in the following diagram.

Graph 2: Corporate Governance transformation journey

20182017

20132014

2016 2015

Benchmarking and upgrading the governance framework and introducing automated tools

Enhancing theGovernance Culture

Corporate GovernanceCBK Rule Implementation

CBK Shari’ahGovernance Rules

Developing Governanceimplementation monitoring tools

Transforming discourse andtransperency framework


Corporate Governance Pillars During Corporate Governance transformation and implementation journey, the Bank has developed its framework building blocks covering the pillars of the CBK. The building blocks are:

AUB Corporate Governance Pillars - Graph 2

Sustainability & CSR

Risk Governance & Internal Controls

Stakeholder Protection

Disclosure & Transparency

Remuneration & Performance Managements

Board Oversight

The Corporate Governance building blocks are in line with CBK nine pillars which are the following:

• Board of Directors• Corporate Values, Conflict of Interest and Group

Structure• Senior Executive Management• Risk Management & Internal Control• Remuneration Regulations & Policy• Disclosure and Transparency• Complex Corporate Structure• Protection of Shareholders Rights• Protection of Stakeholders Rights

The Board OversightThe Board of Directors comprises of nine non-executive directors two of which are independent. The Board Chairman facilitates the effective contribution of non-executive and independent directors and ensures constructive relations between all directors. Non-executive and independent directors provide constructive challenges on strategy. Non-executive directors and independent directors in addition

to scrutinize the performance of management in achieving the set bank’s goals and objectives and monitor their performance.

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

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

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

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

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




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

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

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

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

BOARD EFFECTIVENESS

Size &Composition

Board Culture

Board OperationsInvolvement and Time Dedication


Board Risk Committee

Audit & Compliance Committee

Compensation & Nominating

Committee

Executive Committee


AUB Corporate Governance Pillars - Graph 2

Board of Directors key achievements 1. Reviewed and re-aligned the Bank’s strategy with the

market’s dynamics 2. Reviewed and enhanced the overall governance

framework 3. Monitored the strategy implementation on semi-annual

basis 4. Appointed a new GM Risk Management 5. Approved the Financial Statements6. Conducted Branches networking review 7. Reviewed the regulatory compliance reporting packs 8. Reviewed and approved the risk appetite statement 9. Approved Bank lines & country limits10. Reviewed and approved The Internal Capital Adequacy

Assessment (ICAAP) Process. and Stress Testing Reviewed Risk/Audit Reports raised by their respective committees

11. Approved 2019 estimated budget and business plans12. Reviewed Bank’s policies to ensure compliance with

Shari’ah governance laws issued by Central Bank of Kuwait

13. Noted Resolutions rendered by the Shari’ah Supervisory Board

BOARD COMMITTEES1. CORPORATE GOVERNANCE COMMITTEE:

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

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

Number of meetings held during 2018: 2

Key Achievements • Reviewed the governance manual and suggest

enhancements • Reviewed and discuss the governance implementation

progress reports • Reviewed and discuss Shari’ah governance monitoring

dashboard • Initiated a project to review and enhance the overall

governance framework • Adopted a plan for automating governance monitoring

processes • Reviewed the disclosure and transparency manual


Number of Meetings held in 2018Board of Directors Meetings


Risk Committee

Audit & Compliance Committee

Compensation & Nominating

Committee

Executive Committee

7 2 4 7 2 3

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

Anwar Ali Al-Mudhaf 5 2 - - - -

Abdullah Jaber Al-Ahmad Al-Sabah 6 - - - 2 2

Jamal Shaker Al-Kazemi 5 2 - 6 - -

Adel Mohamed El-Labban 5 - - - 2 3

Sanjeev Baijal 6 - - 7 - -

Keith Henry Gale 5 - 4 - - 3

Michael Gerald Essex 7 - 4 7 2 -

Mohamed Tareq Mohamed Sadeq Mohamed Akbar

6 - - 7 - -

Abdulla Ahmed Al-Raeesi 6 2 4 - - -



2. BOARD RISK COMMITTEE

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

Committee Members:Keith Henry Gale ChairmanMichael Gerald Essex Member (independent)Abdullah Al Raeesi Member


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

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

underlying analysis and methodologies• Conducted Analysis of sukuk investment , real estate

and reverted assets • Reviewed and discuss the reputational risk modeling • Reviewed and followed up the work plan for the

assessment of security systems and information• Reviewed the risk exposures and risk limits • Reviewed updates and implementation process of IFRS• Reviewed Retail Real Estate Portfolio.• Timely monitoring of the ERM risk management

reporting pack

3. AUDIT AND COMPLIANCE COMMITTEE:

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

Committee Members:Mohamed Tareq Mohamed Chairman (independent) Sadeq Mohamed Akbar Sanjeev Baijal MemberMichael Gerald Essex Member (independent)Jamal Shaker Al-Kazemi Member


Key Achievements• Reviewed and discuss the quarterly reports of the

internal audit • Conducted an independent quality assessment on the

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

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

2019 • Monitored the execution of corrective action plans &

regulatory compliance;• Reviewed and evaluated the Internal Control System

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

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

unit;• Reviewed complaints reports from the Complaints and

Customer Protection Unit to ensure the effectiveness of internal procedures in handling these complaints in line with the relevant policies and regulatory requirements;

• Reviewed and discussed the consolidated financial statements of the Bank and submitted recommendations to the Board of Directors for their approval;

• Met with internal and external auditors, without the presence of executive management, to discuss financial and internal audit/compliance reports and matters of regulatory compliance;

• Reviewed all quarterly and annual financial statements and management letters;

• Reviewed appointment of external auditors with recommendations to the Board;

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


4. COMPENSATION & NOMINATING COMMITTEE:

Committee ObjectivesAssist the Board of Directors in fulfilling its oversight responsibilities related to managing the Bank’s compensation arrangements including short and long term performance related remuneration and recommending for the Board’s own approval the remuneration of Directors in line with Islamic Shari’ah principles and international best practice. In addition, the CNC identifies potential nominations of qualified nominees to become members of the Board and the Bank’s Senior Management; and initiates the assessment process of the Board performance, its members and its individual Committees.

Committee Members:Sheikh Abdullah Jaber Chairman Al-Ahmad Al-SabahAdel A. El-Labban MemberMichael Gerald Essex Member (independent)


Key Achievements• Reviewed the nomination of members of the Board re-

election • Reviewed the nomination and structure of the Shari’ah

Supervisory Board and provided recommendation to the Board of Directors

• Reviewed the Board and Board Committees r e m u n e r a t i o n

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

• Recommended to the Board of Directors the performance bonus pool accrual and related risk adjustment methodology for creation of the proposed bonus pool

• Reviewed the analysis of the annual assessment for the Board of Directors that included individual self-assessment, Board overall performance and Board Committees performance and presented the results for Board notification

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

plan • Reviewed the proposal from subsidiary for remunerations

& compensation for the year 2018• Reviewed the nomination of recruiting new executives

during the year 2018• Reviewed the Bank’s Succession Planning

5. EXECUTIVE COMMITTEE:

Committee ObjectivesAssists the Board of Directors in the oversight of key executive activities of the Bank, mainly related to the core banking functions and any other tasks delegated by the Board. It discharges its responsibilities in two capacities, namely: acting on behalf of the Board on matters normally reserved for the Board’s own resolutions and assuming responsibilities delegated by the Board including, but not limited to, credit, investment, liquidity, market and operational risks and excesses over limits assigned to other Committees.

Committee Members:Sheikh Abdullah Jaber Chairman Al-Ahmad Al-SabahAdel A. El-Labban MemberKeith H. Gale Member


Key achievements • Supported the Board in reviewing the progress of

strategy and business plan • Oversaw the financing proposal and approve within the

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

of management committees • Reviewed investment proposals and ensuring its

alignment with the Bank’s polices




SHARI’AH SUPERVISORY BOARD (SSB)In accordance with the applicable laws, an independent Shari’ah Supervisory Board must be established in each Islamic bank to oversee the Bank’s businesses. The number of members of the Shari’ah board should not be less than three appointed by the Bank’s general assembly. Memorandum and Articles of Association of the Bank must provide for the existence of such a board, the means of its formation, and the means of exercising of its functions. Shari’ah Board resolutions are binding upon the Bank’s departments, and the Bank is responsible for implementing these resolutions. The Shari’ah Board shall oversee and ensure the Management’s adherence to these resolutions and shall present its report to the General Assembly, including its opinion on the Bank’s business compliance to with Islamic Shari’ah provisions.

SSB Meetings During the year 2018 , the Board met 6 times , details of the Board members attendance is shown below:

• Sheikh Dr. Khaled M. Al Mathkour 6/6

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

• Sheikh Dr. Issam K. Al-Enezi 6/6

• Sheikh Dr. Ali I. Al-Rashed 4/5

Sheikh Ali Al-Rashed joined the SSB on April 26,2018. During the year , the SSB issued 72 resolutions.

SSB Key Achievements in 2018: • Reviewed the Shari’ah Governance Framework and

ensured compliance with the CBK rules • Developed a Shari’ah Governance monitoring dashboard • Ensured an effective handshake between the Board of

Directors and the SSB • Reviewed the reporting line of the Shari’ah internal audit

and ensured its independence• Reviewed the Bank’s proposed transactions, contracts

and proposed services to ensure its compliance with Islamic Shari’ah Principles

Internal Shari’ah Audit Internal Shari’ah Audit conducts quarterly audits on all the Bank’s departments to ensure their compliance with the Shari’ah Supervisory Board resolutions, and that the Bank exercises its business in accordance with the Islamic Shari’ah provisions based on the resolutions of the Shari’ah Supervisory Board. The Internal Shari’ah Audit submits its reports to the Shari’ah Supervisory Board on the findings of the audit function and its recommendations on these findings.

VIOLATIONS RESULTING IN PROFITS OR EXPENSES IN BREACH OF ISLAMIC SHARI’AH PROVISIONS No financial violations (that means financial impacts result therefrom, either by collection of prohibited income or payment of prohibited expenses, according to the resolutions of the Shari’ah Supervision Board) were detected during 2018.

ANNUAL ZAKAT PAID BY THE BANK In accordance with the law No. 46 of 2006, and according to the resolution of the Ministry of Finance No. 58/2007, the Bank shall have to pay zakat tax imposed by law. In some cases, the zakat tax covers the zakat amount to be paid by the Bank.

shareholders as zakat for their money.

The amount of zakat tax for the fiscal year ending 31/12/2018 amounted to KD 536,154

REMUNERATION OF THE SHARI’AH SUPERVISORY BOARD The Annual General Assembly endorses appointment/reappointment of the Shari’ah Supervisory Board members and authorizes the Board of Directors to determine their remuneration. The total remuneration was KD 32,000

RISK GOVERNANCE AND INTERNAL CONTROLSRisk is inherent in all of the Bank’s activities and is managed through a process of ongoing identification, measurement, analysis, evaluation, monitoring and management of all financial and non-financial risks that could have an impact on the Bank’s performance. The Bank is exposed principally to credit risk, market risk, liquidity risk and operational risk. Other risks such as reputational risk, legal risk and the various risks defined by the Basel accord are also monitored and managed.

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


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

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

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

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

The Board has reviewed the Internal Control systems and the Risk Management responsibilities and ensured their effectiveness within the Bank for the year 2018. In light of CBK instructions on internal audits within financial

institutions, and to ensure the effectiveness and adequacy of its internal control systems, the Board has reviewed the Bank’s internal control systems through an independent and certified external audit firm. The Internal Control Report (ICR) was discussed by the Board of Directors and no significant control gaps were detected in the opinion concluded by the report. Accordingly, the Board of Directors certifies the adequacy of the internal controls and supervision of the Bank.

ControlEnvironment

ControlActivities

RiskAssessment

Information & Communication

MonitoringActivities




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

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

Employees

Suppliers

Society

Shareholders

Competitors

Regulators

Customers

Subsidiaries

Board of Directors

INTERNAL STAKEHOLDER

EXTERNAL STAKEHOLDER



Components of the Stakeholders protection module:

Largest Shareholders:

Code of Condcut Confidentiality and

Information Security Managing Conflicts Whistle-blowing

Customers Complaints

Process

Provide controls on the values and ethical behaviours of the Bank Board of Directors, Executive Management and the employees.

The Bank adopts well strcutured policies and procedures to ensure full adehnrence to the Bank’s private and confidentialty. This is also supported by a well established information secuirty framework monitored independnetly by the risk management function in the Bank.

The Bank is always keen to enhance its related parties trnsactions policies and ensure its adhernece to the IFRS and the applicable rules and regulations. Any conflict of interest is governed through the Bank’s policy which requires a full disclsoure of such cases to avoid any signifncat risk

The Bank is always keen to enhance its related parties trnsactions policies and ensure its adhernece to the IFRS and the applicable rules and regulations. Any conflict of interest is governed through the Bank’s policy which requires a full disclsoure of such cases to avoid any signifncat risk

The customers complaints unit is well equiped with the experinced resources who are capable to deal will all the complaints independently and adopting a criteria to solve all complains within a quaity assurance program to ensure the trageted customers satsfication.

Shareholder Holding Percentage

Ahli United Company 67.33 %

Public Institution for Social Securities 12.31%



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

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

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

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

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

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

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

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

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

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

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

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



Remuneration disclosure and reporting The Bank’s is complying with its discourse and transparency policy, accordingly on annual basis, the Bank issues its annual remuneration disclosure report along with its annual corporate governance report. The Bank has fulfilled all the CBK requirements in reporting and disclosing the remuneration categories and provided a transparent methodology of showing the annual remuneration values this is according to the annual report as of 31 December 2018.

• Remuneration of the Board and the related committees committed to KD 266,000 collectively.

• Total remuneration of the top eight (8) Bank’s executives, including the Senior GM Finance, GM Internal Audit and Senior GM Risk Management KD 1,270,833

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

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

• Sponsorships;• Donations;• Charitable Events;

• Educational Programs;• Corporate Volunteering Programs;• Employees and Society Awareness Sessions and

Campaigns.

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

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

Code of Conduct No. of EmployeesFixed

Remunerations (KD) Variable

Remunerations (KD) Total

Payments (KD)

Senior Management 11 1,136,885 395,587 1,532,472

Material Risk Takers 26 1,401,974 369,526 1,771,500

Financial & Control Functions

23 1,055,800 234,514 1,290,314

Disclosure of Remuneration as per Employees Categories



Contents

52 Independent Auditors’ Report

58 Consolidated Statement of Profit or Loss

59 Consolidated Statement of Other Comprehensive Income

60 Consolidated Statement of Financial Position

61 Consolidated Statement of Changes in Equity

62 Consolidated Statement of Cash Flows

63 Notes to the Consolidated Financial Statements

CONSOLIDATED FINANCIAL STATEMENTS



INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS OF AHLI UNITED BANK K.S.C.P.


INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS OF AHLI UNITED BANK K.S.C.P. (CONTINUED)




CONSOLIDATED FINANCIAL STATEMENTS



CONSOLIDATED STATEMENT OF PROFIT OR LOSS For the year ended 31 December 2018

The attached notes 1 to 29 form part of these consolidated financial statements

2018 2017 Notes KD ‘000 KD ‘000

Financing income 156,811 148,112 Distribution to depositors 4 (56,409) (43,980)

NET FINANCING INCOME 100,402 104,132

Net fees and commission income 5 9,878 10,522 Foreign exchange gains 3,622 2,612 Net gain from investment securities 4,479 2,589 Net gain (loss) on sale of investment properties 174 (74) Share of results from associate 13 1,491 (687) Other income 6 1,528 979

TOTAL OPERATING INCOME 121,574 120,073

Provision and impairment losses 7 (30,513) (34,907)

OPERATING INCOME AFTER PROVISIONS AND IMPAIRMENT LOSSES 91,061 85,166

Staff costs (22,159) (24,468) Depreciation (2,979) (2,586) Other operating expenses (12,055) (11,332)

TOTAL OPERATING EXPENSES (37,193) (38,386)

PROFIT FROM OPERATIONS 53,868 46,780 Taxation 8 (2,375) (2,149) Directors’ remuneration (238) (168)

PROFIT FOR THE YEAR 51,255 44,463

Basic and diluted earnings per share (fils) 9 27.1 23.3


CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE INCOME For the year ended 31 December 2018

2018 2017 Note KD ‘000 KD ‘000

Profit for the year 51,255 44,463

Other comprehensive (loss) income

Other comprehensive (loss) income to be reclassified to consolidated statement of profit or loss in subsequent periods: Net movement in cumulative changes in fair values of investment securities - (446) Exchange differences on translation of foreign operations (41) 11

Net other comprehensive loss to be reclassified to consolidated statement of profit or loss in subsequent periods (41) (435)

Other comprehensive income not to be reclassified to consolidated statement of profit or loss in subsequent periods: Net movement in cumulative changes in fair values of investment Securities (624) - Revaluation of freehold land 15 (138) (74)

Net other comprehensive income not to be reclassified to consolidated statement of profit or loss in subsequent periods (762) (74)

Other comprehensive loss for the year (803) (509)

Total comprehensive income for the year 50,452 43,954



CONSOLIDATED STATEMENT OF FINANCIAL POSITIONAt 31 December 2018

2018 2017 Notes KD ‘000 KD ‘000

ASSETSCash and balances with banks 10 76,937 42,329 Deposits with Central Bank of Kuwait 346,097 415,626 Deposits with other banks 334,801 222,631 Financing receivables 11 2,799,906 2,672,832 Investment securities 12 264,185 217,358 Investment in associate 13 8,823 9,318 Investment properties 14 36,539 38,026 Premises and equipment 15 34,279 33,273 Other assets 16 12,086 14,186

TOTAL ASSETS 3,913,653 3,665,579

LIABILITIES AND EQUITY LIABILITIES Deposits from banks and other financial institutions 918,651 708,867 Deposits from customers 17 2,424,516 2,426,281 Other liabilities 18 79,084 62,843

TOTAL LIABILITIES 3,422,251 3,197,991

EQUITY Share capital 19 196,451 187,096Reserves 19 278,268 263,809

474,719 450,905 Treasury shares 20 (43,957) (43,957)

Attributable to Bank’s equity shareholders 430,762 406,948 Perpetual Tier 1 Sukuk 21 60,640 60,640

TOTAL EQUITY 491,402 467,588

TOTAL LIABILITIES AND EQUITY 3,913,653 3,665,579


Dr. Anwar Ali Al-Mudhaf Chairman



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,410

)

Bal

ance

as

at 1

Jan

uar

y 20

18 [r

esta

ted

] 1

87,

09

6

12,

88

3 7

8,8

77

22,

66

0

132

,96

1

4,0

27

9,9

76

974

4

1

26

2,39

9

(43,

957

) 6

0,6

40

4

66

,178

Pro

fit fo

r th

e ye

ar

- -

- -

51,2

55

- -

-

- 51

,255

-

-

51

,255

Oth

er c

om

pre

hen

sive

loss

for

the

year

-

- -

- -

(624

) (1

38)

- (4

1)

(80

3)

- -

(80

3)

