Al-Rajhi Bank: Annual Report 2018

Transcription

1. Annual Report 2018 Annual Report 2018 Scan to view the mobile version of this Annual Integrated Report The web and mobile HTML versions are published online on the same date as the date of issue of this publication at https ://www.alrajhibank.com.sa/en/investor-relations/pages/annual_report_2018.aspx
3. The Most Merciful , The Most Gracious The Custodian of the Two Holy Mosques King Salman Bin Abdulaziz Al Saud His Royal Highness Crown Prince Mohammad Bin Salman Bin Abdulaziz Al Saud 1 In The Name of Allah
5. 3 2018 Annual Report As “The Blue-chip Islamic Bank”, our strong foundation continues to produce robust returns. A few years ago, we developed a strategic path that began with going back to basics, that formed a solid foundation for successful progress. Today, as we welcome the emerging new technologies and continue to attract new digital customers, we are excited about the bright future ahead.
6. The Blue-chip Islamic Bank Annual Report 2018 © 2018 Al Rajhi Bank Scan to view the online version of this Annual Report The web and mobile HTML versions are published online on the same date as the date of issue of this publication at https://arb.sa/report2018
7. Value Drivers Leadership 06 08 11 Message from the Chairman Chief Executive Officer ’s Review Board of Directors Strategy 25 Executive Management Strategic Direction Operating Environment Our Value Creation Model Stakeholders and Materiality Risk Management Performance 41 Financial Review Investor Relations Digital Footprint Sharia Group Review of Business Portfolio Review of Other Operations Review of Subsidiaries and International Branches Corporate Governance Financial Reports 85 113 Independent Auditors’ Report Consolidated Statement of Financial Position Consolidated Statement of Income Consolidated Statement of Comprehensive Income Consolidated Statement of Changes in Shareholders’ Equity Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements Basel 3 Qualitative and Quantitative Disclosures Supplementary Information 209 About this Report Consolidated Statement of Financial Position in USD Consolidated Statement of Income in USD Five Year Summary in USD GRI Content Index Glossary of Key Islamic Finance Terms Corporate Information 12 14 18 22 26 31 34 36 38 42 52 54 57 59 69 83 114 120 121 122 123 124 125 205 210 211 212 213 214 217 219 Annual Report About the Bank 2018 5 Contents
8. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Annual Report 2018 6 About the Bank The Bank History Vision , Mission, and Values Referred to as the “Bank” in this document, Al Rajhi Bank (ARB) received its current name in 2006 but was originally established in 1957 as an exchange house and converted to a bank under the name Al Rajhi Banking Corporation in 1987. The Bank is a Saudi joint stock company that was formed and licensed in accordance with Royal Decree No. M/59 and Article 6 of the Council of Ministers’ Resolution No. 245, both of June 1987. With its headquarters in Riyadh, Kingdom of Saudi Arabia, the Bank operates under Commercial Registration No. 1010000096 and is listed on the Saudi Stock Exchange (Tadawul) with the Ticker No. RJHI. Our Vision To be a trusted leader delivering innovative financial solutions to enhance the quality of life of people everywhere. Our Mission To be the most successful bank admired for its innovative service, people, technology, and Sharia compliant products, both locally and internationally. Our Values Everything the Bank does is built around its core values, which puts the customer at the heart of all its activities. Integrity and transparency Being open and honest while maintaining the highest standards of corporate and personal ethics A passion to serve Anticipating and addressing customer needs to deliver results that go beyond expectations Solution oriented Helping the customers achieve their objectives through effective and efficient solutions Modesty and humility Being humble in thought, word, and deed Innovativeness Nurturing imagination and fostering creativity for better results Meritocracy Defining, differentiating, and reinforcing excellence in people Care for society Contributing towards a better tomorrow Objectives The Bank’s objectives are to carry out banking and investment activities within the Kingdom of Saudi Arabia, and beyond, pursuant to the Bank’s Articles of Association and Bylaws, the Banking Control Law and the Council of Ministers’ Resolution (mentioned previously under History), and in compliance with Islamic Sharia legislations. Operations and reach The second largest Bank in the Kingdom in terms of assets and the largest Islamic bank in the world, Al Rajhi Bank (ARB) accounted for 16.1% of total assets and 17.3% of total deposits among banks in the Kingdom as of end 2018. The Bank’s market capitalisation as of 31 December 2018 was SAR 142.2 Bn. Total Group assets amounted to SAR 365 Bn. as of 31 December 2018. The Bank delivers its services through diverse channels for the convenience of its customers. These consist of both traditional and modern channels, including an extensive network of 551 branches including 157 ladies branches and sections, 5,006 ATMs and 83,958 POS terminals that span the Kingdom, in addition to online banking and mobile banking services. While managing the largest branch network in the Middle East, the Bank also operates 10 branches in Jordan and two branches in Kuwait while its subsidiary in Malaysia operates 18 branches.
9. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information 7 About the Bank Meticulous adherents of Islamic Banking principles , the members of the Al Rajhi Bank Group consist of seven subsidiaries in addition to the Bank. Four of these subsidiaries are situated within the Kingdom (refer Review of Subsidiaries on page 83) while three are located overseas. Together the Group provides clients with innovative financial and other products and services that combine Islamic values with modern commercial requirements. Refer Review of Subsidiaries on page 83. Products and services In line with the rapidly changing international banking landscape the Bank provides a range of products and services to meet the needs of its varied customer groups. Corporate banking Retail banking BANK SME banking Refer Review of Business Portfolio on page 59. Treasury International business Together the Group provides additional services including: Securities Real estate GROUP Brokerage Professional services Insurance 2018 Al Rajhi Bank Group Annual Report With over nine million customers, the Bank serves the largest customer base in the Kingdom, processing the payrolls of over 50% of government employees. Handling an average of 172 million transactions per month and over a million remittances, the Bank now partners with over 200 correspondent banks in around 50 countries. Its employee cadre numbered 12,732 at end 2018 making the Bank among the top 10 employers in the Kingdom and the largest employer in the financial sector.
10. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Value Drivers Value Drivers 8 Customer deposits (SAR Mn.) 2018 2018 – 293,909 2017 – 273,056 Annual Report Increase: 7.60% Female customers Growth of 30% over the last three years Earnings per share (SAR) 2018 – 6.34 2017 – 5.61 Increase: 13.00% Total assets (SAR Bn.) Net income (SAR Bn.) 2018 – 365 2017 – 343 2018 – 10.30 Increase: 6.40% Increase: 12.90% 2017 – 9.10 Cost to income ratio (%) 2018 – 31.70 2017 – 32.90 Improved: 120 bps Market capitalisation SAR Bn. Total capital adequacy ratio (%) 150 120 90 2018 – 20.20 2017 – 23.30 60 30 0 2014 2015 2016 2017 2018
11. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Value Drivers 9 Digital : manual ratio 2018 – 56:44 3.7 Mn. by assets and market capitalisation Active digital users Customer Deposits SAR Bn. No. 1 retail bank in the Middle East 300 in retail deposits and income 240 180 120 60 0 2014 2015 2016 2017 2018 No. 1 Distribution network in the Middle East by number of branches, POS, ATMs and remittance centres Staff strength 2018 – 12,732 No. 1 in banking transactions in the KSA 4 of 10 transactions in KSA Saudisation rate (%) 2018 – 96 No. 1 Bank brand in the KSA Brand Power Score Annual Report Largest Islamic Bank worldwide 2018 2017 – 49:51
12. Completed in 2018 , Al Rajhi Bank Tower is the Bank’s new head office building which stands out in Riyadh’s ever-changing skyline
13. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Leadership Message from the Chairman 12 Chief Executive Officer ’s Review 14 Board of Directors 18 Executive Management 22 Annual Report 2018 11 Value Drivers
14. Messagethe from the Chairman Message from Chairman Annual Report 2018 12 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Recording another record year , the Bank continued to grow and fortify its position as the world’s largest Islamic Bank. Group net income for the current year increased to SAR 10,297 Mn. from SAR 9,121 Mn. in 2017. This achievement is all the more significant given the complex dynamics at work in the wider operating environment. Traversing closer to Vision 2030 Plotting a sustainable course As Saudi Arabia pushes ahead with plans to reduce dependence on oil and diversify the economy, the Bank continued to align its own strategies with KSA’s Vision 2030. The Kingdom’s focus on further revitalising the financial sector by fostering private sector growth, creating an advanced capital market, and nurturing financial responsibility among its people will contribute greatly towards its goal of being a global investment powerhouse. During the year under review, the Kingdom continued to make good progress in its mission to achieve its Vision 2030 goals. With GDP continuing to grow, private sector contribution to GDP which was 48.2% in 2017 is projected to be well on its way to reach the target of 65% by 2030. Public debt to GDP is projected to be 21% by end 2018. Saudi owned dwellings (occupied with Saudi households) increased from 49.1% in 2017 to 51.7% in 2018, while foreign direct investment edged up to USD 2,388 Mn. for the three quarters ended 30 September 2018 compared to USD 1,420 in 2017. The Bank is fully aware of its responsibility to be sustainable in running every aspect of its business. Corporate governance at the Bank covers the rules, practices, systems and procedures which direct and control its activities. Our governance structure helps the Bank to balance the interests of our multiple stakeholder groups as we focus our energies on value creation. Within Saudi Arabia, our five strategic pillars, which focus on growth, employees, customers, digital leadership, and execution excellence, are continuing to show robust results. Our subsidiary in Malaysia and our branches in Kuwait and Jordan ensure that the Bank remains geographically diverse. We will continue forging strong partnerships beyond our borders to provide our stakeholders with greater value over the years to come. The Corporate Governance Manual and Regulations for Board Committees and Management Committees, published in 2014, are reviewed annually to ensure that they remain relevant to the changing times. We also apply the key principles of the Saudi Arabian Monetary Agency’s (SAMA) Corporate Governance Code for Banks in all our operations within the Kingdom of Saudi Arabia and Corporate Governance Regulations issued by CMA. Such stringent adherence to corporate governance is vitally important in an environment that is continuously in motion. Every day new players alight on the global arena, disrupting the banking industry as we know it with advanced technology that had not even been dreamed of a few years ago. If we do not move nimbly to capitalise on the opportunities while mitigating the risks, we and our stakeholders risk being marooned in the past.
15. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information An independent policy of the Bank relating to conflicts of interest was adopted while the policy on related party transactions was also approved . The aim of approving of such policy is to establish guidelines to deal with transactions which have conflict of interest. Provisioning for the future We are well aware of the critical role that employees play in the success of the Bank. To ensure that our employees career development needs are met, the Bank adopted the competencies and functional succession policy. This policy also helps meet the immediate and future staffing needs of the Bank. The promotion of Saudisation is another benefit of these policies. To create and sustain an open and enabling culture within the Bank, the violations reporting policy was also adopted. It encourages the reporting of improper behaviour or any activity that violates the Bank’s policies, procedures and instructions. Naturally, we also apply SAMA regulations regarding remuneration in accordance with the provisions of the Saudi Company Law. Our shareholders are a key stakeholder group that the Bank is committed to continue serving. As a result of their trust and loyalty, the Bank is ultimately provided with the means to expand its business further or capitalise on sudden business opportunities, should the need arise. To retain their trust and promote transparency, the Bank ensured that all material information, inclusive of banking information required to be disclosed by SAMA and CMA regulations, was also disclosed to shareholders. Focusing on strengthening the Bank’s role in society, we also adopted a policy for social responsibility. We continue to give back to the community by supporting a range of programmes that are geared to provide relief and support for the marginalised or disabled segments of society. We are immensely proud of the active participation of our employees in community efforts and look forward to an increase in the number of volunteer hours contributed. Taking a leadership role in increasing financial literacy among the communities within which we operate, we also undertook a number of awareness programmes during the year. Dividends I am pleased to report that the Bank distributed a dividend of SAR 2 per share for the first half of 2018, and proposed a final dividend of SAR 4.25 per share. Total dividends for the year amounted to SAR 6,906 Mn., representing 67% of earnings. Acknowledgements Together with the Board of Directors, I express our appreciation to the Custodian of the Two Holy Mosques and the Crown Prince for their strategic vision and leadership. My appreciation, expressed on behalf of the Board, also goes out to the Ministries of Finance, and Commerce and Investment; the Saudi Arabian Monetary Agency; the Capital Market Authority; and their eminences the Chairman and the members of the Bank’s Sharia Board, for their invaluable advice and guidance. The Board and I extend our gratitude to our shareholders, correspondent banks and customers. We also thank all employees for their dedication towards making the Bank’s Vision and Mission a reality. In conclusion, I thank my colleagues on the Board of Directors whose support and counsel I hold in high regard. Abdullah bin Sulaiman Al Rajhi Chairman Annual Report The Board is well aware of these developments and has already taken prudent but pragmatic steps to make the best of such rapid advancements. A number of policies, practices and procedures relating to corporate governance were developed during the year and the Governance Manual updated. In addition, the Delegation of Authorities (DOA) matrix has been amended according to regulator requirements. 2018 13 Message from the Chairman
16. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Annual Report 2018 14 Chief Executive Officer ’s Review Chief Executive Officer’s Review Just as the Kingdom is in the process of a great transformation, the Bank too continues to engage in its own journey of change – one that will complement and contribute towards Saudi Arabia’s Vision 2030. During the year under review, we accelerated our transformation, continuing to deliver superior returns for our shareholders while further enhancing our customer and staff engagement. Accelerate growth For all our shareholders, the starting point of their expectations remains value creation through accelerated growth – growth which, while it exceeds industry, remains both prudent and pragmatic. Building on its momentum, the Bank outperformed peers in the market yet again, registering meaningful market share improvements across key product lines. Our mortgage portfolio grew by over 27% through the introduction of new products such as Self Construction, a home financing solution for Ministry of Housing and Real Estate Development Fund beneficiaries. These efforts increased the Bank’s market share to 27.9% compared with 20.6% three years ago. The Bank also registered market share increases of 4.6%, 6.6% and 30% in terms of remittance centres, current accounts, and female customers respectively. With 551 branches, including 157 ladies sections and branches and 236 remittance centres as well as 300 affluent lounges, we ensured that the Bank’s distribution network remained the largest and most technologically advanced in the Kingdom. To further accelerate growth, we introduced many firsts during the year, such as “FX Forwards”, a first of its kind in the Islamic hedging market, and also a comprehensive Supply Chain Financing programme which provides a wide range of solutions for corporate customers. We also launched POS Merchant Financing for Small and Medium Enterprises, merging our SME and retail arms to leverage our network and enhance customer service. While we remained focused on our domestic organic strategy we continued to invest outside the Kingdom. In Kuwait, we became the first foreign Bank to launch a second branch. In Jordan, we opened three more branches, which will provide our customers with a wide range of banking products and services. Malaysia performance improved substantially and we signed an exclusive 10-year agreement with Sun Life Malaysia Takaful Berhad, appointing them sole distributor of Family Takaful products and services. We remain focused on effective balance sheet management in a rising rate environment and witnessed successful (6%) growth in non-profit bearing deposits, which increased our market share to represent over 25% and represents 94% of our total deposits. As a result, the Bank’s net profit margin improved by 26 basis points in 2018 to 4.34%. During 2018, a Corporate Sukuk proposition was developed and the Bank participated in a high profile Sukuk issuance in the Kingdom and in several large syndicated transactions.
17. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Customer focus For our employees , we must continue being the employer of choice – providing them with the career development opportunities they need to excel. It is only when they are truly engaged that our employees are able to anticipate and meet the banking needs of our customers and empowered to act in our customers’ best interest. With our people and digital systems increasingly geared towards providing a superior customer experience, the Bank is on a clear trajectory towards meeting its customer advocacy goals. We monitor our Net Promotor Score (NPS) very closely focusing on whether a customer would recommend the Bank to others. Among banks in the Kingdom, our NPS improved from 14% in 2015 to 42% in 2018. We now rank second, up from seventh position in 2015 out of a total of 12 banks in Saudi Arabia. We also lead in social media, ranking first on Twitter, YouTube and Instagram. During the year, we provided 65,000 hours of training and development. With the aim of strengthening diversity and increasing the number of female employees, the Bank also launched the first dedicated female graduate development programme during the year. In 2018, the number of female employees grew by 54% from 2015, representing 13.5% of the Bank’s total employee base. Contributing towards Vision 2030, the Bank also increased its Saudisation ratio to 96% during the year. We also sought to provide our employees with every opportunity to excel at what they do. For instance, on its journey of transformation, our HR function embraced innovation. We launched “SAHL”, a new generation HR Services mobile application that is integrated with HR systems. SAHL provides employees with greater flexibility in utilising and requesting HR services on their mobiles. Giving back to the communities within which we operate, has always been a part of our ethos and this year was no different. Nearly 3,000 of our people banded together, contributing over 14,000 hours on 75 social responsibility programmes in 22 cities. By 2020, our goal is to be able to report 50,000 cumulative hours of employee volunteering. We are establishing an innovation centre in our new facility and will be expanding the level of customer input in both the design and prioritisation of new features and products. The feedback and suggestions from customers have enhanced our ability to increase conversion to digital channels and functionality, continuing to enhance customer experience further. We delivered 11 new products during 2018 and have a full pipeline in place for 2019 and beyond. Digital leadership In today’s always-connected, always switchedon world, to meet the needs of our customers, we must compete with the latest technological innovations and market disruptions introduced by both start-ups and the biggest brands in the consumer and technology space. While this is no easy challenge, we have already begun focusing on some of the latest innovations in the market. Blockchain is one such innovation. The Bank has partnered with RippleNet, a global payments network that makes it easier for customers to connect and transact across a network of over 200 banks and payment providers worldwide. Annual Report Become employer of choice 2018 15 Chief Executive Officer’s Review
18. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Annual Report 2018 16 Chief Executive Officer ’s Review To further meet customer needs, during the year, we harnessed technological innovations such as fingerprint identification technology and electronic signatures to make banking safer and more convenient for our customers. As part of the ongoing digital transformation journey, we also focused on mobile and internet banking enhancements, further expanding our digital footprint. At year’s end, 56% of customer transactions were being performed digitally. In addition, the number of active retail users of the Bank’s “Mubashar” online banking platform for Retail customers grew strongly by 61% during 2018 to 3.6 Mn., while active Corporate users grew by 12.5% to almost 40,000. In terms of point of sale, we captured 18.9% of the value of the point of sale in the Kingdom, up from 16.3% in 2017. We deployed 250 self-service kiosks and plan to add 200 more in 2019. In 2018, 25% of transactions were made on a mobile or desktop. We will continue to forge new partnerships with Fintech companies in various parts of our business, including payments, and expanded use of robotics in our operations. Execution excellence Al-Rajhi Bank is committed to ensuring the highest standards of compliance across all its activities and functions. With the overarching goal of maintaining a “World-Class” Compliance Program, the Bank continues to invest in “State-of-the-Art” compliance Systems, technology enabled processes and people. The Bank successfully transformed its Anti-Money Laundering (AML), Counter-terrorist Financing (CTF) and Sanctions frameworks; and has achieved an established state of maturity. While continuing to improve the Bank’s compliance standards and procedures, we focused on protecting the interests of our customers and meeting the increasingly rigorous demands of local and international regulators. To ensure that we abide with all the regulatory requirements and new developments during the year, the Bank updated its Governance Manual, as well as all approved policies and procedures for its businesses across the Kingdom and at our branches abroad. We will continue to seek process improvements, such as digital solutions for retail credit approvals, sanction screening and other operational processes. In the near future we will roll out these initiatives to other lines of business in the Bank so that efficiency and effectiveness can be further improved across business lines and functions. We are one of the largest users of robotics in the Middle East, with 253 bots processing around up to 22,000 transactions per day, improving turnaround time. We also completed our new head office and data centre during the year. Acknowledgements I extend my sincere appreciation to the Chairman and the Board for their support and guidance, the Bank’s customers and investors for their continued loyalty and patronage, and our employees for their commitment and hard work. The quest to succeed has always been strong within Al Rajhi Bank. While this spirit has stood the Bank in good stead over the past six decades, I have no doubt that our leadership team, our people and our clear ABCDE strategy outlined in the Report, will continue to position the Bank for long-term success. Stefano Paolo Bertamini Chief Executive Officer
19. Largest Islamic Bank worldwide by assets and market capitalisation
20. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Alaa bin Shakib Al Jabri Salah bin Ali Abalkhail Annual Report 2018 18 Abdullah Bin Sulaiman Al Rajhi Board of Directors Committees membership Committees membership Committees membership Executive Committee Executive Committee , Board Risk Management Committee (BRMC), Nominations and Compensations Committee Executive Committee, Governance Committee Current positions  Chairman of the Board and Chairman      of Executive Committee – Al Rajhi Bank Chairman of the Board – Al Rajhi Company for Cooperative Insurance Chairman of the Board – Farabi Petrochemicals Company Chairman of the Board – Al Rajhi Holding Group Chairman of the Board – Al Rajhi Capital Company Chairman of the Board – Fursan Travel & Tourism Company Current positions  Board Member, Executive Committee Member Current positions  Vice Chairman, Board Member, Executive Committee Member and Member of BRMC and Chairman of Nominations and Compensations Committee – Al Rajhi Bank  Board Member – Construction Products Holding Company  Board Member – Rolaco Group  Board Member and Chief Executive Officer – Medical and Pharmaceutical Services Company     and Chairman of Governance Committee – Al Rajhi Bank Board Member – Al Rajhi Capital Company Partner and Chairman of the Board – National Veterinary Company Chairman and Office Owner – Salah Abalkhail Consulting Engineers Chairman of the Board – Salah Abalkhail & Co. Information Technology Previous positions At Norconsult Telematics Company since 1972: Previous positions Previous positions At Al Rajhi Bank since 1979:  Deputy General Manager of Financial Affairs  Deputy General Manager of Investment and Foreign Relations  Senior Deputy General Manager  General Manager  Chief Executive Officer  Managing Director/Chief Executive Officer  Board Member/Executive Committee Member  Vice Chairman of the Board and Executive Committee Member  Board Member – SIMAH  Board Member – Higher Education Fund  Board Member – Saudi Travellers Qualifications  Bachelor of Business Administration – Cheques Company  Board Member – Arab International Bank – Tunisia Head of Risk Group – SABB General Manager of Western Region – SABB General Manager of Gulf International Bank Director of International Business – National Commercial Bank  Deputy CEO – Gulf International Bank  Corporate Banking Manager – Saudi Investment Bank     King Abdulaziz University – 1979 Qualifications Experience Contributed to the conversion of Al Rajhi Exchange and Trade Company into a public joint stock company and held many leading positions in ARB for more than 35 years until his current position as the Chairman of the Board of Directors.  Bachelor of BA – American University in Beirut  Master of BA – Enseed, France Experience Having professional experience of more than 30 years, in the banking and financial fields, during which he held many leading positions in many local and international banks.      Project Engineer Assistant Project Engineer Project Manager Associate Consultant for the Company's projects Member of Engineering Committee – Ministry of Commerce Qualifications  Bachelor of Electrical Engineering – University of Arizona – 1972 Experience Working in the field of advisory and investment for more than 40 years. He assumed the position of Board Member of Al Rajhi Bank, since the first tenure, and served as a member on many Board committees.
21. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Bader Bin Mohammed Al Rajhi Khaled bin Abdulrahman Al Qwaiz Annual Report 2018 19 Abdulaziz bin Khaled Al Ghefaily Board of Directors Committees membership Current positions Committees membership Executive Committee , Nominations and Compensations Committee  Board Member – Al Rajhi Bank.  Managing Director and Vice Chairman – Nominations and Compensations Committee, Board Risk Management Committee (BRMC) Current positions  Board Member – Executive Committee Member – Member of Nominations and Compensations Committee – Al Rajhi Bank  Board Member – Al Rajhi Capital Company  Board Member – Savola Group  Board Member – Panda Retail Company     Previous positions  Worked from 1981 to 2016 at General       Organization for Social Insurance “GOSI” Board Member – Industrialization & Energy Services Company Board Member – Riyadh Hotels and Entertainment Co. Board Member – Saudi Industries Development Company Board Member – Tabuk Agriculture Development Company (TADCO) Board Member – National Medical Care Company Board Member – Herfy Food Services Qualifications  Bachelor of Economics – King Saud University  Master’s Degree in Economics from Western Illinois University – USA – 1990 Experience Working in the field of financial investment for more than 25 years.  Mohammed Abdulaziz Al Rajhi & Sons Investment Company (MARS) Chairman of Rajhi Steel Industries Co. Ltd. (Rajhi Steel) Chairman of the Board – Global Beverage Company Chairman of the Board – Al-Jazirah Home Appliance Co. Ltd. Chairman of the Board – Falcon Plastic Products Company Chairman of the Board – Manafe Investment Company Previous positions  Held several leading positions in areas of management, industry and real estate investment. He has served as a member of Boards of Directors of joint-stock companies. Qualifications  High School Experience Having experience of 30 years, Mr Bader has held several leading positions in areas of management, industry and real estate investment and served as a member of Boards of Directors of many joint-stock companies. Current positions  Board Member – Member of Nominations and     Compensations Committee – Chairman of BRMC – Al Rajhi Bank Board Member, Audit Committee Member and Chairman of the Nominations and Compensations Committee – Swicorp Company Chairman of the Board, Chairman of the Executive Committee and member of Nomination Committee – Riyadh Cables Group Company Board Member – EMCOR Facilities Services Board Member – Unique Solutions for Chemical Industries (USIC) Previous positions  Managing Director – ACWA Holding Company  Chief Executive Officer – Astra Industrial Group  General Manager – Corporate Banking Group in the Central Region – SAMBA Group  General Manager – Credit Group – Arab National Bank  Manager of Financial and Administrative Affairs Sector – National Cooperative Insurance Company  Head of Loan Team – Saudi Industrial Development Fund  Board and Executive Committee Member – ACWA Holding Company  Board Member and Chairman of Nominations and Compensations Committee – Saudi Tabreed Company Qualifications  Bachelor of Urban Planning – University of Washington – USA Experience Having more than 30 years of experience in the banking, financial, and industrial field, during which he held many leading positions in many local banks, in the field of retail, wholesale, risk and insurance.
22. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Ameen bin Fahad Al Shiddi Hamza bin Othman Khushaim Annual Report 2018 20 Ibrahim bin Fahad Al Ghofaily Board of Directors Committees membership Committees membership Committees membership Governance Committee Audit and Compliance Committee Executive Committee , Board Risk Management Committee (BRMC) Current positions Current positions  Board Member and Member of Governance  Board Member and Chairman of Audit and Committee – Al Rajhi Bank  Board Member – Jiwar Real Estate Management, Marketing and Development Company  Head of Arriyada Financial Consulting Center Compliance Committee – Al Rajhi Bank Board Member – VIVA – Kuwait Telecom Company Board Member – Deutsche Gulf Finance. Board Member – Oger Telecom Company CFO - Saudi Telecom Company (STC) Previous positions  Board Member – Alinma Bank  Deputy General Manager of Banking and Development – Al Rajhi Bank  Associate Professor at Faculty of Economics, King Abdulaziz University  Vice Dean of Faculty of Economics, King Abdulaziz University     King Abdulaziz University Faculty of Economics, King Abdulaziz University  Financial Advisor of King Abdulaziz Endowment Project in Makkah  Board Member – Solutions Company  Board Member – Advanced Sale KAUST Endowment  Hedge Fund Manager Portfolio – Investment Cables Company  Board Member – Aqalat Company  Board Member – Viva Bahrain Company Management – Treasury – Saudi Aramco Co.  Financial Analyst – Investment Management – Treasury – Saudi Aramco Co.  Board Member and Member of Remuneration and Compensations Committee – Dallah Healthcare Holding Company Qualifications  Bachelor of Accounting, King Saud University  Master’s Degree in Accounting, University of Missouri, USA  CMA, SOCPA, CPA Experience Having more than 25 years of experience in the fields of financial, investment, consulting and supervisory, he has served as a Board Member of many local and international companies in various sectors and has membership in several professional, commercial, and consulting committees. Having practised academic work for 10 years and with 10 years of experience in the Islamic Banking Sector, he established Arriyada Financial Consulting Center, in 2002, and performed several studies and Islamic Financing Structuring for projects (the most prominent being Abraj AlBait in Makkah). He participated and presided over various Islamic financing conferences within and beyond the Kingdom’s borders. Previous positions  Hedge Fund Portfolio Manager – Limited Company  Board Member – Arab Submarine  Bachelor of Public Administration – Experience Department – Hassana Investment Company  Member of the Saudi Investor Association  Certified member of the Association of Financial Analysts – USA Qualifications King Abdulaziz University  Master of Public Administration – California State University – 1978  PhD in Philosophy – Florida State University – 1981 Committee and BRMC – Al Rajhi Bank  Director of International Investment Previous positions  Assistant Professor, Faculty of Economics,  Member of the Graduate Studies Committee, Current positions  Board Member – Member of Executive Qualifications     Bachelor of Finance, Michigan State University Master’s Degree in Business Administration University of Michigan in Ann Arbor CFA Experience Having 12 years of experience in investment.
23. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Abdullatif bin Ali Al Seif Annual Report 2018 21 Raed bin Abdullah Al Tamimi Board of Directors Committees membership Committees membership Governance Committee , Nominations and Compensations Committee Audit and Compliance Committee Current positions  Board Member – Member of Audit and Current positions  Board Member – Member of Governance Compliance Committee – Al Rajhi Bank Committee – Member of Nominations and Compensations Committee – Al Rajhi Bank  Board Member - Cooperative Insurance Company  Board Member – Najm for Insurance Services  Board Member – Arabian Cement  CEO – Alra’idah Investment Company  Board Member – Al Ra’idah Previous positions  Deputy Head and Head of Investment – Investment Company Previous positions At Cooperative Insurance Company, since 1996:  Chief Executive Officer  Senior Deputy CEO – Technical Affairs  Deputy CEO – Medical Insurance and Takaful Insurance  General Manager of Human Resources and Administration Affairs  Board Member – Waseel Electronic Information Transfer King Abdullah Foundation  Director of Portfolio Management – Masik  Head of Portfolio Management, Investment Management Division – Saudi Aramco Co.  Portfolio Manager – KAUST Investment Management Company  Financial Analyst – Saudi Aramco Co.  Board Member – HSBC Saudi Arabia  Executive Director – Vision Combined Limited Company Qualifications  Bachelor of Medical Science, University Qualifications of Wales, UK  Has many training courses from leading international institutes such as Enseed, IMD, LBS, etc.  Bachelor of Business Administration – Experience Having over 20 years of management, with his last leading position being CEO of “Tawuniya” (the Largest Insurance Company in MENA area), he currently serves as Board Member and Board Committee Member in many listed and unlisted companies. Boston University  Master’s Degree in Business Administration – Boston University  Master’s of Economics – Boston University  CPA, CFA Experience Having more than 16 years of experience in investment, he serves on several Boards and Committees in many companies.
24. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information 22 Executive Management Waleed Abdullah Almogbel Abdullah Ali Alkhalifa Christopher Macleen Annual Report 2018 Stefano Paolo Bertamini Current positions Current positions Current positions Current positions Chief Executive Officer Deputy Chief Executive Officer Chief Financial Officer Chief Risk Officer Previous positions Previous positions Previous positions Previous positions Chief Executive officer (Standard Chartered Bank) Chief Operating Officer (ARB) Chief Financial Officer (ANB) Chief Risk Officer (West Bank) Qualifications Qualifications Qualifications Qualifications Master’s Degree – Finance and International Banking Business PhD – Accounting and Auditing Master’s Degree – Accounting Bachelor’s Degree – Accounting Experience Experience Experience Experience 32 years 21 years 28 years 35 years Khalid Fahad Alhozaim Omar Mohammad Almudarra Abdulaziz M Al-Shushan Saleh Abdullah Allheidan Current positions Current positions Current positions Current positions Chief Human Resources Officer Chief Governance and Legal Officer Chief Internal Audit General Manager – Sharia Previous positions Previous positions Previous positions Previous positions General Manager – Human Resources (Acting) (ARB) General Manager – Head of Legal – SAMBA Financial Group Executive Director (Head of Internal Audit) ACWA Power Associate Professor in the High institute of Judiciary – Al Imam Mohammed bin Saud Islamic University Qualifications Qualifications Qualifications Qualifications Bachelor’s Degree – Computer Engineering Master’s Degree – Law Executive Master’s Degree – Business Administration PhD – in Comparative Fiqh (Islamic Law) Experience Experience Experience Experience 19 years 19 years 19 years 33 years
25. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information 23 Executive Management Majed Abdulrahman Alqwaiz Abdulrahman Abdullah Alfadda Abdullah Sulaiman Alnami Annual Report 2018 Saleh Abdullah Alzumaie Current positions Current positions Current positions Current positions General Manager – Retail Banking Group General Manager – Corporate Banking Group General Manager – Treasury and Financial Institutions Chief Compliance Officer Previous positions Previous positions Previous positions Previous positions GM RBG (Acting) (ARB) GM CBS (SABB) GM Treasury and Investment (SAIB) Deputy CORO (Riyad Bank) Qualifications Qualifications Qualifications Qualifications Bachelor’s Degree – English Language Bachelor’s Degree – Finance Accounting Bachelor’s Degree – Electrical Engineering Master’s Degree – Management and Business Experience Experience Experience Experience 28 years 24 years 22 years 24 years
26. Executive Management Annual Report 2018 24 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Number one distribution network in the Middle East in terms of branches , POS, ATMs and Remittance Centres
27. Strategy Strategic Direction 26 Operating Environment 31 Our Value Creation Model 34 Stakeholders and Materiality 36 Risk Management 38 Annual Report 2018 25 25 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information
28. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Annual Report 2018 26 Strategic Direction The Bank ’s 2020 strategy, first formulated in 2015, was designed to build new capabilities and ensure sustainable growth amidst a rapidly changing environment. It also contributes towards the Kingdom’s Vision 2030 objectives of creating a thriving financial sector. Strategy overview A key enabler for Saudi Arabia’s Vision 2030 is the creation of a thriving financial sector that underpins and nurtures private sector growth, supports the formation of an advanced capital market, and promotes financial responsibility among its residents. Delivering these ambitions is a central objective of the strategy of Al Rajhi Bank. Al Rajhi Bank’s 2020 strategy was first formulated in 2015, following the appointment of the current management team. It aims to build new capabilities and ensure sustainable growth amidst a rapidly changing environment, while leveraging KSA’s Vision 2030 objectives of creating a thriving financial sector. This macro ambition enables the delivery of the 2020 strategy. The strategy is geared to expand the product and customer portfolio, diversify sources of funding, expand delivery channels, enhance customer and employee engagement, migrate customers to online channels and streamline internal processes. The banking environment in Saudi Arabia is in a state of rapid evolution: fiscal and monetary policy dynamics, increased regulatory activity, and most importantly, rapidly evolving technological innovations, increasing digitisation and heightened customer expectations. In response to this dynamic environment, Al Rajhi Bank’s strategy has a relentless focus on business enabling and cost-efficient technological enhancements, as well as on the sustainability of our operations. The Bank is planning for the digital future now, and building the kind of bank that tomorrow’s digital customers will want to engage with. The Bank aims to achieve these objectives through the execution of its “ABCDE – Back to Basics” strategic plan, which is composed of five key pillars: accelerate growth to outperform our competition, become the employer of choice in the industry, enhance customer focus, achieve digital leadership, and improve execution excellence: A B C D E Accelerate growth Become employer of choice Customer focus Digital leadership Execution excellence Grow mortgage, private sector, affluent, ladies and Tahweel Engaged workforce Update value propositions Smartly expand channels and formats World-class compliance Enhance SME and corporate capabilities Expand development and training programmes Empower frontline Digitise customer journeys Enhance IT infrastructure Enhance International presence Strengthen diversity Align organisation to customer advocacy Migrate customers to self-service channels Centralise and automate operations Improve yields Enhance employee value proposition Install and embed NPS across the Bank Innovate in payments Strengthen risk infrastructure Exceed industry Higher engagement Most recommended Best in class Deliver
29. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Several key initiatives are being executed to accelerate growth ahead of the industry :  Grow the mortgage portfolio  Increase exposure to the private sector  Expand the customer base of female customers,  Enhance SME and corporate capabilities  Selectively enhance the international footprint  Improve yields and enhance cross sell In 2018, the Bank registered meaningful market share improvements across key product lines through the introduction of new innovative products and the selective expansion of its distribution network. The mortgage portfolio grew by 27.4% and our market share grew to 27.9% at end of 2018, compared to 20.6% at the end of 2015. This was partially driven by the introduction of new products such as Self Construction, a financing solution targeting landowners willing to construct or owners of incomplete properties looking to complete construction Off Plan, is another financing solution to fund customers as they make payments towards the construction of their residential property currently owned by a real estate company which will further accelerate growth in 2019 and beyond. Al Rajhi Bank has the largest distribution network in Saudi Arabia with 551 branches, over 5,000 ATMs, approximately 84 thousand POS terminals and 236 remittance centres. The Bank also operates 18 branches in Malaysia, 10 in Jordan and two in Kuwait. Over the past three years, the Bank also grew its female customers by 30% with the introduction of five additional dedicated ladies sections and branches bringing the total dedicated sections and branches for ladies to 157, further cementing the Bank’s distribution network as the largest in the Kingdom. The Bank also expanded its corporate and SME offering, including Islamic FX forwards, Supply Chain Financing (SCF), facilities that are based on receivables purchase agreement on behalf of the Bank’s corporate clients’ suppliers; and POS Financing, offered to SME customers through an active point of sale terminal to cover their short-term and long-term needs. Sophisticated cash and liquidity management is crucial for the modern corporate, and Al Rajhi launched a corporate liquidity management solution in 2018, providing centralised and automated cash management for corporate customers. Additionally, 2018 saw the successful launch of fully-fledged supply chain finance solutions (SCF) for its corporate customers. Al Rajhi Bank is the first bank in the Kingdom to offer a comprehensive SCF programme with a wide range of solutions backed by a strong technological platform available to the entire value chain of customers, both upstream and downstream. The Bank’s focus on the SME sector remained a key initiative for the year. The Bank merged its SME business with its retail banking business, leveraging its retail branch network and enhancing customer service. Internationally, 2018 was a year of advancement: the Bank opened three new branches in Jordan and one new branch in Kuwait. In Malaysia performance improved substantially. Finally, the Bank has continued to improve yields during 2018 through effective balance sheet management in a rising rate environment and successful growth of 6% in non-profit bearing deposits, which now comprise 93.6% of total deposits. As a result, the Bank’s net profit margin improved by 26 basis points in 2018 to 4.36%. Annual Report 2018 strategy review Accelerate growth 2018 27 Strategic Direction
30. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Annual Report 2018 28 Strategic Direction Become employer of choice Customer focus The Bank ’s commitment to remaining the employer of choice in the industry is a key pillar of its strategy, and 2018 saw continued efforts focused on promoting an engaged workforce, expanding development and training programmes, strengthening diversity, and enhancing the employee value proposition. With the ambition to be recognised as the most recommended bank in Saudi Arabia, strong focus is placed on customer advocacy while embedding improvement in Net Promoter Score (NPS) into our balanced scorecards. In 2018, the Bank became the number two bank in the country based on NPS versus the number seven bank position in 2015. In November 2018, the Bank moved both its main office and operations centre to the new state of the art building in Riyadh. In 2018, the Bank launched the Al Rajhi Bank Academy, which includes a School of Banking providing a series of domain and role specific certifications as well as running six graduate development programmes, for students in their final stages of graduation. The Academy also launched the School of Leadership. In total, more than 65,000 training days were delivered in 2018. Through the use of digital advancements and ongoing agent training and development, the Bank has further improved customer experiences to better address customer needs. During 2018, the Bank registered 10% growth in its NPS score, a biannual external study is commissioned by the Bank to measure progress relative to competition. We measure how satisfied and likely a customer is to promote the Bank to other friends and colleagues. Net Promoter Score (NPS) With the aim to strengthen diversity and grow the number of female employees, the Bank launched the first dedicated female graduate development programme and introduced a nursery allowance programme for female employees during 2018. The percentage of female employees grew by 6.2% in 2018, and today women represent approximately 14% of the total Bank’s employee workforce. % 14% 21% 34% 42% 2015 2016 2017 2018 3,554 4,587 31,058 15,119 100 80 60 40 20 0 Base Detractors Passive Promoters Source: Online top down NPS study commissioned by Al Rajhi Bank data collection period end September 2018.
31. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Execution Excellence The banking industry is transforming into a digital industry , and Al Rajhi is at the forefront of this change. The Bank is committed to being the pioneer in digital banking by capitalising on the latest technologies to provide customers with the highest quality services. In this regard, the Bank remains focused on smartly expanding channels, digitising customer journeys, migrating customers to self-service channels, and exploring innovations in payment methods. Execution excellence is a key enabler of the Bank, helping it deliver a strong performance to meet its operational objectives. It also helps achieve world-class compliance, enhanced IT infrastructure, automated operations and strengthened risk infrastructure. As part of this ongoing digital transformation journey, the Bank continues to accelerate its focus on mobile banking enhancements and customer journeys to both further grow its digital footprint and enhance the customer experience. Today 56% of customer transactions are performed digitally. In addition, the number of active retail users of the Bank’s “Al Mubashar” online platform grew by 64% during 2018 to 3.6 Mn., while active corporate users grew by 12.8% to almost 40,000. The integration of WhatsApp and Apple Pay with the Bank’s mobile application is one of the many innovations in 2018 that have enhanced customer experience and ease of use. Other digital initiatives during 2018 included: new self-service kiosks were rolled-out and installed across remittance centres, a trial of artificial intelligence and voice recognition technologies was implemented across customer call centres. Robotics was further expanded to improve efficiency of back office transactions, secure cross-border money transfers using Ripple Blockchain technology were conducted with other financial institutions. We will continue to explore innovative opportunities and partnerships in the fintech industry in 2019 and beyond. We are one of the largest users of robotics in the Middle East. We have 253 bots processing around 22,000 transactions daily. This has significantly improved our processing leading to a much faster turnaround time and a better customer journey. During 2018, the Bank finalised the construction of its Tier 4 data centre, granting the Bank the recognition of being the first bank in the GCC to have a Tier 4 certification. Full migration to the new data centre is scheduled for 2019 which will provide the Bank with world-class modern infrastructure ensuring resilient risk, security and compliance controls. Annual Report Digital Leadership 2018 29 Strategic Direction
32. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information 30 Strategic Direction Annual Report 2018 2019 Strategy The Bank will continue to implement its ABCDE strategy during 2019 which is based on adopting artificial intelligence solutions , automation, block chain, cloud computing, big data analysis and internet of things similar to the past three years. It is focused on continuing to deliver superior returns, enhanced customer and employee engagement while accelerating digital execution. Key strategic focus areas for 2019 include: Continued growth in mortgage and current accounts Accelerate growth in revolving cards and E-Commerce Further enhance digital offerings and customer journeys Continuing to partner with Fintech companies and expand use of Agile working teams Enhance cross-sell and fee income streams Continued investment in the capabilities of its people and infrastructure
33. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information 31 Operating Environment The crude price dynamic supported a host of positive economic indicators : GDP grew by 2.2%, up from -0.8% in 2017. Broad money supply (M3) expanded at 2.8%, up from 0.2% in 2017. Bank claims on the private sector grew 3.0% year-on-year, recovering from the prior year contraction of 0.8% and overall credit grew by 2.8%, up from -1.0% in 2017. Interest rates vs inflation % 3.00 4 2.25 3 1.50 2 0.75 1 0 0 -0.75 KSA growth vs oil prices % USD/bbl 6.0 80 4.5 60 3.0 40 1.5 20 0 0 -1.5 2015 2016 GDP growth, constant prices (%) 2017 2018 2019 -20 Brent crude (USD/bbl) The crude price dynamic supported a host of positive economic indicators. And against this backdrop, policy rate increases in the US were mirrored in the Kingdom, leading average 3M SAIBOR rate to increase by 60 bps to 2.41%. 2018 After several years of constrained economic activity, 2018 marked a return to growth for Saudi Arabia, driven by a steadily rising oil price for the first three quarters. 2015 3M SAIBOR (LHS) 2016 2017 2018 -1 Inflation, average consumer prices (RHS) But a supportive oil price was not the only driver of economic growth: the reforms initiated under the Vision 2030 strategy saw macro growth mirrored in the real economy: Real estate lending, retail credit and cards were all particularly strong. Also, real estate finance has been doubled comparing to the past years from SAR 3,993 Mn. to SAR 8,092 Mn. and auto finance grew 79% annually compared to -1% in 2017. In addition, deposits grew 2.6% comparing to 0.1% in 2017. In these conditions, the banking industry benefited overall, with the domestic banking sector posting net profits of SAR 48 Bn., up 10% from 2017. Annual Report A true evaluation of the Bank’s performance and value delivery must, of course, take into account the sociopolitical and economic trends within which it operates. This section outlines the main forces that shaped the local, regional, and global landscape as well as the banking sector in general.
34. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Annual Report 2018 32 Operating Environment Comprising 12 listed banks and other non-listed banks , the Kingdom’s banking sector witness marginal growth in deposits, with demand deposits accounting for 61.8% while time and savings deposits accounted for 27.7%. Individuals held 76.4% of total deposits while government entities accounted for 21.6%. Together, National Commercial Bank, Al Rajhi Bank, Samba Bank, and Riyadh Bank – the Kingdom’s four largest banks – account for 55.3% of total assets. Banking sector income Banking sector loan growth SAR Bn. % SAR Bn. % 100 7.5 1,400 12 80 6.0 1,050 9 60 4.5 700 6 40 3.0 350 3 20 1.5 0 0 0 -350 0 2015 2016 Banking sector income (SAR Bn.) 2017 2018 Banking sector net profit (SAR Bn.) 2015 2016 Bank credit: Loans, advances and overdrafts (SAR Bn.) 2017 2018 -3 YoY growth (%) YoY income growth (%) Banking industry benefited overall, with the domestic banking sector posting net profits of SAR 48 Bn., up 10% from 2017. Even at this early stage, just two years into the execution of Vision 2030, 2018 already seems like a milestone year. Al Rajhi Bank’s own credit dynamics during the year reflected this new mood of growth in the Kingdom. As a predominantly retail oriented bank (72% of the business), Al Rajhi thrives when the Kingdom grows, and 2018 was proof of this. We experienced strong growth in mortgages (+27%) achieving a record market share of 27.9%. Our credit cards business also witnessed strong growth with 200,000 credit cards now in service, up from 50,000 last year. Banking sector deposits SAR Bn. % 2,000 2.5 1,600 2.0 1,200 1.5 800 1.0 400 0.5 0 2015 2016 Bank deposits (SAR Bn.) 2017 2018 YoY growth (%) 0
35. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information SAR Bn . % 150 15 120 12 90 9 60 6 30 3 0 2015 2016 Mortgage loans by Banks (SAR Bn.) 2017 2018 0 What is particularly gratifying from a management point of view, though, was that we did not allow the positive macroenvironment to lead to complacency. On the contrary, our ongoing ABCDE strategy and focus on our employees and customers mean that the Bank has never felt more dynamic. We delivered 65,000 hours of training to our staff in 2018, double the 2015 figure. We continued to improve our customer service, further accelerated digitisation and product development. We launched 12 new products in 2018, including securitisation, supply chain financing, FX forwards, and point of sale financing for SMEs. YoY growth (%) We experienced strong growth in mortgages (+27%) achieving a record market share of 26.9%. And this growth was not delivered at a cost to margin: Partially driven by rate hikes, but also supported by strong management discipline, Al Rajhi Bank margins expanded by 26 bps during the year, to 4.34%. The banking sector adoption of IFRS 9 accounting standard fundamentally changes the way banks account for provisions associated with financing activities. While the settlement reached between all banks and the General Authority for Zakat and Tax (GZAT ), which will harmonise the treatment of Zakat for all banks in future, added to a sense of confidence for the sector. In this context, 2018 was a particularly strong year for Al Rajhi Bank, delivering sector-leading achievements such as growth in operating profits, growth in net income, return on equity and return on assets. Our digital leadership is now well established in the sector due to significant and early adoption of robotic tools. We have now implemented 253 bots processing over 22,000 transactions daily. We have focused on improving our turnaround time and have received Tier 4 certification for our data centre – the first bank in the Middle East to achieve this. In summary, all banks in the Kingdom benefited from macro tailwinds in 2018. Al Rajhi has not been complacent, and has rigorously pursued its journey to be The Blue-chip Islamic Bank, admired for its innovative service, people, technology and Sharia compliant products, both locally and internationally with more vigour than ever. Annual Report Banking sector mortgage loans 2018 33 Operating Environment
36. Our Value Creation Model Vision , Mission and Values Stakeholders and Materiality 34 Operating Environment Annual Report 2018 Strategy As portrayed in the Bank’s business model, its inputs (on-balance sheet and off-balance sheet forms of capital), activities, outputs, outcomes and impact are set against the trends of the operating environment; the Bank’s vision, mission, and values; and its strategy. The whole is underpinned by strong governance practices as described in the Management Discussion and Analysis section, under Governance, Strategy, and Performance on pages 26 to 111. The figure illustrates how the Bank’s inputs feed its activities. These activities can be described as enhancements to capitals (such as improved customer products and services, better quality employee development plans, or innovative technological enhancements) which delivered value during the year under review. Such activities in turn generate outputs. These outputs can be described as the value created both for the Bank and its stakeholders in the short term. The outcomes, such as (insert example), create value in the medium term, while the impact highlights value created in the long term. Inputs Activities Activities Financial capital Strong book value of the Bank reflecting profitability and asset quality Institutional capital Cutting edge knowledge-based intangibles and tangibles owned and controlled by the Bank Investor capital Loyal investor base nurtured and rewarded through sound governance and ethical business practices Customer capital Trust and loyalty earned by putting the customer at the heart of all we do Accelerate growth Improve portfolios in key customer segments Employer of choice Create a performance-driven culture where the customer comes first Customer focus Provide greater convenience and security in customer offering Business partner capital A bedrock of market confidence and financial stability through exemplary stewardship Employee capital Digital leadership Expand digital channels and migrate customers to self-service banking An innovative team of achievers driven by a passion to serve Social and Environmental capital A license to operate earned through our contribution towards financial inclusion aligned with Vision 2030 Execution excellence Explore and execute measures to improve operations
37. Our Value Creation Model 35 Stewardship Outputs Outcomes Impact Value delivered : Sound financial intermediation Grow mortgages, retail, SME and corporate banking Empower frontline and embed NPS across the Bank Improve customer touchpoints, products and services Introduce new and improved digital banking options Enhance IT infrastructure, centralise and automate operations, and strengthen risk infrastructure Value derived: Profitability, shareholder loyalty and business portfolio growth Value delivered: Professional development and a motivating work culture Value derived: A dedicated and empowered workforce Value delivered: Sharia compliant products and services via wide network Value derived: Strong brand value, customer patronage, and market leadership Value delivered: Sustainable, convenient banking options Valued derived: Brand value and market leadership Value delivered: Smoother systems that facilitate better customer service Value derived: Cost savings and improved stakeholder confidence Move the Bank towards becoming the leading Digital Bank in the region. Be an integral player in the development of a thriving financial sector and a key enabler of the Kingdom’s Vision 2030 by offering services to support private sector growth. Annual Report 2018 Monitoring and Evaluation
38. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Annual Report 2018 36 Stakeholders and Materiality We consider as stakeholders those individuals or entities who are materially impacted by the Bank ’s activities or those who have the ability to make an impact on the Bank by their actions, opinions, attitudes, or perceptions. Key ARB stakeholder groups Investors The Environment Customers Society and Local Communities Key ARB stakeholder groups Business Partners Government Authorities Employees Regulators Stakeholder engagement Given the significant impact that the perceptions and behaviour of our stakeholders can have on the Bank’s ability to conduct its business and meet its strategic goals, and also the Bank’s own capacity to impact its stakeholders, it is vital for us to identify and communicate effectively with them.
39. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information 37 Stakeholders and Materiality Investors Customers Principal means of engagement Subjects of engagement        General Assembly Meeting Extraordinary General Meetings Interim financial statements Annual report Investor presentations Press releases Announcements made on the Saudi Stock Exchange and the Bank's corporate website  Investor conferences  Strategy  Financial statements of the Bank                Price Ease of access User-friendliness Banking hours Specialised needs          Performance standards Career plans Training and development Corporate values Corporate strategies and plans Trends in banking Saudisation Remuneration and benefits CSR programmes Branches Service centres ATM network Online banking Corporate website Print and electronic media Social media Customer satisfaction surveys Customer visits Net Promoter Score (NPS)  Induction programmes  Development of key performance indicators (KPIs) Employees Society and environment  Individual career development plans  Meetings  Staff societies and volunteerism      Education Youth and employment Microfinance for women Programmes for SMEs Assistance to needy and vulnerable and the Group plans, prospects, and forecasts  Shareholder returns  Governance  Risk management  Financial inclusion  Affordable financing for disadvantaged segments and community empowerment  Assistance for disadvantaged and vulnerable groups Materiality Material topics are those that significantly affect the Bank’s ability to create value over the short, medium and long term, having a significant impact on the opinions, attitudes, and perceptions of stakeholders. Material topics are defined by their relevance and significance, where the latter is a function of the magnitude of their impact and the probability of occurrence. The materiality assessment is conducted in light of the Bank’s value creation process, corporate planning exercise, emerging global and local trends, and feedback from its many stakeholder engagement mechanisms. 2018 The Bank utilises the following methods of engagement for its key stakeholder groups. Annual Report By connecting with our stakeholders we are able to understand their needs better and address any concerns they may have. We are also then able to balance the distribution of value created and better prepare ourselves for any challenges that the future may bring.
40. Annual Report 2018 38 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Operating in a highly competitive and dynamic environment , the Bank focused on managing a range of risks during the year under review. Risk Management Credit risk The most common risk for the Bank and the Group is financial loss due to a counterparty failing to meet the terms of an obligation to a transaction. Key sources of credit risk include credit facilities provided to customers, cash and deposits held with other banks, and some off balance sheet financial instruments such as guarantees relating to purchase and sale of foreign currencies or letters of credit. Using quantitative and qualitative aspects we systematically evaluate a customer’s creditworthiness. This helps us to maintain a robust loan portfolio. The Bank is also able to take remedial measures by conducting periodic loan reviews that are geared to detect any weaknesses in the quality of the portfolio. Liquidity risk When the Bank is unable to meet its financial liabilities when they fall due or replace withdrawn funds without incurring unacceptable losses, this is termed liquidity risk. Such a risk would invariably strike a serious blow to the Bank’s reputation and its ability to do business going forward. Since the ability to accurately forecast cash flows and cash equivalents is crucial to the Bank’s ability to manage such a risk, they are carried out on the basis of practice and limits set by the Group and historical deposit movement. The Bank’s liquidity is also affected by market disruptions and credit downgrades. For this reason, assets are managed judiciously with a conservative balance of cash, cash equivalents and other assets maintained at all times. To further mitigate this risk the Bank focuses on diversifying its sources of funding. Market risk Risks related to currency, profit rate and price are classed as market risk. They occur when the fair value or future cash flows of a financial instrument fluctuate due to changes in market prices. Profit rate products, foreign currency, and mutual fund products are all exposed to general and specific market movements. As a result, changes in the level of volatility of market rates or prices such as profit rates, foreign exchange rates, and quoted market prices, can impact the performance of the Bank. Being Sharia compliant means that the Bank is immune from risks resulting from speculative operations such as hedging, options, forward contracts, and derivatives. The Group is not immune to market risks such as profit rate risk, foreign currency risk, price risk and operational risk. Please refer Note 27.3 to the Consolidated Financial Statements for a detailed discussion. Operational risk Operational risk scenarios are more or less idiosyncratic in nature and generally attributed to inadequate or failed internal systems and processes, human actions and/or external events. During the year under review, the aggregated results of such stresses indicated manageable levels of risk while high risk levels were never breached. This demonstrates the Bank’s overall resilience and the success of its integrated approach to the identification, measurement and monitoring of operational risk. Concentration risk If the Bank’s area of business was limited to one location or its customers to a single type, it would be at greater risk from the slightest shocks to its operating environment. Instead, the Bank is geographically diversified and counts on the loyalty and patronage of a varied customer base which spans industries, countries, and wallet-size. Such diversity mitigates concentration risk by providing greater stability in the face of external impacts. Risk management practices The role of the Board Risk Management Committee (BRMC) is to support the Board of Directors in their role of overseeing the Bank’s performance in line with the Bank’s risk appetite. The risk management function operates within the regulatory framework set out by the Saudi Arabian Monetary Authority (SAMA). The Bank’s Internal Capital Adequacy Assessment Process (ICAAP) covers the Bank’s risk management framework, detailing its risk appetite, risk management approach, and primary risk controls. Reviewed by the BRMC and approved by the Board, the ICAAP is submitted to SAMA on an annual basis. Similarly, the BRMC reviews and provides recommendations on the Internal Liquidity Adequacy Assessment Plan (ILAAP). These are
41. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Crucial to the Bank ’s management of risk across its operations is the role of the Credit and Risk Group headed by the Chief Risk Officer. Covering credit risk management, operational risk management and enterprise risk management, this team works within the risk frameworks and policies approved by the Board of Directors. The Group’s reports to the Board of Directors and related committees span credit risks and portfolio asset quality, operational risks, liquidity risks, market risks, reputational risks, and technology and cyber security risks among others. The BRMC also reviews the Credit and Provisioning Policy, Operational Risk Policies, Risk Appetite Statements, Market and Liquidity Risk Policies and Information Security Policy. Its recommendations are submitted for the Board’s approval. The Bank’s liquidity risk is monitored by the Asset and Liability Committee (ALCO). Their remit includes day-to-day management of funds to ensure that funds are available when necessary to meet commitments; monitoring liquidity ratios against benchmarks; and managing the concentration and profile of debt maturities. Market risks are regularly monitored by the Credit Risk Department with reports being sent to ALCO each month for assessment. ALCO ensures that risks taken are appropriate but initiates mitigating action if they are not within the Bank’s risk appetite. The diversity of the customer base fortifies and strengthens the Bank. Having a keen understanding of different customer requirements, we segmented this stakeholder group into three primary segments:  Retail banking customers  Micro customers and Small and Medium Size Enterprises (MSME)  Corporate banking This type of segmentation also allows us to align our value proposition in terms of products, services, and delivery channels to better cater to customer needs. Our retail customer-oriented Supporting our long-term value creation plans, our risk management practices regulate the entire customer journey from onboarding to issuing finances and providing reliable and relevant products and services. In line with global standards, the Bank implemented credit provisioning framework IFRS 9 and Internal Liquidity Adequacy Assessment Plan (ILAAP) during the year under review. It also established Risk Appetite Statements at business line level, foreign branch level and subsidiary level. In 2019, the Bank will focus on enhancing its credit delivery and management processes and further improving the robustness of its information security and disaster recovery infrastructure. Credit rating Rating agency S&P Long term Short term BBB+ A-2 Fitch A- F1 Moody’s A1 P-1 Capital Intelligence A+ A1 Receiving positive credit ratings from international rating agencies over consecutive years has been favourable for the Bank’s reputation. The year under review was no different (except for one notch downgrading of Fitch’s rating from A to A-. Moody’s and S&P maintained their ratings at A1 and BBB+ respectively). Looking ahead Expanding its core customer segments of retail, corporate, and SME in line with world-class risk management practices, regulatory standards, international standards, and best practices continues to be a core focus for the Bank. 39 business model provides a diverse risk profile that is supplemented by our robust corporate banking customer base. Our extensive branch network endears us to our loyal customer base, generating for us a high level of stable demand deposits, which in turn has a positive impact on the Bank’s liquidity. 2018 submitted to the Board and, upon approval, are submitted to SAMA annually. Annual Report The Bank must manage risks with prudence combined with pragmatism in order to remain profitable. To do so it has to accurately identify potential risks and the impact of such risks on the Bank’s value creation process. This involves establishing risk thresholds which are derived from the Bank’s risk appetite. The policies and procedures set up by the Bank help identify and analyse relevant risks, manage its capital effectively and provide shareholders with sustainable returns. Risk Management
42. Annual Report 2018 40 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Number one retail bank in the Middle East by retail deposits and income Risk Management
43. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Performance Financial Review 42 Investor Relations 52 Digital Footprint 54 Sharia Group 57 Review of Business Portfolio 59 Review of Other Operations 69 Review of Subsidiaries and International Branches 83 Annual Report 2018 41 Risk Management
44. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Annual Report 2018 42 Financial Review Bank achieved improved performance during the fiscal year 2018 , recording growth in most of the key performance indicators. Income statement Al Rajhi Bank reported net income of SAR 10,297 Mn. for the full year 2018, reflecting strong momentum in the delivery of the strategy, and resulting in improved financial metrics. FY 2018 SAR Mn. FY 2017 SAR Mn. YoY % 13,253 12,029 +10.2 Fees and other income 4,067 3,875 +4.9 Total operating income 17,320 15,905 +8.9 Operating expenses (5,492) (5,237) +4.9 Total impairment charge (1,531) (1,548) -1.1 Net income for the period 10,297 9,121 +12.9 6.34 5.61 +13 Dividends per share (SAR) 4.25 4.00 +6 Return on equity (%) 19.8 17.2 +15 Net financing and investment income Earnings per share (SAR) 2.9 2.7 +10 Net financing and investment margin (%) 4.34 4.08 +6 Cost to income ratio (%) 31.7 32.9 -4 Cost of risk (%) 0.63 0.66 -3 Return on assets (%) Operating income Total operating income for 2018 reached SAR 17,320 Mn., 8.9% higher than in 2017, reflecting strength across the board in all our main businesses. Net financing and investment income totalled SAR 13,253 Mn., up 10.2% year-on-year. This was driven by a widening of the financing and investment margin, which reached 4.34%, as policy rates increased and our funding platform continued to deliver a world-class funding mix at the lowest industry cost. Fees and other income grew 4.9% to SAR 4,067 Mn. as strong growth in Treasury and Al Rajhi Capital offset a more competitive fee environment in the Retail and Corporate segments. Exchange income was SAR 755.8 Mn., down from SAR 841.8 Mn. in 2017, reflecting a more volatile market environment, while other income was SAR 209.7 Mn., down from SAR 336.4 Mn. last year, due to some non-recurring items.
45. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information 43 Financial Review 2018 SAR Mn . 2017 SAR Mn. 2016 SAR Mn. 2015 SAR Mn. 2014 SAR Mn. Total operating income 17,320 15,905 15,341 13,746 13,667 Operating expenses Net income for the period 5,492 5,237 5,007 4,658 4,519 10,297 9,121 8,126 7,130 6,836 Operating expenses Total operating expenses for the year increased by 4.9% to reach SAR 5,492 Mn., largely reflecting the ongoing investment in our digital capabilities, as well as the introduction of VAT. The cost-to-income ratio of 31.7% for the year represents a 120 basis point improvement against 2017. Discrepancies in operational results for the previous year results: Description Total operating income Operating expenses Net income for the period 2018 2017 SAR Mn. SAR Mn. Change (+) or (-) SAR Mn. 17,320 15,905 1,415 8.89 5,492 5,237 255 4.87 10,297 9,121 1,176 12.90 Change % Impairment charges Total impairment charges for the year were 1.1% lower than in 2017 at SAR 1,531 Mn. The cost of risk was 0.63% against 0.66% last year. Annual Report Description 2018 Financial results comparison
46. Annual Report 2018 44 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Financial Review Balance sheet Total assets grew by 6 .4% year-on-year as the Bank was able to offset a relatively flat financing landscape by optimising the balance sheet through a reduction of cash balances, and greater investments in securities and in the interbank market. FY 2018 SAR Mn. FY 2017 SAR Mn. YoY % Cash and balances with SAMA and other central banks Due from banks and other financial Institutions Investments, net Financing, net Total assets 43,246 30,808 43,063 234,063 365,004 48,282 10,710 36,401 233,536 343,117 -10.4 +187.7 +18.3 +0.2 +6.4 Due to banks and other financial institutions Customers’ deposits Total liabilities 7,290 293,909 316,450 5,523 273,056 287,366 +32.0 +7.6 +10.1 48,554 55,751 -12.9 254,506 19.1 20.2 196 12.9 80.8 0.95 251,115 22.2 23.3  199 15.7 85.5  0.74 +1 -14 -13  -1 -18 -6  +28 341.98 313.82 +9 Total shareholders’ equity Risk weighted assets Tier 1 capital ratio (%) Total capital adequacy ratio (%) Liquidity coverage ratio (LCR) (%) Basel III leverage ratio (%) Financing to customer deposits ratio (%) Non-performing financing ratio (%) Non-performing financing coverage ratio (%) Assets and liabilities comparison Description 2018 SAR ’000 2017 SAR ’000 2016 SAR ’000 2015 SAR ’000 2014 SAR ’000 Cash in SAMA and other central banks Dues from banks and other financial institutions Investments, net Financing, net Property and equipment, net Investment properties, net Other assets, net 43,246,043 48,282,471 42,149,905 27,053,716 33,585,377 30,808,011 43,062,565 234,062,789 8,897,587 1,297,590 3,629,245 10,709,795 36,401,092 233,535,573 7,858,127 1,314,006 5,015,464 26,578,525 34,032,879 224,994,124 6,485,162 1,330,868 4,140,354 26,911,056 39,876,864 210,217,868 5,578,931 1,350,000 4,631,213 16,516,208 42,549,623 205,939,960 4,813,941 – 4,306,446 Total assets 365,003,830 343,116,528 339,711,817 315,619,648 307,711,555 Dues to banks and other financial institutions Customers’ deposits Other liabilities 7,289,624 293,909,125 15,251,063 5,522,567 273,056,445 8,786,598 8,916,970 272,593,136 6,254,839 4,558,224 257,821,641 6,600,729 2,135,237 256,077,047 7,603,077 Total liabilities 316,449,812 287,365,610 287,764,945 268,980,594 265,815,361 Total shareholders’ equity
47. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information 45 Financial Review Key performance indicators Retail Corporate Treasury Investment services and brokerage Total operating income (SAR ‘000) 12,015,569 2,490,518 2,276,459 536,972 17,319,518 Total operating expenses (SAR ‘000) Net income (SAR ‘000) (5,687,481) 6,328,088 (632,765) 1,857,753 (554,728) 1,721,731 (147,677) (7,022,651) 389,295 10,296,867 Income by operating segment Net income by operating segment SAR Mn. SAR Mn. 12,500 7,500 10,000 6,000 7,500 4,500 5,000 3,000 2,500 1,500 0 Retail Corporate Treasury Investment services and brokerage 0 Retail Corporate Total Treasury Investment services and brokerage Investments Customers’ deposits Net investments increased by 18.3% in 2018, to SAR 43,063 Mn., as the Bank increased its exposure to Sukuks, which, under the leadership of our Treasury segment, enhanced asset utilisation and yield. Customer deposits increased by 7.6% in 2018 to SAR 293,909 Mn. as the Bank continued to grow non-profit bearing deposits, which represented 94% of total deposits at year-end 2018. Financing and advances Net Financing was flat at SAR 234,063 Mn., as continued growth in Retail financing offset limited Corporate financing opportunities and some loan repayments. The overall financing mix remains predominantly Retail, with 71.7% of net exposure. Credit quality The non-performing financing ratio remains strong at 0.95%, an increase from 0.74% last year, reflecting certain classification changes in our portfolios and strong growth in the Retail financing book. The coverage of non-performing financing increased by 9% from 2017, to 342%. Annual Report Indicator 2018 Analysis of income by operating segment
48. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information 46 Financial Review Capital Annual Report 2018 Al Rajhi Bank continued to maintain a strong capitalisation profile with core equity Tier 1 and total capital adequacy ratios of 19 .1% and 20.2%, respectively, for 2018. These ratios reflect a 1% increase in risk-weighted assets, and a decrease in equity driven by two significant industrywide factors, namely (i) the adoption of IFRS 9, reflected in retained earnings (SAR 2.9 Bn.), (ii) the settlement agreement with the General Authority for Zakat & Income Tax (GZAT ), Al Rajhi Bank’s retail business is the largest retail banking franchise in the Kingdom and offers a full range of financial products and banking services to individuals, such as current accounts, personal finance, and housing and auto financing. reflected in reserves (20% of SAR 5.4 Bn. for previous years plus SAR 943.4 Mn. for 2018). Additionally, the Bank’s shareholders will see a significant capital distribution corresponding to 67% of net income. Liquidity The Bank’s liquidity position remained healthy with a liquidity coverage ratio of 196%, while the financing to customer deposits ratio declined by 470 basis points during the year, to 80.8%, from 31 December 2017. Financial Performance of Business Units Type of activity Activity revenues (in thousand SAR) Percentage % Retail Retail sector includes deposits of retail customers, credit facilities, debit current account (overdraft) and banking services, and remittances fees 12,015,569 70 Corporate Corporate sector includes deposits of corporate, major customers, corporate credit facilities, and debit current accounts (overdraft) 2,490,518 14 Treasury Treasury sector includes treasury services, Murabaha with SAMA, and international trading portfolio 2,276,459 13 536,972 3 17,319,518 100 Investment services and brokerage Includes investments of individuals and corporates in mutual funds, local and international share trading services, and investment portfolios Total Retail Banking The Retail segment saw continued growth in 2018, with financing reaching SAR 168 Bn., up 3.3% from 2017. FY 2018 SAR Mn. FY 2017 SAR Mn. YoY % Net financing and investment income 9,998 9,139 +9.4% Fees and other income 2,017 2,318 -13.0 Total operating income 12,016 11,457 +4.9 Operating expenses 4,510 4,397 +2.6 Total impairment charge 1,177 1,191 -1.2 Net income for the period 6,328 5,869 +7.8 Total assets 187,898 183,870 +2 Total liabilities 273,504 249,430 +10
49. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Operating expenses totalled SAR 4 ,510 Mn. in 2018, a 2.6% increase year-on-year. The impairment charge for Retail amounted to SAR 1,177 Mn. for 2018, a 1.2% improvement relative to 2017 due to better credit quality and recoveries during the year. Net income for 2018 increased 7.8% to SAR 6,328 Mn. A number of new products and initiatives were launched during 2018, supporting volume growth across our mortgage and personal financing segments. In mortgages, the success of our ongoing partnership with the Ministry of Housing as well as the Real Estate Development Financing has enabled us to further segment our product offering and reach a wider audience, supporting the government’s drive for higher home ownership. In Personal financing, we continue to strengthen our leadership by growing our distribution network capabilities. We now have the largest distribution network in Saudi Arabia with 551 branches, 5,006 ATMs, 83,958 POS terminals and 236 remittance centres. We also operate 18 branches in Malaysia, 10 in Jordan and 2 in Kuwait. Over the past 3 years, the Bank registered 4.6% market share growth in remittance centres and growth of 30% in female customers with the introduction of 5 additional dedicated ladies sections and branches bringing the total dedicated sections and branches for ladies to 157, further cementing the Bank’s distribution network as the largest in the Kingdom. Comparison of SME Financial Results: Financial data of SME during the current year. As at 31 December 2018 Small Medium Total Finance for small, medium and micro enterprises – on balance sheet (SAR Mn.) 837 4,113 4,950 Finance for small, medium and micro enterprises – off balance sheet (SAR Mn.) 172 756 928 Finance on balance sheet to small, medium and micro enterprises as a percentage of total finance on balance sheet (%) 0.36 1.76 2.11 Finance off balance sheet to small, medium and micro enterprises as a percentage of total finance off balance sheet (%) 1.34 5.90 7.24 Number of financings (on and off balance sheet) 3,494 1,655 5,149 Number of customers (on and off balance sheet) (SAR Mn.) 1,099 759 1,858 Finances number guaranteed by kafalah programme (on and off balance sheet) 394 – 394 Finances total guaranteed by kafalah programme (on and off balance sheet) (SAR Mn.) 370 – 370 Annual Report The Retail segment delivered 4.9% total operating income growth in 2018 to reach SAR 12,016 Mn. Net financing and investment income grew 9.4% year-on-year to SAR 9,998 Mn., driven by a 2% increase in assets, while fees and other income decreased 13.0% to SAR 2,017 Mn. 2018 47 Financial Review
50. 48 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Financial Review Financial data of SME during the previous year . Annual Report 2018 As at 31 December 2017 Small Medium Total Finance for small, medium and micro enterprises – on balance sheet (SAR Mn.) 1,129 4,120 5,249 Finance for small, medium and micro enterprises – off balance sheet (SAR Mn.) 139 423 562 Finance on balance sheet to small, medium and micro enterprises as a percentage of total finance on balance sheet (%) 0.48 1.76 2.25 Finance off balance sheet to small, medium and micro enterprises as a percentage of total finance off balance sheet (%) 1.02 3.12 4.14 Number of financings (on and off balance sheet) 3,614 2,178 5,792 Number of customers (on and off balance sheet) (SAR Mn.) 1,046 1,327 2,373 Finances number guaranteed by kafalah programme (on and off balance sheet) 288 – 288 Finances total guaranteed by kafalah programme (on and off balance sheet) (SAR Mn.) 461 – 461 Corporate Banking Al Rajhi Bank’s corporate banking segment offers a comprehensive range of corporate financing facilities as well as trade finance, cash management and financial hedging and protection solutions to corporate customers. FY 2018 SAR Mn. FY 2017 SAR Mn. YoY % Net financing and investment income Fees and other income 1,879 611 1,974 624 -4.8 -2.1 Total operating income Operating expenses Total impairment charge 2,491 330 303 2,598 472 356 -4.1 -30.0 -14.9 1,858 1,771 +4.9 62,102 18,948 63,535 21,288 -2 -11 Net income for the period Total assets Total liabilities The Corporate segment’s total operating income amounted to SAR 2,491 Mn. for 2018, a 4.1% decline over 2017. Net financing and investment income decreased 4.8% yearon-year at SAR 1,879 Mn. and fees and other income decreased by 2.1% to SAR 611 Mn. Operating expenses totalled SAR 330 Mn. in 2018, 30% lower than in 2017. The impairment charge for Corporate Banking decreased by 14.9% to SAR 303 Mn. for 2018 compared with 2017. Net income of SAR 1,858 Mn. for 2018 was 4.9% higher than in 2017. During 2018, we introduced new products such as Supply Chain Financing (SCF), facilities that are based on receivables purchase agreement on behalf of the Bank’s corporate clients’ suppliers; and POS Financing, offered to SME customers through an active point of sale terminal to cover their short term and long term needs.
51. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information 49 Financial Review Treasury Fees and other income Total operating income Operating expenses Total impairment charge Net income for the period Total assets Total liabilities Treasury and Investments reported a strong performance in 2018 , with operating income rising 62.6% year-on-year to SAR 2,276 Mn. This was driven by both higher investment balances and increased net financing and investment yields causing a 51.9% rise in net financing and investment income to SAR 1,359 Mn. Despite volume-related increases in both operating expenses, to SAR 504 Mn., and impairments, to SAR 51 Mn., the higher operating income translated to 47.4% year-on-year net income growth to SAR 1,722 Mn. for 2018. 2018 saw several new developments in the Treasury department, with new product launches at several desks including Money FY 2018 SAR Mn. FY 2017 SAR Mn. YoY % 1,359 895 +51.9 917 505 +81.6 2,276 1,400 +62.6 504 231 +117.8 51 1 +9192.1 1,722  1,168 +47.4 111,970 92,783 +21 23,868 16,107 +48 Markets and FX, a significant ramping up of the activities of our Investment Desk and at our Financial Institutions desk, the creation of entirely new units such as ALM and Structuring and Derivatives Desk. Our remittances business, Tahweel Al Rajhi, has been brought under the umbrella of the Treasury department to enhance synergies, as we continue to invest in our digital platform on this and other channels. Over 55% of all Tahweel transactions were done using electronic means last year. On the technology front, we are excited that our FI desk played a significant role in the implementation of new technology using Ripple, a blockchain-based digital ledger algorithm, to settle trades with one of our banking correspondents. Annual Report Net financing and investment income 2018 The treasury segment is responsible for managing the Bank’s financial position to accomplish successful structuring of maturities and liquidity, investment efficiency and exchange rates and offers financial hedging and protection solutions to corporate customers.
52. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information 50 Financial Review Annual Report 2018 Investment Services and Brokerage The Bank ’s investment services and brokerage business offers asset management and local and international share trading services. FY 2018 SAR Mn. FY 2017 SAR Mn. YoY % 16 22 -27.1 Fees and other income 521 428 +21.7 Total operating income Operating expenses 537 148 450 137 +19.3 +8.0 Total impairment charge 0 0 389  313 3,033 2,928 +4 130 540 -76 Net financing and investment income Net income for the period Total assets Total liabilities +24.2 The Investment Services and Brokerage business grew 2018 operating income to SAR 537 Mn., a 19.3% increase over 2017, driven by brokerage and by investment, which resulted in 24.2% net income growth year-on-year to SAR 389 Mn. In addition, the unit’s Real Estate business saw the milestone IPO of the Al Rajhi REIT Fund, which was oversubscribed by 174%. Lastly, our Proprietary Investments, benefited from several initiatives launched last year and contributed 24% of segment in 2018. Al Rajhi Capital retained its position as the leading broker on Tadawul, and expanded its market share to 20.3% from 19.6% in 2017. The Asset Management business also expanded significantly with total AUMs (assets under management) up 40% to SAR 38 Bn. Al Rajhi Capital was named “Best Broker in Saudi Arabia” by EMEA Finance and “Broker of the Year” by Euromoney Global Investor, “Best Provider of Sharia-compliant Funds – 2018’’ by Global Finance and “Real Estate Investment Firm of the Year” by Euromoney Global Investor. Financial Performance of Subsidiaries Type of activity Activity revenues Percentage (SAR ’000) % Al Rajhi Bank Malaysia An Islamic bank licensed under Islamic Financial Services Law issued in 2013, incorporated and practices its business in Malaysia. 183,982 -3.29 Al Rajhi Capital A closed joint-stock company, registered in KSA to work as a main agent and/or provide financial brokerage services, insurance, management, consultancy, arrangements and keeping. 536,972 19.00 Al Rajhi Takaful Agency A limited liability company, registered in KSA to work as an agent to practice insurance brokerage activities according to agency agreement with Al Rajhi Cooperative Insurance Company. 3,104 -68.00 Al Rajhi Development Co. Ltd. A limited liability company registered in KSA to support real estate finance programmes of ARB by transferring and keeping real estate ownership documents in its name on behalf of the Bank; collect revenues of selling some properties sold by the Bank; provide consultancies in real estate and engineering field; register real estate contracts; and supervising real estate valuation. 31,830 58.00 186,557 10.00 Al Rajhi Services Co. A limited liability company registered in KSA to provide recruitment services.
53. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information 51 Financial Review Annual Report East Asia 19 .5% 2018 tax and provisions grew by 19% to reach JOD13.5 Mn. (SAR 71 Mn.). Total assets grew by 8% to JOD 502 Mn. (SAR 2.7 Bn.) compared to 2017. Financing portfolio grew by 5% in 2018 and reached JOD 348 Mn. (SAR 1.8 Bn.). Shareholders’ equity increased by 10% to JOD 68 Mn. (SAR 358 Mn.). Geographical analysis of total revenue of ARB subsidiaries Geographical analysis of total revenue of ARB branches Kingdom of Saudi Arabia Kuwait 0.4% 80.5% Jordan 0.8% Year 2018 130 Kingdom of Saudi Arabia SAR ‘000 East Asia Total SAR ‘000 SAR ‘000 758,463 183,981 942,444 130 Kingdom of Saudi Arabia -76% 98.8% Financial Performance of International Branches Year Al Rajhi Bank Kuwait Operating income for 2018 increased to KD 1.55 Mn., primarily due to growth in retail financing portfolio to KD 122 Mn. by 14% YoY compared to average Kuwait market growth rate of 4%. Retail deposit portfolio grew by 75% YoY to reach KD 72.2 Mn. Deposit concentration (top five deposits) improved from 82.4% in 2017 to 76.3% in 2018. Retail non-performing loans ratio stood at 0.6% against the average market ratio of 2.0% Al Rajhi Bank – Jordan Income grew by 13% compared to 2017 to reach JOD 24.8 Mn. (SAR 130 Mn.) as a result of increase in financing income by 14% and commission and fees by 13%. Net profit before 2018 130 Kingdom of Saudi Arabia SAR ‘000 Kuwait Jordan Total SAR ‘000 SAR ‘000 SAR ‘000 16,171,543 73,142 130 540 132,390 16,377,075 -76% There are no loans on the Bank or its subsidiaries (whether payable on demand or others). Applicable Accounting Standards: The Bank prepares its unified financial statements in accordance with international accounting standards based on circular of CMA no. (2978/4) regarding applying international accounting standards. In addition, the Bank prepares its financial statements in compliance with Banking Control Law, Corporate Law in KSA, and the Bank’s Articles of Association.
54. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Annual Report 2018 52 Investor Relations At the Bank we focus on sustainable growth because our investors expect optimal returns . We also focus on providing timely and accurate performance results and strategic updates. Such proactive communications bolsters confidence and fidelity, providing us with an invaluable long lasting relationships with the investment community. We are proud of our sound reputation for communicating with our investors in a consistent, comprehensive and precise manner, taking this responsibility way beyond the minimum regulatory requirements. Our stakeholders’ views are of paramount value to us. Investors feedback is always considered and incorporated into our department’s strategies for long-term value creation. We ensure providing maximum information to our investors by various disclosures through investor relations section of the website, investor presentations, quarterly disclosures and earning releases, earning calls and annual reports. Performance of the share Key Metrics Ratings 14.25 Times 19.84% A1 BBB+ Price/earnings Return on equity Moody’s S&P 2.74 Times 2.94% A- Price/book Return on assets Fitch 4.86% Dividend yield RAJHI ATVR* vs. MSCI minimum requirement (>15%) % 121 103 79 77 75 72 55 15 Jul. 17 Aug. Sep. Oct. Nov. Dec. Jan. 17 17 17 17 17 18 RAJHI 3M ATVR* Feb. Mar. Apr. May Jun. 18 18 18 18 18 Jul. 18 Aug. Sep. Oct. Nov. Dec. 18 18 18 18 18 MSCI Minimum Source: MSCI; *3M AVTR is MSCI’s measure of annualised median trading value of FOL and free float adjusted market capitalisation over the last 3 months, which is required to be >15% for MSCI index inclusion.
55. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information 53 Investor Relations The market value of the Bank ’s ordinary share was SAR 87.50 as of 31 December 2018, while it was SAR 64.62 as of 31 December 2017. Share price performance top 3 KSA banks (monthly; Rebased to 100) SAR Rajhi, 170 160 140 NCB, 130 120 Riyad, 117 100 TASI, 94 80 60 40 31 December 2014 30 June 2015 NCB RAJHI 31 December 2015 30 June 2016 RIYAD 31 December 2016 30 June 2017 31 December 2017 30 June 2018 31 December 2018 TASI During the year ended 31 December 2018, the highest price recorded by the share was SAR 85.90 on 27 December 2018, while the lowest price recorded was SAR 67.00 on 4 January 2018. Cumulative monthly trading volumes Mn. 737.6 729.3 549.4 Jan. 2018 Feb Mar. 2017 Apr. May 2016 ARB’s trading volumes remained strong consistently. Jun. Jul. Aug. Sep. Oct. Nov. Dec. 2018 Share price Annual Report ARB has the highest weight in the MSCI GCC index.
56. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information 54 Digital Footprint Annual Report 2018 The four themes for 2018 and our achievements at a glance We launched a number of digital solutions for key customer segments such as retail , SME, corporate and private wealth solutions during the year. 1 Customer satisfaction Retail New digital channels 10 Retail 4 2 Themes Regulatory and compliance Retail Corporate 1 SME 1 PWS 2 Cost reduction and revenue generation 3 11 2 Retail 9 Corporate 3 PWS 1 Exponential jump in retail banking customers using digital services Active users for Al Mubasher retail, the Bank’s internet banking service for retail customers, exceeded 2018 targets. Active users – Mubasher 3.25 Mn. 3.25 Mn. 3.00 Mn. 3.00 Mn. 3.50 Mn. 3.50 Mn. 2.75 Mn. 3.75 Mn. 2.75 Mn. 3.75 Mn. 2.50 Mn. 2.50 Mn. 3.6 Mn. 2.2 Mn. 2.25 Mn. 2.25 Mn. 2.00 Mn. 2.00 Mn. 2017 2018
57. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information 55 Digital Footprint 2018 Corporate banking customers increase interest in digital banking services Annual Report Active users of eCorporate , the Bank’s internet banking service for Corporate customers, increased 12.5% over the previous year. Active users – eCorporate 39,000 38,000 39,000 38,000 40,000 37,000 41,000 36,000 40,000 37,000 41,000 36,000 35,184 39,588 35,000 35,000 34,000 34,000 2017 2018 Digital solutions for SME banking The eSME app was launched at end 2018 and is our latest offering for this important customer group, part of our contribution towards the Kingdom’s Vision 2030. eSME The eSME application explicitly targets the Bank’s SME customers. Existing Retail and Corporate customers will be migrated to the new application in order to provide them with improved services. Functionalities available:  Home – dashboard  Payroll  Current accounts  Payroll cards  Balance certificate   Cheque book National address in eSME application  POS management  Pending actions  Tax invoice  My profile  Bill payments  Marketing message MOI payments  Users management Transfers  Token management Beneficiaries  Alerts management Standing Orders  Activity logs    
58. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Online remittance numbers on the rise SADAD fees Tahweel Al Rajhi , the Remittances arm of the Bank, launched the Tahweel app in mid 2017. Customers using this app had reached 279,509 in number by end 2018. SAR Mn. 10.00% 200 11.71% 160 Active users – Tahweel 8.64% 7.20% 120 300,000 80 250,000 350,000 40 200,000 400,000 0 2014 2015 2016 2018 2017 150,000 Online payment gateway increases in popularity 279,509 100,000 The Bank’s online payment gateway is a secure platform that allows merchants to receive payments through credit cards issued around the world. By the end of 2018, transactions and transaction amounts at our internet payment gateway had increased substantially. 50,000 2018 Increased use of digital channels Our digital channels (comprising Mobile, Desktop, eCorp and the Tahweel App) are rising in popularity. In 2018, the use of digital channels for transfers rose 15% over the previous year, while digital bill payments (SADAD) increased 5% over the same period. Payment gateway numbers Mn. 2018 48% 34% 4% 2017 5% Transfer 47% 750 1.6 600 2018 4% 38% 33% ATM IVR 58% 63% Branch 300 0.4 150 2017 2018 Transactions 62% Digital 450 484% 502% 0.8 0 SADAD 2017 SAR Mn. 2.0 1.2 Transaction distribution 2017 vs 2018 4% Annual Report 2018 56 Digital Footprint 2017 2018 Value 0
59. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information To continue its robust dedication towards Islamic banking , the Bank brought together an independent Sharia Board, comprising high-ranking scholars who are specialists in this field. Through their expert guidance the Bank is able to ensure Sharia compliance both within the Kingdom and beyond. The responsibility for constituting the Board and approving its regulation lies with the General Assembly. In addition, it is compulsory for all Bank departments to be in compliance with the Sharia Board’s resolutions. During the 38 Sharia Board meetings held in 2018, the Sharia Board examined 300 subjects including the Bank’s:      Products Investment and financing agreements Contracts Models Inquiries A total of 1,170 resolutions have been issued by the Bank’s Sharia Board as of 31 December 2018, while 627 audit standards were issued during the year. Coordinating the Bank’s requirements requires a dedicated team to operate within the Bank and support the Board’s work. To this end, the Sharia Group was established, consisting of the following departments: Secretariat of the Sharia Board With the support of a number of legal advisors on its team, the duties of the Secretariat include:  Studying the banking products, agreements, and contracts received from various groups and departments within the Bank  Preparing the necessary research and legal studies and presenting it to the Sharia Board  Informing internal departments of the directives and resolutions of the Board  Participating in the development of Sharia products  Providing legal advice to internal departments in accordance with the resolutions of the Board  Executing the minutes of the meetings of the Sharia Board while maintaining and classifying the same to facilitate use Sharia Supervisory Department With the support of an integrated team of legal supervisors the Department’s role includes:  Supervising all Bank transactions in regard to the implementation of and compliance with the resolutions and directions of the Sharia Board  Ensuring that no product, contract or model not approved by the Board is employed  Ensuring that employees understand the Sharia Board's resolutions and apply the same to their work  Auditing the work of the Bank through automated systems and field visits in accordance with professional practice, governance, and discussions  Preparing the annual plan and the quarterly operational plans; determining the objectives, tools and means of auditing used; preparing the necessary reports and submitting them to Sharia Board The models and templates of auditing are updated as per standards and guidelines issued periodically by the Board. Annual Report Through its memorandum of association, the Bank’s commitment to provide Sharia-compliant banking has remained strong over the past 30 years. 2018 57 Sharia Group
60. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Annual Report 2018 58 Sharia Group A total of 1 ,170 resolutions have been issued by the Bank’s Sharia Board as of 31 December 2018, while 627 audit standards were issued during the year. Bank employees, customers and those with an interest in Islamic banking have been provided with legal awareness from the Sharia Group through the following means:  An educational website for employees to clarify the Sharia aspects of the Bank's products and services  Specialised banking courses for Bank employees numbering 23 during 2018, with a total of 138 training hours and 500 beneficiaries, including sales staff, future managers, branch managers, district managers, operations managers, and other Bank leaders  A total of six joint workshops on the Sharia aspects of banking products  Responses to more than 350 telephone inquiries and over 90 postal inquiries  A total of 10 awareness messages through internal mail to employees about the Bank's products and Sharia guidelines for the same  A total of 18 outstanding publications on Islamic banking and financial transactions, based on PhD- and MA-level scientific letters by specialists in this field, prepared, printed and distributed to interested parties and commercial libraries  The provision of scientific support to a number of Sharia researchers in the field of Islamic banking, with workshops held for PhD students in the Jurisprudence Department at the Faculty of Sharia at Imam Muhammad bin Saud Islamic University In addition, the Department was involved in the following:  Representing the Bank at SAMA meetings of the Banking Committee and assuming Chairmanship of the Committee during the year under review  Participating in workshops related to banking products held by SAMA in Riyadh and Jeddah  Participating in specialised seminars and forums such as scientific seminars organised by the Center of Excellence Research of the Imam Muhammad bin Saud Islamic University, the banking seminar organised by the National Bank and the 16th conference of the Accounting and Auditing Organization for Islamic Financial Institutions (AAIOFI) of the Sharia bodies
61. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information 59 Review of Business Portfolio 2018 Retail banking group Highlights for Retail Banking Over Over Over 9 million 3 .6 million 550 customers digital banking customers branches Over Largest distribution network in the Kingdom Top market share across key products No. 1 in ATMs No. 1 in Branches No. 1 in Personal loans No. 1 in Auto loans No. 1 in Mortgages 5,000 ATMs Operating the largest retail business in the Middle East, Al Rajhi Bank serves over nine million retail customers. During the year, the Bank continued at its top position in terms of branch and ATM networks and remittance centers across the Kingdom, by focusing on increasing its market share in deposit. Through this wide network, ARB customers have access to the entire range of financial products and services from the Kingdom’s leader in current accounts, personal loans, auto loans, and mortgages. Improved private centres and affluent lounges Continuing to cater to the banking needs and aspirations of its private customers, the Bank extended working hours to 9.00pm at its Private Centres in Riyadh, Jeddah, Dammam, and Makah and at its dedicated Ladies Private Centre in Riyadh. The Bank also increased and enhanced a number of Affluent lounges with contemporary design to meet the expectations of our valued customers and ensure that their experience with us remains comfortable and convenient. The Bank’s Affluent lounges now number 300 and span the Kingdom. During the year, we also increased the number of relationship managers at our 60 dedicated Affluent Ladies Sections. Introducing online account opening In alignment with the Bank’s strategy and its contribution towards the Saudi 2030 vision to engage with technology and implement a cashless society we introduced customers to online account opening during the year under review. By fully automating the account opening process in line with regulations, we provided an attractive new option that enhanced the customer experience and service standards while enticing potential customers to sign up. Annual Report Operating the largest retail business in the Middle East, Al Rajhi Bank serves over nine million retail customers.
62. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Annual Report 2018 60 Review of Business Portfolio The Bank ’s new retail expansion strategy was supplemented by a new layout for each branch that was designed to enhance the customer experience and entice them to try out and experience digital banking. Developing the real estate mortgage market Despite being one of the largest in the Gulf region, Saudi Arabia’s real estate market remains underdeveloped, with only an estimated 47% of Saudis owning their own home. Rising incomes, urbanisation, growing families and a young demographic, however, mean that the long-term outlook for the KSA real estate remains positive. A stimulus package of SAR 72 Bn., that supports housing construction and waives fees for small businesses and investors provides further incentive in this market. The government’s plans to launch large infrastructure projects, such as Neom City and Red Sea, to meet the goals of Vision 2030 and steer the Kingdom away from an oil-dependent economy means that the real estate market is one to watch in the coming years. Capitalising on this situation, the Bank launched a real estate programme, in cooperation with the Real Estate Development Fund (REDF) and the Ministry of Housing (MOH) which has already resulted in a positive impact on the book size of our Real Estate financing for the Retail portfolio. The fund is based on the Murabaha principle and supports financing for customers who meet the Bank’s credit conditions. The Bank will purchase the property in full on behalf of the customer, with REDF paying the Bank an advance payment on behalf of the customer. This project is one example of the Bank’s contribution towards increasing home ownership in Saudi Arabia to 60% by 2020 in line with the Saudi Vision 2030. During the year, the Bank launched 15 high-demand new products and features in the home financing space, such as self-construction and off-plan, which were supported by government initiatives including profit subsidy, down payment support, and military support. The launch of these products and features was augmented by marketing campaigns to ensure targeted and wider reach among potential and existing retail banking customers in segments as varied as salaried, near retirement, retired, and self-employed. With more such products and features in the pipeline to be launched from 2019 to 2025, the Bank is geared to meet market demand. We look forward to facing the challenges of 2019 head on as we continue to maintain the largest market share in this segment and offer best-in-class customer service while enhancing our relationship with REDF/MOH. Retail expansion strategy The Bank’s new retail expansion strategy was supplemented by a new layout for each branch that was designed to enhance the customer experience and entice them to try out and experience digital banking. Retail expansion strategies implemented during 2018 include:  More machines at self-service kiosks At its 24-hour, self-service kiosks, known as ASRAA, the Bank installed a total of 230 machines during the year – considered a record even by global standards. These kiosks provide customer with 24x7 banking services.  Draft cheque printing For the first time in the market customers are now able to print draft cheques instantly at any self-service kiosk.
63. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information  Fingerprint technology Customers can now update their personal information using fingerprint technology without having to visit the branch. This initiative is part of the Bank’s ongoing strategy to be the market leader in innovative products and services especially in self-service banking.  Foreign currency exchange at ATMs Another pioneering self-service banking solution introduced during the year was the facility for customers to exchange foreign currency at ATMs located at different international airports. Able to now withdraw and deposit foreign currency from their accounts utilising fingerprint technology, usage of this new service, especially among transit passengers, is very high.  More interactive teller machines The Bank also installed 20 interactive teller machines (ITMs), making ARB the proprietor of the largest such network in Saudi Arabia. ITMs allow customers to communicate with remote tellers through video and audio as they perform various banking transactions. This high-tech solution provides customers with easy and convenient banking options.  Customer spending behaviour and engagement continues to grow on digital platforms such as e-commerce and international transactions which significantly adds to portfolio profitability. Cards for convenience The Al Rajhi Mada Infinite Debit Card was launched for customers with elite lifestyles. It provides access to over 1,000 airport lounges around the world through the Lounge Key Programme and global concierge services including for flight, hotel, and restaurant reservations. Using passwords and CHIP technology these debit cards have superior security features and provide customers with free instant messaging for all financial transactions. Customer loyalty programme The MOKAFA’A programme was launched during the year to reciprocate customer loyalty. This programme allows ARB customers to earn points every time they use the Bank’s many products and enhanced features. These points can be redeemed at a range of locations belonging to participating merchants or service providers.  provide “Electronic Signature” service for customers. Instead of having to ask customers to sign documents in person, the new service allows them to add signatures to documents electronically. The new service provides convenience without compromising security. After registering at the National Centre for Digital Certification, MCIT through the Bank, customers are able to request for any new service using digital mediums. Electronic signatures Signing a memorandum of understanding with the specialised companies at the Ministry of Communication and Information Technology, the Bank partnered with the National Centre for Digital Certification, to The Al Fursan Card from Al Rajhi Bank was also launched during the year under review. Whenever customers make a payment with this card they receive free air miles on Saudi Arabian Airlines. With the Kingdom’s recent moves to provide ladies with greater autonomy, the Bank launched the Selective Credit Card exclusively for women. The first of its kind in the Kingdom, this card offers our female customers distinction and privacy while providing special offers and discounts at retail outlets for the best in women’s goods and services. Annual Report Customer spending behaviour and engagement continues to grow on digital platforms such as e-commerce and international transactions which significantly adds to portfolio profitability. 2018 61 Review of Business Portfolio
64. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Annual Report 2018 62 Review of Business Portfolio The Bank has the third largest and fastest growing portfolio with a milestone of 200 ,000 revolving credit cards as at end 2018. The Bank continues to be the leader in the market in debit cards, with a market share of eight million cards in circulation, leading in spend volume as well. The Bank has the third largest and fastest growing portfolio with a milestone of 200,000 revolving credit cards as at end 2018. The Bank continues to be the leader in the market in debit cards, with a market share of eight million cards in circulation, leading in spend volume as well. Issue resolution and improved customer service was a priority for the Bank’s auto finance team. To this end, one of our customers’ top complaints regarding missing duplicate keys was revisited and a more streamlined solution introduced. In addition, the Sub Dealer Rebate programme, a new revenue stream initiative was introduced. Responsible lending principles In May, of the year under review, the Responsible Lending Principles were issued by SAMA under Circular Number (46538/99). The main objective of these regulations is to shift consumer behaviour towards savings and mortgage finance and away from consumer finance. The regulation calls for tighter DBR (Debt Burden Ratio) restrictions across all products, especially auto leasing, in addition to the introduction of an affordability module which includes the consideration of external obligations. Personal finance The Bank continued to advance its Personal Finance offering, launching the largest buyout programme which allowed customers to transfer their salaries to Al Rajhi Bank in exchange for the settlement of their financing in other Saudi banks. Watani Flex Finance, the Bank’s fully Sharia-compliant personal financing solution and its most profitable retail banking product, was further enhanced during the year. Processes were streamlined to cater to the needs and aspirations of internal as well as external stakeholders. Growing the auto finance business The auto market in general has been witnessing a gradual slump since mid 2016, a trend which continued into 2018 owing particularly to the introduction of SAMA’s Responsible Lending framework. Despite this, the Bank’s Auto Finance arm managed to increase its yield. Focusing on small and medium enterprises The Saudi Arabian banking sector has a significant growth opportunity in the small and medium-sized enterprise (SME) sector. As part of its contribution towards the Saudi Vision 2030, Al Rajhi Bank plans to increase its support towards SME growth by facilitating various programmes and providing funding for this sector. SME business Our SME business flat-lined in 2018 as a result of prevalent market conditions and the Bank’s decision to focus on selective businesses. The Bank merged its SME business with Retail Banking to further expand its SME presence by leveraging the existing Retail Branch network and identifying key geographical concentrations of SMEs for better customer reach. The Bank continued to prudently maintain the SME lending book while stabilising asset quality and loss provisions. Key branches were instructed to provide enhanced customer service for SME customers. Our SME business has also enhanced its one-stop-shop concept with the development of comprehensive credit programmes for its business segments, and the launch of POS financing and e-SME (Internet Banking). During the coming year, the Bank is planning a major revamp of its SME business. In line with Saudi Vision 2030 the Bank will focus on widening its share of the SME market with greater emphasis on Healthcare, Education, Tourism, Services, Transportation, and Communication. The Bank will also focus on
65. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information cash management services for SMEs to fulfil the business needs of cash-heavy traders and retail businesses .  Launched the Corporate Liquidity Management solution to provide centralised and automated cash management for Corporates The Bank will also launch specific and targeted lending products. Greater emphasis will be given to process automation and channels to enhance the customer experience and provide a seamless banking service. By introducing a digital platform for customers to interact with and fulfil their banking needs the Bank will be further contributing towards the Saudi Vision 2030 to implement a cashless society.  Launched business-to-business (B2B) solutions to provide STP (straight through processing) for Corporate Banking, integrating Banking solutions directly between businesses and the Bank  Re-launched Cash 24 Card (for cash depositing services) in compliance with SAMA’s know-your-customer (KYC) requirements  Revamped eCorp with enhanced services to Corporate clients Corporate banking group The Bank’s Corporate Banking arm put in another robust performance during the year under review. The Bank maintained its top position by increasing volume in cash deposit machines, payroll, and payroll cards. New products and services such as the Corporate Liquidity Management solution and Business to Business were introduced and further boosted brand value. We continued to exercise stringent controls and focus on greater efficiency as we implemented improved governance standards and a strict compliance culture. Significant achievements during the year include the following:  Developed Corporate Sukuk proposition and participated in one of the high profile Sukuk issuances in KSA  Launched auto receivable securitisation successfully  Closed several structured REIT financing transactions  Participated in large ticket syndicated and clubbed transactions  Conducted four business events during the year, across regions, to reach out to corporate clients in order to cross sell newly launched products and services  Enhanced KYC processes and brought in additional controls to improve the TAT and customer experience – Ensuring the e-Commerce statement is visible in eCorp – Providing national address filling data through eCorp – Upgraded SADAD account OLP Live with FG3 as required by SADAD – Launched SADAD Invoice Hub Live  Achieved savings on the cost of CDM and cash pickup vehicles Supply Chain Finance The Bank launched a fully-fledged Supply Chain Finance solution (SCF) for Corporate customers, becoming the first Bank in the Kingdom to offer a wide-ranging suite of solutions backed by a strong technological platform available to the entire value chain of customers. The SCF contributes towards one of Vision 2030’s goals of supporting private sector growth. It refers to facilities that are based on a receivables purchase agreement with the client, which allows the Bank to be the sole owner of the receivables due from buyers. Purchases are made on a structured basis, allowing the Bank to manage products, disputes, fraud and other risks that may result in non-payment by the buyer. Annual Report During the coming year, the Bank is planning a major revamp of its SME business. In line with Saudi Vision 2030 the Bank will focus on widening its share of the SME market with greater emphasis on Healthcare, Education, Tourism, Services, Transportation, and Communication. 2018 63 Review of Business Portfolio
66. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Annual Report 2018 64 Review of Business Portfolio The Bank maintained its top position by increasing volume in cash deposit machines , payroll, and payroll cards. The SCF products consist of the following:  Supplier Finance Programme  Receivable Finance  Medical Claim Discounting  Insurance Claim Discounting (Insurance Corporate Centric) In addition, to enhance our customer service proposition, we continued to invest in technology, systems and our people. We launched various self-improvement certification and management development programmes in partnership with reputed third party providers, during the year. We also continued to focus on cross selling to improve customer wallet share and enhance the customer experience. Treasury The Treasury Group’s main responsibilities are three-fold:  Manage the Bank’s overall funding and liquidity  Meet client requirements for treasury products  Maintain relationships with International Financial Institutions  Provide foreign exchange remittance services to both retail and corporate clients New products from money market desk Our money market desk manages the ARB balance sheet, provides funding for the Bank’s requirements and optimises the use of funds. In 2018, the money market desk introduced products designed to expand the Bank’s liability product mix such as Repo and Wakalah. Investment desk contributions Our investment desk, which was established in early 2016, has contributed significantly to the expansion of our investment portfolio over the last three years. The Investment Desk manages diversified asset classes including Government and Corporate Sukuks, Mutual Funds and Equities. It has also actively worked on yield enhancement and portfolio re-balancing, which contributed positively to Treasury’s overall income, forming 44% and 53% of the treasury gross yield income in 2017 and 2018 respectively. Asset liability management function launched In response to a more comprehensive and robust internal as well as regulatory risk management regime, an asset liability management function was formed as a separate unit in early 2018 to provide specific focus on managing the Bank’s liquidity and profit rate risk. Financial Institutions Department expands network The Financial Institutions (FI) Department executed a strategic network expansion plan during the year to provide robust support for customer requirements. It expanded access and reach through multiple corridors in the face of strong competition and bank mergers in the market with the aim of maximising customer experience. Currently the Bank maintains a wide network of around 220 FI correspondent banks. FI has also played a significant role in implementing new technology such as block-chain through Ripplenet. After conducting successful transactions with one of its correspondent banks, the Bank is now working with others in different countries using this technology. Similarly, FI continues to play a significant role in supporting the Bank’s Corporate business to boost its market share in the highly competitive Trade Finance market.
67. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Building new horizons in foreign exchange business The Bank ’s Foreign Exchange (FX) business has embraced change, presenting customers with innovative Islamic banking products and digital solutions to offer convenient and comprehensive financial solutions. The Bank installed one of the most sophisticated pricing engines for FX, and will now focus on expanding this across its network. The Bank is now able to offer competitive pricing which moves in line with the market 24 hours a day. The fully-integrated and automated FX pricing engine has state-of-the-art technology to process multiple FX prices across multiple channels within seconds. Bullion business In parallel, the Bank has penetrated the KSA bullion business by establishing a Bullion Desk in a market where only few banks offer such a service. The Treasury Group has also increased its presence in the banknotes business by expanding the existing ATM grid. We initially added over 20 multi-currency ATMs at key locations across the Kingdom. The focus on Banknotes has redefined the Bank’s standing in the KSA Inter-Bank market, profiling us as a market maker in the wholesale banknotes business. OTC – Islamic FX forward and variants The new Islamic hedging product for FX was launched recently giving our clients the flexibility to explore new opportunities to hedge their future exchange exposure risks within the Bank. The product is called the “Islamic FX Forward” (IFX FWD) and is fully Sharia compliant. This product contractually obligates two parties to a reciprocal agreement, to exchange a certain amount in one currency to be exchanged to another currency at an agreed future date and price. The IFX FWD has been at the forefront, triggering further development in the Treasury OTC Islamic product suite. Islamic FX flexible forward This is an FX forward contract where settlement is flexible and the client chooses the date of settlement within the agreed/specific time period. Such a product offers our clients the flexibility to withdraw the required FX amount at the agreed rate during the life of the contract. Re-prioritise Tahweel business In April 2018, the Bank’s remittances arm, Tahweel Al Rajhi was migrated to Treasury to garner greater synergies. Tahweel Al Rajhi is an important element of our business, providing local and global money transfer services and banknotes services in addition to many other premium services in keeping with our passion to meet all our customers’ banking needs. Tahweel has the largest network in the Kingdom with 230 centres offering competitive banking services using state-of-the-art technology and serving customers around the clock. In line with the Bank’s strategy to provide services that are more convenient to customers, Tahweel has added new electronic channels, like Tahweel Mobile Application. Such self-service banking channels allow customers to add international beneficiaries, open new memberships, and make transfers with greater convenience, without the hassle of having to line up at the centre. More than 55% of Tahweel transactions are conducted through E- channels. In addition, Tahweel has launched Al Rajhi keyboard which is an online keyboard that allows customers to execute transfers through any chatting apps including social media apps. Annual Report The Bank installed one of the most sophisticated pricing engines for FX, and will now focus on expanding this across its network. 2018 65 Review of Business Portfolio
68. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Annual Report 2018 66 Review of Business Portfolio In 2019 , our Treasury business will continue to provide new innovative services and products to the Bank’s customers in order to meet their expectations and to enhance their experiences. In 2019, our Treasury business will continue to provide new innovative services and products to the Bank’s customers in order to meet their expectations and to enhance their experiences. It will also continue to increase its contribution to the Bank’s overall profitability. Investments services and brokerage Business performance Retained its status as the leading broker on Tadawul in 2018, Al Rajhi Capital grew its market share to 20.26%. Asset Management continued to perform strongly, with total assets under Management increasing by 40% to SAR 38 Bn. Its real estate business grew substantially thanks to the successful IPO of the Al Rajhi REIT Fund, which was oversubscribed by 174%. Proprietary Investments, which are based on income-generating assets, benefited from the full-year impact of initiatives taken in 2017, and contributed 24% to overall revenues in 2018. These achievements were recognised by several industry awards:  “Best Broker in Saudi Arabia” by EMEA Finance  “Broker of the Year” by Euromoney Global Investor  “Best Provider of Sharia-Compliant Funds 2018” by Global Finance  “Real Estate Investment Firm of the Year” from Euromoney Global Investor Awards such as the above reflect the strength and diversity of Al Rajhi Capital’s investment products and solutions, and the committed efforts of the entire team. Strategic progress Towards the implementation of its five-year strategy and growth vision for 2020, Al Rajhi Capital introduced a number of key initiatives in 2018. The Company’s strategy is closely aligned with the Kingdom’s Vision 2030, National Transformation Plan 2020; and the Strategic Plan 2019 of the Capital Market Authority. Key strategic developments in 2018 include the launch of a major digital transformation initiative, to deliver products and services to clients through digital channels based on a “mobile first” approach. During the year, the institutional client base of Brokerage and Asset Management saw encouraging growth, with the Institutional Brokerage team partnering with two leading regional brokers to execute transactions for their clients. They helped to position Al Rajhi Capital as the local broker of choice for international clients. With leading funds performing well, Asset Management successfully added a number of new discretionary institutional mandates across asset classes. In addition, the IPO and subsequent listing on Tadawul of the Al Rajhi REIT Fund significantly expanded the real estate business, with the Company’s overall real estate portfolio now standing at over SAR 3 Bn. Institutional capability was strengthened through further enhancements to the critical areas of employee capital, information technology and digitisation, operations, risk and compliance – ably supported by innovative customer service and marketing initiatives.
69. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information International business group Al Rajhi Bank – Malaysia A pioneer in its field and the world’s largest Islamic bank by capital, the Al Rajhi Bank brand is one that is on par with other major international banks around the globe. Promoting and developing Islamic banking in countries where the Bank operates through the introduction of innovative banking products is one of its key goals. During 2018, the Bank’s International business performed well. Beginning the year with the announcement of a new Chairman and member to the Board of Directors the Bank’s Malaysia subsidiary performed well during 2018. In fact, our Malaysia operations outperformed all foreign-owned Islamic banks in the country from 2014 to 2017, turning in another stellar performance in 2018. Signing an exclusive 10-year agreement with Sun Life Malaysia Takaful Berhad, the Bank appointed the former as its sole distributor of Family Takaful products and services to its150,000 customer base across the nation. Presence and Branches 10 Jordan 551 KSA 2 Kuwait 18 Malaysia Annual Report During the year, the institutional client base of Brokerage and Asset Management saw encouraging growth, with the Institutional Brokerage team partnering with two leading regional brokers to execute transactions for their clients. 2018 67 Review of Business Portfolio
70. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Annual Report 2018 68 Review of Business Portfolio During the year under review , the Bank’s International business performed as well as expected. The Bank also expanded our Cash Management System to be able to provide our customers in Malaysia with an improved experience. Keen to provide customers with products that meet their needs, the Bank also focused on expanding product offerings such as Commodity Murabaha. In the short term we will be looking to:  Drive corporate and retail deposits  Expand our digital offering by introducing Retail Internet Banking and Tablet Banking  Tap into regional markets with new offerings  Keep investing in talent management  Roll out infrastructure improvements  Continue investing in IT solutions that are focused on improving efficiency and enhancing the customer experience. (Refer Review of subsidiaries for more details.) Al Rajhi Bank – Kuwait The Bank became the first foreign bank in Kuwait to launch a second branch in the region after local regulations on foreign banks were lifted. The Bank’s collaboration with one of the local banks to provide ATM access to our customers is a one-of-a-kind project in Kuwait, providing customers with a wider network to access our banking services. The Bank also began operating our first ever call centre in Kuwait to provide customers with ready access to their Bank in Kuwait. The Bank also launched Ijara and Murabaha mortgages to better serve our customers in Kuwait. Al Rajhi Bank – Jordan As part of its strategy to expand its network of branches, the Bank opened three new branches in Jordan, taking the total of branches in the country to 10. Each branch will provide a wide range of banking products and services including home finance, personal finance, car finance and commodities finance, in addition to other products such as current account, joint investment account and many other financial solutions.
71. Review of Other Operations Governance and legal group The Governance and Legal Group has provided through its sub-departments the expected added value to the work of the Bank ; therefore, has succeeded in achieving numerous accomplishments, and developed procedures aimed to control business and reduce errors and risks. For example, the Governance Department has developed many policies, practices, procedures and control processes related to governance within the Bank including Related Party Transactions and Dealing with Conflicts of Interest Policy, ARB Board Members Nomination and Appointment Policy and Authorities Matrix for high-level management to comply with regulatory requirements. In addition, it has updated ARB Governance Manual and has monitored performance of different committees to ensure having an approved charter for each committee; while it has worked on creating new committees and developing Charters of some committees to meet business needs and requirements of regulators. Furthermore, it has monitored all approved policies and procedures in ARB KSA and overseas branches to be updated as required and to assure abiding by development requirements. Governance Department aims at achieving adherence of the Bank to all governance related regulatory requirements and it represents the Bank’s arm to set rules and regulations that guarantee compliance of all business levels with best practiced rules of governance. Board Secretariat has finished all its assigned jobs in a professional manner and has utilised modern technology, represented in Convene system, in circulation of Board and Executive Committee resolutions to shorten the length of processing proposals, ensure smooth and efficient work flow in a timely manner with immediate access of all Board and Executive Committee members to Convene. In addition, Board Secretariat has developed work process by updating its business regulations to be compatible with the Bank’s strategy and targets. It has coordinated and collaborated with all proposals’ stakeholders to meet business requirements and achieve the best interest for the Bank and other related parties as per approved business regulations. Board Secretariat has continued to follow up with Board or Executive Committee members and the management to ensure effective processing of all matters related to their resolutions and instructions. The Legal Department continued to provide legal and advisory services as an internal consultant sector within the Bank and document the Bank's rights to defend them in order to preserve its assets and earnings. The Shareholders Register Secretariat continued to maintain its performance and professional communication while implementing formal regulations and abiding by their rules. In addition to the disclosure of all mandatory requirements and distribute all reports and declarations, where all investors can review the Bank’s performance on a regular basis. Annual Report To ensure that the Bank abides by all development and regulatory requirements, the Governance and Legal Group monitored and, where necessary, updated all approved policies and procedures for its businesses across the Kingdom and at overseas branches. 2018 69 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information
72. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information 70 Review of Other Operations Annual Report 2018 Human resources group Total staff strength Saudisation rate New staff recruited 2018 2018 2018 12 ,732 96.0% over 725 2017 – 13,077 2017 – 91.8% 2017 – 671 Number of training hours Learning and development 2018 Al Rajhi Academy over 65,000 2017 – 64,000 School of Leadership School of Banking Accolades: GCC Best Employer Brand Award for Best Graduate Programme amongst KSA Banks. Employee function Executives Employees engaged in control functions 0.2% 2.8% 2017 Employees engaged in risk taking activities Executives Employees engaged in control functions 0.2% 3.0% 2018 Employees engaged in risk taking activities 12.4% 12.6% Other employees Other employees 84.6% 84.2%
73. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Employer of choice Becoming an employer of choice is one of the Bank ’s key strategies as it is keenly aware of the positive impact of an engaged workforce. With this goal in view, HR has transformed itself as it worked towards building a motivated, competent and engaged workforce over the past few years; one that is capable of surmounting the current and future challenges of the Bank. HR has successfully achieved several key milestones already, recording significantly lower attrition in the high performer category. The Bank has been recognised for the third consecutive year as the Best GCC Employer Brand by Employer Branding Institute and the Most Preferred Banking Employer in KSA for Saudi graduates by UNIVERSUM for the second year in a low. Given below are some of the key strategic initiatives that HR Group has implemented successfully in order to deliver on the broader sustainability objectives. Recruiting the best The HR pipeline Overall turnover Recruit the best % Develop talent 15 12 Cater to graduates 9 Plan for succession 6 Strengthen leadership 3 0 Drive performance 2015 2016 2017 2018 Being the largest banking employer in KSA, we recruited over 725 new employees during 2018. To do so we implemented best-in-class selection tools that include: High performers turnover % 7.5 6.0 4.5 3.0 1.5 0 2015 2016 2017 2018  Ability tests  Psychometric assessments  Criteria-based interviews  Fully-fledged assessment centres Annual Report Becoming the employer of choice is one of the pathways of the Bank’s 2020 ABCDE strategy. 2018 71 Review of Other Operations
74. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Annual Report 2018 72 Review of Other Operations The Bank ’s graduate programmes are also designed to provide the necessary knowledge foundation and resilience for young Saudi female talent to navigate across the current complex banking environment. Recruitments 2018 Head Office 45% Branches 55% To ensure a smooth and effective recruitment process across all regions of the Kingdom we partnered with and depended on:  Recruitment specialists  The on-boarding team  The automated on-boarding process Establishing sustainable core talent management practices is an integral part of the 2020 HR Strategy and a key driver for achieving our strategic aspirations towards becoming Employer of Choice. With this intent, we have set up the ARB Talent Council, under the patronage of our CEO to reflect our commitment in developing strong Saudi leadership. The Talent Council plays a critical role in identifying, developing, nurturing and mobilising the Bank’s Saudi talent. It prioritises talent under the following categories for the purpose of succession planning for critical roles across the Bank:  Senior leaders – Tier 1  Junior leaders – Tier 2  Emerging leaders – Tier 3 Catering to graduates The HR pipeline Recruit the best Developing and managing talent Develop talent The HR pipeline Recruit the best Develop talent Cater to graduates Plan for succession Strengthen leadership Drive performance Once on board, new recruits are carefully cultivated by the Talent Council to ensure that they have the best experience with us and that we create an environment that brings out their latent talents. Cater to graduates Plan for succession Strengthen leadership Drive performance The Bank’s graduate programme has been rated as the best among all the financial institutions in the Kingdom for the second consecutive year by UNIVERSUM. We adopt best in class selection methodology, including an online ability test and a motivational interview approach to select the best Saudi graduates from different national and international universities. The Bank’s graduate programmes are also designed to provide the necessary knowledge foundation and resilience for young Saudi female talent to navigate across the current complex banking environment.
75. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information To date , we have inducted over 150 graduates within the Bank since the programme began in 2015. There are primarily two types of Graduate programmes:   Identifying critical positions within the Bank which have a significant impact on its financial and control functions  Identifying the status of these positions (filled/vacant) and the availability of in-house successors and their preparedness for identified roles  Developing proactive strategies with respect to succession planning Graduate development programme: The graduate development programme is an 18-month journey that includes classroom learning, rotation with business and control functions, attachment with Groups on live projects, mentoring and coaching, and contribution to our CSR initiatives. During the year, we launched the Bank’s first dedicated female graduate development programme, the sixth such graduate programme since its inception four years before. So far, three batches have graduated, and three are currently undergoing training.  Succession Planning at Al Rajhi Bank is undertaken with the following objectives in mind: Thematic development programme: The thematic graduate development programme is a 12-month journey and is focused on building domain specific capabilities. To date, we have implemented four such programmes, dedicated to Corporate Banking, SME, IT and Transformation and Change Management. Upon graduation, the participants will take up roles within their respective business or functional areas. Planning for succession The HR pipeline The identified successors undergo a variety of development initiatives engineered and launched by the HR team in 2018/19 to make sure that the Bank is investing in bridging the gaps between the identified successor and his/her future targeted role. Building strong business leaders The HR pipeline Recruit the best Develop talent Cater to graduates Plan for succession Strengthen leadership Recruit the best Drive performance Develop talent Cater to graduates Plan for succession Strengthen leadership Drive performance The Bank has embarked on a mission to establish the Al Rajhi Bank Academy to develop the business and leadership capabilities of its employees and meet the goals of its 2025 strategy to be the Employer of Choice. The Academy consists of two key pillars, the School of Leadership and the School of Banking. During 2018, more than 65,000 training hours were delivered to ARB employees covering different domains such as technical, regulatory, leadership, and personal effectives. Annual Report During 2018, more than 65,000 training hours were delivered to ARB employees covering different domains such as technical, regulatory, leadership, and personal effectiveness. 2018 73 Review of Other Operations
76. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information 74 Review of Other Operations 2018 Break down of 2018 training days Annual Report Nos . 3,000 2,400 1,800 1,200 600 0 RBG network dedicated learning RBG network coaching Control and governance (Mandatory) related learning Management and leadership Graduate development related learning Technical learning School of leadership School of banking For Al Rajhi Bank to grow sustainably, it is imperative that the leadership pipeline is strong and vibrant. The following leadership programmes have been launched to address the current and emerging development needs of senior leaders at the Bank: The primary focus of the school of banking is to build role specific capabilities and domain expertise across different businesses and functions of the Bank. This is delivered through a structured development and certification approach. Examples of these structured developments include:   Executive leadership programme: Facilitates leadership development, enabling experienced leaders to better manage their current responsibilities while making a greater contribution in an increasingly complex environment The leadership development programme: Addresses leadership capabilities needed to develop the next generation of leaders at Al Rajhi Bank and support effective ongoing implementation of our business strategy  Transition management programme: Empowers individuals during their career progression journey, supporting individuals with focused development and preparing them at each transition stage of their career  Management development curriculum: Builds confidence and efficiency in employees with people management responsibilities  Treasury and FI Certification  Corporate Banking Credit Risk Certifications  SME Credit Risk Certification  Retail Branch Manager Certification  Certified Compliance Officer Certification  Certified Auditor Certification A blended approach of learning has been adopted in the design of these structured interventions in order to ensure learning effectiveness and drive greater efficiency.
77. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information 75 Review of Other Operations Cascading the strategy to all groups and departments and ultimately to individuals is a critical success factor for the Bank . 2018 Championing a performancedriven culture Cascading and Cause & Effect ARB Strategy Develop talent Plan for succession Strengthen leadership Drive performance In line with our Vision, Mission, and Values each business unit and support function is required to develop its own strategy which is in alignment with the overall strategies of the Bank. Achieving the plan of each department depends on the efforts of the employees. To ensure that each employee clearly understands their role in realising the Bank’s goals, the Bank’s strategic plan is cascaded to each department. Then, working as part of a team, each employee identifies and agrees to the objectives, targets and deadlines they must meet in order to contribute towards the goals of their department and ultimately the Bank itself. Measuaring Impact Cater to graduates Group Objectives Sector Objectives Department Objectives Employees Objectives Cascading Objectives Recruit the best Annual Report The HR pipeline
78. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Annual Report 2018 76 Review of Other Operations These key performance indicators are met through the Performance Management System , which helps document each employee’s progress. These key performance indicators are met through the Performance Management System, which helps document each employee’s progress. It consists of three main phases as shown below: 3 1 End of the year Beginning of the year Evaluate performance with evidence Identify areas for development Identifying areas for improvement (training) Setting objectives with timelines and target Setting objectives with timelines and targets Fill and sign the final appraisal form for the year Fill and sign the final appraisal form for the year Performance management cycle Ongoing monitoring, coaching and feedback Evaluate performance with evidences Conduct mid year review and performance discussion 2 Middle of the year Ongoing monitoring, coaching and feedback Conduct mid-year review and performance discussion  Pay for Performance Rewards Culture To ensure consistency and comparability, the Bank has developed its Employee Value Proposition and Compensation policies and practices on a differentiated, pay-forperformance-and-potential model that is linked to the Bank’s and the individual’s performance and market pay position. The Bank’s rewards strategy and policies are in complete alignment with SAMA’s requirements. In February 2018, the Human Resources Group completed a self-assessment review of the Bank’s Compensation Incentive Schemes against SAMA rules and FSB standards. The key pillars of the Bank’s compensation framework are: 1. Governance – Board of Directors oversight 2. Policies and procedures 3. Compensation structure and incentive schemes Risk factors are an integral part of the balanced scorecard for performance management of Senior Executives. The Bank’s total compensation approach comprises fixed and variable compensation. The variable components are in alignment with good corporate governance and include claw back and holdback arrangements.  
79. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Digitised HR services HR Governance In line with the Bank ’s ABCDE Roadmap and the HR Strategy to Become an Employer of Choice, the Human Resources Group launched “SAHL”, a new generation HR Services application. “SAHL” is a mobile application that is compatible with IOS and Android and is integrated with HR systems that provide employees with the ability to execute their HR Services anywhere, anytime. It improves the convenience, efficiency and reliability of HR services. A dedicated Governance Unit has been established within HR covering audit, risk, compliance and SAMA-related matters. As one of the largest banking workforces in the Kingdom, it is of critical importance that HR maintains strict control and adherence to all policies, procedures and regulatory guidelines. Standardised Control and Risk Governance KPIs are included in all relevant employees’ scorecards. Employee engagement and communication The Bank promotes a culture of strong open communication with all employees to assess engagement levels and identify areas that require further attention. Communication channels include: Embracing the Kingdom’s Vision 2030 % 100 80 60 40 20 2014 2015 2016 Pulse surveys  Focus group discussions  HR Newsletter  Online employee communication portal TAWASUL  Annual roadshows and town halls  Ramadan family activities The overall engagement score significantly improved in 2018 and we continue to enhance HR solutions and deliverables to meet employee expectations. Saudisation trend 0  2017 2018 In line with Vision 2030, the Bank increased its Saudisation ratio to 96% by end of 2018 and increased the female workforce by 32% since 2016. Annual Report The Bank promotes a culture of strong open communication with all employees to assess engagement levels and identify areas that require further attention. 2018 77 Review of Other Operations
80. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Annual Report 2018 78 Review of Other Operations As part of the multi-year transformation journey , Internet and Mobile banking continues to be a key focus of our Digital Agenda. Shared Services Group Information Technology (IT) Department Throughout 2018, the Bank’s IT Department continued on its journey towards transformation and digitisation (refer Digital Footprint on page 54 for a detailed overview). Under the patronage of the IT Steering Committee, multi-year strategic programmes were initiated and are now well underway, moving the Bank forward in its ambition to become the leading digital bank in the region. Against a backdrop of tightening local and international regulations, the IT Department implemented more than 400 initiatives, directly contributing to the Bank’s strategic agenda, including:  Regulatory and compliance: Increased stability and security The Bank continued its focus on cyber security to maintain safe and secure services for customers, 24 hours a day, and seven days a week. This strategy has enabled the Bank to mitigate and address cyberattacks with zero impact on customers. The Bank’s emphasis on customer centricity requires “state-of-the-art” customer relationship management tools. During the year, we empowered our call centre agents with tools that provided a comprehensive 360o view of customer needs, enabling us to act swiftly to fulfil customer requests or address issues. The Bank also extended the types of accounts available to customers to enable a broader set of services to accommodate the needs of our diverse customer segments. New account types include:  Citizen account Revenue generation and cost efficiency: Improved profitability   Family  Escrow  Meeting customer needs: Increased customer satisfaction  Virtual accounts  New and improved digital channels and services: Faster time-to-market Technology is at the heart of our customer experience as we continue to maintain and support the needs of our nine million customers, safely and securely.  As part of the multi-year transformation journey, Internet and Mobile banking continues to be a key focus of our Digital Agenda. Multiple enhancements have been introduced for both Retail and SME customers to improve not only the available services but, importantly, the Internet and Mobile customer experience. The integration of the Al Rajhi Mobile Application with WhatsApp is a great example of innovation that enhanced the user experience and ease of use for customers to Bank with Al Rajhi (Refer Contact Centre Department on page 79). A richer array of self-service options has been introduced within our ATM network enabling a broader spectrum of banking services outside Branch hours for customers who prefer physical to virtual interaction. Operations Excellence and Governance Department During the year, this department continued its focus on reducing errors and enhancing the customer experience. It did so by bringing efficiency and cost effectiveness to end-to-end processes throughout the Bank’s back-office functions over the short to medium term. This involves:  Making changes to our current operating model  Streamlining processes  Implementing control enhancements  Employing the latest technology
81. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information On its journey towards operational excellence the Bank implemented the following initiatives :  Robotic solutions for retail credit approvals, sanction screening and other operational processes  Managed services for functions like reconciliations and card operations  Outsourcing of cash centre operations One of the most important responsibilities of this department is to ensure that the Bank is in compliance with internal and external policies and regulations. We also ensure that the Shared Services group is compliant with Audit, Compliance and Risk requirements. The creation of this function has helped to improve the control environment across the Shared Services.    Over the forthcoming year, the focus will be on rolling these initiatives to other lines of business in the Bank so that efficiency and effectiveness can be further improved across the Bank. In line with the Bank’s strategy of Digital Leadership, the Contact Centre launched the “WhatsApp Channel” – the first bank in the Kingdom to launch WhatsApp services using an official business number. This is part of our omni-channel programme which is designed to enhance other Contact Centre channels like email and social media to deliver a seamless experience across all customer touch points. Business Operations and Support Department The Bank’s Business Operations arm takes responsibility for the smooth delivery of banking services, handling all back office operations for all business lines within the Bank. Its key activities include:  Managing cash and operations for ATM and Point of Sale (POS)  Managing cash collections and despatching to branches, Tahweel Centre and retailers  Handling domestic and international payments  Managing back office for Treasury activities  Processing trade transactions Contact Centre Department The Contact Centre’s objectives are:  To enhance the after-sale services   To respond promptly and effectively to customer inquiries and requests Processing credit applications for retail customers   To resolve complaints to the customer’s satisfaction Executing lending deals for corporate, Mid corporate and SME customers  Supporting all consumer products operations such as personal loans, credit cards, car lease and real estate  Archiving documents and ensuring their authenticity, quality and compliance with the regulatory instructions A snapshot of Contact Centre activity in 2018:  Received more than 7.8 million calls  Received over 1.4 million service requests  Resolved over 204,000 complaints   The Bank successfully launched a new customer relationship management system, with the 360 degree view of the customer as mentioned previously. Innovations such as these help us win the customer’s loyalty and trust, knowing that we care enough to listen and respond to their banking needs. We also use a predictive complaints system using big data technology to resolve customer issues proactively. During the year, the Department focused on improving process efficiency and the control environment. Business Operations optimised cash management across all channels and improved ATM availability to meet and exceed SAMA service levels. We also improved processes aimed at reducing customer ATM claims, streamlining insurance for cars and real estate assets, and reducing turnaround time for credit approvals and ancillary services. Annual Report The Bank’s Business Operations arm takes responsibility for the smooth delivery of banking services, handling all back office operations for all business lines within the Bank. 2018 79 Review of Other Operations
82. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Annual Report 2018 80 Review of Other Operations The Compliance Group supports the Bank in achieving its objectives by complying with all rules and regulations applicable within the Kingdom of Saudi Arabia and covered by global standards and best practice . The Bank implemented a new payments system which provides it with a platform to introduce advance payment services. A new fraud management system was also implemented to cover the cards acquiring side of transactions. In addition, we are utilising the services of specialised vendors who undertake non-core activities. All these strategies have not just enhanced efficiency but will also support standardisation of processes and reduce operational costs for the Bank. During 2019, the Department will focus on the following:  Realigning Business Operations’ end-to-end accountability model  Further improving service delivery and the customer experience The Properties and Support Services Department is responsible for the management and implementation of all engineering projects for the Bank, from planning, design and construction to renovation and operation, across of all its properties in all regions of the Kingdom. The Department is currently maintaining and supporting more than 900 branches and remittance centres and more than 5,000 ATMs. In 2018, the Department successfully completed the head office building, Al Rajhi Tower, with a built up area of 100,000m2, and the operations and technology building, North Ring Road Complex with a built up area of 68,000m2. Together the buildings have a staff capacity of more than 3,000 employees and offers state-of-the-art facilities. Catering to employee needs these facilities include: In addition, the Department completed the new ladies’ headquarters occupying 22,000m2 with a staff capacity of more than a 1,000 female employees. The Department is responsible for managing all of the Bank’s suppliers and service providers in terms of contracts, purchase orders and invoices.   It is also responsible for providing security and safety for all Bank assets in the Kingdom, through the application of various policies, technologies, and security devices to ensure safe work flow at all times. Compliance Group Compliance and financial crimes risks have become some of the most significant ongoing concerns for financial institutions in the Kingdom, where regulatory penalties have dramatically increased since 2016 and the scope of regulatory focus continues to expand. Accordingly, the Compliance Group has expanded beyond offering advice on statutory rules, regulations, and laws and become an active regulatory co-owner of risk, providing independent oversight over the control framework. The new approach starts by defining which risks apply to a given business process and identifying where exactly in the process they occur. The Compliance Group supports the Bank in achieving its objectives by complying with all rules and regulations applicable within the Kingdom of Saudi Arabia and covered by global standards and best practice. The Compliance Group has two main functions: compliance and financial crimes.  Educational and administrative facilities  State-of-the-art gym  Break out areas for team collaborations Compliance is mainly responsible for:  Mosque  Interpreting the regulatory requirements  Medical unit   Fully-catered dining area Identifying the associated risk that might impact the Bank’s reputation  Ample parking spaces for the entire employee cadre  Implementing regulatory requirements
83. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Financial Crimes is a specialised department that is responsible for combating :  Money laundering  Terrorism financing  Financing weapons of mass destruction  Bribery and corruption  Sanction and name screening  Self-supervision The Group Chief Compliance Officer (GCCO) leads the compliance function and assists Management in identifying and assessing compliance issues and in guiding and educating staff on related matters. The GCCO has a direct contact with the Board of Directors, Chairman of the Board or its members. In addition, he directly reports to the Board Audit and Compliance Committee, and also reports to the CEO administratively. The GCCO has oversight of the Compliance programmes of the Bank’s Overseas Branches (Jordan and Kuwait) and Banking Subsidiary (Malaysia). management features implemented in the Kingdom, Jordan, and Kuwait. A Robotics Process Automation solution was also introduced.  Sanctions programme: The Bank made major enhancements to its Sanctions Programme. In 2018, the Bank implemented the “Daily-Delta Screening” methodology. Using this solution, the Bank’s customers and beneficiaries are screened on a daily basis against sanction list updates.  Customer risk assessment: The Customer Risk Assessment Methodology and model was enhanced in 2018. The AML risk rating for all customers (KSA, Jordan, and Kuwait) was updated.  Compliance management system: An automated Compliance Management System was implemented which contains the compliance catalogue (library of regulatory requirements) and risk registers. This system was rolled out across Saudi Arabia, the Bank’s overseas branches (Jordan and Kuwait) and its subsidiary (Malaysia).  Compliance training and awareness: Major programmes delivered to improve the training and awareness across all three lines of defense. Key accomplishments in 2018 Major investments in governance, systems, data, processes and people capabilities were made over the past three years. Described below are the key accomplishments in 2018:   Compliance organisation and people: The Bank continues to invest in Compliance. The current headcount of the Compliance Department as of December 2018 is 151, a growth of 147 % in FTE count. Female staff number 16. Training and awareness campaigns continued to be enhanced and expanded across the Bank. Transaction monitoring and reporting of suspicious transactions (AML): In 2018, the latest version of the AML Transaction Monitoring System was introduced with improved visual analytics and case World-class compliance: Our vision for 2019 compliance programme In line with global best practices in 2019, the Compliance Group will focus on emerging risks surrounding “disruptive” technologies and innovations. These include assessment and mitigation of:  Money laundering and terrorist financing risks  On-line customer on-boarding  Robotics process automation  Block-chain Annual Report Major investments in governance, systems, data, processes and people capabilities were made over the past three years. 2018 81 Review of Other Operations
84. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Annual Report 2018 82 Review of Other Operations The Internal Audit Group ’s Mission is assuring the Board of Directors independently and objectively about the efficiency and effectiveness of internal audit systems, risk management, Bank governance and the optimal use of available resources to achieve the operational and strategic objectives of the Bank. 75 social responsibility programmes in 22 cities Internal audit group Internal audit represents the third defence line that provides reasonable assurance on the efficiency and effectiveness of other control functions, including Risk and Compliance Departments as second line of defence. Moreover, the role of the Executive Management of the Bank includes designing and implementing effective internal controls as a first line of defence. The Internal Audit Group’s objectives include providing to the Board of Directors reasonable, objective and independent assurance on the efficiency and effectiveness of internal control systems, risk management, and Bank’s governance including integrity and accuracy of information, regulatory reporting, level of compliance with policies, regulatory requirements, assets safeguarding measures and best utilisation of resources to achieve the Bank’s operating and strategic objectives. 2,904 volunteer employees 2,288 females 11,215 2,900 volunteer hours by males Corporate social responsibility In 2018, the Bank gave back to the communities within which it operates by initiating several social responsibility programmes that included the participation of Bank employees. volunteer hours by females Total volunteer hours The work scope of Internal Audit Group includes: Bank’s activities within the Kingdom, oversight of internal audit activities located in overseas branches and subsidiaries. To achieve its objectives, internal audit carries out its activities following a risk-based audit approach and the international auditing standards issued by The Institute of Internal Auditors supported by a qualified, skilled and experienced team to carry out its activities in an effective and professional manner. To ensure effectiveness and transparency, the audit team has been granted the required access to the Bank’s records, systems, employees’ activities and unlimited access to Bank’s premises. 616 male volunteers 14,115 The Bank was keen to ensure diversity in groups that benefited from these programmes including:  The differently-abled  Orphans  The unfortunate  Those with special needs In addition, the Bank supported anti-smoking programmes and focused on raising financial awareness in secondary schools in Riyadh. The Bank participated in international days to raise awareness of important issues and spread knowledge within the community.
85. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information 83 Review of Subsidiaries and International Branches Al Rajhi Bank Malaysia Al Rajhi Development Company Ltd . An Islamic bank licensed under Islamic financial services law issued in 2013, incorporated and practices its business in Malaysia. A limited liability company registered in KSA to support real estate finance programmes of ARB by transferring and keeping real estate ownership documents in its name on behalf of the Bank, collect revenues of selling some properties sold by the Bank, provide consultancies in real estate and engineering field, register real estate contracts and supervising real estate valuation. Al Rajhi Capital A closed joint stock company, registered in KSA to work as a main agent and/or provide financial brokerage services, insurance, management, consultancy, arrangements and book keeping. Al Rajhi Services Company Al Rajhi Takaful Agency A limited liability company, registered in KSA to work as an agent to practice insurance brokerage activities according to agency agreement with Al Rajhi Cooperative Insurance Company. Subsidiary name Al Rajhi Bank Malaysia Al Rajhi Capital A limited liability company registered in KSA to provide recruitment services. There are no loans on the Bank or its subsidiaries (whether payable on demand or others). Capital Ownership % Country (place of operation) Country (place of foundation) 1,051,714,300 100 Malaysia Malaysia 500,000,000 100 KSA KSA Al Rajhi Takaful Agency 2,000,000 99 KSA KSA Al Rajhi Development Company Ltd. 1,000,000 100 KSA KSA 500,000 100 KSA KSA Al Rajhi Services Company International Branches Al Rajhi Bank (Kuwait) Al Rajhi Bank (Jordan) A foreign branch registered with the Central Bank of Kuwait. A foreign branch operating in Hashemite Kingdom of Jordan providing all financial, banking, and investments services and importing and trading in precious metals and stones in accordance with Islamic Sharia rules and under the applicable banking law. Subsidiary name Capital Ownership % Country (place of operation) Country (place of foundation) Al Rajhi Bank Kuwait 389,888,426 100 Kuwait Kuwait Al Rajhi Bank Jordan 264,842,950 100 Jordan Jordan 2018 Subsidiaries Annual Report To meet its goals, including the promotion and development of Islamic banking within and beyond the Kingdom’s borders, the Bank has established a number of subsidiaries of which it owns all or a majority of shares.
86. About the Bank Review of Subsidiaries and International Branches Value Drivers brand in the Kingdom of Saudi Arabia Number one banking Annual Report 2018 84 Leadership Brand Finance Strategy Performance Corporate Governance Financial Reports Supplementary Information
87. Corporate Governance Annual Report 2018 85 85 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information
88. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Annual Report 2018 86 Corporate Governance Corporate governance encompasses the set of rules , practices, systems and procedures which direct and control the activities of an organisation. The governance structure helps the Organisation to balance the interests of the various stakeholders in the process of value creation. Policies relating to the governance manual In 2014, the Bank issued a Corporate Governance Manual and a Governance Manual Supplement which includes term of references (Charters) for Board Committees and Management Committees. These documents are subject to annual review. Furthermore, the Bank applies the key principles of the Saudi Arabian Monetary Authority’s (SAMA) Corporate Governance Principles for Banks operating in the Kingdom of Saudi Arabia that was issued in June 2012, as updated on 23 March 2014, in addition to Capital Market’s Authority’s (CMA) Corporate Governance Regulations and International best practices A number of policies, practices and procedures relating to corporate governance have been developed. The Governance Manual was updated during the year. The Delegation of Authorities (DOA) matrix has been amended to adequately reflect internal practices. A comprehensive policy of the Bank relating to Management of Related Parties Transactions and conflicts of interest was adopted in 2018 in order to address relevant regulatory requirements from the Companies Law, CMA Governance Manual and SAMA’s principles and guidelines; a policy for Nomination and Membership in the Board of Directors was adopted by the General Assembly Meeting held on 4 March 2013 and was further amended and approved by the General Assembly Meeting held on 22 October 2017 to reflect all the changes derived from the Companies law and relevant regulations from CMA and SAMA, detailed procedures were developed in 2018. In addition, a policy for Remunerations and Compensation of Board Members was approved by the General Assembly Meeting held on 22 October 2017, such policy provides detailed approach for determination of remuneration paid to Board and External members within the Board of Directors, Board Committees and Audit and Compliance Committee. The competencies and functional succession policy and plans has also been adopted both for Board members and key positions within Executive Management. This provides for career development for staff with high potential and also meets the immediate and future staffing needs of the Bank. It also promotes Saudization. The Whistle-Blowing policy encourages the reporting of improper behavior or any activity that violates the Bank’s policies, procedures and instructions. The Bank, through its comprehensive disclosure policy, ensured that all material information, inclusive of banking information required to be disclosed by SAMA and CMA regulations is disclosed to shareholders. The Bank has also adopted a policy for social responsibility, that aims at strengthening the social role of the Bank. The Bank has developed an Introduction Pack to assist new Board members. This pack contains information on the financial and legal aspects of the Bank. In addition, Board members are provided with all information needed to perform their duties. They are also provided with training on any relevant subject including the regulatory, financial and economic aspects pertaining to the Bank and its operating environment. The Bank has procedures in place to settle customer complaints which are monitored by the SAMA.
89. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Bank has given due cognisance to the currently applicable corporate governance regulations as enumerated by the Capital Market Authority of the KSA . Given below is a report on corporate governance practices at the Bank and the extent of compliance with the relevant CMA regulations. Implementation and nonimplementation of provisions of the CMA Regulations The Bank applies all provisions of Corporate Governance Regulations issued by the Capital Market Authority (CMA), except the following guiding provisions: Article Profiles of the members of Board, Committee and Executive Management Board structure The Board of Directors of the Bank comprises 11 members elected by the Ordinary General Assembly every three years. Any member may stand for re-election after completing his or her term in accordance with the Bank’s regulations. Refer Board of Directors on page 18 and Executive Management on page 22 for the profiles of the Members of Board, Committee and Executive Management. Requirements Reasons for not applying Article (41) – The Board shall carry out the necessary Clause “E” arrangements to obtain an assessment of its performance from a competent third party every three years. (Guiding paragraph) The assessment is conducted internally on an annual basis. Article (54) – The Chairman of the Audit Committee Clause ”B” shall be an Independent Director. (Guiding paragraph) A Non-Executive Board member chairs the Audit and Compliance Committee at ARB and he has been selected based on his qualifications which are found appropriate for the position. Article (87) ARB has a Social Responsibility Policy approved by the BoD. The Ordinary General Assembly, based on the Board recommendation, shall establish a policy that guarantees a balance between its objectives and those of the community for purposes of developing the social and economic conditions of the community. (Guiding article) Annual Report Corporate Governance Regulations of the CMA 2018 87 Corporate Governance
90. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Annual Report 2018 88 Corporate Governance Names of the companies inside and outside the Kingdom in which a Board member is a member of their current or previous Board member or manager Member name Names of companies where the Board member is a member of its current Boards or one of its Directors Inside / outside Kingdom Abdullah bin Sulaiman Al Rajhi  Al Rajhi Bank Inside the  Listed joint stock Kingdom company  Al Rajhi Company for Cooperative Insurance  Listed joint stock company  Farabi Petrochemicals Company  Unlisted company  Salah bin Ali Aba Alkhail Abdulaziz bin Khaled Al Ghefaily Legal entity (listed joint stock company/ unlisted joint stock company/ limited liability) Names of companies, in which the Board member is a member of its previous Boards or one of its previous Directors Inside/ outside Kingdom Legal entity (listed joint stock company/ unlisted joint stock company/ limited liability)  Al Rajhi Bank (CEO) Inside the  Listed Kingdom joint stock company  Industrialization & Energy Services Company (TAQA) Al Rajhi Holding Group  Unlisted company  Al Rajhi Capital  Unlisted company  Fursan Travel & Tourism Company  Limited liability company  Al Rajhi Bank  Al Rajhi Capital  Unlisted company  National Veterinary Company  Unlisted company  Abalkhail Consulting Engineers  Limited liability company  Salah Aba Alkhail & Co. Information Technology  Limited liability company  Al Rajhi Bank  Al Rajhi Capital  Unlisted company  Savola Group  Listed joint stock company  Dur Hospitality  Unlisted company  Panda Retail Company  Unlisted company  Saudi Industries Development Company  Unlisted company  Tabuk Agriculture Development Company  Listed joint stock company  National Medical Care Company  Listed joint stock company  Herfy Food Company  Unlisted company Inside the  Listed joint stock Kingdom company Inside the  Listed joint stock Kingdom company Inside the  Unlisted Kingdom company
91. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Member name Names of companies where the Board member is a member of its current Boards or one of its Directors Inside / outside Kingdom Bader Bin Mohamed Al Rajhi  Al Rajhi Bank Inside the  Listed joint stock Kingdom company  Mohammed Abdulaziz Al-Rajhi & Sons Investment Company  Limited liability company  Rajhi Steel Industries Limited  Limited liability company  Global Beverage Company  Limited liability company  Al-Jazirah Home Appliance Company, Ltd.  Limited liability company  Falcon Plastic Products Company  Limited liability company  Manafe Investment Khaled bin Abdulrahman Company Al Qwaiz  Al Rajhi Bank Names of companies, in which the Board member is a member of its previous Boards or one of its previous Directors Inside the  Limited liability company  ACWA Holding Kingdom Company  Listed joint stock company  ASTRA Industrial Group Swicorp Company  Unlisted company  Riyadh Cables Group Company  Unlisted company Samba Financial Group  Arab National Bank EMCOR Facilities Management Co   Unique Solutions for Chemical Industries (USIC)   Al Rajhi Bank  Construction Products Holding Company   Rolaco Group  Unlisted company  Medical and Pharmaceutical Services Company  Unlisted company    Alaa bin Shakib Al Jabri Legal entity (listed joint stock company/ unlisted joint stock company/ limited liability) Unlisted company Unlisted company Inside the  Listed joint stock Kingdom company  SABB  Gulf International Bank Unlisted company Inside/ outside Kingdom Legal entity (listed joint stock company/ unlisted joint stock company/ limited liability) Inside the  Unlisted Kingdom company  Listed joint stock company  Listed joint stock company  Listed joint stock company Inside and  Listed outside joint stock the company Kingdom  Unlisted company Annual Report 2018 89 Corporate Governance
92. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information 90 Corporate Governance Names of companies where the Board member is a member of its current Boards or one of its Directors Inside / outside Kingdom Ibrahim Fahad Al Ghefaily  Al Rajhi Bank Inside the  Listed joint stock Kingdom company  Jiwar Real Estate Management, Marketing and Development Company Annual Report 2018 Member name Amin bin Fahad Al Shiddi Hamza bin Othman Khushaim Raid bin Abdullah Al Tamimi Legal entity (listed joint stock company/ unlisted joint stock company/ limited liability)  Names of companies, in which the Board member is a member of its previous Boards or one of its previous Directors Inside/ outside Kingdom  Alinma Bank Inside the  Listed Kingdom Joint stock company  Al Rajhi Bank   STC Solutions  Advanced Sale Limited Company  Arab Submarine Cables Company  Unlisted company  Aqalat Company  Unlisted company  Viva Bahrain Company  Unlisted company  Waseel Electronic Information Transfer  Cooperative Insurance Company  Listed joint stock company  Unlisted company Unlisted company  Al Rajhi Bank Inside and  Listed joint stock outside company the  Unlisted company Kingdom  VIVA – Kuwait Telecom Company  Deutsche Gulf Finance  Unlisted company  Oger Telecom Company  Unlisted company  Al Rajhi Bank  Dallah Healthcare Holding Company  Listed joint stock company  Hassana Investment Company  Unlisted company  Al Rajhi Bank  Cooperative Insurance Company  Listed joint stock company  Najm for Insurance Services  Unlisted company  National Medical Care Company  Listed joint stock company  Al Tawunyah Real Esatet Company Inside the  Listed joint stock Kingdom company  HSBC Saudi Arabia Abdullatif bin  Al Rajhi Bank Ali Al Seif Legal entity (listed joint stock company/ unlisted joint stock company/ limited liability) Listed Joint stock company Inside and  Unlisted outside company the  Unlisted Kingdom company Inside the  Listed joint stock Kingdom company Inside the  Listed joint stock Kingdom company  Arabian Cement  Listed joint stock company  Al Ra’idah Investment Company  Unlisted company Inside the  Unlisted Kingdom company Inside the  Unlisted company  Executive Director – Kingdom  Limited Vision Combined liability Limited Company company
93. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information According to the definitions of Article 2 of the Corporate Governance Regulations issued by CMA , Board members are classified as follows: No. Member name Membership classification (Executive/Non-Executive/Independent) 1. Abdullah bin Sulaiman Al Rajhi Non-Executive 2. Salah bin Ali Aba Alkhail Non-Executive 3. Abdulaziz bin Khaled Al Ghefaily Non-Executive 4. Bader bin Mohamed Al Rajhi Non-Executive 5. Khaled bin Abdulrahman Al Qwaiz Non-Executive 6. Alaa bin Shakib Al Jabiri Independent 7. Ibrahim bin Fahad Al Ghofaily Independent 8. Amin bin Fahad Al Shiddi Non-Executive 9. Hamza bin Othman Khushaim Non-Executive 10. Raid bin Abdullah Al Tamimi Independent 11. Abdullatif bin Ali Al Seif Independent Committees of the Board of Directors Executive Committee The functions and responsibilities of the Committees are laid down in internal guidelines and regulatory requirements. The membership term is three years which ends with the term of the Board. The Board of Directors has the authority to appoint, reappoint or terminate any member of the Committees. The Committees submit their recommendations and the minutes of meetings to the Board of Directors. The Executive Committee (ExCom), headed by the Chairman of the Board of Directors, carries out all the functions and authorities the Bank entrusts it with, including: assuming the responsibility for all businesses of Al Rajhi Bank, taking the quick decisions with respect to urgent matters and issues related to the business of the Bank. Also, ExCom will be responsible for approving all credit facilities exceeding the authorities of the Credit Committee, approving the real estate guarantees documented for default facilities, approving the contracts exceeding the powers of the Committees operating in the Bank and the CEO within limits of the approved budget and within powers determined by the Board of Directors. A brief description of ARB Committees’ competences and functions is given below: Annual Report Composition of the Board and classification of its members, as Executive Directors, Non-Executive Directors, or Independent Directors 2018 91 Corporate Governance
94. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information 92 Corporate Governance Annual Report 2018 The Committee held 12 meetings in 2018 as follows : Member name Meeting Date Abdullah bin Sulaiman Al Rajhi Chairman Salah bin Ali Aba Alkhail member Abdulaziz bin Khaled Al Ghefaily member Alaa bin Shakib Al Jabri member Hamza bin Othman Khushaim member 1. 4 February 2018      2. 15 February 2018      3. 25 February 2018      4. 25 March 2018      5. 9 April 2018      6. 14 May 2018      7. 24 June 2018      8. 17 July 2018      9. 22 October 2018      10. 19 November 2018      11. 3 December 2018      12. 20 December 2018      Nominations and Compensations Committee The main purpose of the Nominations and Compensations Committee include recommending the selection of Board members, Committee members, and Senior Executives to Board of Directors, preparing description of abilities and qualifications required for BoD membership, assessing the effectiveness and efficiency of BoD and High Management, compliance of the Bank with the internal incentive schemes, and rules of incentive practices issued by SAMA, principles and criteria of compensations, in the way best achieves the interests of depositors, shareholders and Bank’s strategic objectives. The Committee held two meetings during 2018 as follows: Member name Meeting Date Alaa bin Shakib Al Jabri Chairman Abdulaziz bin Khaled Al Ghefaily member Khaled bin Abdulrahman Al Qwaiz member Raid bin Abdullah Al Tamimi member 1. 13 May 2018     2. 19 November 2018    
95. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information 93 Corporate Governance The Committee held four meetings during 2018 as follows : Member name Meeting Date 1. 14 February 2018 Salah bin Ali Aba Alkhail Chairman Ibrahim Fahad Al Ghefaily member Raid bin Abdullah Al Tamimi member    2. 17 May 2018    3. 3 September 2018    4. 13 December 2018    Audit and Compliance Committee Audit and Compliance Committee comprise of five members – two members from the Bank’s Board of Directors and three non-executive members. The Committee’s responsibilities includes reviewing the Bank’s Financial Statements, accounting and regulatory policies, supervising the activities of internal audit group, external Auditors and compliance group. The Committee held (10) ten meetings during 2018. The below table shows that the Committee’ members attended most scheduled meetings during 2018: Member name Meeting Date Amin bin Fahad Al-Shadi – Chairman Abdul Latif bin Ali Al Seif Abdullah bin Ali Al-Muneef Faraj bin Mansour Abuthnin Walid bin Abdullah Tamirik 1. 30 January 2018      2. 15 February 2018      3. 11 March 2018      4. 23 April 2018      5. 20 May 2018      6. 19 July 2018      7. 6 September 2018      8. 18 October 2018      9. 22 November 2018      10. 23 December 2018      Annual Report The main purpose of Governance Committee includes the annual review of Board of Directors structure and Board Committees, and governance framework in the Bank, updating policies related to BoD and Board members, Bank's governance and conflict of interests, supporting and maintaining the application of the highest standards of corporate governance issued by SAMA and Corporate Governance Regulations issued by CMA, in addition to following up the application of Governance Manual and its appendixes, Bank's matrix of authorities, and following up the works of Management Committees. 2018 Governance Committee
96. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information 94 Corporate Governance Annual Report 2018 The Committee during its meetings discussed and considered the agenda within its annual plan as approved by the Board of Directors in addition to other related matters , which includes: yy Discussion of the annual Financial Statements with external auditors as of 31 December 2017. yy Discussion and approval of internal audit plan and compliance group programme for the year 2018. yy Discussed internal audit and compliance groups’ quarterly performance. yy Review the Bank’s quarterly Financial Statements. yy Review the level of implementation of recommendations reported by Internal Audit Group, external Auditors and regulatory supervisory team level of efforts made by the Bank’s management to implement such recommendations. yy Recommending for the appointment of the external auditors for the year 2018. yy Review the Bank’s policies and those policies pertain to overseas branches (Kuwait and Jordan) including reports issued by respective regulators. yy Discussion of the impact of IFRS 9 on the Bank. yy Review the Banks’ legal cases that has an impact on the Bank’s Financial Statements. Board Committees members (Non-Board members): No. Name Committee memberships Current positions Previous positions Qualifications Experience 1. Abdullah bin Ali Al Maneef Audit and Compliance Committee yy Member of Audit yy Chief Executive Officer – yy Bachelor of Held many academic, leading and advisory positions in financial and management fields and Compliance Committee – Al Rajhi Bank yy Member of Shura Council yy Member of the Arab Parliament Al Muneef Financial and Management Consultancy Office yy Advisor – National Guard yy Director General of Finance and Administration Affairs – National Guard Accounting – King Saud University yy Master Degree in Accounting – University of Southern California, USA yy Head of Accounting Department, yy PhD in Accounting King Saud University yy Associate Professor of Accounting Department, King Saud University yy Executive Director of Financial and Administrative Affairs – King Faisal Specialist Hospital yy Head of Accounting Association, King Saud University yy Assistant Professor of Accounting Department, King Saud University yy Lecturer at Accounting Department, King Saud University – University of South Carolina, USA
97. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information 95 Corporate Governance Name Committee memberships Current positions Previous positions Qualifications 2 . Farraj Bin Mansour Abuthnain Audit and Compliance Committee  Member of Audit  Director of Loan  Bachelor of Industrial Held many leading Astra Industrial Group  Board Member of Petrochem  Member of Audit Committee – Almarai Company Walid bin Abdullah Tmairak Audit and Compliance Committee  Member of Audit and Compliance Committee – Al Rajhi Bank Department – Industrial Development Fund  Member of the Project Loan Committee – Industrial Development Fund Management – University of Wisconsin – Milwaukee positions in the Saudi Industrial Development Fund  Member of the Industrial Projects Performance Audit Committee – Industrial Development Fund  Senior Vice President of Finance and Investment – National Industrialisation Company (Tasnee)  Arthur Andersen & Co  Ernst & Young  Member of  Bachelor of Accounting – King Abdulaziz University  Fellowship Has more than 25 years of experience in accounting, auditing and economics of SOCPA Audit Committee – Ewaan Global Residential Company  Member of Advisory Committee of College of Management and Economics – King Abdulaziz University  Tmairak is a Chartered Accountant Board Risk Management Committee This Committee was formed after the election of BoD in the current tenure. The purpose of BRMC is to assist Board of Directors in management of credit, market, operational, business, investment and financial businesses and reputational risks. Additionally, it includes the provision of consultation to the BoD with respect to the risk appetite and risk strategy, Internal Capital Adequacy Assessment Process (ICAAP), Internal Liquidity Adequacy Assessment Plan (ILAAP), credit policies, liquidity risk and market risk management policies, dealing with finance and liquidity limits. The Committee is also responsible for approving losses arising out of banking operations, fraud, system errors and compensation of customers that falls beyond the powers of the Risk Management Committee. Annual Report and Compliance Committee – Al Rajhi Bank  Board Member – 3. Experience 2018 No.
98. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information 96 Corporate Governance Annual Report 2018 The Committee held seven meetings during 2018 as follows : Meeting Date Khaled bin Abdulrahman Al Qwaiz Chairman Alaa bin Shakib Al Jabri member Hamza bin Othman Khushaim member 1. 2. 11 February 2018    19 March 2018   3.  9 April 2018    4. 13 May 2018    5. 18 July 2018    6. 23 October 2018    7. 16 December 2018    Procedure taken by the Board to inform its members, Non-Executive Directors in particular, of the shareholders' suggestions and remarks on the Company and its performance. ARB registers shareholders’ suggestions provided through the General Assembly and notifies the Chairman of any suggestions to be presented at the next Board meeting. In addition, there is an email address published on the Bank and Tadawul websites dedicated to receive comments and suggestions of shareholders which are delivered directly to the Board Secretary who presents same to the Board. Performance of the Board and Committees The Bank has an integrated mechanism with time frames to evaluate the work of the Board of Directors and its supporting committees. There is also a mechanism to use the findings of the evaluation. These are made use of in the nomination process for membership of the Board and Committees and in ascertaining future training needs. The methods used by the Board to evaluate BoD, Board Committees and their members’ performance: Governance Committee evaluates performance of Board, Board Committees and Board members via specific surveys on three different levels. Evaluation is conducted based on BoD terms of reference specified in ARB’s Governance Manual. Evaluation of Board Committees and Audit and Compliance Committee is conducted based on its approved charters. Evaluation of Board and Board Committee members is conducted by the respective members themselves. After that, Governance Committee raises the annual assessment report to Board of Directors to be approved. Finally, a copy of the final report is provided to Nominations and Compensations Committee. Remuneration and compensation of the Board members and Executive management The Bank pays the expenses and remuneration to Board members including the compensation they are entitled for attendance at Board meetings. It also pays salaries, remuneration and compensations to Senior Executives according to their contracts.
99. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information 1 . Board of Directors remuneration and compensations:  ARB’s Board members will receive a fixed annual remuneration of SAR 400,000 for their membership in ARB’s Board of Directors and their participation in its activities.  Board member will receive an attendance fee of SAR 5,000 for his attendance of each Board meeting either personally or through electronic remote channels.  ARB shall compensate Board members for their actual expenses paid to attend the Board meetings including travelling and accommodation expenses. 2. Remuneration and compensations of BoD members for their membership in Board Committees:  ARB’s Board members will not receive an additional remuneration for their membership in ARB’s Board Committees as the annual remuneration will include any other remuneration paid for the Director for his participation in any Board Committee.    Audit and Compliance Committee members will receive an attendance fee of SAR 5,000 for his attendance of each Committee meeting either personally or through electronic remote channels.  ARB shall compensate Committee members for their actual expenses paid to attend the Board meetings including travelling and accommodation expenses. 4. Granting shares:  ARB does not grant shares as remuneration for any Board, Board Committee and Audit Compliance Committee members. 5. Allocation and payment mechanisms for remuneration and compensation:  Board member will receive an attendance fee of SAR 5,000 for his attendance of each Board Committee either personally or through electronic remote channels. Remuneration and compensation for Board members and Non-Board members will be allocated annually based on recommendation from Nomination and Compensation Committee and approval of Board, amounts will then be presented to the next General Assembly meeting for ratification.  ARB shall compensate Board members for their actual expenses paid to attend the Committees’ meetings including travelling and accommodation expenses. Remuneration can vary to reflect the Director’s experience, independence and number of attended meetings among other criteria.  Attendance fees are paid annually to Directors based on their attendance sheets for Board, Board Committees, and Audit and Compliance Committee meetings.  Payments are done through bank transfers, cheques, or any other methods, and Directors are informed of details through relevant departments.  Remuneration and Compensations paid to directors should not exceed SAR 500,000 annually, payment of any additional due amounts will be stopped. Total amounts paid to Directors should not exceed 5% of total net profits. 3. Remuneration and compensations of Audit and Compliance Committee members:  Compliance Committee member from inside the Board shall not exceed the annual limits set by Policy for Remuneration and Compensation approved by ARB’s General Assembly. ARB’s Audit and Compliance Committee members, either from inside or outside the Board, will receive a fixed annual remuneration of SAR 150,000 for their membership in the Committee and his participation in its activities provided that annual remuneration for Audit and Annual Report a) Summary of significant items of policy for remunerations of BoD and Board Committees and executive management members 2018 97 Corporate Governance
100. Annual Report 2018 98 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Corporate Governance 6 . Remuneration and compensation of Senior Executives: The role of the Board of Directors includes, but not limited to, the following:      The Board of Directors is responsible for approving the overall design and oversight of all aspects of the remuneration system and shall not delegate this responsibility to management. Despite the establishment of the Board Nomination and Compensation Committee, the Board of Directors shall be ultimately responsible for promoting effective governance and sound remuneration practices. The Board of Directors shall review and, if satisfied, approve the Remuneration Policy and any of its subsequent revision/ updates, on the recommendation of the Nomination and Compensation Committee, taking into account, inter-alia, the Rules on Compensation Practices of May 2010 and any future updates or revisions, issued by Saudi Arabian Monetary Agency (SAMA). The Board of Directors shall review and, if satisfied, approve the recommendations of the Nomination and Compensation Committee regarding the level of remuneration of the key executives. The key executives for this purpose will include senior managers and all those executives whose appointments are subject to no objection by SAMA or other regulators. 7. Structure of remuneration and compensation granted to Senior Executives:  The Remuneration structures for various levels of employees should be designed to promote effective risk management and achieve remuneration and compensation objectives.  The mix of forms of remuneration should vary depending on the employees position and role, and may include cash, equity and other forms of compensation.  The proportion of fixed and variable components of remuneration for different business lines may be determined taking into account the nature and level of responsibilities of an employee, business area in which he/she is working and the overall philosophy of the Remuneration Policy of the Bank. The Bank should ensure that the total variable remuneration does not limit its ability to strengthen the capital base.  The remuneration structure of employees working in control functions such as risk management, compliance, internal control, etc. Should be designed to ensure objectivity and independence of these functions. In this regard, it should be ensured that performance management and determination of remuneration of such employees are not dealt with by any person working in/associated with the business areas monitored by them.  The determination of the bonus pool should take into account the overall performance of the Bank whereas its distribution to individual employees should be based on performance of the employees as well as that of the business unit or division in which he/she is working. There should, however, be no guaranteed minimum bonuses and similar other payments, other than an employee’s salary, that are not based on performance.  The Bank may as part of the Remuneration Policy, provide deferment of a reasonable proportion of performance bonus with a minimum vesting period of not less than three (3) years. The proportion of the bonus to be deferred and the vesting period should be determined based on the nature of the business, its risks and the activities of the concerned employee. The Board of Directors shall ensure that the Management has put in place elaborate systems and procedures and an effective oversight mechanism to ensure compliance of the SAMA Rules on Compensation Practices and the FSB Principles and Standards.
101. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information  deferring the joining bonuses, on terms similar to the deferred bonuses foregone from the previous company.  Joining bonuses are not permitted, unless clearly aligned with long-term value creation and prudent risk taking. Any such payments should be related to performance achieved over time and designed in a way that does not reward failure. Joining bonuses should be at least linked to successful completion of probation period and where possible, The Bank should demand from their employees that they commit themselves not to use personal hedging strategies or remunerations and liability-related insurance to undermine the risk alignment effects embedded in their remuneration and compensation arrangements. The Bank confirms that there are no material deviations between granted remunerations and applicable remunerations policy. b) Remuneration and compensation paid to members of BoD, Board Committees, Audit and Compliance Committee in 2018: Board meetings No. Name 1. BACC meetings No. Amount No. Amount Abdullah bin Sulaiman Al Rajhi 7 35,000 – 2. Saleh bin Ali Abdullah Aba Alkhail 7 35,000 3. Abdulaziz bin Khaled Al Ghefaily 7 4. Khalid bin Abdulrahman Al Quaiz 5. Bader bin Mohammed Al Rajhi 6. Alaa bin Shakib Al Jabri 7. Ibrahim bin Fahad Al Ghefaily 8. Raid bin Abdullah Al Tamimi 9. Hamza bin Othman Khushaim ExCom meetings NCC meetings Governance Committee meetings BRMC Special Committees No. Amount No. Amount No. Amount No. Amount No. Amount – 12 60.000 – – – – – 11 55.000 – – 35,000 – – 12 60.000 7 35,000 – – – 7 35,000 – – – 7 35,000 – – 10 7 35,000 – – – 7 35,000 – – – – – 12 Total (SAR) Total paid to the member as per the Policy (SAR) – – – – 400.000 495.000 495.000 4 20.000 – – – – 400.000 510.000 500.000 2 10.000 – – – – – – 400.000 505.000 500.000 – 2 10.000 – – 6 30.000 – – 400.000 475.000 475.000 – – – – – – – 3 15.000 400.000 450.000 450.000 2 10.000 – – 6 30.000 4 20.000 400.000 545.000 500.000 – – – 4 20.000 – – – – 400.000 455.000 455.000 – 2 10.000 4 20.000 – – – – 400.000 465.000 465.000 – – – – 6 30.000 7 35.000 400.000 560.000 500.000 50.000 7 35,000 10. Ameen bin Fahad Al Sheddi 7 35,000 11 55,000 – – – – – – – – 4 20.000 550.000 660.000 500.000 11. Abdullatif bin Ali Al Saif 7 35,000 10 50,000 – – – – – – – – 3 15.000 550.000 650.000 500.000 12. Abdullah bin Ali bin Ali Al Manif – – 10 50,000 – – – – – – – – – – 150.000 200.000 200.000 13. Waleed bin Abdullah Tmairak – – 11 55,000 – – – – – – – – – – 150.000 205.000 205.000 – – – – – – – – – – – – 150.000 200.000 200.000 21 105.000 5.150.000 6.375.000 5.945.000 14. Faraj bin Mansour Abu Thnain Total 77 385.000 10 50,000 52 260.000 60.000 – Annual Bonus 57 285.000 8 40.000 12 60.000 18 90.000 2018 Where the Remuneration Policy provides for payment of a part of the compensation in shares, it should also lay down the criteria to be used for determining the value for allocation of shares. Furthermore, the payouts in shares should be subject to an appropriate share retention policy. Annual Report  99 Corporate Governance
102. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Annual Report 2018 100 Corporate Governance c ) Remunerations and compensations paid to five Senior Executives who have received highest remunerations from the Company including CEO and CFO in 2018. Description Five Senior Executives (CEO and CFO included) Salaries and compensations 9,765,000 Allowances 5,085,744 Periodic and annual rewards 35,228,250 Incentives schemes – Any other in-kind compensations or benefits paid annually or monthly – Total 50,078,994 Any penalty, precautionary measure, or precautionary legal binding imposed on the Bank by CMA or any other supervisory, regulatory, judicial authority Fines imposed by CMA: NIL Fines imposed by SAMA: Violation Violations of SAMA supervisory instructions SAMA instructions related to customer protection SAMA instructions related to due-diligence Fiscal year 2018 Fiscal year 2017 Number of resolutions Total amount of fines in Saudi Riyal Number of resolutions Total amount of fines in Saudi Riyal 43 15,864,000 34 2,315,000 1 10,000 – – – – – – – SAMA instructions related to service level of ATMs and POSs 2 227,377 – SAMA instructions related to due diligence in AML and TF 1 120,000 3 450,000
103. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information 101 Corporate Governance Increase of building area percentage for ATMs , lack of setbacks, visible advertising posters on branches facades and ATMs, and non-existence of licenses for some bank’s locations Internal control The Bank’s Management is responsible for designing an appropriate internal control system through the Board of directors direct supervision to ensure availability of effective controls in mitigating those risks may impact achieving the Bank’s strategic and operating objectives. The Bank’s executive management has adopted a comprehensive internal control system aligned with SAMA regulatory requirements. The Bank has developed and approved a governance framework, which is the mandate for preparing and updates controls requirements including defining roles and responsibilities at the Bank’s different levels including Board of Directors and Board committees and other committees.  The Bank has group of policies and procedures that govern its business activities, which subject to a periodic updates to ensure it’s completeness, efficiency and appropriateness to Bank’s activities. Fiscal year 2018 Total amount of fines in Saudi Riyal Total amount of fines in Saudi Riyal 2,044,500 1,588,000  Most of the Bank’s operating activities carried out automatically through different core system, which minimizes manual errors and fraud incidences opportunities.  Oversight on the Bank’s activities and important decisions taken through committees established to ensure that the Bank’s activities carried out appropriately in order to safeguard the Bank’s assets.  The Bank has dedicated specialized functions on evaluating the effectiveness of the Bank’s internal control systems, which includes internal audit, compliance, anti-fraud and other risks management functions.  Existence of an effective Audit and Compliance Committee supervising internal and External Auditors activities in order to support and promote their independence. This Committee receives regular and periodic reports on audits carried out on different functions within the Bank.  Regular reviews on the efficiency and adequacy of the internal control system is carried out by Internal Audit based on an annual plan approved by the Audit and Compliance Committee beside reviews of effectiveness of internal control by the External Auditors and supervisory reviews conducted by the SAMA. The following are some of the key components of the Bank’s internal control system:  Fiscal year 2017 Annual Report Violation 2018 Fines imposed by Ministry of Municipal and Rural Affairs:
104. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Annual Report 2018 102 Corporate Governance Annual review of internal control procedures During 2018 , the Bank explored all possible efforts to ensure appropriateness and effectiveness internal control in order to be in line with the requirements of internal control issued by SAMA. Furthermore, the Bank’s activities carried out during the year 2018, which included a review of effectiveness of internal controls systems in addition to existence of necessary tools, systems and procedures to identify, assessing and mitigating high risks being faced by the Bank. As a result, no material weaknesses have been identified negatively impacts appropriateness of internal control environment. Based on the outcome of assessment of the Bank’s internal control effectiveness ,the Bank has an adequate internal control system that operates appropriately and being reviewed on a continues basis. It should be noted that despite of effective design and effectiveness, no absolute assurance can be provided on the effectiveness of internal control system. Core Announcements The following are the main Al Rajhi Bank announcements that have been published on the Saudi Stock Exchange (Tadawul) website during 2018: No. The announcements 1. Al Rajhi Bank announces the outcome of the settlements for Zakat claims with General Authority of Zakat & Tax (GAZT ) 20 December 2018 2. AL Rajhi Bank Announcement on the Relocation of its Principal Office 20 December 2018 3. Al Rajhi Bank announces the appointment of the Deputy Chairman and the appointment of a Deputy Chief Executive Officer (CEO) 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. Al Rajhi Bank announces its interim financial results for the period ending on 30 September 2018 (nine months) Date 5 November 2018 24 October 2018 Al Rajhi Bank announces the interim financial results for the period ending on 30 June 2018 (six months) 26 July 2018 Al Rajhi Bank announces the distribution of dividend for period first half of 2018 15 July 2018 Clarifying announcement for Al Rajhi Bank announces the interim financial results for the period ending on 31 March 2018 (three months) 1 May 2018 Al Rajhi Bank announces the interim financial results for the period ending on 31 March 2018 (three months) 1 May 2018 Al Rajhi Bank announces its results of the 29th Ordinary General Meeting (Second meeting) 26 March 2018 Al Rajhi Bank invites its shareholders to attend the 29th Ordinary General meeting (1st meeting) (reminder) 21 March 2018 Al Rajhi Bank invites its shareholders to attend the 29th Ordinary General Meeting (1st meeting) 15 March 2018 Al Rajhi Bank announces that the Board of Directors has recommended the distribution of dividend for period the second half of 2017 18 February 2018 Al Rajhi Bank announces the annual financial results for the period ending on 31 December 2017 (twelve months) 11 February 2018
105. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information 103 Corporate Governance Historical information of General Assembly meetings during the fiscal year : Attendance record No. Name Ordinary AGM number 29 on 25 March 2018 1. Abdullah bin Sulaiman Al Rajhi  2. Salah bin Ali Aba Alkhail  3. Alaa bin Shakib Aljabri  4. Khaled bin Abdulrahman Alqwaiz  5. Amin bin Fahad Alshiddi  6. Bader bin Mohammed Al Rajhi (Representative of Mohammed Abdulaziz Al Rajhi & Sons Investment Co.)  7. Abdullatif bin Ali Alseif (Representative of Public Pension Agency)  8. Hamza bin Othman Khushaim (Representative of GOSI)  9. Abdulaziz bin Khalid A Alghefaily  10. Raid bin Abdullah Al Tamimi  11. Ibrahim bin Fahad Alghefaily  Annual Report The Bank always adheres to the concerned Government regulations in all matters relating to Ordinary General Assembly and Extraordinary ones. All regulatory provisions are accompanied by sufficient information to enable shareholders to make their decisions. 2018 General Assembly
106. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Annual Report 2018 104 Corporate Governance Bank ’s significant plans, decisions and the future expectations Arabian Monetary Authority (SAMA) directions as follows: ARB maintains its leading position in retail as its market share represents 36.4% of total retail loans granted in Q3 2018. The Bank intends to enhance its leadership in this sector by increasing finance portfolio in general and real estate finance in particular. The Bank intends to initiate investment in the latest technology to ensure providing the best banking services and products as well as expanding customer base by expanding branch network and electronic banking channels. a. The due Zakat amounts scheduled to be paid by shareholders are calculated and the Bank pays such amounts to competent parties. Bank’s dividends distribution policy The Bank distributes the specified annual net profits, after deduction of all general expenses and other costs and arranging the necessary provisions to confront doubtful debts, investment losses and urgent commitments for which the Board of Directors evaluates the risk level under the Banking Control Law and Saudi b. The Bank transfers not less than 25% of the remaining net profits to the following year after deducting the Zakat of the statutory reserve to ensure that the mentioned reserve becomes equal–at least–to the paid capital. c. Of the remaining profits, not less than 5% of the paid capital after deducting the statutory reserves and Zakat to be distributed to shareholders according to recommendations of the Board of Directors and decisions of the General Assembly. If the percentage left from the profits due to shareholders is insufficient to pay the above-mentioned percentage, the shareholders may not claim to pay it during the next year(s) and the General Assembly may not decide to distribute a percentage of profit greater than the one proposed by the Board of Directors. d. After allocating the amounts mentioned in items (a), (b) and (c); the remaining amount will be used according to the recommendation of the Board of Directors and the decision of the General Assembly. Distribution of dividends Profits distributed during the year Percentage of dividend to share book value Total 18 July 2018 Percentage of profits to be distributed at the end of the year Total profits 20 22.5 42.5 3,250,000 3,656,000.25 6,906,000.25
107. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information No . Name of beneficiary Number of Ownership shares at beginning of year 2018 % 1. Abdullah bin Sulaiman Al Rajhi 2. Salah bin Ali bin Abdullah Abal Khail 3. GOSI 4. Abdulaziz bin Khaled bin Ali Al Ghefaily 5. Mohammed Abdulaziz Al Rajhi & Sons Co. for investment 33,343,641 2.052 6. Bader bin Mohammed Al Rajhi, (representative of Mohammed Abdulaziz Al Rajhi & Sons Co. for investment) 11,207 0.001 7. Khaled bin Abdulrahman Al Qoaiz 1,000 0.000 1,000 0.000 – 0.00 8. Alaa bin Shakib Al Jabiri 6,000 0.000 6,000 0.000 – 0.00 9. Ibrahim bin Fahad ALGhofaily 459,981 0.028 459,981 0.028 – 0.00 10. Raeed bin Abdullah AlTamimi 1,000 0.000 1,000 0.000 – 0.00 11. Abdulatif bin Ali AlSeif Representative of Public Pension Agency 40,000 0.002 40,000 0.002 – 0.00 12. Hamzah bin Othman Khushaim representative of GOSI – 0.000 – 0.000 – 0.00 13. Ameen bin Fahad AlShddi – 0.000 – 0.000 – 0.00 Number of Ownership Net shares at end change of year 2018 % 35,221,483 2.167 35,221,483 2.167 1,460,000 0.090 1,470,000 0.090 165,667,525 10.195 165,667,525 10.195 – 0.00 0.000 – 0.00 33,343,641 2.052 – 0.00 11,207 0.001 – 0.00 – 0.000 – – % of change 10,000 0.00 0.68 Description of any interest, contractual papers and subscription rights of Senior Executives and their relatives in Bank’s shares or debit instruments. No. Name of beneficiary Number Ownership of shares (at beginning of 2018) % Number Ownership of shares (at end of 2018) % 1. Abdullah bin Ali Alkhalifa 2,455 0.000 10,228 2. Christopher Mark Macleen 2,209 0.000 9,204 Net Change % of change 0.001 7,773 316.62 0.001 6,995 316.66 Annual Report Description of any interest, contractual papers and subscription rights of Board members and their relatives in Bank’s shares or debit instruments: 2018 105 Corporate Governance
108. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information 106 Corporate Governance Annual Report 2018 Board sessions and attendance The Board of Directors held seven sessions during 2018 : Number of meetings (7) No. Member name 1. Abdullah bin Sulaiman Al Rajhi        2. Salah bin Ali Aba Alkhail        3. Abdulaziz bin Khaled Al Ghefaily        4. Bader bin Mohamed Al Rajhi        5. Khaled bin Abdulrahman Al Qwaiz        Alaa bin Shakib Al Jabri        Ibrahim Fahad Al-Ghefaily        Amin bin Fahad Al Shiddi        Hamza bin Othman Khushaim        Raid bin Abdullah Al-Tamimi        Abdullatif bin Ali Al Seif        6. 7. 8. 9. 10. 11. First Second meeting meeting 25 February 25 March 2018 2018 Third meeting 14 May 2018 Fourth Fifth meeting meeting 17 July 22 October 2018 2018 Sixth Seventh meeting meeting 23 October 20 December 2018 2018
109. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information 107 Corporate Governance No . Request date Request reasons 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 1 January 2018 3 January 2018 5 February /2018 1 March 2018 22 March 2018 27 March 2018 3 April 2018 1 May 2018 5 June 2018 2 July 2018 18 July 2018 3 September 2018 4 October 2018 4 November 2018 5 December 2018 Updating shareholders records Updating shareholders records Updating shareholders records Updating shareholders records Preparing to Extraordinary General Assembly Dividend distribution Updating shareholders records Updating shareholders records Updating shareholders records Updating shareholders records Preparing a file for shareholders eligible for dividend of H1 2018 Updating shareholders records Updating shareholders records Updating shareholders records Updating shareholders records Related party transactions In the ordinary course of business, the Bank transacts business with related parties. The related party transactions are governed by the regulations issued by the regulators in the Kingdom of Saudi Arabia. The Bank has disclosed such transactions in Note 30 of its closing Financial Statements for 2018. The nature and balances resulting from such transactions for the year ended 31 December 2018 are as follows (all amounts are in thousand Saudi Riyals). Related party Loans and advance payments Potential obligations Current accounts Contributions receivable Debtors against liabilities Bank’s balances Income from finance and other income Mudaraba fees Employees’ salaries and benefits (air tickets) Rental expenses Contributions – policies written Incurred and reported claims during the year Paid claims Board members remunerations Short-term benefits End of service provision Balances resulting from the transaction 10,312,909 6,929,817 77,788 252,706 144,640 274,705 139,496 68,272 4,142 2,238 1,059,392 900,207 905,840 5,945 85,579 11,536 Annual Report 2018 Bank requests for shareholders’ register
110. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Annual Report 2018 108 Corporate Governance Information of 2018 transactions and contracts in which the Bank is a party and any of Board members or senior executives , or any of their related parties has an interest: Commercial and services contracts (Figures are in SAR) No. Related party Party with direct indirect interest 1. Fursan Travel & Tourism Co. 2. Position in ARB Type of relation with related party Relation type Period Conditions Transactions/ contracts amount SAR Abdullah bin Board Sulaiman Al Rajhi member Owned by Board member Travel tickets for employees contract Pricing contract and annually renewable Standard conditions without preferences 4,141,611 STC Amin bin Fahad Alshiddi Board member Senior executive in the company Integrated Pricing communications contract services and solutions for two years contract – SMS services Standard conditions without preferences 36,708,895 3. STC Amin bin Fahad Alshiddi Board member Senior executive in the company Pricing Integrated contract communications services and solutions for three years contract – rented lines Standard conditions without preferences 55,450,171 4. STC Amin bin Fahad Alshiddi Board member Senior executive in the company Contract and services Pricing for connecting PoS contract devices to network and annually renewable Standard conditions without preferences 28,208,748 5. Arabian Internet and Telecom Services (STC Solutions) Amin bin Fahad Alshiddi Board member He has an influence on company’s decisions as he is a senior executive in the parent company (STC) Internet services contract Annual contract Standard conditions without preferences 1,512,000 6. Arabian Internet and Telecom Services (STC Solutions) Amin bin Fahad Alshiddi Board member He has an influence on company’s decisions as he is a senior executive in the parent company (STC) Supply, instalation and maintenance of devices Dell-EMC contract 4 years Standard conditions without preferences 75,111,584 7. Global Beverage Bader bin Holding Company Mohammed Al Rajhi Board member Chairman of the company’s Board of Directors Bottled water supply services Annual contract (as per the best quotation) Standard conditions without preferences 299,987
111. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Rental contracts (Figures are in SAR) No. Related party Party with direct indirect interest Position in ARB Type of relation with related party Relation type Period Conditions Transactions/ contracts amount SAR 1. Panda Retail Co. Abdulaziz bin Khaled Ali Alghefaily Board member A Board member in the company ATM site rent contract 5 years – annually renewable for similar period Rent contract 45,000 2. Panda Retail Co. Abdulaziz bin Khaled Ali Alghefaily Board member A Board member in the company ATM site rent contract 5 years – annually renewable for similar period Rent contract 25,000 3. Panda Retail Co. Abdulaziz bin Khaled Ali Alghefaily Board member A Board member in the company ATM site rent contract 5 years – annually renewable for similar period Rent contract 35,000 4. Panda Retail Co. Abdulaziz bin Khaled Ali Alghefaily Board member A Board member in the company ATM site rent contract 5 years – annually renewable for similar period Rent contract 40,000 5. Mohammed Abdulaziz Al Rajhi & Sons Investment Co. Bader bin Mohammed Abdulaziz Al Rajhi Board member A Board member in the company Southern region management building rent contract 10 years – annually Rent contract renewable for similar period 245,542 6. Mohammed Abdulaziz Bader bin Al Rajhi & Sons Mohammed Investment Co. Abdulaziz Al Rajhi Board member A Board member in the company Contract for renting direct sales office in Abha 9 years – annually renewable for similar period Rent contract 40,000 7. Mohammed Abdulaziz Bader bin Al Rajhi & Sons Mohammed Investment Co. Abdulaziz Al Rajhi Board member A Board member in the company ATM site rent contract 5 years – annually renewable for similar period Rent contract 35,000 8. Abdullah bin Sulaiman Al Rajhi – – A Board member in the Bank ATM site rent contract 3 years – annually renewable for similar period Rent contract 90,000 9. Abdullah bin Sulaiman Al Rajhi – – A Board member in the Bank Albatha’a exchange & remittance centre rent contract 3 years – annually renewable for similar period Rent contract 550,000 10. STC Amin bin Fahad Alshiddi Board member A senior executive in the company ATM site rent contract 2 years – annually renewable for similar period Rent contract 30,000 11. STC Amin bin Fahad Alshiddi Board member A senior executive in the company ATM site rent contract 3 years – annually renewable for similar period Rent contract 30,000 Annual Report 2018 109 Corporate Governance
112. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information 110 Corporate Governance 2018 (Figures are in SAR) Annual Report Insurance Contracts No. Related party Party with direct indirect interest Position in ARB 1. Al Rajhi Co. for Cooperative Insurance Abdullah bin Sulaiman Abdulaziz Al Rajhi Board A Board member member in the company Comprehensive insurance Annual for banks, properties, work contracts disruption, managers and executives Standard conditions without preferences 2. Al Rajhi Co. for Cooperative Insurance Abdullah bin Sulaiman Abdulaziz Al Rajhi Board A Board member member in the company Comprehensive insurance for cars No preferred conditions or benefits Type of relation with related party Relation type Period Conditions Annual contracts Transactions/ contracts amount SAR 7,665,921 1,051,726,079 Regulatory payments The Bank’s regulatory payments during the year consisted of Zakat due by shareholders, taxes, amounts paid to the General Organisation for Social Insurance (GOSI), Visa and Passport costs etc. Details of payments made during the year are given below: 2018 Description Paid Payable until the end of the financial period (not paid) Brief description Reasons Zakat 1,081,054,185 – Paid – Tax 29,181,464.05 – Paid – VAT 110,120,152.12 – Paid GOSI 247,939,702.00 – Paid – 828,704.00 – Paid – 6,028,289.00 – Paid – Visa and Passports costs Ministry of Labour Fees There were no amounts due for the financial period but unpaid.
113. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information The Bank provides its employees with a number of benefits which are paid during or at the end of their service according to Saudi Labour Law and Bank policies . The provision for employees’ end of service benefits is accrued using accrual valuation according to Saudi Labour Law and local regulatory requirements. The provision for end of service benefits stood at SAR 848 Mn. Al Rajhi Bank also grants free shares to its senior employees and those of its subsidiary companies who are seen as valuable human assets. This helps to ensure the long-term commitment of these employees. Granting of shares is based on the approval of the Board of Directors upon their commendation of the Nomination and Remuneration Committee. The Board of Directors has not recommended replacing the External Auditors before the end of their contract. Acknowledgment of Board of Directors According to the available information, Auditor’s report, and current market data, the Board of Directors acknowledge the following:  Accounting records have been prepared properly.  Internal control system has been prepared based on proper fundamentals and executed efficiently.  There is no doubt about the Bank’s ability to continue its business. Books of Accounts Conclusion The Consolidated Financial Statements are prepared in accordance with the Accounting Standards for Financial Institutions promulgated by SAMA and the International Financial Reporting Standards (IFRS). The Bank also prepares its Consolidated Financial Statements to comply with the requirements of Banking Control Law and the Companies Law in the Kingdom of Saudi Arabia, and the Bank’s Articles of Association. The Board of Directors is pleased to express their pride in the positive results achieved by the Bank in 2018. On this occasion, the Board would like to convey its appreciation to the Custodian of the Two Holy Mosques, Crown Prince, and our wise Government. Basel 3 Certain qualitative and quantitative disclosures are published by ARB. These disclosures are available in the Annual Basel Report and are available on the ARB website (www.alrajhibank.com.sa). Auditors During the Ordinary General Assembly of shareholders, PricewaterhouseCoopers and KPMG Al Fozan and Partners were designated as Auditors of the Bank’s accounts for the fiscal year 2018. The next General Assembly will designate the External Auditors for the fiscal year of 2019, based on a recommendation from the Audit and Compliance Committee. The Board would also like to express its sincere appreciation to the Ministry of Finance, Ministry of Commerce & Investment, Saudi Arabian Monetary Authority (SAMA) and the Capital Market Authority (CMA) for their consistent cooperation and support in developing the banking sector, which manifests itself in the reinforcement and growth of the national economy. The Board would also like to seize this opportunity to express its gratitude and appreciation to the honorable shareholders, customers and correspondents for their support, trust and cooperation, which has led to the achievement of further advancement and prosperity for the Bank. Last but not least, the Board would like to present its sincere appreciation to all the Bank employees for their loyal efforts and devotion in accomplishing their obligations and tasks. In addition, the Bank extends its appreciation to Sharia Board members for their loyal efforts and effective contributions to the Bank’s business. Annual Report Employee Benefits and Plans 2018 111 Corporate Governance
114. Annual Report 2018 112 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Corporate Governance
115. 114 Consolidated Statement of Financial Position 120 Consolidated Statement of Income 121 Consolidated Statement of Comprehensive Income 122 Consolidated Statement of Changes in Shareholders ’ Equity 123 Consolidated Statement of Cash Flows 124 Notes to the Consolidated Financial Statements 125 Basel 3 Qualitative and Quantitative Disclosures 205 113 2018 Independent Auditors’ Report Annual Report Financial Reports
116. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information KPMG Al Fozan & Partners Certified Public Accountants 114 2018 Annual Report Independent Auditors’ Report Independent auditors’ report on the audit of the consolidated financial statements to the shareholders of Al Rajhi Banking and Investment Corporation (a Saudi Joint Stock Company) Opinion We have audited the consolidated financial statements of Al Rajhi Banking and Investment Corporation (“the Bank”) and its subsidiaries (collectively referred to as “the Group”), which comprise the consolidated statement of financial position as at 31 December 2018, and the consolidated statement of income, consolidated statement of comprehensive income, consolidated statement of changes in shareholders’ equity and consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at 31 December 2018, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (“IFRS”) as modified by the Saudi Arabian Monetary Authority (“SAMA”) for the accounting of zakat and income tax. Basis for opinion We conducted our audit in accordance with the International Standards on Auditing that are endorsed in the Kingdom of Saudi Arabia. Our responsibilities under those standards are further described in the Auditors’ responsibilities for the audit of the consolidated financial statements section of our report. We are independent of the Group in accordance with the professional code of conduct and ethics as endorsed in the Kingdom of Saudi Arabia that are relevant to our audit of the consolidated financial statements, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements for the current year. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. For each matter below, a description of how our audit addressed the matter is provided in that context:
117. Key audit matter Impairment of financing As at 31 December 2018 , the gross financing of the Group amounted to SAR 241.9 billion against which an impairment allowance of SAR 7.8 billion was maintained. Effective 1 January 2018, the Group has adopted IFRS 9 – “Financial Instruments” which introduced a forward-looking, expected credit loss (“ECL”) impairment model. On adoption, the Group has applied the requirements of IFRS 9 retrospectively without restating the comparatives. The adoption of IFRS 9 resulted in a reduction of the Group’s equity on 1 January 2018 by SAR 2.9 billion. The impact of transition is explained in note 3a) to the consolidated financial statements. We considered this as a key audit matter, as the determination of ECL involves significant management judgment and this has a material impact on the consolidated financial statements of the Group. The key areas of judgment include: 1. Categorisation of financing into Stages 2 and 3 based on the identification of: (a) exposures with significant increase in credit risk (“SICR”) since their origination; and (b) individually impaired/defaulted exposures. 2. Assumptions used in the ECL model for determining probability of default (“PD”), loss given default (“LGD”) and exposure at default (“EAD”), including but not limited to assessment of the financial condition of the counterparty, expected future cash flows and forward-looking macroeconomic factors. 3. The need to apply additional overlays to reflect current or future external factors that might not be captured by the ECL model. 4. Disclosures resulting from the adoption of IFRS 9 and the related incremental disclosures of IFRS 7. Refer to the summary of significant accounting policies note 3a) to the consolidated financial statements for the adoption of IFRS 9 – Financial Instruments and impairment of financial assets; note 2d)i) which contains the disclosure of critical accounting judgments, estimates and assumptions relating to impairment losses on financial assets and the impairment assessment methodology used by the Group; note 7 which contains the disclosure of impairment against financing; and note 27a) for details of credit quality analysis and key assumptions and factors considered in the determination of ECL . How our audit addressed the key audit matter We have obtained an understanding of management’s assessment of impairment of financing including the IFRS 9 implementation process, the Group’s internal rating model, the Group’s impairment allowance policy and the ECL modelling methodology. We compared the Group’s impairment allowance policy and ECL methodology with the requirements of IFRS 9. We assessed the design and implementation, and tested the operating effectiveness, of controls over: – the modelling process, including governance over monitoring of the models and approval of key assumptions; – the classification of borrowers into various stages (including timely identification of SICR and determination of default or individually impaired exposures); and – the integrity of data inputs into the ECL model. We assessed the Group’s criteria for determination of SICR and identification of impaired/default exposures and their classification into stages. For a sample of customers, we assessed: – the internal ratings determined by the management based on the Group’s internal rating model, and checked that these ratings were in-line with the ratings used in the ECL model; – the staging as identified by management; and – management’s computations of ECL. We assessed the underlying assumptions, including forward looking assumptions, used by the Group in ECL calculations. Where management overlays were used, we assessed those overlays and the governance process around such overlays. We tested the completeness of data underlying the ECL calculation as at 31 December 2018. Where relevant, we involved specialists to assist us in the review of model calculations and data integrity. As the Group has used the modified retrospective approach for adoption of IFRS 9, we performed all the above mentioned tasks to evaluate management’s computation of ECL adjustment to the Group’s equity as at 1 January 2018 (as a result of adoption of IFRS 9). We assessed the adequacy of disclosures in the consolidated financial statements. 2018 KPMG Al Fozan & Partners Certified Public Accountants 115 Independent Auditors’ Report Annual Report About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information
118. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information KPMG Al Fozan & Partners Certified Public Accountants 116 2018 Annual Report Independent Auditors’ Report Key audit matter Fees from banking services The Group charges administrative fees upfront to borrowers in respect of financing transactions. All such fees are an integral part of generating an involvement with the resulting financial instrument and therefore, these fees should be considered as part of the effective yield on financing and recognised within ‘Gross financing and investment income’. However, due to the large volume of transactions with mostly individually insignificant fee amounts, management used certain assumptions and thresholds for recognition of such fees and classified them within “Fee from banking services, net”. We considered this as a key audit matter since the use of management assumptions and judgments could result in material misstatement to the consolidated financial statements, as they affect the timing and recognition of fees. Refer to the summary of significant accounting policies note 3e) to the consolidated financial statements. How our audit addressed the key audit matter We performed the following audit procedures: – We assessed the design and implementation and tested the operating effectiveness of key controls over the consistent application of management’s assumptions and thresholds for recognition of fee income. – We evaluated the assumptions and thresholds used by management for making adjustments to the effective yield of financing and checked the recording of such adjustments. – We obtained management’s assessment of the impact of the use of assumptions and thresholds and performed the following: – on a sample basis, traced the historical and current year data used by management to the underlying accounting records; and – assessed management’s estimation of the impact of fees on ‘Fee from banking services, net’ and classification in ‘Gross financing and investment income’.
119. Other information included in the Group ’s 2018 annual report The Board of Directors (“the Directors”) is responsible for the other information. Other information consists of the information included in the Group’s 2018 annual report, other than the consolidated financial statements and our auditors’ report thereon. The annual report is expected to be made available to us after the date of this auditors’ report. Our opinion on the consolidated financial statements does not cover the other information, and we do not and will not express any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above when it becomes available and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. When we read the other information, if we conclude that there is a material misstatement therein, we are required to communicate the matter to those charged with governance. Responsibilities of the Directors and those charged with governance for the consolidated financial statements The Directors are responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS as modified by SAMA for the accounting of zakat and income tax, applicable requirements of the Regulation for Companies, the Banking Control Law in the Kingdom of Saudi Arabia and the Bank’s By-Laws, and for such internal control as the Directors determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, the Directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Group’s financial reporting process. Auditors’ responsibilities for the audit of the consolidated financial statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the International Standards on Auditing that are endorsed in the Kingdom of Saudi Arabia will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. 2018 KPMG Al Fozan & Partners Certified Public Accountants 117 Independent Auditors’ Report Annual Report About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information
120. Annual Report 2018 118 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Independent Auditors ’ Report KPMG Al Fozan & Partners Certified Public Accountants As part of an audit in accordance with the International Standards on Auditing that are endorsed in the Kingdom of Saudi Arabia, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:  Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error; design and perform audit procedures responsive to those risks; and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.  Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.  Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Directors.  Conclude on the appropriateness of the Directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors’ report. However, future events or conditions may cause the Group to cease to continue as a going concern.  Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.  Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Group audit. We remain jointly responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and communicate to them all relationships and other matters that may reasonably be thought to bear on our independence and, where applicable, related safeguards.
121. Report on other legal and regulatory requirements Based on the information that has been made available to us , nothing has come to our attention that causes us to believe that the Bank is not in compliance, in all material respects, with the applicable requirements of the Regulation for Companies, the Banking Control Law in the Kingdom of Saudi Arabia and the Bank’s By-Laws in so far as they affect the preparation and presentation of the consolidated financial statements. PricewaterhouseCoopers P O Box 8282 Riyadh 11482 Kingdom of Saudi Arabia KPMG Al Fozan & Partners Certified Public Accountants P O Box 92876 Riyadh 11663 Kingdom of Saudi Arabia Omar M. Al Sagga Certified Public Accountant Registration No. 369 Abdullah Hamad Al Fozan Certified Public Accountant License No. 348 5 Jumada II 1440H (10 February 2019) 2018 From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements for the year ended 31 December 2018 and are therefore the key audit matters. We describe these matters in our auditors’ report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Annual Report KPMG Al Fozan & Partners Certified Public Accountants 119 Independent Auditors’ Report About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information
122. Consolidated Statement of Financial Position 120 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Notes 2018 (SAR ’000) 2017 (SAR ’000) Cash and balances with Saudi Arabian Monetary Authority (“SAMA”) and other central banks 4 43,246,043 48,282,471 Due from banks and other financial institutions 5 30,808,011 10,709,795 As at 31 December Annual Report 2018 Assets Investments, net 6 43,062,565 36,401,092 Financing, net 7 234,062,789 233,535,573 Property and equipment, net 8 8,897,587 7,858,127 Investment properties, net 9 1,297,590 1,314,006 10 3,629,245 5,015,464 365,003,830 343,116,528 11 7,289,624 5,522,567 Customers’ deposits 12 293,909,125 273,056,445 Other liabilities 13 15,251,063 8,786,598 316,449,812 287,365,610 14 16,250,000 16,250,000 Statutory reserve 15 16,250,000 16,250,000 Other reserves 15 (349,555) 5,281,682 12,747,323 13,906,736 3,656,250 4,062,500 48,554,018 55,750,918 365,003,830 343,116,528 Other assets, net Total assets Liabilities and Shareholders’ Equity Liabilities Due to banks and other financial institutions Total liabilities Shareholders’ equity Share capital Retained earnings Proposed dividends 23 Total shareholders’ equity Total liabilities and shareholders’ equity The accompanying Notes from pages 125 to 204 form an integral part of these consolidated financial statements. Chairman Chief Executive Officer Chief Financial Officer
123. Notes 2018 (SAR ’000) 2017 (SAR ’000) Gross financing and investment income 17 13,759,457 12,581,004 Return on customers’, banks’ and financial institutions’ time investments 17 (506,724) (551,587) Net financing and investment income 17 13,252,733 12,029,417 Fee from banking services, net 18 3,101,286 2,697,208 755,804 841,839 209,695 336,390 17,319,518 15,904,854 2,809,449 2,813,918 314,567 311,015 For the years ended 31 December 121 Consolidated Statement of Income About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Exchange income, net Other operating income, net 19 Total operating income Expenses Salaries and employees’ related benefits 20 Rent and premises related expenses 8 442,171 440,566 21 1,925,518 1,671,052 7 1,530,946 1,547,577 Total operating expenses 7,022,651 6,784,128 Net income for the year 10,296,867 9,120,726 14 & 22 1,625 1,625 22 6.34 5.61 Depreciation and Amortisation Other general and administrative expenses Impairment charge for financing and other financial assets, net Weighted average number of shares outstanding (million) Basic and diluted earnings per share (in SAR) The accompanying Notes from pages 125 to 204 form an integral part of these consolidated financial statements. Chairman Chief Executive Officer Chief Financial Officer Annual Report 2018 Income
124. Consolidated Statement of Comprehensive Income 122 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information For the years ended 31 December Notes Annual Report 2018 Net income for the year 2018 (SAR ’000) 2017 (SAR ’000) 10,296,867 9,120,726 Other comprehensive income Items that cannot be reclassified to consolidated statement of income in subsequent periods Fair Value through Other Comprehensive income (FVOCI) equity investments (49,798) – Net change in fair value 15 – Re-measurement of employees’ End of Service Benefits (EOSB) 25 – – – Net change in fair value 15 – 201,825 – Net amounts transferred to consolidated statement of income 15 – (340,134) (29,521) Items that are or may be reclassified to consolidated statement of income in subsequent periods – Available-for-sale investments – Exchange differences on translation of foreign operations Total comprehensive income for the year 15 (52,637) 73,624 10,194,432 9,026,520 The accompanying Notes from pages 125 to 204 form an integral part of these consolidated financial statements. Chairman Chief Executive Officer Chief Financial Officer
125. Other reserves (SAR ’000) Retained earnings (SAR ’000) Proposed dividends (SAR ’000) (SAR ’000) 3 38 23 23 15 16,250,000 – – 16,250,000 – – 16,250,000 – – 16,250,000 – – 5,281,682 (129,789) – 5,151,893 – – 13,906,736 (2,752,899) (799,356) 10,354,481 – (3,250,000) 4,062,500 – – 4,062,500 (4,062,500) – 55,750,918 (2,882,688) (799,356) 52,068,874 (4,062,500) (3,250,000) 2018 Balance at 31 December 2017 Impact of adopting IFRS 9 Other adjustment Restated balance at 1 January 2018 Dividend for the second half 2017 Interim dividends for the first half of 2018 Net change in fair value of FVOCI investments Net movement in foreign currency translation reserve Net other comprehensive income recognised directly in equity Net income for the period Total comprehensive income for the period Zakat for previous year(s) Zakat for current year and other transfers 15 – – (49,798) – – (49,798) 15 – – (52,637) – – (52,637) – – – – (102,435) – – 10,296,867 – – (102,435) 10,296,867 15 – – (102,435) (5,379,724) 10,296,867 (25,547) – – 10,194,432 (5,405,271) 15 – – (19,289) – (991,517) – – Proposed final dividends for 2018 Balance at 31 December 2018 2017 Balance at 1 January 2017 Transfer to other reserves for zakat Dividends for the second half of 2016 Interim dividends for the first half of 2017 Net change in fair value of available-for-sale investments Net amounts transferred to consolidated statement of income Net movement in foreign currency translation reserve Net income recognised directly in shareholder’s equity Net income for the year 23 – (972,228) (3,656,250) 3,656,250 – 16,250,000 16,250,000 (349,555) 12,747,323 3,656,250 48,554,018 16,250,000 – – – 16,250,000 – – – 4,773,362 758,000 – – 12,236,010 (758,000) – (2,437,500) 2,437,500 – (2,437,500) – 51,946,872 – (2,437,500) (2,437,500) 15 – – 201,825 – – 201,825 15 – – (340,134) – – (340,134) 15 – – 73,624 – – 73,624 – – – – (64,685) – – – (64,685) 9,120,726 Re-measurement of employee EOSB – – (29,521) Total comprehensive income for the year Zakat paid Zakat Payable transferred to other liability – – – – – – (94,206) (155,474) – – – Proposed final dividends for 2017 Balance at 31 December 2017 23 – – 9,120,726 – 9,120,726 – (192,000) (29,521) – – – 9,026,520 (155,474) (192,000) (4,062,500) 4,062,500 16,250,000 16,250,000 5,281,682 13,906,736 4,062,500 16,250,000 16,250,000 5,281,682 13,906,736 4,062,500 Balance at 31 December 2017 The accompanying Notes from pages 125 to 204 form an integral part of these consolidated financial statements. Chairman – Chief Executive Officer Chief Financial Officer – 55,750,918 55,750,918 2018 Notes Statutory reserve (SAR ’000) Annual Report Total Share capital (SAR ’000) For the years ended 31 December 123 Consolidated Statement of Changes in Shareholders’ Equity About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information
126. Consolidated Statement of Cash Flows About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information 2018 (SAR ’000) 2017 (SAR ’000) 10,296,867 9,120,726 (14,600) 442,171 16,416 115 1,530,946 (47,928) (12,635) 440,566 16,862 (594) 1,547,577 (35,545) (1,491,942) (15,005,538) (4,940,851) 151,904 1,333,582 191,193 8,083,181 (10,089,026) (261,286) (801,486) 1,767,057 20,852,681 (520,389) (3,394,403) 463,309 2,293,735 14,370,491 7,562,174 (1,481,746) (1,389,489) 1,203,936 96,748,563 (103,363,657) (1,813,962) (1,071,373) 380,213 111,048,401 (112,554,297) For the years ended 31 December Annual Report 2018 124 Notes Cash flows from operating activities Net income for the year Adjustments to reconcile net income to net cash from/(used in) operating activities: Gain/loss on investments held at fair value through statement of income (FVSI) Depreciation and Amortisation on property and equipment Depreciation on investment properties Loss/(Gain) on sale of property and equipment, net Impairment charge for financing and other financial assets, net Share in earnings of associate (Increase)/decrease in operating assets Statutory deposit with SAMA and central banks Due from banks and other financial institutions Financing Investments held as FVSI Other assets, net Increase/(decrease) in operating liabilities Due to banks and other financial institutions Customers’ deposits Other liabilities 19 8 19 7 19 Net cash from operating activities Cash flows from investing activities Acquisitions of property and equipment Purchase of FVOCI/Available for sale investment Proceeds from disposal of FVOCI/Available-for-sale investment Proceeds from maturities of investments recorded at amortised cost Purchase of investments recorded at amortised cost 8 – Proceeds from sale of property and equipment 1,025 Net cash (used in)/from investing activities (8,282,393) (4,009,993) Cash flows from financing activities Dividends paid Zakat paid (7,312,500) (211,290) (4,858,497) (155,474) Net cash used in financing activities (7,523,790) (5,013,971) Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year (1,435,692) 31,222,195 (1,461,790) 32,683,985 29,786,503 31,222,195 13,391,901 12,639,813 (728,956) (542,644) 12,662,945 12,097,169 72,106 147,106 Cash and cash equivalents at the end of the year Gross financing and investment income received during the year 24 Return on customers’, banks’ and financial institutions’ time investments paid during the year Non-cash transactions: Other real estate Net change in fair value and gain/(loss) transferred to consolidated statement of income on available-for-sale investments – (49,798) Net change in fair value of FVOCI equity investments The accompanying Notes from pages 125 to 204 form an integral part of these consolidated financial statements. Chairman Chief Executive Officer Chief Financial Officer (138,309) –
127. Name of subsidiaries (a) Incorporation and operation Al Rajhi Banking and Investment Corporation, a Saudi Joint Stock Company, (the “Bank”), was formed and licensed pursuant to Royal Decree No. M/59 dated 3 Dhul Qadah 1407H (corresponding to 29 June 1987) and in accordance with Article 6 of the Council of Ministers’ Resolution No. 245, dated 26 Shawal 1407H (corresponding to 23 June 1987). Beneficial shareholding percentage 2018 % 2017 % Al Rajhi Development Company – KSA 100 100 A limited liability company registered in the Kingdom of Saudi Arabia to support the mortgage programmes of the Bank through transferring and holding the title deeds of real estate properties under its name on behalf of the Bank, collection of revenue of certain properties sold by the Bank, provide real estate and engineering consulting services, provide documentation service to register the real estate properties and overseeing the evaluation of real estate properties. Al Rajhi Corporation Limited – Malaysia 100 100 A licensed Islamic Bank under the Islamic Financial Services Act 2013, incorporated and domiciled in Malaysia. Al Rajhi Capital Company – KSA 100 100 A limited liability company registered in the Kingdom of Saudi Arabia to act as principal agent and/or to provide brokerage, underwriting, managing, advisory, arranging and custodial services. Al Rajhi Bank – Kuwait 100 100 A foreign branch registered with the Central Bank of Kuwait. Al Rajhi Bank – Jordan 100 100 A foreign branch operating in Hashemie Kingdom of Jordan, providing all financial, banking, and investments services and importing and trading in precious metals and stones in accordance with Islamic Sharia rules and under the applicable banking law. Al Rajhi Takaful Agency Company – KSA 99 Al Rajhi Company for Management Services – KSA 100 The Bank operates under Commercial Registration No. 1010000096 and its Head Office is located at the following address: Al Rajhi Bank 8467, King Fahd Road – Al Muruj District Unit No. 1 Riyadh 12263 – 2743 Kingdom of Saudi Arabia The objectives of the Bank are to carry out banking and investment activities in accordance with its Articles of Association and Bylaws, the Banking Control Law and the Council of Ministers’ Resolution referred to above. The Bank is engaged in banking and investment activities inside and outside the Kingdom of Saudi Arabia through 581 branches (2017: 599 branches) including the branches outside the Kingdom and 13,532 employees (2017: 13,077 employees). The Bank has established certain subsidiary companies (together with the Bank hereinafter referred to as “the Group”) in which it owns all or majority of their shares as set out below [Also see Note 3 (b)]: 99 A limited liability company registered in the Kingdom of Saudi Arabia to act as an agent for insurance brokerage activities per the agency agreement with Al Rajhi Cooperative Insurance Company. 100 A limited liability company registered in the Kingdom of Saudi Arabia to provide recruitment services. 125 General 2018 1 Notes to the Consolidated Financial Statements Annual Report About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information
128. Annual Report 2018 126 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Notes to the Consolidated Financial Statements The subsidiaries are wholly or substantially owned by the Bank and therefore , the non-controlling interest which is insignificant is not disclosed. All the above-mentioned subsidiaries have been consolidated. As of 31 December 2018 and 2017, interests in subsidiaries not directly owned by the Bank are owned by representative shareholders for the beneficial interest of the Bank. (b) Sharia Authority As a commitment from the Bank for its activities to be in compliance with Islamic Sharia legislations, since its inception, the Bank has established a Sharia Authority to ascertain that the Bank’s activities are subject to its approval and control. The Sharia Authority had reviewed several of the Bank’s activities and issued the required decisions thereon. 2 Basis of Preparation (a) Statement of compliance The (consolidated) financial statements of the Bank (Group) have been prepared; – in accordance with “International Financial Reporting Standards (IFRS) as modified by Saudi Arabian Monetary Authority (SAMA) for the accounting of zakat and income tax”, (relating to the application of International Accounting Standard (IAS) 12 – “Income Taxes” and IFRIC 21 – “Levies” in so far as these relate to accounting for Saudi Arabian zakat and income tax); and. – in compliance with the provisions of Banking Control Law, the Regulations for Companies in the Kingdom of Saudi Arabia and By-laws of the Bank. (b) Basis of measurement and preparation The consolidated financial statements are prepared under the historical cost convention except for the measurement at fair value of investments held as fair value through statement of income (“FVSI”) and fair value through other comprehensive income (“FVOCI”) investments. The Bank presents its statement of financial position in order of liquidity. An analysis regarding recovery or settlement within 12 months after the reporting date (current) and more than 12 months after the reporting date (non-current) is presented in Note 27.2. (c) Functional and presentation currency The consolidated financial statements are presented in Saudi Arabian Riyals (“SAR”), which is the Bank’s functional currency and are rounded off to the nearest thousand except otherwise indicated. (d) Critical accounting judgements, estimates and assumptions The preparation of consolidated financial statements in conformity with IFRS requires the use of certain critical accounting estimates and assumptions that affect the reported amounts of assets and liabilities. It also requires management to exercise its judgements in the process of applying the Bank’s accounting policies. Such estimates, assumptions and judgements are continually evaluated and are based on historical experience and other factors, including obtaining professional advice and expectations of future events that are believed to be reasonable under the circumstances. Revisions to accounting estimates are recognised in the period in which the estimate is revised, if the revision affects only that period, or in the period of revision and in future periods if the revision affects both current and future periods. The 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 described below. The Bank, based its assumptions and estimates on parameters available when the consolidated financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances beyond the control of the Bank. Such changes are reflected in the assumptions when they occur. Significant areas where management has used estimates, assumptions or exercised judgements is as follows: (i) Impairment losses on financial assets The 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.