To

tal c

om

pre

hen

sive

inco

me

(loss

) fo

r th

e ye

ar

- -

- -

51,2

55

(624

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38)

- (4

1)

50,4

52

- -

50

,452

Div

iden

d –

20

17 (N

ote

19

) -

- -

- (2

1,8

99

) -

- -

- (2

1,8

99

) -

- (2

1,8

99

)

Bo

nus

shar

es is

sued

– 2

017

(No

te 1

9)

9,35

5 -

- -

(9,3

55)

- -

- -

(9,3

55)

- -

-

Tran

sfer

to res

erve

s (N

ote

19

) -

- 5,

387

- (5

387)

-

- -

- -

- -

-

De-

reco

gin

itio

n o

f equity

inst

rum

ent c

arrie

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t fai

r va

lue

th

rough

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er c

om

pre

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me

- -

- -

(36

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369

-

- -

- -

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-

Pro

fit p

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n T

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1 Su

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te 2

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- -

- -

(3,3

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- -

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)

Bal

ance

as

at 3

1 D

ecem

ber

20

18

19

6,4

51

12,

88

3 8

4,2

64

2

2,6

60

1

43,

877

3

,772

9

,838

9

74

-

278

,26

8

(43,

957

) 6

0,6

40

4

91,

40

2

Bal

ance

as

at 1

Jan

uar

y 20

17

173,

237

12,8

83

74,1

99

22

,66

0

131,

04

8

3,9

24

10,0

50

974

30

25

5,76

8

(43,

957

) 6

0,6

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4

45,

68

8

Pro

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- -

-

- 4

4,4

63

-

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4,4

63

-

-

44,

46

3

Oth

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om

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hen

sive

(lo

ss) i

nco

me

for

the

year

-

- -

-

-

(4

46

) (7

4)

-

11

(50

9)

-

-

(50

9)

Tota

l co

mpre

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sive

inco

me

(loss

) fo

r th

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ar

- -

-

-

44,

46

3 (4

46

) (7

4)

-

11

43,

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-

-

4

3,9

54

Div

iden

d –

20

16 (N

ote

19

) -

- -

-

(1

8,7

17)

-

-

-

-

(1

8,7

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-

-

(18,7

17)

Bo

nus

shar

es is

sued

– 2

016

(No

te 1

9)

13,8

59

- -

-

(1

3,8

59)

-

-

-

-

(13,

859

) -

-

-

Tran

sfer

to res

erve

s (N

ote

19

) -

- 4,

678

-

(4,6

78)

-

-

-

-

-

-

-

-

Pro

fit p

aym

ent o

n T

ier

1 Su

kuk

(No

te 2

1)

- -

-

-

(3,3

37)

- -

-

-

(3,3

37)

-

-

(3

,337

)

Bal

ance

as

at 3

1 D

ecem

ber

20

17

187,

09

6

12,8

83

78,8

77

22,6

60

13

4,9

20

3,4

78

9,9

76

974

41

263,

80

9

(43,

957

) 6

0,6

40

4

67,

588


CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended 31 December 2018


2018 2017 Notes KD ‘000 KD ‘000

OPERATING ACTIVITIESProfit for the year 51,255 44,463

Adjustments for: Net (gain) loss on sale of investment properties (174) 74 Net gain from investment securities (4,479) (2,589) Share of results from associate 13 (1,491) 687 Dividend income 6 (1,013) (688) Net income from investment properties 6 (447) (105) Depreciation 2,979 2,586 Provision and impairment losses 7 30,513 34,907 Amortisation of sukuk premium 537 595

Operating profit before changes in operating assets and liabilities 77,680 79,930

Changes in operating assets / liabilities: Deposits with Central Bank of Kuwait 69,529 11,221 Deposits with other banks (133,190) 17,016 Financing receivables (148,964) 6,567 Other assets 2,502 5,489 Deposits from banks and other financial institutions 209,743 6,852 Deposits from customers (1,765) (65,590) Other liabilities 7,095 4,935

Net cash from operating activities 82,630 66,420

INVESTING ACTIVITIESPurchase of investment securities (312,164) (358,069)Sale and redemption of investment securities 269,564 344,895Purchase of investment properties (30) (21,409)Proceeds from sale of investment properties 1,500 4,517Purchase of premises and equipment (4,123) (4,540)Net income from investment properties 6 447 105Dividend income received 6 1,013 688

Net cash used in investing activities (43,793) (33,813)

FINANCING ACTIVITIESProfit payment on Tier 1 Sukuk (3,329) (3,337)Dividend paid to shareholders 19 (21,899) (18,717)

Net cash used in financing activities (25,228) (22,054)

NET INCREASE IN CASH AND CASH EQUIVALENTS 13,609 10,553Cash and cash equivalents at 1 January 87,601 77,048

CASH AND CASH EQUIVALENTS AT 31 DECEMBER 10 101,210 87,601

Financing income received amounted to KD 157,384 thousand (2017: KD 149,972 thousand) and distribution to depositors paid amounted to KD 52,486 thousand (2017: KD 45,735 thousand).


AHLI UNITED BANK K.S.C.P. ANNUAL REPORT 2018 63AHLI UNITED BANK ANNUAL REPORT 2018 63

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAs at 31 December 2018



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As at 31 December 2018


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

The Bank commenced operations as an Islamic bank from 1 April 2010. From that date, all activities are conducted in accordance with Islamic Sharia’a, as approved by the Bank’s Fatwa and Sharia’a Supervisory Board.

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

As at 31 December 2018, the Bank holds 50.41% (2017: 50.12%) effective interest in its subsidiary, Kuwait and Middle East Financial Investment Company K.S.C.P. (“KMEFIC”), a company incorporated in the State of Kuwait. KMEFIC is listed on the Kuwait Stock Exchange and is engaged in investment and portfolio management activities for its own account and for its clients.

The consolidated financial statements comprising the financial statements of the Bank and its subsidiary (together the “Group”) were authorised for issue in accordance with a resolution of the Board of Directors of the Bank on 10 January 2019 and are subject to the approval of the Ordinary General Assembly of the shareholders’ of the Bank. The Ordinary General Assembly of the Shareholders has the power to amend these consolidated financial statements after issuance.

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

2.1 Basis of preparationThe consolidated financial statements are prepared under the historical cost convention except for the re-measurement at fair value of investment securities, freehold land and derivative financial instruments.

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

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

2.3 Changes in accounting policies The accounting policies applied are consistent with those used in the previous year except for the changes arising from the adoption of IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with customers, effective from 1 January 2018.




2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)2.3 Changes in accounting policies (continued)

IFRS 9 : Financial InstrumentsThe Group has adopted IFRS 9 Financial Instruments issued in July 2014 with a date of initial application of 1 January 2018, with the exception of requirements of the expected credit losses on financing facilities as noted above in Note 2.2. The requirements of IFRS 9 represent a significant change from IAS 39 Financial Instruments: Recognition and Measurement. The new standard brings fundamental changes to the accounting for financial assets and to certain aspects of the accounting for financial liabilities.

The Group has not restated comparative information for 2017 as permitted by the transitional provisions of the standard. Therefore the information presented for 2017 does not reflect the requirements of IFRS 9 and is not comparable to the information presented for 2018. Differences in the carrying amount of financial assets resulting from the adoption of IFRS 9 are recognised in retained earnings and reserves as at 1 January 2018 and are disclosed in Note 3.

The key changes to the Group’s accounting policies resulting from the adoption of IFRS 9 are summarised below: Classification and measurement of financial assets and financial liabilities:The new standard requires all financial assets, except equity instruments and derivatives, to be assessed based on a combination of the entity’s business model for managing the assets and the instruments’ contractual cash flow characteristics. The IAS 39 measurement categories of financial instruments have been replaced by new classification of financial instruments as : At amortised cost, At Fair Value through Other Comprehensive Income (FVOCI) and At Fair Value Through Profit or Loss (FVTPL).

The accounting policies for financial liabilities will largely be the same as the requirements of IAS 39, except for the treatment of gains or losses arising from an entity’s own credit risk relating to liabilities designated at FVTPL. Such movements will be presented in Other Comprehensive Income (OCI) with no subsequent reclassification to the statement of profit or loss, unless an accounting mismatch in profit or loss would arise.

Under IFRS 9, derivatives embedded in contracts where the host is a financial asset in the scope of the standard are never separated. Instead, the hybrid financial instrument as a whole is assessed for classification.

The Group’s accounting policies for classification and measurement of financial assets under IFRS 9 is explained in Note 2.6.

Impairment of financial assets:IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with an ‘Expected Credit Loss’ (ECL) model. The new impairment model applies to financial assets measured at amortised cost, contract assets and debt investments at FVOCI, but not to investments in equity instruments. The credit losses are based on ECLs associated with the probability of default in the next twelve months unless there has been a significant increase in credit risk since origination. If the financial asset meets the definition of Purchased or Originated Credit Impaired (POCI), the credit loss is based on the change in ECLs over the life of the asset. The Group is also required to calculate provision for credit losses on financing receivables in accordance with the instructions issued by the CBK. Impairment of financing receivables shall be recognised at the higher of ECL computed based on CBK guidelines for measurement of ECL under IFRS 9, and the provision required by the CBK instructions.

The Group’s accounting policies for impairment of financial assets is explained in Note 2.6. The quantitative impact of adoption of IFRS 9 as at 1 January 2018 is disclosed in Note 3.




2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)2.3 Changes in accounting policies (continued) IFRS 9 : Financial Instruments (continued)

Hedge accounting:The general hedge accounting requirements of IFRS 9 retain the three types of hedge accounting mechanisms in IAS 39. However, greater flexibility has been introduced to the types of transactions eligible for hedge accounting, specifically broadening the types of instruments that qualify as hedging instruments and the types of risk components of non-financial items that are eligible for hedge accounting. In addition, the effectiveness test has been overhauled and replaced with the principle of an ‘economic relationship’. Retrospective assessment of hedge effectiveness is no longer required.

The Group has elected to apply the hedge accounting requirements of IFRS 9. As IFRS 9 does not change the general principles of how an entity accounts for effective hedges, applying the hedging requirements of IFRS 9 does not have a significant impact on Group’s consolidated financial statements.

IFRS 15: Revenue from Contracts with customersIFRS 15 was issued in May 2014 and is effective for annual periods commencing on or afte 1 January 2018. IFRS 15 outlines a single comprehensive model of accounting for revenue arising from contracts with customers and supersedes current revenue guidance, which is found currently across several Standards and Interpretations within IFRS. It established a new five-step model that will apply to revenue arising from contracts with customers. Under IFRS 15, revenue is recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer.

The Group adopted IFRS 15 ‘Revenue from Contracts with Customers’ resulting in no change in the revenue recognition policy of the Group in relation to its contracts with customers. Further, adoption of IFRS 15 had no impact on this consolidated financial statements of the Group.

Other amendments to IFRSs which are effective for annual accounting period starting from 1 January 2018 did not have any material impact on the accounting policies, financial position or performance of the Group.

2.4 New and revised IASB Standards, but not yet effectiveStandards issued but not yet effective are listed below. The Group intends to adopt those standards when they become effective.

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




2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

2.5 Basis of consolidationThe consolidated financial statements comprise the financial statements of the Bank as at 31 December 2018 and its subsidiary. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the Group controls an investee if and only if the Group has:

• Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee)

• Exposure or rights to variable returns from its involvement with the investee, and• The ability to use its power over the investee to affect its returns

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

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

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

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

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

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

2.6 Financial instruments a) RecognitionA financial asset or a financial liability is recognised when the Group becomes a party to the contractual provisions of the instrument. All “regular way” purchases and sales of financial assets are recognised on the settlement date, i.e. the date that the Group receives or delivers the asset. Changes in fair value between the trade date and settlement date are recognised in the consolidated statement of profit or loss or in the consolidated statement of other comprehensive income in accordance with the policy applicable to the related instrument. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the market place.




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

b) Classification and measurementThe Bank offers Sharia’a compliant products and services such as Murabaha, Musawamah, Wakala and Ijara.

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

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

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

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

Policy applicable from 1 January 2018From 1 January 2018, the Group classifies all of its financial assets except for equity instruments and derivatives, based on the business model for managing the assets and the asset’s contractual cashflow characteristics.

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

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

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

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

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

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

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

The business model assessment is based on reasonably expected scenarios without taking ‘worst case’ or ‘stress case’ scenarios into account. If cash flows after initial recognition are realised in a way that is different from the Group’s original expectations, the Group does not change the classification of the remaining financial assets held in that business model, but incorporates such information when assessing newly originated or newly purchased financial assets going forward.




2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)2.6 Financial instruments (continued) b) Classification and measurement (continued)Policy applicable from 1 January 2018 (continued)

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

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

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

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

The Group reclassifies when and only when its business model for managing those assets changes. The reclassification takes place from the start of the first reporting period following the change. Such changes are expected to be very infrequent.

The Group classifies its financial assets upon initial recognition into the following categories :• Debt instruments at amortised cost• Debt instruments at Fair Value through Other Comprehensive Income (FVOCI)• Equity instruments at FVOCI, with no recycling of gains or losses to consolidated statement of profit or loss on

derecognition• Financial assets at FVTPL

i) Debt instruments at amortised costA financial asset which is a debt instrument, is measured at amortised cost if it meets both of the following conditions and is not designated as at FVTPL:- The asset is held within a business model whose objective is to hold assets to collect contractual cash flows; and- The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of

principal and profit (SPPP) on the principal amount outstanding.

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

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




2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)2.6 Financial instruments (continued) b) Classification and measurement (continued)Policy applicable from 1 January 2018 (continued)

ii) Debt instruments at FVOCIA debt instrument is carried at FVOCI if it meets both of the following conditions:- The instrument is held within a business model, the objective of which is achieved by both collecting contractual cash

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

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

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

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

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

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

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

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

FVTPL assets are subsequently measured at fair value.

Changes in fair values, financing income and dividends are recorded in the consolidated statement of profit or loss according to the terms of the contract, or when the right to payment has been established.




2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)2.6 Financial instruments (continued) b) Classification and measurement (continued)

Policy applicable before 1 January 2018The Group classifies its financial instruments as “investments at fair value through profit or loss”, “loans and receivables”, “investments available for sale” or “financial liability other than at fair value through profit or loss”. Management determines the appropriate classification of each instrument at the time of acquisition.

i) Investments at fair value through profit or lossThese are financial assets that are either financial assets held for trading or those designated as investments at fair value through profit or loss upon initial recognition. A financial asset is classified in this category only if they are acquired principally for the purpose of generating profit from short-term fluctuation in price or if so designated by the management in accordance with a documented risk management or investment strategy and reported to key management personnel on that basis. This includes all derivative financial instruments, other than those designated as effective hedging instruments.

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

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

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

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

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

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




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

c) Impairment of financial assets

Policy applicable after 1 January 2018 The Group recognises ECL on financing receivables, non-cash credit facilities in the form of bank guarantees, letters of guarantee, documentary letters of credit, bank acceptances, undrawn cash and non-cash credit facilities (revocable and irrevocable) and investment in debt securities measured at amortised cost or FVOCI.

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

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

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

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

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

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

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

For financial assets for which the Group has no reasonable expectations of recovering either the entire outstanding amount, or a portion thereof, the gross carrying amount of the financial asset is reduced. This is considered a (partial) derecognition of the asset.




2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)2.6 Financial instruments (continued) c) Impairment of financial assets (continued)Policy applicable from 1 January 2018 (continued)Expected credit losses (continued)

When estimating lifetime ECL for undrawn financing commitments, the Group estimates the expected portion of the financing commitment that will be drawn down over its expected life. The ECL is then based on the present value of the expected shortfalls in cash flows if the financing facility is drawn down. The expected cash shortfalls are discounted at an approximation to the expected effective profit rate on the financing.

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

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

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

• Internal rating of the borrower indicating default or near-default;• The borrower requesting emergency funding from the Group;• The borrower having past due liabilities to public creditors or employees;• The borrower is deceased;• A material decrease in the underlying collateral value where the recovery of the loan is expected from the sale of the

collateral;• A material decrease in the borrower’s turnover, loss of major customers or deterioration of customer financial position;• A covenant breach not waived by the Group;• The obligor (or any legal entity within the obligor’s group) filing for bankruptcy application / protection or liquidation;• Obligor’s listed debt or equity suspended at the primary exchange because of rumours or facts about financial

difficulties;• Legal measures and action against customer by other creditors;• Clear evidence that the customer is unable to repayment financing receivable on maturity dates;• Financial assets are classified under Stage 2 when there has been a downgrade in the facility’s credit rating by 2 grades

for the facilities with Investment Grade and by 1 grade for those with Non-Investment Grade; All rescheduled financial assets are classified under the Stage 2 unless it qualifies for Stage 3 classification.

The quantitative criteria used to determine a significant increase in credit risk is a series of relative and absolute thresholds. All financial assets that are more than 30 days past due are deemed to have significant increase in credit risk since initial recognition and migrated to stage 2 even if other criteria do not indicate a significant increase in credit risk.




2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)2.6 Financial instruments (continued) c) Impairment of financial assets (continued)Expected credit losses (continued)Policy applicable from 1 January 2018 (continued)Determining the stage of impairment (continued)

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

Objective evidence that debt instrument is impaired includes whether any payment of principal or profit is overdue by more than 90 days or there are any known difficulties in the cash flows including the sustainability of the counterparty’s business plan, credit rating downgrades, breach of original terms of the contract, its ability to improve performance once a financial difficulty has arisen, deterioration in the value of collateral, etc. The Group assess whether objective evidence of impairment exists on an individual basis for each individually significant asset and collectively for others not deemed individually significant.

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

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

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

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

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

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

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




2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)2.6 Financial instruments (continued) c) Impairment of financial assets (continued)Policy applicable from 1 January 2018 (continued)

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

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

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

Write-offsThe Group’s accounting policy under IFRS 9 remains the same as it was under IAS 39. Financial assets are written off either partially or in their entirety only when the Group has stopped pursuing the recovery. If the amount to be written off is greater than the accumulated loss allowance, the difference is first treated as an addition to the allowance that is then applied against the gross carrying amount. Any subsequent recoveries are credited to credit loss expense.

Policy applicable before 1 January 2018At each reporting date, the Group assesses whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is impaired, if and only if, there is objective evidence of impairment as a result of one or more events that have occurred after the initial recognition of the asset and that loss event has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. If such evidence exists, the asset or group of financial assets is written down to its recoverable amount. The recoverable amount of a profit-bearing instrument is estimated based on the net present value of future cash flows discounted at original profit rates, and of equity instrument is determined with reference to market rates or appropriate valuation models. For variable profit rate bearing instruments, the net present value of future cash flows is discounted at the current effective profit rate determined under the contract.




2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)2.6 Financial instruments (continued) c) Impairment of financial assets (continued)Policy applicable before 1 January 2018 (continued)

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

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

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

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

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

General provisionThe Bank’s policy for minimum general provision before 1 January 2018 was same as that stated below under “Provisions for credit losses in accordance with CBK instructions”.

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




2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)2.6 Financial instruments (continued) c) Impairment of financial assets (continued)Provisions for credit losses in accordance with CBK instructions (continued)

Category Criteria Specific provision

Watch list Irregular for a period up to 90 days -

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

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

Bad Irregular for a period exceeding 365 days 100%

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

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

d) DerecognitionA financial asset (in whole or in part) is derecognised either when: (i) the contractual rights to receive the cash flows from the asset have expired or (ii) the Group has retained its right to receive cash flows from the assets but has assumed an obligation to pay them in full without material delay to a third party under a ‘pass through’ arrangement; or (iii) the Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. Where the Group has transferred its right to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Group’s continuing involvement in the asset.

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

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





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

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

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

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

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

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

All assets and liabilities for which fair value is measured or disclosed in the consolidated financial statements are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:

• Level 1:- Quoted (unadjusted) market prices in active markets for identical assets or liabilities• Level 2 :- Valuation techniques for which the lowest level input that is significant to the fair value measurement is

directly or indirectly observable• Level 3 :- Valuation techniques for which the lowest level input that is significant to the fair value measurement is

unobservable

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

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

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

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

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





2.8 Derivative financial instruments and HedgingThe Group deals in Islamic derivative instruments to manage exposures to profit rate, foreign currency and credit risks.

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

Islamic Forward AgreementsIn the ordinary course of business, the Bank enters into various types of transactions that involve financial instruments represented in forward foreign exchange agreements (Waad) to mitigate foreign currency risk. A Waad is a financial transaction between two parties where payments are dependent upon movements in price of one or more underlying financial instruments, reference rate or index in accordance with Islamic Sharia’a. The notional amount, disclosed gross, is the amount of a Waad’s underlying asset/ liability and is the basis upon which changes in the value are measured.

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

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

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

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

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

For the purposes of hedge accounting, hedges are classified into two categories: (a) fair value hedges when hedging the exposure to changes in the fair value of a recognised asset or liability or an unrecognised firm commitment; and (b) cash flow hedges, when hedging exposure to variability in cash flows that is either attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction or a foreign currency risk in an unrecognised firm commitment.




2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)2.8 Derivative financial instruments and Hedging (continued)Hedge accounting (continued)

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

When an unrecognised firm commitment is designated as a hedged item, the subsequent cumulative change in the fair value of the firm commitment attributable to the hedged risk is recognised as an asset or liability with a corresponding gain or loss recognised in consolidated statement of profit or loss.

For those contracts classified as cash flow hedges, the effective portion of the gain or loss on the hedging instrument is recognised directly as other comprehensive income in the cash flow hedge reserve, while any ineffective portion is recognised immediately in the consolidated statement of profit or loss. Amounts recognised as other comprehensive income are transferred to the consolidated statement of profit or loss when the hedged transaction affects profit or loss, such as when the hedged financial income or financial expense is recognised or when a forecast sale occurs. Where the hedged item is the cost of a non-financial asset or non-financial liability, the amounts recognised as other comprehensive income are transferred to the initial carrying amount of the non-financial asset or liability.

If the forecast transaction or firm commitment is no longer expected to occur, the cumulative gain or loss previously recognised in fair value reserve are transferred to the consolidated statement of profit or loss. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, any cumulative gain or loss previously recognised in other comprehensive income remains in other comprehensive income until the forecast transaction or firm commitment affects profit or loss.

The Group discontinues hedge accounting when the following criteria are met:

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

2.9 Financial guarantees In the ordinary course of business, the Group provides financial guarantees, consisting of letter of credit, guarantees and acceptances. Financial guarantees are initially recognised in the consolidated financial statements at fair value, being the premium received, in other liabilities. The premium received is amortised in the consolidated statement of profit or loss on a straight line basis over the life of the guarantee. Subsequent to initial recognition, the Group’s liability under each guarantee is measured at the higher of the amortised premium received and the best estimate of net cash flow required to settle any financial obligation arising as a result of the guarantee. A provision for credit losses based on the higher of ECL under IFRS 9 according to the CBK guidelines and the provisions required by the CBK instructions is also accounted.





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

Under the equity method, the investment in associate is carried in the consolidated statement of financial position at cost plus post acquisition changes in the Group’s share of net assets of the associate.

Goodwill relating to the associate is included in the carrying amount of the investment and is neither amortised nor individually tested for impairment.

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

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

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

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

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

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

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

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

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





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

Buildings, other premises and equipment are stated at cost, less accumulated depreciation and impairment losses if any. Depreciation of buildings and other premises and equipment is provided on a straight-line basis over their estimated useful lives. The estimated useful lives of the assets for the calculation of depreciation are as follows: Buildings 40 to 45 years

Other premises and equipment 2 to 5 years When assets are sold or retired, their cost and accumulated depreciation are eliminated from the accounts and any gain or loss resulting from their disposal is recognised in the consolidated statement of profit or loss.

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

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

2.14 Impairment of non-financial assetsThe Group assesses at each reporting date whether there is an indication that an asset may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the Group estimates the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or cash-generating unit’s fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets and then its recoverable amount is assessed as part of the cash-generating unit to which it belongs. Where the carrying amount of an asset (or cash-generating unit) exceeds its recoverable amount, the asset (or cash-generating unit) is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a discount rate that reflects current market assessments of the time value of money and the risks specific to the asset (or cash-generating unit). In determining fair value less costs to sell, an appropriate valuation model is used. These calculations are corroborated by available fair value indicators.





2.15 End of service indemnityProvision is made for employees’ end of service indemnity in accordance with the local laws based on employees’ salaries and accumulated periods of service or on the basis of employment contracts, where such contracts provide extra benefits. The provision, which is unfunded, is determined as the liability that would arise as a result of involuntary termination of staff at the reporting date. This basis is considered to be a reliable approximation of the present value of the final obligation.

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

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

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

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

Once a financial instrument categorised as “financing receivables” is written down to its estimated recoverable amount, related income is thereafter recognised on the unimpaired portion based on the original effective profit rate that was used to discount the future cash flows for the purpose of measuring the recoverable amount. (ii) Fee and commission incomeThe Group earns fee and commission income from a diverse range of services it provides to its customers. Fee income can be divided into the following two categories:

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

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

(iii) Dividend income is recognised when right to receive payment is established.(iv) Rental income is recognised on an accrual basis.





2.19 Taxation

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

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

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

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

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

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

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

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

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

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





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

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

Accounting JudgementsClassification of financial assets - applicable from 1 January 2018The Group determines the classification of financial assets based on the assessment of the business model within which the assets are held and assessment of whether the contractual terms of the financial asset are solely payments of principal and profit on the principal amount outstanding.

Classification of financial assets – applicable before 1 January 2018Financial assets within the scope of IAS 39 are classified as financial assets at fair value through profit or loss, loans and receivables, held to maturity investments, available for sale financial assets, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. The Group determines the classification of its financial assets at initial recognition.

Impairment of available for sale equity investments - applicable before 1 January 2018The Group treats equity financial assets available for sale as impaired when there has been a significant or prolonged decline in the fair value below its cost or where other objective evidence of impairment exists. The determination of what is “significant” or “prolonged” requires considerable judgment.

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

Impairment of financial instruments - applicable from 1 January 2018The measurement of impairment losses both under IFRS 9 and IAS 39 across all categories of financial assets requires judgement, in particular, the estimation of the amount and timing of future cash flows and collateral values when determining impairment losses and the assessment of a significant increase in credit risk. These estimates are driven by a number of factors, changes in which can result in different levels of allowances.




2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)2.25 Significant accounting judgement, estimates and assumptions (continued)Estimation uncertainty and assumptions (continued)Impairment of financial instruments - applicable from 1 January 2018 (continued)

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

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

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

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

inputs into the ECL models

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

Provision for credit losses – applicable before 1 January 2018The Group reviews its financing receivables on a quarterly basis to assess whether a provision for credit losses should be recorded in the consolidated statement of profit or loss. In particular, considerable judgment by management is required in the estimation of the amount and timing of future cash flows when determining the level of provisions 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.

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

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

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




3 TRANSITION DISCLOSURES

The impact of the change in accounting policy as at 1 January 2018 is as follows:

Retained Fair value earnings reserve KD ‘000 KD ‘000

Closing balance under IAS 39 (31 December 2017) 134,920 3,478 Impact on reclassification and re-measurements:Fair value adjustments on sukuks - 794Fair value adjustment on hedged investments - (245)Movement in investment in associate (1,959) -

(1,959) 549

Opening balance under IFRS 9 on date of initial application of 1 January 2018 132,961 4,027

Classification of financial assets and financial liabilities on the date of initial application of IFRS 9The following table shows reconciliation of original measurement categories and carrying value in accordance with IAS 39 and the new measurement categories under IFRS 9 for the Group’s financial assets as at 1 January 2018.

Original New carrying carrying Original New amount Transition amount classification classification under IAS 39 adjustments under IFRS 9 under IAS 39 under IFRS 9 KD 000’s KD 000’s KD 000’s

Financial assetsCash and balances with banks Loans and Amortised receivables cost 42,329 - 42,329

Deposits with Central Bank of Kuwait Loans and Amortised receivables cost 415,626 - 415,626

Deposits with other banks Loans and Amortised receivables cost 222,631 - 222,631

Financing receivables Loans and Amortised receivables cost 2,672,832 - 2,672,832

Investment securities – sukuks Investments Amortised available for sale cost 210,002 794 210,796

Investment securities Investments Equity – equity and funds available for sale instruments 6,974 - 6,974 at FVOCI

Investment securities Investments Financial – equity and funds available for sale asset 382 - 382 at FVTPL Profit receivable and other assets Loans and Amortised

receivables cost 7,105 - 7,105

Total financial assets 3,577,881 794 3,578,675 Adoption of IFRS 9 did not result in any change in classification or measurement of financial liabilities.




3 TRANSITION DISCLOSURES (continued)

ECL and staging of financial instrumentsCredit loss expenseAll deposits with other banks and Investments securities measured at amortised cost are classified in stage1.The table below shows the ECL charges on financial instruments for the year recorded in the consolidated statement of profit or loss:

KD ‘000

Deposits with other banks 21Investment securities measured at amortised cost 134

155

Movement of ECL

KD ‘000

ECL charge for the year 155

At 31 December 2018 155

4 DISTRIBUTION TO DEPOSITORS The Board of Directors of the Bank determines and distributes the depositors’ share of profit based on the Bank’s results at the end of each quarter.

5 NET FEES AND COMMISSION INCOME

2018 2017 KD ‘000 KD ‘000

Investment management fees 1,520 1,217Credit related fees and commission 9,493 9,818Brokerage fees 861 1,112

Total fees and commission income 11,874 12,147Fees and commission expense (1,996) (1,625)Net fees and commission income 9,878 10,522

6 OTHER INCOME

2018 2017 KD ‘000 KD ‘000

Dividend income 1,013 688Net income from investment properties 447 105

Other income 68 186 1,528 979




7 PROVISION AND IMPAIRMENT LOSSES

2018 2017 KD ‘000 KD ‘000

Impairment of financing receivables (Note 11) 24,158 32,293Recoveries from written off financing receivables (2,267) (5,641)Impairment of non-cash credit facilities (Note 11) (55) 1,867Impairment losses on investments available for sale - 691 Impairment of investment properties (Note 14) 30 1,685Other provisions 8,492 4,012Expected credit losses for investment in sukuks (Note 12) 134 -Expected credit losses for other financial assets 21 -

30,513 34,907

8 TAXATION

2018 2017 KD ‘000 KD ‘000

Contribution to Kuwait Foundation for the Advancement of Sciences (KFAS) 485 419National Labour Support Tax (NLST) 1,354 1,240Zakat 536 490

2,375 2,149

9 BASIC AND DILUTED EARNINGS PER SHARE

2018 2017

Net profit for the year attributable to the Bank’s equity shareholders (KD 000) 51,255 44,463Less: Profit payments on Tier 1 Sukuks (KD 000) (3,329) (3,337)

Net profit for the year attributable to equity holders of the Bank after profit payment on Tier 1 Sukuks 47,926 41,126

Weighted average number of shares outstanding during the year 1,768,735,977 1,768,735,977

Basic and diluted earnings per share attributable to the Bank’s equity shareholders (fils) 27.1 23.3




9 BASIC AND DILUTED EARNINGS PER SHARE (continued)

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

2018 2017

Weighted average number of Bank’s issued and paid up shares 1,964,505,903 1,964,505,903Less: Weighted average number of treasury shares (195,769,926) (195,769,926)

1,768,735,977 1,768,735,977

Earnings per share for the year ended 31 December 2017 was 24.4 fils, before retroactive adjustment to the number of shares following the bonus issue (Note 19).

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

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

2018 2017 KD ‘000 KD ‘000

Cash and balances with banks 76,937 42,329Deposits with other banks with an original maturity of seven days or less 24,273 45,272

101,210 87,601

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

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

At 1 January 2018 10,700 102,384 113,084Charge for the year (Note 7) 3,988 20,170 24,158Amounts written off (166) (12,947) (13,113)

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

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

At 1 January 2017 10,742 110,163 120,905Charge for the year (Note 7) 3,949 28,344 32,293Amounts written off (3,991) (36,123) (40,114)

At 31 December 2017 10,700 102,384 113,084




11 FINANCING RECEIVABLES (continued)

The ECL determined under IFRS 9 guidelines by CBK for financing receivables as of 31 December 2018 is KD 101,349 thousand, which is lower than provision for credit losses calculated in accordance with CBK instructions.

As at 31 December 2018, non-performing financing receivables on which income has been suspended from recognition amounted to KD 37,191 thousand (2017: KD 38,624 thousand).

The available specific provision on cash facilities is KD 8,464 thousand (2017: KD 5,433 thousand).

The provision recovery for the year on non-cash facilities is KD 55 thousand (2017: provision charge of KD 1,867 thousand). The available provision on non-cash facilities of KD 7,736 thousand (2017: KD 7,790 thousand) is included in other liabilities (Note 18).

The policy of the Group for calculation of the impairment provision for financing receivables complies in all material respects with the provision requirements of Central Bank of Kuwait.

According to the CBK instructions, a minimum general provision of 1% for cash facilities and 0.5% for non-cash facilities has been made on all applicable credit facilities (net of certain categories of collateral), that are not provided for specifically.

12 INVESTMENT SECURITIES

2018 KD ‘000

Measured at amortised cost: Sukuks 241,730

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

6,387

264,185

2017 KD ‘000

Available for sale: Sukuks 210,002

Equity securities and funds - Quoted 724 - Unquoted 6,632

217,358




12 INVESTMENT SECURITIES (continued)

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

2018 KD ‘000

Gross carrying amount as at 1 January 2018 (restated) 210,796New assets purchased net of redemptions during the year 30,023Exchange rate movements 1,045

At 31 December 2018 241,864 2018 KD ‘000

ECL allowance as at 1 January 2018 -Charge during the year (Stage 1) 134

At 31 December 2018 134

13 INVESTMENT IN ASSOCIATEThe share in assets, liabilities and results of the associate for the year ended is as follows:

2018 2017 KD ‘000 KD ‘000

Share of associate’s statement of financial position:Current assets 2,121 2,464Non-current assets 10,416 7,215Current liabilities (1,193) (274)Non-current liabilities (2,521) (87)

Net assets 8,823 9,318

Share of associate’s results: Operating income 3,533 788

Profit (loss) for the year 1,491 (687)




14 INVESTMENT PROPERTIESThese represents properties acquired by the Group and is recognised at cost less accumulated depreciation and impairment. Investment properties were revalued by independent valuers using market comparable approach that reflects recent transaction prices for similar properties and is therefore classified under level 2 of the fair value hierarchy. In estimating the fair value of investment properties, the highest and best use of the properties is their current use. There has been no change to the valuation technique during the year. The fair value of the investment properties at the reporting date is KD 38,867 thousand (2017: KD 40,448 thousand).

Movement for the year is as follows:

2018 2017 KD ‘000 KD ‘000

At 1 January 38,026 23,055Additions 30 21,409Disposals (1,325) (4,591)Impairment (Note 7) (30) (1,685)Depreciation charged for the year (162) (162)

At 31 December 36,539 38,026

15 PREMISES AND EQUIPMENTPremises and equipment includes a revaluation decrease of KD 138 thousand (2017: decrease of KD 74 thousand) in the value of freehold land based on valuations determined by independent valuation experts. Freehold land was revalued by independent valuers using significant valuation inputs based on observable market data and is classified under level 2 of the fair value hierarchy.

16 OTHER ASSETS

2018 2017 KD ‘000 KD ‘000

Profit receivable 6,525 7,098Positive fair value of derivative financial instruments (Note 24) 1,245 528Others 4,316 6,560

12,086 14,186

:




17 DEPOSITS FROM CUSTOMERSDepositors’ accounts are deposits received from customers under current account, saving investment accounts, and fixed term investments accounts. The depositors’ accounts of the Bank comprise the following

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

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

Saving Investment Accounts These are open-term deposits and the client is entitled to withdraw the balances of these accounts or portions thereof

at any time.

Fixed-Term Deposit Investment Accounts These are fixed-term deposits based on the deposit contract executed between the Bank and the depositor. These

deposits mature monthly, quarterly, semi-annually, or annually.

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

Funds utilised in investments for each investment deposit are computed using ratios identified in the contracts for opening of these accounts with clients. The Bank guarantees to pay the remaining un-invested portion of these investment deposits. Accordingly, this portion is considered Qard Hassan from depositors to the Bank, in accordance with Islamic Sharia’a. The fair values of deposits from customers do not differ significantly from their carrying values.

18 OTHER LIABILITIES

2018 2017 KD ‘000 KD ‘000

Depositors’ profit share payable 16,782 12,859Provision for staff indemnity and passage 6,635 6,310Provision for non-cash credit facilities (Note 11) 7,736 7,790Negative fair value of derivative financial instruments (Note 24) 1,485 217Account payables, accruals and others 46,446 35,667

79,084 62,843




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

2017: 2,500,000,000 shares) of 100 fils each and the issued and fully paid share capital as at 31 December 2018 comprises of 1,964,505,903 ordinary shares (31 December 2017: 1,870,958,003 shares) of 100 fils each.

ii) The Board of Directors of the Bank has proposed cash dividend of 15% (2017: 13%) amounting to15 fils per share (2017: 13 fils) and bonus shares of 5% (2017: 5%). The proposed dividends are subject to the approval of the shareholders at the Bank’s Annual General Assembly. The shareholders’ Annual General Assembly held on 1 April 2018 approved the distribution of cash dividend of 13 fils per share (2016: 12 fils per share) to the Bank’s equity shareholders registered in the Bank’s records as of the date of Annual General Assembly Meeting and issuance of bonus shares of 5% (2016: 8%) to the Bank’s equity shareholders on record at the date of regulatory approval.

iii) The Bank is required by the Companies’ Law and the Bank’s Articles of Association to transfer 10% of the profit for the year attributable to the Bank’s equity shareholders before KFAS, NLST, Zakat and Directors’ remuneration to the statutory reserve. The Bank may resolve to discontinue such annual transfers when the statutory reserve equals 50% of the paid up share capital. Accordingly the Bank has transferred KD 5,387 thousand (2017: KD 4,678 thousand) to statutory reserve. Distribution of the statutory reserve is limited to the amount required to enable the payment of a dividend of up to 5% of share capital in years when retained earnings are not sufficient for the payment of such dividend.

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

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

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




20 TREASURY SHARESThere was no purchase or sale of treasury shares during the current year.

2018 2017

Number of treasury shares 195,769,926 186,447,549Treasury shares as a percentage of total shares issued 9.97% 9.97%

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

Market value of treasury shares (KD 000) 58,144 65,070

Weighted average market value per treasury share (fils) 301 409

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

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

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

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

Semi-annual profits were paid during the year ended 31 December 2018.




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

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

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

As at 31 December 2018Financing receivables 7 6 - 42,319 42,319Deposits with other banks - 4 72,100 314 72,414Deposits from banks and financial institutions - 7 36,712 503,180 539,892Deposits from customers 13 26 - 27,917 27,917Commitments and contingent liabilities - 6 12,258 41,087 53,345Islamic Forward Agreements - 1 10,498 - 10,498Profit Rate Swaps - 1 104,866 - 104,866

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

As at 31 December 2017Financing receivables 10 9 - 40,354 40,354Deposits with other banks - 4 93,174 175 93,349Deposits from banks and financial institutions - 7 16,891 398,532 415,423Deposits from customers 14 27 - 13,492 13,492Commitments and contingent liabilities - 7 8,486 45,008 53,494Islamic Forward Agreements - 1 9,651 - 9,651Profit Rate Swaps - 1 44,659 - 44,659

Parent Others Total KD’000 KD’000 KD’000

TransactionsFor the year ended 31 December 2018Financing income 2,779 1,977 4,756Distribution to depositors 844 11,680 12,524

For the year ended 31 December 2017Financing income 1,257 1,574 2,831Distribution to depositors 320 9,593 9,913




22 TRANSACTIONS WITH RELATED PARTIES (continued)

2018 2017 KD ‘000 KD ‘000

Directors:Board of Directors’ remuneration 238 168

Key management compensation: Salaries and other short term benefits 1,874 2,106Post-employment benefits 232 204

2,344 2,478

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

23 COMMITMENTS AND CONTINGENT LIABILITIES

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

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

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

2018 2017 KD ‘000 KD ‘000

Acceptances 23,895 42,040

Letters of credit 69,443 74,072

Guarantees 449,301 436,367

542,639 552,479

Irrevocable credit commitments to extend credit at the reporting date amounted to KD 919 thousand (2017: KD 2,894 thousand).

b) Capital commitmentThe capital commitment for purchase of assets as at 31 December 2018 is KD 1,495 thousand (2017: KD 1,827 thousand).




24 DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING

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

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

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

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

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

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

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

Notional amount

Less More Assets Liabilities than 1 1 to 3 3 to 12 than 12 (positive) (negative) month months months months Total 31 December 2018 KD ‘000 KD ‘000 KD ‘000 KD ‘000 KD ‘000 KD ‘000 KD ‘000

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

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

Notional amount

Less More Assets Liabilities than 1 1 to 3 3 to 12 than 12 (positive) (negative) month months months months Total 31 December 2017 KD ‘000 KD ‘000 KD ‘000 KD ‘000 KD ‘000 KD ‘000 KD ‘000

Waad 107 42 8,838 3,597 12,126 - 24,561Profit Rate Swaps (held as fair value hedge) 246 - - - - 14,484 14,484Profit Rate Swaps (others) 175 175 - - - 60,350 60,350

528 217 8,838 3,597 12,126 74,834 99,395




25 FAIR VALUES MEASUREMENT

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

Fair value measurement hierarchy for assets and liabilities as at 31 December 2018 is as follows:

Level: 1 Level: 2 Level: 3 Total2018 KD 000 KD 000 KD 000 KD 000

Assets measured at fair valueFinancial assetsInvestments securities 16,726 1,166 4,563 22,455

Derivative financial instrumentsWaad - 422 - 422Profit Rate Swap - 823 - 823

- 1,245 - 1,245

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

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

- 1,485 - 1,485

Level: 1 Level: 2 Level: 3 Total2017 KD 000 KD 000 KD 000 KD 000

Assets measured at fair valueFinancial assetsInvestments available for sale 210,726 2,167 4,325 217,218

Derivative financial instrumentsWaad - 107 - 107Profit Rate Swap - 421 - 421

- 528 - 528

210,726 2,695 4,325 217,746

Liability measured at fair valueDerivative financial instrumentsWaad - 42 - 42Profit Rate Swap - 175 - 175

- 217 - 217




25 FAIR VALUES MEASUREMENT (continued)

Investments classified under level 1 are valued based on the quoted bid price. Equity securities and funds classified under level 2 are valued based on market multiples and declared NAV’s. Equity securities and funds classified under level 3 are valued based on discounted cash flows and dividend discount models. The movement in level 3 is mainly on account of change in fair value of financial assets during the year.

The significant inputs for valuation of equity securities classified under level 3 are annual growth rate of cash flows and discount rates and for funds it is the illiquidity discount. Lower growth rate and higher discount rate, illiquidity discount will result in a lower fair value.

The impact on the consolidated statement of financial position or the consolidated statement of shareholders’ equity would be immaterial if the relevant risk variables used to fair value the unquoted securities were altered by 5 per cent. There was no material changes in the valuation techniques used for the purpose of measuring fair value of investment securities as compared to the previous year.

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

26 MATURITY ANALYSIS OF ASSETS AND LIABILITIES The table below summarises the maturity profile of the Group’s assets and liabilities analysed according to remaining contractual maturity:

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

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

Total assets 2,548,101 655,148 710,404 3,913,653

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

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

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




26 MATURITY ANALYSIS OF ASSETS AND LIABILITIES (continued)

Up to 3 to 12 Over 3 months months 1 year Total2017 KD 000 KD 000 KD 000 KD 000

ASSETSCash and balances with banks 42,329 - - 42,329Deposits with Central Bank of Kuwait 140,911 274,715 - 415,626Deposits with other banks 222,631 - - 222,631Financing receivables 1,889,998 273,189 509,645 2,672,832Investments available for sale 102,787 16,061 98,510 217,358Investment in associate - - 9,318 9,318Investment properties - - 38,026 38,026Premises and equipment - - 33,273 33,273Other assets 11,137 1,814 1,235 14,186

Total assets 2,409,793 565,779 690,007 3,665,579

LIABILITIES Deposits from banks and other financial Institutions 370,202 290,807 47,858 708,867Deposits from customers 1,940,032 447,218 39,031 2,426,281Other liabilities 22,439 16,383 24,021 62,843

Total liabilities 2,332,673 754,408 110,910 3,197,991

Net liquidity gap 77,120 (188,629) 579,097 467,588

27 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

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

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

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




27 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)RISK MANAGEMENT (continued)

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

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

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

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

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

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

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

Assessment of expected credit losses (policy applicable from 1 January 2018)Definition of defaultThe Group considers a financial asset to be in default and therefore Stage 3 (credit impaired) for ECL calculations when for those facilities where any payment of principal or profit is overdue by more than 90 days or there are any known difficulties in the cash flows including the sustainability of the counterparty’s business plan, credit rating downgrades, breach of original terms of the contract, its ability to improve performance once a financial difficulty has arisen, deterioration in the value of collateral etc. In such cases, the Group recognises a loss allowance for the life time ECL.

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

The Group considers a variety of indicators that may indicate unlikeliness to pay as part of a qualitative assessment of whether a customer is in default. Such indicators include:

• breaches of covenants• borrower having past due liabilities to public creditors or employees• borrower is deceased




27 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)RISK MANAGEMENT (continued)A CREDIT RISK (continued)Assessment of expected credit losses (policy applicable from 1 January 2018) (continued)

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

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

• Credit facilities are classified under Stage 2 where there has been a default in principal or profit payment for more than 30 days;

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

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

Measurement of ECLsECLs are probability weighted estimates of credit losses and are measured as the present value of all cash shortfalls discounted at the effective interest rate of the financial instrument. Cash shortfalls represent the difference between cash flows due to the Group in accordance with the contract and the cash flows that the Group expects to receive. The key elements in the measurement of ECL include probability of default (PD), loss given default (LGD) and exposure at default (EAD). The Group estimates these elements using appropriate credit risk models taking into consideration the internal and external credit ratings of the assets, forward looking macro-economic scenarios etc. Incorporation of forward-looking informationThe Group considers key economic variables that are expected to have an impact on the credit risk and the ECL inorder to incorporate forward looking information into the ECL models. These primarily reflect reasonable and supportable forecasts of the future macro-economic conditions. The consideration of such factors increases the degree of judgment in determination of ECL. The Group employs statistical models (GCorr macro model) to incorporate macro-economic factors on historical default rates.The Group considers 3 scenarios (base case, upside case, and a downside case) of forecasts of macro-economic data separately for each geographical segments and appropriate probability weights are applied to these scenarios to derive a probability weighted outcome of expected credit loss. The management reviews the methodologies and assumptions including any forecasts of future economic conditions on a regular basis.




27 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)RISK MANAGEMENT (continued)A CREDIT RISK (continued)

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

Maximum Maximum exposure exposure 2018 2017 KD ‘000 KD ‘000

Credit risk exposures relating to consolidated statement of financial position items:Balances with banks 59,949 20,029Deposits with the Central Bank of Kuwait 346,097 415,626Deposits with other banks 334,801 222,631Financing receivables 2,799,906 2,672,832Investment securities 241,730 210,002Other assets 10,903 13,183

3,793,386 3,554,303

Credit risk exposures relating to off - balance sheet items: (Note 23a) Acceptances, letters of credit, and guarantees 542,639 552,479Irrevocable credit commitments 919 2,894

543,558 555,373

The gross maximum credit exposure to a single client or counterparty as of 31 December 2018 is KD 76,516 thousand (2017: KD 62,004 thousand) before taking account of any collaterals.




27 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)RISK MANAGEMENT (continued)A CREDIT RISK (continued)Maximum exposure to credit risk (continued)

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

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

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

3,793,386 543,558

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

3,793,386 543,558

Contingencies & Assets Commitments representing representing credit risk credit risk2017 KD ‘000 KD ‘000

Geographic region:Kuwait 3,195,888 427,460Other GCC 240,105 69,127Europe 12,382 39,107North America 14,535 1,423Other countries 91,393 18,256

3,554,303 555,373

Industry sector: Trading and manufacturing 514,267 211,175Banks and financial institutions 861,294 105,645Construction and real estate 1,204,466 166,494Other 974,276 72,059

3,554,303 555,373





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

All internal risk ratings are tailored to the various categories and are derived in accordance with the Group’s rating policy. The credit quality of class of assets with underlying credit risks are as follows:

Neither past due nor impaired (KD 000)

High Standard Closely 2018 grade grade monitored Total

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

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

(KD 000)

High Standard Closely 2017 grade grade monitored Total

Balances with banks 20,029 - - 20,029Deposits with Central Bank of Kuwait 415,626 - - 415,626Deposits with other banks 222,631 - - 222,631Financing receivables 2,362,878 163,647 62,433 2,588,958Investments available for sale 210,002 - - 210,002Other assets 13,183 - - 13,183

3,244,349 163,647 62,433 3,470,429





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

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

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

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

Fair value of collateral 8,350

Past due Past due Past due up to 30 days 31 to 60 days 61 to 90 days Total2017 KD 000 KD 000 KD 000 KD 000

Financing receivables - Retail financing 8,233 3,019 927 12,179 - Commercial financing 28,446 7,355 2,703 38,504

36,679 10,374 3,630 50,683

Fair value of collateral 37,732

Financial assets by class that are impaired:

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

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

37,191 8,464 26,081

Gross Impairment Fair value exposure provision of collateral2017 KD ‘000 KD ‘000 KD ‘000

Financing receivables - Retail financing 10,938 1,551 - - Commercial financing 27,686 3,882 29,816

38,624 5,433 29,816

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





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

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

Less than 1 to 3 3 to 12 1 to 5 Over 1 month months months years 5 years Total2018 KD 000 KD 000 KD 000 KD 000 KD 000 KD 000

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

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


Deposits from banks and other financial institutions 295,872 74,582 294,296 49,085 - 713,835Deposits from customers 1,431,291 510,879 451,802 39,031 - 2,433,003Other liabilities 19,028 3,411 16,383 24,021 - 62,843

1,746,191 588,872 762,481 112,137 - 3,209,681

The table below shows the contractual expiry by maturity of the Group’s credit related contingent liabilities and commitments as disclosed in Note 23:


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

32,472 58,818 224,286 206,005 21,977 543,558 2017 Credit related contingent liabilities 22,289 62,162 250,368 185,516 32,144 552,479Irrevocable credit commitments - - - 158 2,736 2,894

22,289 62,162 250,368 185,674 34,880 555,373





C MARKET RISKThe Group defines market risk as the uncertainty in future earnings on the Group’s on and off balance sheet positions resulting from changes in market variables such as profit rate risk, currency risk and equity price risk.

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

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

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

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

Effect on profit before tax

Changes in 2018 2017Currency currency rate in % KD 000 KD 000

US Dollars +/- 5% 54 3

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

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

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

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

Effect on equity

Changes in 2018 2017Market indices equity price % KD 000 KD 000

Kuwait Index +/- 5% 33 5




27 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)RISK MANAGEMENT (continued)C MARKET RISK (continued)C.3 EQUITY PRICE RISK (continued)

Effect on statement of profit or loss

Changes in 2018 2017Market indices equity price % KD 000 KD 000

Saudi Arabia + 5% 530 -

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

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

C.4 PREPAYMENT RISKPrepayment risk is the risk that the Group will incur a financial loss because its customers and counterparties repay or request repayment earlier than expected, such as fixed rate mortgages when profit rates fall. Due to the contractual terms of its Islamic products, the Bank is not significantly exposed to prepayment risk. D OPERATIONAL RISKThe Group has a set of policies and procedures approved by the Board of Directors and are applied to identify, assess and supervise operational risk in addition to other types of risk relating to the banking and financial activities of the Group. Operational risk is managed by the Risk Management Division. This Division ensures compliance with policies and procedures to identify, assess, supervise and monitor operational risk as part of overall Global Risk Management.

The Group manages operational risks in line with the Central Bank of Kuwait instructions dated 14 November 1996 regarding general guidelines for internal control systems and directives issued on 13 October 2003 regarding “Sound Practices for the Management

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




28 SEGMENT REPORTING (continued)

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

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

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

Segment results include revenue and expenses directly attributable to a segment and an allocation of overhead cost.

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

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

Retail and Commercial Treasury and Investment

Banking Management Total

2018 2017 2018 2017 2018 2017 KD 000 KD 000 KD 000 KD 000 KD 000 KD 000

Net financing income 81,966 85,500 18,436 18,632 100,402 104,132

Fees, commissions and others 10,572 11,544 10,600 4,397 21,172 15,941

Total operating income 92,538 97,044 29,036 23,029 121,574 120,073

Provision and impairment losses (30,235) (34,178) (278) (729) (30,513) (34,907)

Operating expenses and taxation (33,233) (31,334) (6,573) (9,369) (39,806) (40,703)

Segment result 29,070 31,532 22,185 12,931 51,255 44,463

Profit for the year 51,255 44,463

Retail and Commercial Treasury and Investment

Banking Management Total

2018 2017 2018 2017 2018 2017 KD 000 KD 000 KD 000 KD 000 KD 000 KD 000

Segment assets 3,188,710 3,043,808 724,943 621,771 3,913,653 3,665,579

Segment liabilities 1,935,459 1,789,133 1,486,792 1,408,858 3,422,251 3,197,991

The Group primarily operates in Kuwait.




29 CAPITAL MANAGEMENTThe primary objectives of the Group’s capital management are to ensure that the Group complies with externally imposed capital requirements and that the Group maintains strong and healthy capital ratios in order to support its business and to maximise shareholders’ value.

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

The Group’s regulatory capital and capital adequacy ratios (Basel III) for the year ended 31 December 2018 are calculated in accordance with CBK circular number 2/RB, RBA/336/2014 dated 24 June 2014 are shown below:

2018 2017 KD ‘000 KD ‘000

Risk weighted assets 3,196,336 2,778,966

Total capital required 415,524 375,160

2018 2017 KD ‘000 KD ‘000

Capital available Tier 1 capital 490,772 466,961 Tier 2 capital 38,324 33,184

Total capital 529,096 500,145 Tier 1 capital adequacy ratio 15.35% 16.8%Total capital adequacy ratio 16.55% 18.0%

The Group’s financial leverage ratio for the year ended 31 December 2018 is calculated in accordance with CBK circular number 2/IBS/ 343/2014 dated 21 October 2014 is shown below:

2018 2017 KD ‘000 KD ‘000

Tier 1 capital 490,772 466,961

Total exposure 5,451,278 5,161,609

Financial leverage ratio 9.0% 9.05%

114 AHLI UNITED BANK K.S.C.P. ANNUAL REPORT 2018114 AHLI UNITED BANK K.S.C.P. ANNUAL REPORT 2018

AHLI UNITED BANK K.S.C.P. ANNUAL REPORT 2018 115AHLI UNITED BANK ANNUAL REPORT 2018 115

December 31, 2018

In accordance with Central Bank of Kuwait (“CBK”) Rules and Regulations concerning Capital Adequacy Standard (Basel III) vide

circular reference 2/RB,RBA/A336/2014 dated June 24, 2014

BASEL III – PILLAR III DISCLOSURES



BASEL III – PILLAR III DISCLOSURES 31 December 2018


INFORMATION ON SUBSIDIARIES AND SIGNIFICANT INVESTMENTSThe public disclosures under this section have been prepared in accordance with the Central Bank of Kuwait (“CBK”) Rules and Regulations concerning Capital Adequacy Standard (Basel III) vide circular reference 2/RB,RBA/336/2014 dated June 24, 2014, which apply to Ahli United Bank, Kuwait (“the Bank” or “AUBK”). The disclosures under this section consist of disclosures of the Bank and its subsidiary (together known as “the Group”).

The Bank’s principal subsidiary is Kuwait and Middle East Financial Investment Company K.S.C.P. (“the Subsidiary”), a company incorporated in the State of Kuwait and engaged in investment management activities and regulated by the CBK and the Capital Market Authority (“CMA”). The Bank holds 50.41% effective interest in KMEFIC at 31 December 2018 (2017: 50.12%). The Board of Directors of the Bank in December 2015 approved to sell its entire equity interest in the Subsidiary and recorded this as assets held for sale as per IFRS 5.

The Bank owns 30% (31 December 2017: 30%) equity interest in Middle East Financial Investment Company, an unquoted company incorporated in the Kingdom of Saudi Arabia engaged in investment activities.

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

INFORMATION RELATED TO THE CAPITAL STRUCTURE OF THE LICENSED BANKThe Group’s capital comprises Common Equity Tier (1) (CET1), Additional Tier (1) (AT1) and Tier (2) capital. CET1 capital demonstrates the Group’s strength and includes share capital, reserves minus the treasury shares, dividends declared, goodwill, intangible assets and investments. AT1 capital includes additional paid in capital, including AT1 sukuk, and non-controlling interest. Tier (2) consists of non-controlling interest and general provision up to 1.25% of the total credit risk weighted assets according to CBK rules and regulations.

The authorized, issued and fully paid share capital as at 31 December 2018 comprises 2,062,731,198 (31 December 2017: 1,964,505,903) ordinary shares of 100 fils each (31 December 2017: 100 fils each). In accordance with the CBK instruction vide circular 2/IBS/101/2003 and subsequent amendments / updates, the Group may purchase treasury shares up to 10% of its issued shares. No cash dividend is paid on treasury shares held by the Group. However, treasury shares are entitled for bonus shares.

During October 2016, the Group issued USD 200 million (31 December 2018: KD 60.64 million) Perpetual Non-Cumulative Non-Convertible Additional Tier 1 Regulation S Mudaraba Sukuk (AT1 Sukuk) which has been classified as additional tier (1) capital in accordance with CBK’s Basel III regulations.

The Group does not have structured or complex capital instruments which are prohibited by Islamic Sharia’a principles.




TABLE 1 – CAPITAL STRUCTURE

2018 2017Details KD ‘000 KD ‘000

Common Equity Tier 1

Paid up share capital 206,273 196,451

Property revaluation reserve 9,838 9,976

Cumulative changes in fair value reserve 3,772 3,478

Profit equalization reserve 2,313 2,313

Statutory Reserve 84,264 78,877

General Reserve 22,660 22,660

Treasury share reserves 974 974

Other disclosed reserve 12,883 12,924

Retained earnings 104,581 100,726

Less:

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

Total Common Equity Tier 1 403,601 384,422

Additional Tier 1

Perpetual Tier 1 Sukuk 60,640 60,640

Eligible non-controlling interest in consolidated subsidiaries - -

Total Additional Tier 1 60,640 60,640

Total Core Capital 464,241 445,062

Tier 2 capital

Eligible non-controlling interest in consolidated subsidiaries - -

General provision (up to 1.25% of RWA) 38,324 33,184

Total Tier 2 capital 38,324 33,184

Total Eligible Capital 502,565 478,246




TABLE 2 – RECONCILIATION BETWEEN THE STATEMENT OF FINANCIAL POSITION AND THE REGULATORY CAPITAL ELEMENTS – DECEMBER 2018

STEP 1

2018 KD ‘000

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

Asset

Cash and balances with banks 76,937 76,937

Deposits with Central Bank of Kuwait 346,097 346,097

Deposits with other banks 334,801 *334,822

Financing receivables 2,799,906 ** 2,915,570

Investment securities 264,185 * 264,319

Investment in associate 8,823 8,823

Investment properties 36,539 36,539

Premises and equipment 34,279 34,279

Other assets and intangibles 12,086 *** 10,841

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

Liabilities

Deposits from banks and other financial institutions 918,651 ****-

Deposits from customers 2,424,516 ****-

Other liabilities 79,084 ****-

Total liabilities 3,422,251 ****-

Equity

Share capital 196,451 *****206,273

Reserves 278,268 ******241,285


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


Total equity 491,402 464,241

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

Tier 2 capital 38,324

Total Eligible Capital 502,565

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





STEP 2

2018 KD ‘000

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

Asset

Cash and balances with banks

- Cash items 16,988 16,988

- Bank balances with CBK 46,249 46,249

- Bank balances at other banks 13,700 13,700


Deposits with other banks 334,801 334,822

Financing receivables 2,799,906 2,915,570

Investments securities 264,185 264,319




Other assets and intangibles 12,086 10,841

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

Liabilities

Deposits from banks and other financial institutions 918,651 -

Deposits from customers 2,424,516 -

Other liabilities 79,084 -

Total liabilities 3,422,251 -





STEP 2 (continued)

2018 KD ‘000


Equity

Share capital 196,451 206,273 (a)

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

Reserves

- Statutory reserve 84,264 84,264 (c)

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

- Cumulative changes in fair value 3,772 3,772 (e)

- Property revaluation reserve 9,838 9,838 (f)

- Treasury share reserve 974 974 (g)

- Other disclosed reserves 12,883 12,883 (h)

- Profit equalisation reserve - 2,313 (i)

- Retained earnings 143,877 *104,581 (j)


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

Total equity 491,402 464,241



* Profit equalization reserve reclassified from “Retained earnings” and shown separately. Additional difference is due to accrual for the profit

distribution on the AT1 Sukuk. Moreover, proposed dividends and bonus shares deducted from the “Retained earnings” and proposed bonus

shares added to “Common Equity Tier (1)”.





STEP 3

2018 KD ‘000

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

Share capital 206,273 (a)

Retained earnings 104,581 (j)

Property revaluation surplus 9,838 (f)

Cumulative changes in fair value 3,772 (e)

Profit equalisation reserve 2,313 (i)

Statutory Reserve 84,264 (c)

Voluntary Reserve 22,660 (d)

Treasury share reserve 974 (g)

Other Disclosed Reserves 12,883 (h)

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

Treasury shares (43,957) (b)

Common Equity Tier (1) capital 403,601

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

Total Tier 1 Capital 464,241







STEP 1

2017 KD ‘000

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

Asset

Cash and balances with banks 42,329 42,329



Financing receivables 2,672,832 *2,780,483

Investments available for sale 217,358 217,358




Other assets and intangibles 14,186 ** 13,658

Total assets 3,665,579 3,772,702

Liabilities

Deposits from banks and other financial institutions 708,867 ***-

Deposits from customers 2,426,281 ***-

Other liabilities 62,843 ***-

Total liabilities 3,197,991 ***-

Equity

Share capital 187,096 ****196,451

Reserves 263,809 *****231,928




Total equity 467,588 445,062

Total liabilities and equity 3,665,579 445,062

* Difference is due to inclusion of general provision which was deducted for the accounting consolidation.** Difference is due to replacement cost for Shari’ah compliant hedging contracts.*** Liabilities are not considered in the capital adequacy computations under Basel III Pillar I.**** Difference is due to proposed bonus shares.

***** Difference is due to accrual for the profit distribution on the AT1 Sukuk, proposed dividends and bonus shares.





STEP 2

2017 KD ‘000


Asset

Cash and balances with banks

- Cash items 22,328 22,328

- Bank balances with CBK 11,840 11,840

- Bank balances at other banks 8,161 8,161



Financing receivables 2,672,832 2,780,483

Investments available for sale 217,358 217,358




Other assets and intangibles 14,186 13,658

Total assets 3,665,579 3,772,702

Liabilities

Deposits from banks and other financial institutions 708,867 -

Deposits from customers 2,426,281 -

Other liabilities 62,843 -

Total liabilities 3,197,991 -





STEP 2 (continued)

2017 KD ‘000


Equity

Share capital 187,096 196,451 (a)

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

Reserves

- Statutory reserve 78,877 78,877 (c)

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

- Cumulative changes in fair value 3,478 3,478 (e)

- Property revaluation reserve 9,976 9,976 (f)

- Treasury share reserve 974 974 (g)

- Other disclosed reserves 12,924 12,924 (h)

- Profit equalisation reserve - 2,313 (i)

- Retained earnings 134,920 *100,726 (j)


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

Total equity 467,588 445,062

* Profit equalization reserve reclassified from “Retained earnings” and shown separately. Additional difference is due to accrual for the profit

distribution on the AT1 Sukuk. Moreover, proposed dividends and bonus shares deducted from the “Retained earnings” and proposed bonus

shares added to “Common Equity Tier (1)”.





STEP 3

2017 KD ‘000

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

Share capital 196,451 (a)

Retained earnings 100,726 (j)

Property revaluation surplus 9,976 (f)

Cumulative changes in fair value 3,478 (e)

Profit equalisation reserve 2,313 (i)

Statutory Reserve 78,877 (c)

Voluntary Reserve 22,660 (d)

Treasury share reserve 974 (g)

Other Disclosed Reserves 12,924 (h)

Common Equity Tier (1) capital before regulatory adjustments 428,379

Treasury shares (43,957) (b)

Common Equity Tier (1) capital 384,422

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

Total Tier 1 Capital 445,062




TABLE 4 – MAIN FEATURES OF REGULATORY CAPITAL INSTRUMENTS

Share Capital AT1 Sukuk

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

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

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

ALMUTAHED XS1508651665 / 150865166

Governing laws of the instrument

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

English Law

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

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

Instrument type Equity instrument Deeply subordinated mudaraba sukuk

Amount recognised in regulatory capital

KD 206,273 thousands (2017: KD 196,451 thousands)

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

Par value of instrument 100 fils each USD 1,000

Accounting classification Equity (CET1) Equity (AT1)

Original date of issuance Various 25 October 2016

Perpetual or dated Perpetual Perpetual

Issuer call subject to prior supervisory approval

Not applicable Yes

Optional call date and redemption amount

Not applicable25 October 2021 at par value of the instruments

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

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

Profit rate Not applicable 5.5% per annum

Existence of a dividend stopper Not applicable Yes

Fully discretionary, partially discretionary or mandatory

Fully discretionary Fully discretionary




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

Share Capital AT1 Sukuk

Noncumulative or cumulative Noncumulative Noncumulative

Convertible or non-convertible Non-convertible Non-convertible

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

If write-down, write-down trigger Not applicable

A non-viability event means that the CBK has informed the AUBK in writing that it has determined that a trigger event has occurred. A trigger event would have occurred if any of the following events occur:

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

• An immediate injection of capital is required, by way of an emergency intervention, without which AUBK would become non-viable.

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

If write-down, permanent or temporary

Not applicable Permanent

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

Equity InstrumentDeeply subordinated, senior only to ordinary shares

Non-compliant transitioned features None None




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

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

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

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

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

The Bank has been given the credit rating of ‘A2’ and ‘A+’ by Moody’s and Fitch respectively. Given the favorable ratings, the Bank is confident of raising any additional capital requirements including resorting to eligible Sharia’a compliant instruments at competitive pricing to support any need for additional capital.

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

At 31 December 2018, the total Capital Adequacy Ratio recorded as 15.72% (31 December 2017: 17.21%) higher than the ratio required by regulatory authorities of 13% (31 December 2017: 13.5%) and Tier (1) Capital 14.52% (31 December 2017: 16.02%) and CET1 Capital 12.63% (31 December 2017: 13.83%).

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

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

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




TABLE 5 – CAPITAL REQUIREMENT FOR CREDIT, MARKET AND OPERATIONAL RISKS

2018 2017 KD ‘000 KD ‘000

Risk Minimum Risk Minimum Weighted capital Weighted capital Assets requirement Assets requirement

Claims on PSE - - 1,663 220

Claims on banks 147,886 18,938 92,126 12,262

Claims on corporate 2,208,316 282,702 1,866,322 247,305

Claims on regulatory retail 393,505 50,299 379,655 50,189

Past due exposures 17,453 2,231 19,982 2,641

Goods & commodity other than real estate 351 45 13 2

Investments in real estate and real estate inventory 73,078 9,340 76,052 10,053

Share & commercial real estate financing 160,089 20,462 192,184 25,408

Securitized Sukuk - - - -

Other exposures 113,858 14,554 77,940 10,303

Total credit risk weighted assets 3,114,536 398,571 2,705,937 358,383

Credit risk weighted assets adjustments (85,018) (11,052) (82,861) (11,186)

Net credit risk weighted exposure 3,029,518 - 2,623,076 -

Minimum capital requirement for credit risk 387,519 347,197

Minimum market risk capital charge 204 309 41

Minimum operational risk capital charge 27,801 206,828 27,922

Total 415,524 375,160




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

Internal Capital Adequacy Assessment Process (ICAAP) provides the foundation to determine the economic capital which Bank requires to cover all material risks. ICAAP reflects the strategy of the Bank and its risk appetite. ICAAP is an integrated process of the management decision making for capital planning, asset and profitability growth.

Bank’s ICAAP is intended to:• Determine the level of capital required to support the risk profile of the Bank over and above the minimum capital

adequacy required by the Central Bank of Kuwait;• Identify and quantify the additional risks, which are otherwise not covered in Pillar 1 while calculating minimum capital

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

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

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

Additional risks• Concentration Risk• Residual Credit Risk• Residual Market Risk• Residual Operational Risk• Profit Rate Risk• Liquidity Risk• Reputational Risk• Strategic Risk• Legal Risk• Regulatory & Sharia Risk

The stress testing under the Bank’s ICAAP Policy is to determine the Bank’s financial position from plausible to severe scenarios. Stress testing also provides an indication of the appropriate level of capital necessary to ensure the economic viability of the Bank in the face of deteriorating business conditions. ICAAP is an ongoing process and reviewed by management on a semiannual basis.

Stress testing and scenario analysis are essential tools that the Bank employs for its capital management and planning as well as risk management process.

Stress testing is an evaluation of the Bank’s financial position under multiple scenarios that try to capture potentially adverse conditions. It covers a range of risks and business areas as an Enterprise-wide risk assessment, quantification, impact analysis and decision making. The stress testing process assesses the additional capital requirement to absorb losses on various stress scenarios.




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

The Board of Directors and Senior Management ensure that the ICAAP and stress testing takes into account the following major considerations, which are then communicated across all the business and support units.

• Identification of all the risks that the Bank may be exposed to, with quantification; • Assessment of business conditions prevailing in the markets;• Assessment of the legal and regulatory environments pertaining to the business activities and sources of financing;• Short and medium-term business plans and strategies to achieve such plans;• Assessment of the level of capital required to protect the Bank against anticipated business risks;• Sources of capital;• Quality and loss absorbency of the capital;• Profit distribution;• Supplementary funding;

While stress tests provide an indication of the appropriate level of capital necessary to endure deteriorating economic conditions, the Bank also employs other tools to help mitigate increasing levels of risk. In this connection, stress testing is a supplementary tool to other risk management approaches and measures.

INFORMATION RELATED TO A LICENSED BANK’S RISK MANAGEMENTThe Bank maintains a strong risk management culture balancing risks and rewards focusing on maximizing shareholder value on sustainable basis. The Bank continuously reviews its risk management policies and practices to ensure that it is not subject to large asset valuation and earnings volatility.

The Board has the ultimate responsibility for the risk management of the Bank. The Board determines the Bank’s overall risk appetite that provides guidance on risk management. The Board, senior management and risk management contribute in effective enterprise-wide risk management. .. Risk management is responsible to adequately identify, measure and monitor all the material risks in the Bank to ensure that they are in line with the risk appetite. The risk framework in the Bank is designed in such a way that there is an established effective relationship between the risk managers and the business areas. It helps in timely identification of risk and facilitation of appropriate response.

The Risk Management Division (RMD) structure has a distinct identity and independence from business units. RMD is headed by “Senior General Manager – Risk Management” reporting to the Board’s Risk Committee. The division is comprised of the following major units to address the pertinent risk exposure of the Bank:

- Credit risk- Market and liquidity risk- Operational risk

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





The following committees have the overall responsibility and authorities vested in them for the day-to-day risk management activities of the Bank. Authorities are exercised within the objectives and policies approved by the Board, and subject to the rules and regulations laid down by the CBK.

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

2) Executive Committee (EC) assists the Board in discharging its responsibilities in two capacities, deputizing between Board meetings on matters normally reserved to the Board’s own decision and exercising authorityon credit, investment, liquidity and market risks, in excess of limits assigned to other committees.

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

4) Senior Credit Committee (SCC) approves financing proposals with limits in excess to those assigned to the Credit Committee (CC) and within the parameters that have been set by the Board. In addition, SCC reviews and approves country, bank and investment exposures within the prescribed limits. Whenever necessary, SCC makes the appropriate recommendations to the EC and the Board on related matters.

5) Credit Committee (CC) reviews and approves financing proposals within parameters that have been set by the Board. It also assists the SCC, EC and BRC in managing the Bank’s exposure to credit risk.

6) Credit Evaluation and Provisioning Committee (CEPC) evaluates the overall quality of investment and finance portfolio, ensures that irregular investment and finance transactions are classified based on the CBK and/or IFRS 9 guidelines, ensures adequate provisions are taken and assists the CC, SCC, EC, BRC and the Board in managing the Bank’s exposure to credit risk.

7) Assets and Liabilities Committee (ALCO) reviews and approves strategies relating to the management of assets and liabilities including liquidity, profit rate, foreign exchange, cost of funds, cost allocation, deposit pricing matrix and strategic trading positions.

8) Risk Management Committee (RMC) ensures risk management framework, policies and procedures are applied across all divisions of the Bank. RMC assists the BRC and the Board in fulfilling its oversight responsibilities related to risk management practices, implementation and on-going assessment of the risk framework..

The risk management function of the Bank’s subsidiary is managed by its independent Board of Directors and Senior Management. The Bank’s nominee directors on the Board of Directors of the subsidiary through its oversight manage and monitor the risk management activities of the subsidiary.





The following sections below, detail the risks inherent in the activities undertaken by the Bank, their nature and approach adopted towards management / mitigation of these risks.

STRATEGIC RISKThe Bank defines strategic risk as the adverse impact on Bank’s earnings, capital, and risks arising from changes in environment the Bank operates in, from adverse strategic decisions, improper implementation of decisions or lack of responsiveness to industry strength, economic direction or technological changes. The Bank has put in place strategic risk framework to identify, measure, monitor and report strategic risk exposures. For the purposes of strategic risk the sources of risks are from:

• Inadequate strategic governance framework;• Inadequate identification of factors that impact the strategy and/or business plans;• Insufficient planning and resource allocation process;• Failure in execution of plans, projects and initiatives; and• Issues related to environment dynamics – internal and external including products, services and practices of the Bank.

FINANCING RISKFinancing risk is the risk that one party to a financial instrument will fail to discharge an obligation on time and in full as contracted and cause the other party to incur a financial loss. Financing risk includes the major risks mentioned below:

Direct Financing RiskThe risk that actual customer obligations will not be repaid on time. Direct financing risk occurs in various Islamic products offered by the Bank, both secured and unsecured. It exists for the entire life of the transactions.

Contingent Financing RiskThe risk that potential contingent obligations will become actual obligations and will not be repaid on time. Contingent financing risk occurs in products offered by the Bank ranging from letters of credit and guarantees to unused financing commitments. It exists for the entire life of the transaction.

Issuer Spread RiskThe risk that the market value of a security or other financing instrument may change when the perceived or actual financing standing of the issuer changes thereby exposing the Bank to a financial loss. It is interrelated to price risk.

Pre-Settlement RiskThe risk that a counter-party with which the Bank trades may default on a contractual obligation before settlement of the contract.

Settlement RiskThe risk occurs when the counter-party fails to settle the transaction on settlement date.

The Bank’s Financing Policy aims to promote a strong financing risk management architecture that includes financing policies, procedures and processes. The policy defines the areas and scope of financing activities undertaken by the Bank and its main goal is not simply to avoid losses, but to ensure achievement of targeted financial results with a high degree of reliability in an efficient manner. The Bank’s financing risk management focuses on the dynamic and interactive relationship between three financing extension processes.




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

Portfolio Strategy and PlanningThe portfolio strategy and planning phase defines desired financial results (in each Business Unit and for the Bank) and the credit standards required to achieve them. Business strategies integrate risks and meet defined hurdles for risk-adjusted return on capital. Facility structure translates this risk-conscious business strategy into terms and conditions that mitigate risk. Portfolio management establishes composition targets, monitors the results of these diverse business strategies on a continual basis, and allows the Bank to manage concentrations that can result from seemingly unrelated activities. Specifically, portfolio management involves setting concentration limits by standard dimensions so that no one category of assets or dimension of risk can materially harm the overall performance of the Bank.

The Risk Management and Senior Management, on monthly basis reviews portfolio concentrations in terms of geographical concentrations, individual economic sectors and credit risk rating to ensure that there are no undue concentrations in one sector or risk rating, and that the limits are within those set out by the Bank. These reports are submitted to the Board on quarterly basis.

The Approving bodies (EC, SCC and CC) approve bank-wide portfolio credit concentration limits to corporate or individual counterparties based on the Bank’s overall risk capacity, capital considerations, and assessment of the internal and external environments. The Bank’s credit exposure to individuals or group of counterparties is in accordance with the CBK instructions BS/101/1995 on Maximum Credit Concentration Limits and subsequent amendments / updates.

The process of periodic review and approval of country and bank limits is done within the Bank. The approved limits are then segregated sector wise, which cover Commercial Banking, Treasury and Investments.

A summary of bank wide risk exposure incorporating all the above concentration limits plus discussion on past due, non performing financing (NPFs), collateral concentration, funding profile, capital adequacy and other risk management initiatives are reviewed by the Senior Management and Group Risk on monthly basis and reported to the Board on quarterly basis.

Financing Origination and MaintenanceIn the Financing origination and maintenance phase, each Business Unit solicits, evaluates and manages credit according to the strategies and portfolio parameters established in the portfolio strategy and planning phase. Transactions are generated within well-defined target market criteria, product structure and are approved on risk-adjusted basis through the use of risk rating models.

The Bank uses a Credit Risk Rating (“CRR”) model using Moody’s system to assess the credit worthiness of borrowers. The Financing risk measurement methodology is geared towards measuring Financing risk for corporate and private banking portfolio in a scale of 1 to 10 which meets the requirements of Bank for International Settlements (BIS). Risk ratings 1 to 6 for performing assets; and risk rating 7 to watch list accounts while ratings from 8 to 10 for classified accounts.

Financing maintenance involves processes to control documentation and disbursement, monitor timely repayment, value collateral and review the status of exposures. Within this phase, origination and underwriting for distribution to investors take place. All financing proposals are reviewed independently by Credit Risk before proposals are sent for approval. A Post Fact Approval Unit independently reviews Financing approvals to ensure that the approvals are consistent with policy and that all covenants of the approvals are met prior to disbursement of proceeds and throughout the tenure of the Financing facilities




INFORMATION RELATED TO A LICENSED BANK’S INTERNAL CAPITAL ADEQUACY ASSESSMENT PROCESS (ICAAP) (continued)FINANCING RISK (continued)Financing Origination and Maintenance (continued)

Financing maintenance also includes early problem identification and remedial management of troubled exposures. The Special Asset Management Unit established within Risk Management Division provides a more focused attention to irregular and delinquent accounts. The primary objective of the unit is to develop effective strategies in order to either rehabilitate or restructure impaired financing.

The Bank constantly reviews the entire Financing portfolio and conduct stress tests in order to provide senior management with clear indication of the composition, maximum exposure at risk, overall Financing quality as well as identifying potential signs of weaknesses. As a result, the Bank is able to take timely and appropriate courses of action.

For secured Financing exposure, the collateral valuation is updated in robust manner. Quoted securities are independently valued on a daily basis while the most recent independent valuation for other securities, including real estate, is obtained. Whenever a gap in minimum-security coverage is identified, the concerned counterparty is asked to provide collateral top-up and/or reduce the outstanding exposure to comply with the minimum-security requirement. For unsecured exposure, selected counterparties are requested to provide acceptable collateral. While structuring Financing facilities, the Bank ensures that financing exposure will be repaid from clearly identifiable and unencumbered sources of repayment.

Performance Assessment and ReportingThe performance assessment and reporting phase allows both the Senior Management and Business Units to monitor results and improve performance continually. Both portfolio and process trends are monitored in order to make appropriate and timely adjustments to business strategies, portfolio parameters, and financing policies and credit origination and maintenance practices. This phase of the credit process draws on information within the Bank and external benchmarks to help evaluate performance.

Credit performance is assessed through analysis of:

1) Portfolio concentrations by obligor, industry, risk rating, tenor, product, collateral and other dimensions2) Credit quality indicators3) Exceptions to risk appetite policy4) Other policy exceptions

The Bank has adopted an internal account profitability model (APM) to determine the profitability of corporate and private banking accounts. The methodology is based on the risk-adjusted return on capital (RAROC).In addition, periodic review of both portfolio and process are performed by the Business Units as well as by Risk Management and Audit Division.

In accordance with the instructions of the CBK dated 18 December 1996, setting out the rules and regulations regarding the classification of financing facilities, the Bank has a Credit Classification and Evaluation Committee which is composed of senior management. The committee studies and evaluates existing financing facilities of each customer of the Bank, and identifies any abnormal situations and difficulties associated with a customer’s position which might cause the debt to be classified as irregular and to determine an appropriate provisioning level.





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

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

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

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

The Market Risk Management policy covers the following broad areas:

Profit rate risk;Profit rate risk is the risk of a potential adverse impact on the Bank’s earnings and capital due to change in market rates. The management of the profit rate risk lies with Bank’s Asset Liability Committee (ALCO). The Bank assesses its profit rate risk from both earnings and economic value perspective. The earnings at risk (EaR) or NII is performed by analysis of the repricing maturity profile of the rate-sensitive assets and liabilities. The net repricing gap is applied a parallel rate shock of 100 bps to estimate the adverse impact. In a similar manner, the rate-sensitivity or EVE is estimated by applying a 200 bps parallel shock on the repricing balance sheet’s individual rate-sensitivities. The Bank also performs Basel’s Interest Rate Risk in the Banking Book (IRRBB) approach of six parallel and variable rate shocks. The Bank has performed a behavioral study and analysis of its non-maturity deposits and the repricing assumptions are based on IRRBB Basel guidelines.

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

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

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




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

Equity risk;Equity price risk arises from the changes in fair values of equity investments. Values of individual securities can fluctuate in response to a variety of factors, other than movements in the profit or exchange rates. The equity price risk can be idiosyncratic or issuer specific or it can be due to general market or systemic risks.

The equity risk in the Bank is limited as majority of the portfolio is listed and it is valued on a regular basis.

Liquidity riskThe Bank defines liquidity risk as the risk to its ability to meet all present and future financial obligations in a timely manner and without undue effort and cost.

The following key factors are taken into consideration while assessing and managing the liquidity risk of the Bank:

• The Bank keeps a well-diversified base for funding sources comprising a portfolio of retail customers, large corporate and institutions, small and medium enterprises, high net worth individuals without significant correlation or concentrations thereby diversifying the funding base and mitigating concentration risks. Moreover Bank’s risk appetite has placed limits on the total amount of deposit from any individual depositor.

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

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

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

• The Bank calculates its high quality liquid assets (HQLA) against net cash outflows in 30-days period as part of CBK’s Basel III Liquidity Coverage Ratio (LCR). LCR is prepared on daily basis and submitted to CBK on monthly basis after being reviewed by the Bank’s external auditors. The Bank’s LCR has remained consistently higher than 100% as the Bank has maintained HQLAs at more than net cash outflows.

• The Bank calculates Basel III Net Stable Funding Ratio (NSFR) to determine as how the Bank’s balance sheet is positioned with respect to its stable required funding against stable available funding. NSFR is prepared on daily basis and submitted to CBK on monthly basis after being reviewed by both of the Bank’s external auditors. The Bank’s NSFR has remained consistently higher than 100% as the Bank has maintained available stable funds at more than required stable funds.

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

A liquidity contingency plan to address systemic and localized liquidity emergencies is reviewed periodically to ensure that it is kept up to date and in line with the business continuity plan.





TABLE 6 – MATURITY ANALYSIS OF LIABILITIES

2018 KD ‘000

Up to 3 3 to 12 Over 1 Standard Portfolio Months Months Year Total

Deposits from banks and other financial institutions 547,488 371,163 - 918,651

Deposits from customers 1,997,719 380,621 46,176 2,424,516

Other liabilities 19,390 17,246 42,448 79,084

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

2017 KD ‘000

Up to 3 3 to 12 Over 1 Standard Portfolio Months Months Year Total

Deposits from banks and financial institutions 370,202 290,807 47,858 708,867

Deposit from customers 1,940,032 447,218 39,031 2,426,281

Other liabilities 22,439 16,383 24,021 62,843

Total 2,332,673 754,408 110,910 3,197,991

OPERATIONAL RISKThe Bank has adopted the BASEL’s definition of Operational Risk which states that any risk arising from inadequate or failed internal processes, people or systems or from external events. The definition includes legal risk but excludes reputation and strategic risk.

Moreover, being an Islamic Bank, it went through an enterprise wide assessment of potential risks, came up with robust control processes, updated the policy and procedures documents and educated the staff on the Islamic products, processes and systems. These were complemented by the establishment of the Sharia’a Board to ensure that the Bank’s activities comply with the principles and rulings of the Islamic Sharia’a.

The operational risk management framework provides the Bank with the foundation for a comprehensive and an effective operational risk management program with the following major objectives:

• Operational Risk Policies and procedures – the Bank has operational risk policies and procedures which are being updated on periodic basis.

• Operational Risk Management – the Bank has outlined the process of identifying, assessing, monitoring and mitigating operational risks by implementing various operational risk tools such as operational risk self-assessment, key risk indicators, operational risk approval process.

• Loss Recording Policy – The Bank has the process of recording all actual losses and near miss events as per the BASEL accord.

• Reporting – Operational Risk Management submits reports to Board sanctioned committees and Senior Management highlighting their analysis, thus enabling these committees and Senior Management to take risk based business decisions.




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

• New Products/ Process/ System Changes – All the new products, processes, and any significant change in the existing process and change in system will be reviewed by Operational Risk.

• Business Continuity Management – Business Continuity Plans have been designed, developed and implemented for all business units to recover all critical business functions at the time of disaster scenarios. Business Impact Analysis has also been done on a yearly basis to identify all the critical processes, systems, department dependencies and critical resources to recover the processes.

• Risk Awareness – The Bank is committed to train its employees on Operational Risk Management to ensure all employees are able to understand and identify operational risk in their respective business areas. and

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

Drivers of Operational RiskBank’s operational risk losses are being predominantly reduced over the last five years as a result of an effective risk management and robust control environment which is being assessed and monitored continuously.Main driver of Operational Risk in 2018 arising from Execution, Delivery and Process Management which comprises of 66% of our total losses.

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

Historical data of operational loss is collated by the RMD for all seven operational risk events identified by BASEL guidelines: • Internal Fraud• External Fraud• Employment Practices & Workplace Safety• Clients, Products & Business Practices• Damage to Physical Assets• Business Disruption and System Failure• Execution, Delivery & Process Management

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

Bank projects three stress scenarios whereby the highest operational risk loss recorded in the last 3 years is compared with 75% of the aggregate of highest operational losses in each event type. The higher of two is then stressed by 25%, 50% and 100%




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

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

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

Business Continuity ManagementThe Bank defines “contingency planning”, Disaster Recovery Plan (DRP) and Business Continuity Plan (BCP) as the process of identifying critical information systems and business functions and developing plans to enable those systems and functions to be resumed in the event of a disruption with minimal disruption.

Business Impact Analysis (BIA) is being performed to assess the identify functions in the Bank and plans are being developed accordingly to ensure we recover all such identified critical processes at the time of Disaster.

The Bank’s has enhanced its Business Continuity Management by implementing Active/ Active environment to ensure Recovery Time Objective is minimal since all the systems will be automatically fail over to the secondary data center and vice-versa in case of any disaster.

The Technical DRP is the foundation on which the remaining three factors have been built up e.g. the business continuity plan or recovery process is developed, reviewed and updated based on the progress in the technical disaster recovery front. In case of disaster at Head Office, all the data is replicated at DR site on real-time basis.

The Bank has been conducting regular tests which includes not limited to: a. Full BCP test where head office including data center in not available and all systems and processes are recovered

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

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

Site 2 data center.




INFORMATION RELATED TO A LICENSED BANK’S INTERNAL CAPITAL ADEQUACY ASSESSMENT PROCESS (ICAAP) (continued)OPERATIONAL RISK (continued)Business Continuity Management (continued)

Results of the all the test are presented to Risk Management and Board Risk Committee.

BCP procedures are updated regularly in line with any technical changes implemented by IT. The exercise also requires the end users to accomplish a “business impact analysis” to assess and support business continuity in the end-users’ respective areas.

The above operational risk initiatives comply in all material respects with the CBK instructions dated 14 November 1996 regarding general guidelines for internal control systems and directives issued on 13 October 2003 regarding “Sound Practices for the Management and Control of Operational Risks”.

Moreover, the Bank conducted fire drills intended to meet any contingency. The results of these tests were satisfactory.

Additionally, fire drills are conducted semi-annually to ensure readiness in case of actual fire. Floor wardens are identified from all departments and trained to assist staff in evacuation.

REPUTATION RISK Reputational risk is the potential that negative publicity regarding an institution’s business practices, whether true or not, could cause a decline in the customer base, costly litigation, or revenue reductions. The extent of reputational loss is normally measured by comparing the decline in a firm’s market value.

The safeguarding of AUBK’s reputation is of paramount importance to its continued operations and is the responsibility of every member of staff. Board, the RMC, and Senior Management ensure that a full appraisal of any reputational implications is made before strategic decisions are taken.

The standards and policies, which are integral to the Bank’s system of internal control, are communicated through policies and manuals and appropriate staff training.

The Bank’s management anticipates and responds adequately and promptly to changes of a market/regulatory nature that impacts Banks reputation and foster a sound culture that is well adopted throughout the Bank and has proven very efficient over time. The Bank has setup the monitoring of various reputational risk indicators - quantitative as well as qualitative, which guide the Bank on any potential reputational adverse impact.

In addition, the Bank has very effective internal control environment and management of customer complaints, whether these are raised to the Bank’s staff or escalated to the regulators.





DATA SECURITY MANAGEMENTData Security is a fundamental element in the Bank’s overall posture; breaches in security often pose an immediate threat. Lapses in data security could result in breaches of privacy, theft or corruption of information, contamination of programs and theft of resources or assets. An unsecured network may allow access to sensitive information (e.g., personnel, financings, or payroll records, customer information). In order to safeguard the Bank from the various security threats a robust information security program has been established. A few of the core elements are discussed below:

• The Bank has deployed a well-defined information security framework (Policies, Procedures, Processes, Guidelines), which forms the basis for protecting critical information. The necessary documents of such framework are circulated to employees, third party vendors, partners and others to demonstrate that the Bank takes the security of data seriously. The Bank’s main statement of policy is to implement a secure information system by identifying the responsibilities at every level of information handling i.e. from data ownership (encoding) to data access. Access to such data is granted based on “Need to Know – Need to Do” concept.

The comprehensive Information security framework and policy covers not only the technical aspects of security, but also defines how Bank employees should treat sensitive information, this is to ensure:• Data confidentiality • Availability of resources• Data integrity

• Well defined baselines are in place to handle core infrastructure including but not limited to firewalls, Intrusion Detection and Prevention, network devices, databases servers. These baselines identify the minimal configurations required to ensure security.

• To ensure the integrity of critical systems the Bank maintains change management procedures in addition to audit logs.

• Configuration assessment, periodic vulnerability assessment and penetration testing (internally and externally) on infrastructure components are carried out to ensure that the Bank maintains a good security posture.

• The Bank analyzes network traffic to important critical servers and network devices on daily basis and proactively blocks any suspicious activity to ensure that any unseen security risks are controlled.

• The Bank also provides security guidelines on banking projects to establish an equitable and standard approach.

• Periodic audits are conducted to ensure compliance with the information security framework set by the Bank.

• In the area of Payment Cards security, the Bank attained PCI-DSS certification and is recertified annually.

• The Bank achieved ISO27001:2013 certification and is recertified annually.

• Periodic security awareness for the new employees and current staff.

• The Bank is subscribed with a pronounced anti-phishing company to take down any phishing sites in timely manner.

• The Bank acquired a state of the art Advance Threat Detection (ATD) protection appliances to protect us from zero-day attacks (new malwares).

• The Bank acquired a comprehensive Data Loss Prevention (DLP) solution to restrict unauthorized data leakage.

• Enhanced our Swift systems security framework by introducing modern security controls.

• The bank acquired a leading network access control solution to protect the information assets from malicious threats,

• Information security awareness emailers are sent to all staff to keep them abreast with the latest cyber threats.

• Phishing campaigns are carried to assess the awareness level of staff

• The bank has acquired a leading mobile security solution to secure email’s on mobile devices to prevent exposure to sensitive information.





LEGAL AND COMPLIANCELegal risks represent the possibility of incurring a monetary loss as a result of an inability to enforce contracts / agreements signed by the Bank due to faulty documentation or improper drafting. As a general rule, the Bank ensures that counterparties and customers have legal and necessary authorities to engage in contracts and transactions with the Bank and that obligations arising from these transactions are enforceable.

Legal Division ensures that the Bank is compliant with all legislation applicable to the Bank’s business activities. Meanwhile, the Compliance Unit ensures that the Bank is compliant with all the requirements of CBK and any other legislative party, to which the Bank is held responsible to directly communicate or report. Part of the Compliance Unit’s main responsibilities is to comply with the CBK’s instruction regarding combating money laundering and terrorist financing. Policy and procedures manual are updated on regular basis and regulatory reporting is conducted and delivered within the appropriate time frames.

The Bank, whenever required, follows international standards and adopts best market practices when it comes to risk management activities. RMD stays aware of developments both within the organization as well as in the marketplace to ensure that the Bank may quickly adapt its risk management policies for any significant changes. The risk control programs are periodically benchmarked against regulatory standards and industry best practices.

Whilst the Bank adheres to the regulatory standards and best market practices, it also recognizes the fact that the myriad of risks, affecting different parts of the Bank’s risk-taking activities is continuously evolving. The biggest challenge, therefore, is keeping the information updated and relevant to facilitate better understanding of risk and effective response. To this end, RMD periodically performs a re-evaluation of significant risk management policies and procedures and develops action plans to correct any weaknesses. This also ensures that the Bank moves further along the continuum in terms of sophistication and analytical tools with respect to each of the risk dimensions.

INFORMATION RELATED TO A LICENSED BANK’S COUNTERPARTY CREDIT RISKThe Bank offers FX Waad and Profit Rate Swaps (PRS) to its customers for hedging purposes. Moreover, Bank also enter into PRS agreements to hedge proprietary fixed-income investment book. All customer positions are covered back-to-back with counterparties of investment grade ratings.

The Bank ensures that proper limits are setup for all the customers for all of their forward positions. Customers are well informed of the risks which are inherent in those transactions. The risk management performs the daily valuation of all open positions and the net present value of those contracts is assessed against approved limits. All FX Waad and PRS transactions are reported gross and there are no netting arrangements or collaterals.

The Bank also performs Credit Value Adjustment based on standardized approach as per CBK guidelines to account for potential counterparty credit deterioration





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

TABLE 7 – WAAD TRANSACTIONS

2018 2017 KD ‘000 KD ‘000

Assets Liabilities Notional Assets Liabilities Notional (Positive) (Negative) amount (Positive) (Negative) amount

Waad Contracts 422 444 25,673 107 42 24,561PRS (held as fair value hedge) 508 726 74,536 246 - 44,659PRS (others) 315 315 60,660 175 175 30,175

1,245 1,485 160,869 528 217 99,395

INFORMATION RELATED TO A LICENSED BANK’S INVESTMENT & FINANCE EXPOSURES

Credit Risk ManagementThe objective of Credit Risk Management is to establish and maintain a performing financing portfolio that minimizes the incidence of customer default. The process of risk management begins with the relationship manager who is responsible to assess the markets in which the customer operates and evaluate their credit requests before recommending the same to the respective approving authorities. The Board of Directors determines the authorities for various approving levels including Executive Committee, Senior Credit Committee and Credit Committee. In AUB, credit decisions are taken, based on an overall assessment of the customer’s profile primarily relating to its ability to service the due obligations. Collateral is taken as security to mitigate loss in the event of a default by the customer.

All the applications including consumer financing, are reviewed independently in the business before being submitted to the risk management department for assessment and recommendation. The Credit Committee deliberates on the recommendation of risk management department and takes appropriate decision. All applications which are beyond the scope of approving authority assigned to the Credit Committee are elevated to the next approving level.

Finance facilities with overdue amounts of 90 days or less are identified as past due. In line with regulatory guidelines, facilities with overdue amounts of more than 90 days are classified as either sub-standard, doubtful or bad depending on the number of days which the amounts are overdue.

The provision for impairment of credit facilities covers losses where there is objective evidence that losses may be present in components of the finance facilities portfolio at the balance sheet date. These have been estimated based on historical patterns of losses in each component, the credit ratings allotted to the borrowers and reflecting the current economic climate in which the borrowers operate. Besides, as per the CBK’s requirements, a minimum general provision of 1% for cash facilities and 0.5% for non-cash facilities is made on all asset based and proxy based facilities not subject to specific provision. In compliance with Central Bank of Kuwait regulations regarding IFRS9 requirements, an internal credit rating system is in place to calculate the expected credit loss (ECL). The calculation of ECL is based on staging requirement stipulated by CBK and as per PD, LGD, EAD calculated by the internal credit rating system considering built in macroeconomic factors.




INFORMATION RELATED TO A LICENSED BANK’S INVESTMENT & FINANCE EXPOSURES (continued)Credit Risk Management (continued)

The Bank uses Moody’s Risk Rating calculator to assign an internal risk rating to corporate customers. The internal ratings are mapped to the ratings of ECAI as below:

Risk Rating

RR 1 RR 2 RR 3 RR 4 RR 5 RR 6 RR 7 RR 8 RR 9 RR 10

Moody’s AaaAa

(1-3)A

(1-3)Baa (1-3) Ba (1-3) B (1-3) Caa (1-3) Ca C D

S&P AAAAA

(+/-)A

(+/-)BBB (+/-) BB (+/-) B (+/-)

CCC (+/-)

CC C D

Where available, the Bank uses External Credit Assessment Institutions (ECAI) ratings for categorizing riskiness of credit assets.

ECAI’s have been used for the following standard portfolios

STANDARD PORTFOLIO ECAI

Claims on banks Fitch, Moody’s and Standard & Poor’s





TABLE 8 – GROSS CREDIT RISK EXPOSURES BEFORE CRM

2018 KD ‘000

Year end balances Monthly average balances

Self- Self- financed URIA Total financed URIA Total

Claims on Cash Items 16,417 571 16,988 26,954 938 27,892

Claims on sovereigns 430,818 14,980 445,798 451,141 15,686 466,827

Claims on PSE 84,451 2,936 87,387 60,080 2,089 62,169

Claims on MDBs 2,933 102 3,035 2,910 101 3,011

Claims on banks 445,595 15,493 461,088 312,414 10,862 323,276

Claims on corporate 2,472,213 85,957 2,558,170 2,362,711 82,149 2,444,860

Claims on regulatory retail 399,322 13,884 413,206 394,649 13,721 408,370

Past due exposures 37,853 1,316 39,169 40,704 1,415 42,119

Inventory & commodity other than real estate 181 6 187 113 4 117

Investment in real estate and real estate inventory 35,311 1,228 36,539 35,635 1,239 36,874

Share & commercial real estate financing 152,973 5,319 158,292 199,728 6,945 206,673

Other exposures 73,950 2,571 76,521 63,698 2,215 65,913

Total 4,152,017 144,363 4,296,380 3,950,737 137,364 4,088,101

Average balances are calculated by averaging month-end balances of capital adequacy returns which is the most frequent reporting interval for Management reporting purpose.





TABLE 8 – GROSS CREDIT RISK EXPOSURES BEFORE CRM (continued)

2017 KD ‘000

Year end balances Monthly average balances

Self- Self- financed URIA Total financed URIA Total

Claims on Cash Items 21,396 932 22,328 19,318 842 20,160

Claims on sovereigns 432,859 18,859 451,718 444,186 19,353 463,539

Claims on PSE 65,436 2,851 68,287 59,948 2,612 62,560

Claims on MDBs 2,832 123 2,955 1,899 83 1,982

Claims on banks 316,290 13,781 330,071 321,878 14,024 335,902

Claims on corporate 2,302,416 100,315 2,402,731 2,227,189 97,038 2,324,227

Claims on regulatory retail 388,472 16,925 405,397 384,575 16,756 401,331

Past due exposures 43,114 1,878 44,992 76,892 3,350 80,242

Inventory & commodity other than real estate 7 - 7 17 1 18

Investment in real estate and real estate inventory 36,438 1,588 38,026 30,629 1,335 31,964

Share & commercial real estate financing 214,373 9,340 223,713 270,443 11,783 282,226

Securitized Sukuk - - - 58,514 2,549 61,063

Other exposures 61,292 2,671 63,963 67,449 2,939 70,388

Total 3,884,925 169,263 4,054,188 3,962,937 172,665 4,135,602

Average balances are calculated by averaging month-end balances of capital adequacy returns which is the most frequent reporting interval for Management reporting purpose.





TABLE 9 – GEOGRAPHIC DISTRIBUTION OF EXPOSURES

2018 KD ‘000

Other USA & Other Kuwait Middle East Europe Canada countries Total

Cash Items 16,988 - - - - 16,988

Claims on sovereigns 415,473 30,325 - - - 445,798

Claims on PSE 87,387 - - - - 87,387

Claims on MDBs - 3,035 - - - 3,035

Claims on banks 217,372 171,852 21,214 20,464 30,186 461,088

Claims on corporate 2,360,706 99,242 - - 98,222 2,558,170

Claims on regulatory retail 413,206 - - - - 413,206

Past due exposures 39,169 - - - - 39,169

Inventory & commodity other than real estate 187 - - - - 187

Investments in real estate and real estate inventory 28,591 7,948 - - - 36,539

Share & commercial real estate financing 158,292 - - - - 158,292

Other exposures 51,049 25,467 5 - - 76,521

Total 3,788,420 337,869 21,219 20,464 128,408 4,296,380





TABLE 9 – GEOGRAPHIC DISTRIBUTION OF EXPOSURES (continued)

2017 KD ‘000

Other USA & Other Kuwait Middle East Europe Canada countries Total

Cash Items 22,328 - - - - 22,328

Claims on sovereigns 427,467 24,251 - - - 451,718

Claims on PSE 68,287 - - - - 68,287

Claims on banks - 2,955 - - - 2,955

Claims on corporate 129,946 156,630 21,067 15,263 7,165 330,071

Claims on regulatory retail 2,211,899 99,436 - - 91,396 2,402,731

Past due exposures 405,397 - - - - 405,397

Inventory & commodity other than real estate 44,992 - - - - 44,992

Investments in real estate and real estate inventory 7 - - - - 7

Share & commercial real estate financing 28,412 9,614 - - - 38,026

Securitized Sukuk 223,713 - - - - 223,713

Other exposures 53,486 1,154 5 - 9,318 63,963

Total 3,615,934 294,040 21,072 15,263 107,879 4,054,188

The exposures are allocated under each geographic unit based on the residence / domicile of the obligor.





TABLE 10 - DISTRIBUTION OF GROSS EXPOSURES BY INDUSTRY

2018 KD ‘000

Standard Portfolio Funded Unfunded Total

Trading & manufacturing 637,401 95,055 732,456

Banks & financial institutions 1,046,719 56,380 1,103,099

Construction & real estate 1,285,325 80,752 1,366,077

Others 1,058,783 35,965 1,094,748

Total 4,028,228 268,152 4,296,380

2017 KD ‘000

Standard Portfolio Funded Unfunded Total

Trading & manufacturing 536,238 111,472 647,710

Banks & financial institutions 895,711 53,345 949,056

Construction & real estate 1,298,098 78,713 1,376,811

Others 1,042,655 37,956 1,080,611

Total 3,772,702 281,486 4,054,188





TABLE 11 - DISTRIBUTION OF GROSS EXPOSURES BY RESIDUAL CONTRACTUAL MATURITY

2018 KD ‘000

Up to 1 1 to 3 3 to 12 Over 1 Standard Portfolio Month Months Months Year Total

Cash Items 16,988 - - - 16,988

Claims on sovereigns 140,340 68,203 137,368 99,887 445,798

Claims on PSE 6,865 60,882 19,640 - 87,387

Claims on MDBs 3,035 - - - 3,035

Claims on banks 233,747 173,195 29,511 24,635 461,088

Claims on corporate 1,061,664 873,646 388,779 234,081 2,558,170

Claims on regulatory retail 7,820 2,385 4,692 398,309 413,206

Past due exposures 39,169 - - - 39,169

Inventory & commodity other than real estate 187 - - - 187

Investments in real estate and real estate inventory - - - 36,539 36,539

Share & commercial real estate financing 21,552 64,725 31,020 40,995 158,292

Other exposures 26,113 - 2,298 48,110 76,521

Total 1,557,480 1,243,036 613,308 882,556 4,296,380

2017 KD ‘000

Up to 1 1 to 3 3 to 12 Over 1 Standard Portfolio Month Months Months Year Total

Cash Items 22,328 - - - 22,328

Claims on sovereigns 85,972 79,040 277,585 9,121 451,718

Claims on PSE 9,887 50,087 - 8,313 68,287

Claims on banks 2,955 - - - 2,955

Claims on corporate 199,849 74,690 6,413 49,119 330,071

Claims on regulatory retail 933,877 956,475 299,448 212,931 2,402,731

Past due exposures 6,083 1,712 4,834 392,768 405,397

Inventory & commodity other than real estate 44,992 - - - 44,992

Investments in real estate and real estate inventory 7 - - - 7

Share & commercial real estate financing - - - 38,026 38,026

Securitized Sukuk 79,946 79,785 33,973 30,009 223,713

Other exposures 4,792 7,068 2,072 50,031 63,963

Total 1,390,688 1,248,857 624,325 790,318 4,054,188





TABLE 12 - IMPAIRED FINANCINGS AND PROVISIONS

2018 KD ‘000

* Charge/ (Reversal) Impaired Past Due Specific for the General Standard Portfolio Financing Financing Provisions Period Write Off Provisions

Trading & manufacturing 88 - 18 1,084 1,763 16,406

Banks & financial institutions 1,104 - - - - 3,184

Construction & real estate 26,509 8,801 2,602 5,822 6,204 53,111

Others 9,490 12,142 5,844 9,238 5,146 42,964

Total 37,191 20,943 8,464 16,144 13,113 115,665

2017 KD ‘000

* Charge/ (Reversal) Impaired Past Due Specific for the General Standard Portfolio Financing Financing Provisions Period Write Off Provisions

Trading & manufacturing 1,882 - 697 23,713 23,768 20,258

Banks & financial institutions 1,243 - - - - 2,392

Construction & real estate 29,326 37,675 2,984 14,141 12,355 48,511

Others 6,173 13,008 1,752 4,078 3,991 36,490

Total 38,624 50,683 5,433 41,932 40,114 107,651

There are no impaired or past due financings outside Kuwait.

* Charge for specific provision

As at 31 December 2018, the Bank carries a total provision of KD 124,129 thousand (31 December 2017: KD 113,084 thousand) including the above mentioned specific provision and general provision of minimum 1% on all claims on corporate and regulatory retail exposure (net of certain categories of collateral), that are not provided for specifically in line with CBK instructions. Profit amounting to KD 1,977 (31 December 2017: KD 1,241) has been suspended on the above mentioned impaired financing.





TABLE 13 – MOVEMENT IN SPECIFIC PROVISION

2018 2017 KD ‘000 KD ‘000 Specific provision Specific provision

At 1 January 5,433 3,615

Charge for the year 16,144 41,932

Amounts written off (13,113) (40,114)

At 31 December 8,464 5,433

Irregular and past due financing facilitiesIrregular Credit facilities (Impaired) are classified upon meeting conditions of irregularity defined by CBK and consist of the following categories:

Watch list Category requiring specific provisions:Includes regular clients but upon management’s discretion, provisions have been taken to confront any possible future deterioration, in addition to credit facilities that are overdue for 90 days or less (inclusive). The specific provision percentage is determined based on each case and after a thorough study by the management and after deducting deferred, suspended profit and eligible collateral.

Sub-standard:If facilities are irregular for a period of 91 – 180 days (inclusive), a provision rate of minimum 20% shall be applied on the total of the facilities net of deferred and suspended profit and eligible collateral.

Doubtful Debts:If debts are irregular for a period of 181 – 365 days (inclusive), a provision rate of minimum 50% shall be applied on the total of the facilities net of deferred and suspended profit and eligible collateral.

Bad Debts:If debts are irregular for more than 365 days, a provision rate of 100% shall be applied on the total of the facilities net of deferred and suspended profit and eligible collateral.





TABLE 14 – AGEING OF PAST DUE EXPOSURE

2018 2017 KD ‘000 KD ‘000 Past due exposure Past due exposure

Past due but not impaired

90 days or less 20,943 50,683

Past due and impaired

91 – 180 days 4,659 15,059

181 – 365 days 2,974 4,775

More than 365 days 29,558 42,006

At 31 December 58,134 112,523

Renegotiated financing:The Bank has not renegotiated any financial asset of major exposures that would otherwise be past due or impaired.

TABLE 15 - EXPOSURE POST RISK MITIGATION AND CREDIT CONVERSION

2018 2017 KD ‘000 KD ‘000

Standard Portfolio Rated Unrated Total Rated Unrated Total

Claims on PSE - - - - 1,663 1,663

Claims on banks 147,882 4 147,886 92,126 - 92,126

Claims on corporate 67,046 2,141,270 2,208,316 65,225 1,801,098 1,866,323

Regulatory retail exposures - 393,505 393,505 - 379,655 379,655

Past due exposures - 17,453 17,453 - 19,982 19,982

Inventory & commodity other than real estate - 351 351 - 13 13

Investments in real estate and real estate inventory - 73,078 73,078 - 76,052 76,052

Share & commercial real estate financing - 160,089 160,089 - 192,184 192,184

Securitized Sukuk - - - - - -

Other exposures - 113,858 113,858 - 77,940 77,940

Total 214,928 2,899,608 3,114,536 157,351 2,548,587 2,705,938




INFORMATION RELATED TO A LICENSED BANK’S INVESTMENT & FINANCE EXPOSURES (continued)

Information Related to Financing Risk MitigationCollateral is obtained from clients pursuant to the Bank’s appraisal of the financial position, solvency, reputation and past experience of the client and the Bank’s estimation of the degree of financing risks. Adequate collateral coverage ratios are maintained by the Bank in line with CBK guidelines and Bank policies. In the event of a decline in value of collateral, additional coverage is sought by the Bank. A significant portion of the Bank’s financing portfolio is adequately covered either by tangible collateral that adhere to the Islamic Sharia’a principles or assignment of revenues and third party receivables or other kind of support such as personal/corporate guarantees.

In order to mitigate the financing risk the Bank is exposed to, it accepts collateral in the form of cash (e.g., fixed deposits, deposit certificates and/or other savings instruments); shares / portfolio of shares traded on recognized exchanges and are compliant with the Islamic Sharia’a principles and unconditional Stand-by letters of credit or Bank guarantees by financial institutions having pre-approved limits covering principal amount plus profit.

In addition to the above, the Bank accepts lien on sponsored funds, mortgages on real estate properties and chattel, legal assignment of contracting works or supply contracts as well as legal assignment of rentals or leases.

With respect to counter-party guarantors, the Bank considers only those that fall within the acceptable criteria.

Where applicable, on and off-balance sheet netting are used to the extent allowed as per the provisions of the contracted documentation, legal right to set-off and there being no maturity mismatches.

The Bank has a system of periodic collateral valuation, monitoring, and follow-up for inadequate coverage.

This ensures that the Bank has an effective collateral management process, wherein:

1) The collateral are appraised periodically, following the CBK guidelines as the minimum time interval, e.g. real estate properties are appraised at least annually while shares / portfolio of shares traded on recognized stock exchanges are monitored daily;

2) The minimum financing to Value (FTV) of 60% is required upon granting share/real estate financing bearing in mind, that FTV for individual obligor maybe lower than that set parameters depending on the financing circumstances, structure of facility, and creditworthiness of the obligor;

3) the Bank executes documentation with borrowers empowering the Bank, the right to liquidate or take legal possession of the collateral; and

4) The obligor and the value of the collateral do not have a material positive correlation.

Financing exposure is reviewed monthly to ensure that there is no undue concentration. In the event that there is heavy concentration towards specific economic sector or counter-party, the Bank takes corrective actions including but not limited to sell down the related assets and / or requires the client to put up sufficient liquid security.





TABLE 16 – ELIGIBLE FINANCIAL COLLATERAL AND GUARANTEES

2018 2017 KD ‘000 KD ‘000

Gross Eligible Eligible Gross Eligible Eligible Standard Portfolio Exposure collaterals collaterals Exposure collaterals collaterals

Claims on banks 461,088 - - 330,071 23,009 -

Claims on corporate 2,558,170 288,662 - 2,402,731 473,207 -

Regulatory retail exposures 413,206 16,612 - 405,397 22,183 -

Past due exposures 39,169 8,138 - 44,992 15,093 -

Real Estate & Shares Trading 158,292 51,566 - 223,713 95,590 -

Total 3,629,925 364,978 - 3,406,904 629,082 -

INFORMATION RELATED TO MARKET RISK BANKING BOOK CURRENCY AND COMMODITY POSITIONS AND TRADING BOOK EQUITY AND FIXED-INCOME POSITIONSThe Bank currently follows the standardized approach in determining capital requirement for market risk on the trading book.

All banking book currency and commodity net open positions are considered for market risk capital charges. While equity risk and profit rate risk (Benchmark risk on account of fixed-income positions) is calculated on positions which are for the sole purposes of trading or booked as Held For Trading (HFT).

As the Bank does not trade in equity or fixed-income instruments, the market risk capital requirements are restricted to only banking book currency and commodity positions. The capital charges are calculated as per CBK Criteria in accordance with Basel III guidelines.

TABLE 17 - CAPITAL REQUIREMENT FOR COMPONENTS OF MARKET RISK

2018 2017 KD ‘000 KD ‘000

Commodity risk 54 2

Equity position risk - -

Benchmark risk - -

Foreign exchange risk 150 39

Total 204 41




INFORMATION RELATED TO OPERATIONAL RISKOperational risk is defined by Bank as the risk of direct and indirect loss resulting from inadequate or failed internal processes, people or systems or from external events. The operational risk capital charge is calculated using the Basic Indicator approach. As required under this approach, the Bank has computed its capital as a percentage of the positive average annual gross income of the previous three years. Gross income for this purpose is defined as net profit income plus net non-profit income.

The Basel III accord requires banks to hold capital against operational risk. The accord offers a continuum of approaches from the simplest basic indicator approach to the more advanced measurement approaches. The Bank has adopted basic indicator approach which is in line with CBK requirements.

Risk management is the essence of operational risk where different tools are applied for identification, assessment, monitoring, control and mitigate risks.

Risk identification is vital to the development of viable operational risk monitoring and control systems. Risk identification considers internal factors such as the Bank’s structure, the nature of its activities, the quality of its human resources, organizational changes and employee turnover. It also examines external factors such as changes in the industry, major political and economic changes, and technological advances.

• 1 – Operational Risk Self-Assessment (ORSA) – it is a tool used to identify all inherent risks in the process along with its probability and impact to measure the risk value. We also assess the controls associated to that event and assess its effectiveness using historical data to arrive at residual risk/ risk severity.

All the risks identified are classified as per BASEL event categories and this is an ongoing exercise where all departments are updating the ORSA as and when the risk or potential risk is being identified.

Business Risk Officer and Division Head sign off on the ORSA after every calendar year and all risks are being presented to RMC.

• 2 - Key Risk Indicators (KRI) is the process of collecting and reporting on a selective set of quantitative measures that correlate with the likelihood of potential failures in a process. These indicators are not readily combined into a single aggregate, rather, they are useful on a comparative basis across similar processes and over time. They allow effective benchmarking of processes.

All KRIs are tracked on monthly basis and analysis is performed to see the risk trend whether the trend is increasing, decreasing or stable and accordingly mitigating actions are being taken to proactively mitigate the risk.

• 3 - Loss Data Collection – the Bank’s collection of historical operational risk losses as well as “near misses” is an ongoing exercise. Operational Risk performs the root cause analysis of the all the actual and near miss incidents to understand the cause and to assess existing controls and its effectiveness. New controls are put in place if required to avoid re-occurrence of such incidents and accordingly procedures and ORSA documents are being updated.

Incident Management form is available for all staff in the Bank to report all actual or near miss events. In addition, every division submits the Operational Risk Disclosure certificate to certify that all incidents and loss events are reported to risk management as and when the same are detected.




INFORMATION RELATED TO OPERATIONAL RISK (continued)

• 4 – Operational Risk System – the Bank has implemented state of the art Operational Risk system in June 2017 which enables Bank to effectively identify, assess, monitor and control Operational Risk across all Business Units in the Bank.

The system has the capability to perform ORSA exercise whereby each designated Business Risk Officer captures the identified risks, assess the risk based on impact and probability, assess existing controls and its effectiveness. The system also has the functionality to record KRIs and perform trend analysis to proactively manage Operational Risk. All incidents (actual and near miss) are being recorded into the system along with its root cause and mitigating actions.

• 5 – Operational Risk Awareness Program – the Bank is continuously making efforts to promote risk awareness culture in the Bank by providing risk awareness trainings to all the staff and Business Risk Officers through workshop and online trainings programs.

• 6 - Business Continuity Management – to avoid business disruption and to provide services to the customers during disaster situations, each business unit in the Bank has developed BCPs in co-ordination with Operational Risk team where in all processes undergo Business Impact Analysis to assess the criticality and recovery strategy.

To ensure its readiness to be able to recover the business during disaster situations, the Bank has been conducting various BCP tests throughout the year covering different scenarios such as Loss of site, Loss of System and Loss of people.

Operational risk weighted exposures calculated during the year 2018 amounted to KD 213,852 thousand (31 December 2017: KD 206,828 thousand) as per the Basic Indicator Approach. The amount calculated for operational risk weighted exposures is adequate to cover any projected risks to maintain a reasonable profit ratio for shareholders and investment account owners. The minimum required capital for operational risk exposures amounts to KD 27,801 thousand (31 December 2017: KD 27,922 thousand).

TABLE 18 – CAPITAL REQUIREMENT FOR OPERATIONAL RISK

2018 2017Year KD ‘000 KD ‘000

Net income from financing activities 35,548 33,880

Net income from investing activities 1,480 1,490

Fees and service income 2,520 2,670

Deduction:

Investment Account Holders’ Share of Income (11,747) (10,118)

Total 27,801 27,922




INFORMATION RELATED TO INVESTMENT SECURITIESInvestments in the banking book are made in accordance with Sharia’a principles and governed by the CBK guidelines on financial and direct investments. All investments are subject to Bank’s internal risk appetite and are reviewed by risk and approved by Board’s Executive Committee. The majority of Bank’s financial investments are high quality quoted fixed-income Sukuk investments. All listed or quoted securities are marked-to-market on regular while any unquoted private equity investment is marked-to-model based on internal valuation methodologies.

Investments are classified at the time of acquisition into those which are acquired for capital gains and strategic holdings. Investments acquired with a view of generating income and profits from capital appreciation are reviewed periodically and disposed off at opportune timings.

TABLE 19 – INVESTMENT SECURITIES IN BANKING BOOK

2018 2017 KD ‘000 KD ‘000

Carrying Capital Carrying Capital Investment Type Value grade Value grade

Publicly traded 258,456 33,584 210,725 28,334

Privately held 5,729 1,236 6,633 1,427

Total 264,185 34,821 217,358 29,761

TABLE 20 - CLASSIFICATION OF INVESTMENT SECURITIES BY INDUSTRY

2018 2017 KD ‘000 KD ‘000

Minimum Minimum Carrying Capital Carrying Capital Industry sector Value requirements Value requirements

Banks and financial institutions 194,703 25,319 143,794 19,337

Services 19,019 2,467 31,227 4,204

Real estate 1,239 71 1,481 140

Others 49,225 6,964 40,856 6,080

Total 264,185 34,821 217,358 29,761

Publicly traded investments represent quoted securities traded on local and international stock exchanges. Privately held investments represent investments in unquoted securities and venture funds. The total value of investments in the banking book in the statement of financial position is KD 264,185 thousand (31 December 2017: KD 217,358 thousand). Cumulative realized gain on investment securities is KD 4,479 thousand (31 December 2017: KD 2,589 thousand). The total unrealized gain recognized in the equity is KD 3,772 thousand (31 December 2017: KD 3,478 thousand).




INVESTMENT ACCOUNTSThe Bank receives deposits from customers as part of several unrestricted investment accounts. These deposits are fixed-term, open-term, or renewable automatically with different investment rates.

These funds are used by the Bank in all finance activities that will achieve a targeted return. Investment returns are distributed among the Bank as a Mudarib and investment account holders on proportionate basis for each type of these accounts and the elapsed period of these funds.

The Bank also receives deposits from customers that are restricted. The Bank is investing these deposits as an investment agent (Wakeel).

Customers’ deposits are received and invested according to certain regulations that are mentioned in the procedures manual and instructions guide to ascertain that these funds, whether they were in Kuwaiti Dinar or foreign currency, are invested according to Islamic Sharia’a principles.

Following are the Investment percentages for major Mudaraba based deposits used for the Profit distribution:

TABLE 21 – DEPOSIT ACCOUNTS INVESTMENT PERCENTAGE

Investment Investment Percentage Percentage

Deposit Category 2018 2017

Savings 60.00% 60.00%

1 Month 60.00% 60.00%

3 Months 60-62% 60-62%

6 Months 65.00% 65.00%

9 Months 70.00% 70.00%

1 Year 70-90% 70-90%

TABLE 22 – CLASSIFICATION OF DEPOSIT ACCOUNTS

2018 2017 KD ‘000 KD ‘000

Profit Investment Profit Investment equalization risk equalization risk Deposit categories reserve reserve reserve reserve

Unrestricted 919 2,279 1,580 2,279

Restricted - - - -

Total 919 2,279 1,580 2,279




INVESTMENT ACCOUNTS (continued)

TABLE 23 – DEPOSIT ACCOUNTS RATIOS

2018 KD ‘000

Profit rate Investment Profit reserve to risk reserve to distributed to profit-sharing profit-sharing profit-sharingStandard Portfolio deposits deposits deposits

Unrestricted 0.46% 1.14% 1.94%

Restricted - - -

2017 KD ‘000

Profit rate Investment Profit reserve to risk reserve to distributed to profit-sharing profit-sharing profit-sharingStandard Portfolio deposits deposits deposits

Unrestricted 0.67% 0.97% 1.43%

Restricted - - -

SHARIA’A GOVERNANCESharia’a Governance is a main pillar in any Islamic financial institution. The strengths of the Sharia’a Control unit in any bank provides assurance on the solidity of its operations and accuracy of its businesses and income in compliance with Sharia’a rules and regulations. It will further protect the Bank from accepting expenses or incomes which do not comply with Islamic principles and places the transparency as main principle of the business values. During December 2016, CBK issued circular 2/RBA/369/2016 regarding Sharia Governance. The Bank is fully compliant with the requirements of Sharia Governance Standards as applicable for implementation by 1 January 2018.

Sharia’a Control Structure

Sharia’a Supervisory Board (Sharia’a Board)The Sharia’a Board is formed in Islamic Banks in Kuwait consisting of at least three members appointed by the AGM in compliance with the Memorandum and Articles of Association (AOA) and the Law number 30/2003. The AOA provides the terms of reference and responsibilities of the Sharia’a Board. The resolutions of the Sharia’a Board are enforceable and due for execution as specified and determined. The Sharia’a Department & Sharia’a Board are responsible to ensure compliance and report the results of the annual review to the AGM.

Executive member of the Sharia’a Board Executive member of the Sharia’a Board responsibilities includes reviewing all matters delegated or referred to him by the Sharia’a Board and Executive Committee. He has further to monitor the execution of the Sharia’a resolutions. In addition, he carries out the oversight duties over the Sharia’a Internal Audit Department and presents their results to the Sharia’a Board in each meeting.




SHARIA’A GOVERNANCE (continued)

The Supervisory Authority on Revenues Received from Non-Sharia’a Compliant Sources or Activities. Revenues generated from non-Sharia’a compliant sources either pre-conversion to Islamic Bank or having resulted from some unintentional defective transactions contradicted with the Sharia’a guidelines are maintained under a restricted account. This account is monitored and controlled by the Supervisory Authority and no withdrawals are allowed prior to obtaining a permit from the Authority according to the rules and laws determined by the Sharia’a Board.

Sharia’a Internal Audit Sharia’a Internal Audit department carries out periodical audits on all departments of the Bank to ensure compliance with the resolutions of the Sharia’a Board. It is also responsible for ascertaining the appropriateness, adequacy and effectiveness of the Sharia’a control system in achieving the objective of internal Sharia’a control, which is to ensure compliance with Islamic Sharia’a in all bank transactions, and to raise all findings and recommendations after discussion with the concerned department to the Sharia’a Board and to Audit and Compliance Committee.

In order to achieve its role and the formation of an efficient administrative apparatus as part of a strong oversight system, the department participates in the training of staff in collaboration with the Human Resources and other various development departments in the bank.

Sharia’a AdvisorySharia’a Adivsory replies to all inquiries from different departments or the Bank customers related to Sharia’a matters and to explain and clarify the resolutions of the Sharia’a Board. In addition to the review of the review of the contracts, engagements, letters, policies, procedures and newspapers advertisements and any other matter rasied by the respective departments in accordance with the Sharia’a Board resolutions or to present such matters to the Executive Member fo the Sharia’a Board in accordance with the Procedures approved by the Shari’a Board.

Secretariat of the Sharia’a Supervisory Board:It is a dedicated technical and administrative body that supports the Sharia’a Board in achieving its objectives and performance and includes the functions of the secretariat of the Sharia’a Board: preparing the agenda of the Sharia’a Supervisory Board, indexing and following up the work before the Sharia’a Supervisory board, inviting the regular meetings of the Sharia’a Board, preparing minutes of meetings and following up to be approved by the Sharia’a Board, all questions, inquiries and communications received from the management of the bank to be submitted to the Sharia’a Board, Communicating the Sharia’a Board resolutions to the Executive Management and to the relevant departments of the bank.

Sharia’a ViolationsViolating the Sharia’a guidelines may result in turning the underlined revenue or expense to be non- Sharia’a compliant. The financial consequence of this violation is reported to the Sharia’a Board after discussing it with concerned department and all proceeds are transferred accordingly to the restricted account designed for that purpose which is used for charitable contributions upon proper approvals

During 2018, no violation was observed at the Bank that may have a financial impact on the results of the Bank and its operations.

Violating the Sharia’a guidelines in other cases may not result in gaining any income or incurring expenses or does not have material financial impact on the Bank. In such circumstances, the Sharia’a Departments directs the concerned department to take the corrective action and monitors the compliance subsequently.




SHARIA’A GOVERNANCE (continued)

Zakat In accordance with the Law No. 46 of 2006 and as per the resolution of the Ministry of Finance No. 58/2007, the Bank pays the Zakat. Occasionally, the Zakat covers the Zakat amount to be paid by the Bank’s shareholders. However, The Bank is not responsible for paying Zakat on behalf of shareholders other than Tax Zakat. Any inquiries on Zakat are adequately addressed by the Sharia’a Department.

The amount of the Zakat for the financial year ended 31 December 2018 amounted to KD 536 thousand (31 December 2017: KD 490 thousand).

Remunerations of the Sharia’a Board MembersThe AGM endorses the appointment/ reappointment of the Sharia’a Board members and authorizes the Board of Directors to determine & pay the related remuneration. During the year, remuneration paid/ will be paid to the members of Sharia’a Board amounts to approximately KD 35 thousand (31 December 2017: KD 35 thousand).

REMUNERATIONThe Bank has set up policies over remuneration practices and guides its remuneration based on performance and risk. For this purpose the Bank has set up a Compensation & Nominating Committee (“CNC”) to independently assess and monitor remuneration systems.

CNC consists of three non-executive board members. CNC met 2 times during the year 2018. During the year, remuneration paid/ will be paid to the members of CNC amounts to KD 6,000 (31 December 2017: KD 6,000) approximately which is subject to approval of the Board of Directors.

The remuneration policy provides the basis of determining remuneration to Group’s employees, including material risk-takers based on their responsibilities and authority levels. Senior executives and material risk-takers comprise those whose activities have a significant impact on the Bank’s risk profile and their divisional financial matrix (KPIs), which is cascaded from the annual business targets, expanded to incorporate risk measures (KRIs). These risk measures and weights shall be defined by respective business functions in concurrence with Risk Management. Remuneration is determined based on this policy guidelines including performance rewards and these policy guidelines are applicable to the Group. The material risk takers includes CEO and the business line executives of Corporate Banking, Retail Banking, Private Banking, Treasury and Direct Investments.

Remuneration includes a fixed component that rewards the capacity to hold a position in a satisfactory manner through the employee displaying the required skills and variable components that aim to reward collective and individual performance, depending on the smart objectives defined at the beginning of the period and conditional to meeting said objectives, according to the performance standards and risk parameters defined by the Bank.

In addition, for senior executives and key risk-takers, remuneration is aligned with prudent risk taking and quantitative and human judgment measures included for risk adjustment. Risk adjustment accounts for all type of risks including intangibles such as reputation risk, liquidity risk and cost of capital. Back testing and stress testing is required to test performance alignment of remuneration with risk.




REMUNERATION (continued)

The remuneration processes are designed to reward based on evaluation of performance and advice of external consultants are sought whenever required. Specific employee roles and responsibility related to performance metrics are designed in the form of Key Performance Indicators Matrices (KPIs) to continuously evaluate performance of executives and staff employees. Performances are evaluated based on smart objectives and their achievement measured on a transparent basis that are applied for determining rewards. The CNC regularly reviews the remuneration policy and updates as required.

The Bank takes into account the risk taken by business executives in determining remuneration where the future risks and crystallization of such risks are considered. In cases where the performance-related pay exceeds 60% of the senior executive’s total annual salary, then the performance bonus portion above 60% is deferred for the subsequent 3 years subject to claw back rules in case of negative performance.

The Bank has put in place ex-ante operating profits, net profit, NPLs and ex-post matrices like , trends in NPLs, Peer comparison in key matrix etc, that are used to determine rewards taking long term view including deferred payment of such rewards.

The performance of the Bank’s employees are measured through a performance management system with measurable metrics for performance rewards. Rewards will vary based on the performance of individual managers and employees which are linked to overall performance of the Bank and HR compares the rewards with the normal distribution curve to ensure consistency and that any variances have been investigated.

Performance assessment of the Bank’s designated approved persons in the function of Risk Management, Internal Audit, Operations, Finance, Sharia’a audit, compliance and AML functions measured primarily on the achievement of the objectives and targets of their functions, ensuring independence from business areas. The performance assessment, fixed and variable compensations for the Heads of Audit and Compliance and the Senior GM – Risk Management are specifically discussed by the committee and endorsed by the Chairman of Audit & Compliance Committee and approved by the CNC.




REMUNERATION (continued)

TABLE 24 – TYPE OF REMUNERATION

2018 2017 KD ‘000 KD ‘000Senior management and Material risk takers Unrestricted Unrestricted

Fixed remunerations*

Cash based 2,839 2,811

Variable remuneration*

Cash based ** 765 715

TABLE 25 – NUMBER OF EMPLOYEES AND REMUNERATION PAID

2018 2017 KD ‘000 KD ‘000

Number of Total Number of Total Employees categories employees remuneration employees remuneration

Senior management* 13 1,682 15 1,807

Material risk takers* 30 1,923 30 1,719

Financial and control functions* 28 1,471 24 1,432

TABLE 26 – NUMBER OF EMPLOYEES AND OTHER EMPLOYMENT BENEFITS

2018 2017 KD ‘000 KD ‘000

Number of Number of employees Amount employees Amount

End of service benefits (Senior Management

and Material Risk-takers)* 43 282 45 297

* Some of the positions are duplicated in the categories Senior management, Material risk takers and Financial and control functions.

** Variable remuneration is estimated using the prior year’s variable remuneration and is subject to approval of the Board of Directors by the

end of first quarter of 2019.

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