129.  The Bank’s internal credit grading model, which assigns PDs to the individual grades  The Bank’s criteria for assessing if there has been a significant increase in credit risk and so allowances for financial assets should be measured on a Lifetime ECL basis and the qualitative assessment  The segmentation of financial assets when their ECL is assessed on a collective basis  Development of ECL models, including the various formulas and the choice of inputs  Determination of associations between macroeconomic scenarios and, economic inputs and collateral values, 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 (ii) Fair value of financial instruments The Group measures financial instruments at fair value at each balance sheet date. Fair 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 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 Bank 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 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 – Inputs other than quoted prices included within Level 1 that are observable either directly (i.e. as prices) or indirectly (i.e. derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques in which all significant inputs are directly or indirectly observable from market data. - Level 3 – Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable. (iii) Determination of control over investees The control indicators are subject to management’s judgements that can have a significant effect in the case of the Bank’s interests in investments funds. Investment funds The Group acts as Fund Manager to a number of investment funds. Determining whether the Group controls such an investment fund usually focuses on the assessment of the aggregate economic interests of the Group in the Fund (comprising any carried profits and expected management fees) and the investor’s rights to remove the Fund Manager. As a result the Group has concluded that it acts as an agent for the investors in all cases, and therefore has not consolidated these funds. 2018 The Bank’s ECL calculations are outputs of complex models with a number of underlying assumptions regarding the choice of variable inputs and their interdependencies. Elements of the ECL models that are considered accounting judgements and estimates include: 127 Notes to the Consolidated Financial Statements Annual Report About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information
130. Annual Report 2018 128 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Notes to the Consolidated Financial Statements (iv) Provisions for liabilities and charges The Bank receives legal claims against it in the normal course of business. Management has made judgments as to the likelihood of any claim succeeding in making provisions. The time of concluding legal claims is uncertain, as is the amounts of possible outflow of economic benefits. Timing and cost ultimately depends on the due process being followed as per the Law. (v) Going concern The consolidated financial statements have been prepared on a going concern basis. The Bank’s management has made an assessment of the Bank’s ability to continue as a going concern and is satisfied that the Bank has the resources to continue in business for the foreseeable future. Furthermore, the management is not aware of any material uncertainties that may cast significant doubt upon the Bank’s ability to continue as a going concern. 3 Summary of Significant Accounting Policies The significant accounting policies adopted in the preparation of these consolidated financial statements are set out below: (a) Change in accounting policies The accounting policies used in the preparation of these consolidated financial statements are consistent with those used in the preparation of the annual consolidated financial statements for the year ended 31 December, 2017 except for the adoption of the following new standards and other amendments to existing standards and a new interpretation mentioned below. Except for adoption of IFRS 9, these amendments and adoption has had no material impact on the consolidated financial statements of the Group on the current period or prior periods. The impact and disclosures pertaining to adoption of IFRS 9 has been disclosed in the later part of these financial statements. Adoption of New Standards Effective 1 January 2018, the Group has adopted the following accounting standards and the impact of the adoption of these standards is explained below. Except for the adoption of the following new accounting standards, several other amendments and interpretations apply for the first time in 2018, but do not have impact on the consolidated financial statements of the Bank. Adoption of IFRS 15 – Revenue from contracts with customers The Bank adopted IFRS 15 – “Revenue from Contracts with Customers” resulting in a change in the revenue recognition policy of the Bank in relation to its contracts with customers. IFRS 15 was issued in May 2014 and is effective for annual periods commencing on or after 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 IFRSs. 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. IFRS 15 also includes a comprehensive set of disclosure requirements that will result in an entity providing users of financial statements with comprehensive information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts with customers. The Bank has assessed that the impact of IFRS 15 is not material on the consolidated financial statements of the Group as at the initial adoption and the reporting date. Adoption of IFRS 9 – Financial instruments The Bank has adopted IFRS 9 – Financial Instruments issued in July 2014 with a date of initial application of 1 January 2018. 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.
131. Classification of financial assets and financial liabilities IFRS 9 contains three principal classification categories for financial assets : measured at amortised cost (“AC”), fair value through other comprehensive income (“FVOCI”) and fair value through profit or loss (“FVSI”). This classification is generally based on the business model in which a financial asset is managed and its contractual cash flows. The standard eliminates the existing IAS 39 categories of held-to-maturity, loans and receivables and available for sale. To reflect the differences between IFRS 9 and IAS 39, IFRS 7 Financial Instruments: Disclosures were updated and the Bank has adopted it, together with IFRS 9, for year beginning 1 January 2018. Changes include transition disclosures as shown in Note 3, detailed qualitative and quantitative information about the ECL calculations such as the assumptions and inputs used are set out in Note 27. Reconciliations from opening to closing ECL allowances are presented in Notes 7. Transition IFRS 9 largely retains the existing requirements in IAS 39 for the classification of financial liabilities. However, although under IAS 39 all fair value changes of liabilities designated under the fair value option were recognised in profit or loss, under IFRS 9 fair value changes are generally presented as follows:  The amount of change in the fair value that is attributable to changes in the credit risk of the liability is presented in OCI; and  The remaining amount of change in the fair value is presented in profit or loss. Impairment of financial assets IFRS 9 replaces the “incurred loss” model in IAS 39 with an “expected credit loss” model (“ECL”). The new impairment model also applies to certain loan commitments and financial guarantee contracts but not to equity investments. The allowance is based on the 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 allowance is based on the change in the ECLs over the life of the asset. POCI assets are financial assets that are credit impaired on initial recognition. POCI assets are recorded at fair value at original recognition and interest income is subsequently recognised based on a credit-adjusted EIR. ECLs are only recognised or released to the extent that there is a subsequent change in the expected credit losses. Under IFRS 9, credit losses are recognised earlier than under IAS 39. Changes in accounting policies resulting from the adoption of IFRS 9 have been applied retrospectively, except as described below:  Comparative periods have not been restated. A difference in the carrying amounts of financial assets and financial liabilities resulting from the adoption of IFRS 9 are recognised in retained earnings and reserves as at 1 January 2018. Accordingly, the information presented for 2017 does not reflect the requirements of IFRS 9 and therefore is not comparable to the information presented for 2018 under IFRS 9.  The following assessments have been made on the basis of the facts and circumstances that existed at the date of initial application. i. The determination of the business model within which a financial asset is held. ii. The designation and revocation of previous designated financial assets and financial liabilities as measured at FVSI. iii. The designation of certain investments in equity instruments not held for trading as FVOCI. It is assumed that the credit risk has not increased significantly for those debt securities which carry low credit risk at the date of initial application of IFRS 9. 129 IFRS 7 – Financial Instruments: Disclosures 2018 The key changes to the Bank’s accounting policies resulting from its adoption of IFRS 9 are summarised below. Notes to the Consolidated Financial Statements Annual Report About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information
132. Notes to the Consolidated Financial Statements 130 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information A . Financial assets and financial liabilities The following table shows the original measurement categories in accordance with IAS 39 and the new measurement categories under IFRS 9 for the Bank’s financial assets and financial liabilities as at 1 January 2018. Annual Report 2018 (i) Classification of financial assets and financial liabilities on the date of initial application of IFRS 9 Original classification under IAS 39 New classification under IFRS 9 Original carrying value under IAS 39 (SAR ‘000) New carrying value under IFRS 9 (SAR ‘000) Cash and balances with Saudi Arabian Monetary Authority (“SAMA”) and other central banks Loans and receivables Due from banks and other financial institutions Loans and receivables Amortised cost 48,282,471 48,282,471 Amortised cost 10,709,795 10,705,849 Held to maturity Amortised cost 23,452,869 23,437,245 Financial assets Investments held at amortised cost Murabaha with Saudi Government and SAMA Sukuk Held to maturity Amortised cost 9,805,139 9,775,876 Held to maturity FVTPL 800,000 800,000 Equity investments FVSI FVOCI 23,487 23,487 Mutual funds FVSI FVTPL 389,193 389,193 Investments held as FVSI Available-for-sale investments Equity investments Available for sale FVOCI 771,293 771,293 Mutual funds Available for sale FVTPL 1,034,286 1,034,286 Financing, net Loans and receivables Amortised cost 233,535,573 230,701,718 328,804,106 325,921,418 Financial liabilities Due to banks and other financial institutions Amortised cost Amortised cost 5,522,567 5,522,567 Customers’ deposits Amortised cost Amortised cost 273,056,445 273,056,445 Other liabilities Amortised cost Amortised cost 8,786,598 8,786,598 287,365,610 287,365,610 8,786,598 273,056,445
133. Notes to the Consolidated Financial Statements 131 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information IAS 39 carrying amount as at 31 December 2017 (SAR ‘000) Reclassification Re-measurement (SAR ‘000) (SAR ‘000) IFRS 9 carrying amount as at 1 January 2018 (SAR ‘000) Financial assets Amortised cost Cash and balances with Saudi Arabian Monetary Authority (“SAMA”) and other central banks: Opening balance 48,282,471 – – Closing balance 48,282,471 – – 10,709,795 – – – 48,282,471 Due from banks and other financial institutions Opening balance Remeasurement (ECL allowance) (Note 1) Closing balance – (3,946) 10,709,795 – – (3,946) 233,535,573 – – – 10,705,849 Financing – Net: Opening balance Remeasurement (ECL allowance) (Note 1) Closing balance – 233,535,573 – – (2,833,855) – (2,833,855) – – 230,701,718 Investment: Opening balance 34,058,008 To FVTPL – Remeasurement (ECL allowance) (Note 1) – Closing balance Total financial assets – (800,000) – – – – – (44,887) – 34,058,008 (800,000) (44,887) 33,213,121 326,585,847 (800,000) (2,882,688) 322,903,159 Note 1: Impairment allowance is increased due to change from incurred to expected credit loss (ECL). Annual Report The following table reconciles the carrying amounts under IAS 39 to the carrying amounts under IFRS 9 on transition to IFRS 9 on 1 January 2018. 2018 (ii) Reconciliation of carrying amounts under IAS 39 to carrying amounts under IFRS 9 at the adoption of IFRS 9
134. Annual Report 2018 132 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Notes to the Consolidated Financial Statements IAS 39 carrying amount as at 31 December 2017 (SAR ’000) Reclassification Remeasurement (SAR ’000) (SAR ’000) IFRS 9 carrying amount as at 1 January 2018 (SAR ’000) Financial assets Available for sale Investment: Opening balance 1,805,579 – – – Transferred to: FVOCI – equity (Note 1) – (771,293) – – FVSI (Note 2) – (1,034,286) – – (1,805,579) – – Total available for sale 1,805,579 FVSI Investment: Opening balance From available for sale (Note 2) 412,680 – – – – 800,000 – – (23,487) – – 1,810,799 – – – 1,034,286 From amortised cost (Note 3) – Transfer to FVOCI (Note 1) – Total FVSI 412,680 2,223,479 FVOCI Investment: Opening balance – – – From available for sale – 771,293 – – From FVSI – 23,487 – – Total FVOCI – 794,780 – – 794,780 Financial liabilities At Amortised cost Due to banks and other financial institutions Customers deposits Other liabilities Total at amortised cost 5,522,567 – – 5,522,567 273,056,445 – – 273,056,445 8,786,598 – – 8,786,598 287,365,610 – – 287,365,610 287,365,610
135. Note 2 : The Bank holds a portfolio of mutual funds that failed to meet the solely payments of principal and interest (SPPI) requirement for Amortised cost/FVOCI classification under IFRS 9. As a result, these funds which amounted to SAR 1,034,286 Mn. were classified as FVSI from the date of initial application. Note 3: The Bank holds investment in certain Sukuk that failed to meet the solely payments of principal and interest (SPPI) requirement. As a result, these Sukuk amounted to SAR 800 Mn. were classified as FVSI from the date of initial application. Retained earnings (SAR ’000) Other reserves (SAR ’000) Closing balance under IAS 39 (31 December 2017) 13,906,736 5,281,682 Reclassifications under IFRS 9 129,789 (129,789) Recognition of expected credit losses under IFRS 9 (2,882,688) Opening balance under IFRS 9 (1 January 2018) 11,153,837 – 5,151,893 The following table reconciles the provision recorded as per the requirements of IAS 39 to that of IFRS 9:  The closing impairment allowance for financial assets in accordance with IAS 39; to  The opening ECL allowance determined in accordance with IFRS 9 as at 1 January 2018. 31 December 2017 (IAS 39) (SAR ’000) (SAR ’000) 1 January 2018 (IFRS 9) (SAR ’000) 3,946 3,946 2,833,855 8,389,065 44,887 44,887 2,882,688 8,437,898 Re-measurement Allowance for impairment Loans and receivables (IAS 39)/Financial assets at amortised cost (IFRS 9) Due from banks and other financial institutions Financing – net: Investments Total – 5,555,210 – 5,555,210 133 (iii) Impact on retained earnings and other reserves 2018 Note 1: The Bank has elected to irrevocably designate equity investments of SAR 771.293 Mn. in a portfolio of non trading equity securities at FVOCI as permitted under IFRS 9. These securities were previously classified as available for sale. Upon disposal of equity investment, any balances within the OCI reserve (fair value movement) for these investments will no longer be reclassified to profit or loss. Moreover, equity investments amounting to SAR 23.487 Mn. were reclassified from FVSI to FVOCI. Notes to the Consolidated Financial Statements Annual Report About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information
136. Notes to the Consolidated Financial Statements (iv) The following table provides the carrying value of financial assets and financial liabilities in the Statement of Financial Position Annual Report 2018 134 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information 31 December 2018 Mandatorily at FVSI (SAR ’000) FVOCI – equity investments (SAR ’000) Amortised cost (SAR ’000) Total carrying amount (SAR ’000) Financial assets Cash and balances with Saudi Arabian Monetary Authority (“SAMA”) and other central banks – – 43,246,043 43,246,043 Due from banks and other financial Institutions – – 30,808,011 30,808,011 Murabaha with Saudi Government and SAMA – – 22,477,145 22,477,145 Sukuk – – 17,395,957 17,395,957 Investments held at amortised cost Investments held as FVSI Mutual funds Sukuk 1,141,584 – – 1,141,584 800,000 – – 800,000 FVOCI investments Equity investments – Financing, net – Total financial assets 1,941,584 1,103,463 – 1,103,463 – 1,103,463 234,062,789 234,062,789 347,989,945 351,034,992 Financial liabilities Due to banks and other financial institutions – – 7,289,624 7,289,624 Customers’ deposits – – 293,909,125 293,909,125 Other liabilities – – 15,251,063 15,251,063 Total financial liabilities – – 316,449,812 316,449,812
137. Notes to the Consolidated Financial Statements 31 December 2017 Note Trading (SAR ’000) Designated as at FVSI (SAR ’000) Held to maturity (SAR ’000) Loans and receivables (SAR ’000) Available for sale (SAR ’000) Other amortised (SAR ’000) Total carrying amount (SAR ’000) Financial assets Cash and balances with Saudi Arabian Monetary Authority (“SAMA”) and other central banks – – – 48,282,471 – – 48,282,471 Due from banks and other financial Institutions – – – 10,709,795 – – 10,709,795 Murabaha with Saudi Government and SAMA – – 23,452,869 – – – 23,452,869 Sukuk – – 10,605,139 – – – 10,605,139 Investments held at amortised cost Investments held as FVSI Equity investments – 23,487 – – – – 23,487 Mutual funds – 389,193 – – – – 389,193 – 771,293 – 771,293 – 1,034,286 – 1,034,286 – 233,535,573 – 328,804,106 Available-for-sale investments Equity investments – – – Mutual funds – – – Financing, net – – – Total financial assets – 412,680 34,058,008 233,535,573 292,527,839 – 1,805,579 Financial liabilities Due to banks and other financial institutions – – – – – 5,522,567 5,522,567 Customers’ deposits – – – – – 273,056,445 273,056,445 Other liabilities – – – – – 8,786,598 8,786,598 Total financial liabilities – – – – – 287,365,610 287,365,610 Annual Report 2018 135 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information
138. Annual Report 2018 136 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Notes to the Consolidated Financial Statements (b) Policies applicable from 1 January 2018 Business model assessment 1. Classification of financial assets The Bank makes an assessment of the objective of a business model in which an asset is held at a portfolio level because this best reflects the way the business is managed and information is provided to management. The information considered includes: On initial recognition, a financial asset is classified and measured at: amortised cost, FVOCI or FVSI. Financial asset at amortised cost A financial asset is measured at amortised cost if it meets both of the following conditions and is not designated as at FVSI:  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 interest on the principal amount outstanding. Financial asset at FVOCI A debt instrument is measured at FVOCI only if it meets both of the following conditions and is not designated as at FVSI:  the asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and  the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Equity instruments: On initial recognition, for an equity investment that is not held for trading, the Bank may irrevocably elect to present subsequent changes in fair value in OCI. This election is made on an instrument-by-instrument (i.e. share-by-share) basis. Financial asset at FVSI All other financial assets are classified as measured at FVSI. In addition, on initial recognition, the Bank may irrevocably designate a financial asset that otherwise meets the requirements to be measured at amortised cost or at FVOCI as at FVSI if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise. Financial assets are not reclassified subsequent to their initial recognition, except in the period after the Bank changes its business model for managing financial assets.  the stated policies and objectives for the portfolio and the operation of those policies in practice. In particular, whether management’s strategy focuses on earning contractual profit revenue, maintaining a particular profit rate profile, matching the duration of the financial assets to the duration of the liabilities that are funding those assets or realising cash flows through the sale of the assets;  how the performance of the portfolio is evaluated and reported to the Bank’s management;  the risks that affect the performance of the business model (and the financial assets held within that business model) and how those risks are managed;  how managers of the business are compensated – e.g. whether compensation is based on the fair value of the assets managed or the contractual cash flows collected; and  the frequency, volume and timing of sales in prior periods, the reasons for such sales and its expectations about future sales activity. However, information about sales activity is not considered in isolation, but as part of an overall assessment of how the Bank’s stated objective for managing the financial assets is achieved and how cash flows are realised. 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 Bank’s original expectations, the Bank 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. Financial assets that are held for trading and whose performance is evaluated on a fair value basis are measured at FVSI because they are neither held to collect contractual cash flows nor held both to collect contractual cash flows and to sell financial assets.
139. For the purposes of this assessment , “principal” is the fair value of the financial asset on initial recognition. “Interest” is the consideration for the time value of money, the credit and other basic lending risk associated with the principal amount outstanding during a particular period and other basic lending costs (e.g. liquidity risk and administrative costs), along with profit margin. In assessing whether the contractual cash flows are solely payments of principal and interest, the Bank considers the contractual terms of the instrument. This includes assessing whether the financial asset contains a contractual term that could change the timing or amount of contractual cash flows such that it would not meet this condition. In making the assessment, the Bank considers:  contingent events that would change the amount and timing of cash flows;  leverage features;  prepayment and extension terms; Investments (Murabaha with SAMA): These investments consists of placements with Saudi Arabian Monetary Authority (SAMA). The Bank classifies these investments at amortised cost as they are held to collect contractual cash flows and pass SPPI criterion. Investments (Sukuk): These investments consists of Investment in various Sukuk. The Bank classifies these investment at amortised cost except for those Sukuk which fails SPPI criterion, are classified at FVSI. Equity Investments: These are the strategic equity investments which the Bank does not expect to sell, for which Bank has made an irrevocable election on the date of initial recognition to present the fair value changes in other comprehensive income.  terms that limit the Bank’s claim to cash flows from specified assets (e.g. non-recourse asset arrangements); and Investments (Mutual Funds): The investments consist of Investment in various Mutual Funds. The Bank classifies these investment at FVSI as these investments fail SPPI criterion.  features that modify consideration of the time value of money- e.g. periodical reset of interest rates. 2. Classification of financial liabilities Reclassification The Bank reclassifies the financial assets between FVSI, FVOCI and amortised cost if and only if under rare circumstances its business model objective for its financial assets changes so its previous business model assessment would no longer apply. Financing and Investment The Bank offers profit based products including Mutajara, instalment sales, Murabaha and Istisnaa to its customers in compliance with Sharia rules. The Bank classifies its Principal financing and Investment as follows: Financing: These financing represents loans granted to customers. These financings mainly constitute four broad categiries i.e. Mutajara, Installment sales, Murabaha and credit cards. The Bank classifies these financings at amortised cost. The Bank classifies its financial liabilities, other than financial guarantees and loan commitments, as measured at amortised cost. All amounts due to banks and other financial institutions and customer deposits are initially recognised at fair value less transaction costs. Subsequently, financial liabilities are measured at amortised cost, unless they are required to be measured at fair value through profit or loss. 137 Due from banks and other financial institutions: These consists of placements with financial Institutions (FIs). The Bank classifies these balances due from banks and other financial institutions at amortised cost as they are held to collect contractual cash flows and pass SPPI criterion. 2018 Assessments whether contractual cash flows are solely payments of principal and interest Notes to the Consolidated Financial Statements Annual Report About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information
140. 138 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information 3 . Derecognition Annual Report 2018 (a) Financial assets The Bank derecognises a financial asset when the contractual rights to the cash flows from the financial asset expire, or it transfers the rights to receive the contractual cash flows in a transaction in which substantially all of the risks and rewards of ownership of the financial asset are transferred or in which the Bank neither transfers nor retains substantially all of the risks and rewards of ownership and it does not retain control of the financial asset. On derecognition of a financial asset, the difference between the carrying amount of the asset (or the carrying amount allocated to the portion of the asset derecognised) and the sum of (i) the consideration received (including any new asset obtained less any new liability assumed) and (ii) any cumulative gain or loss that had been recognised in OCI is recognised in profit or loss. From 1 January 2018, any cumulative gain/loss recognised in OCI in respect of equity investment securities designated as at FVOCI is not recognised in profit or loss on derecognition of such securities. Any interest in transferred financial assets that qualify for derecognition that is created or retained by the Bank is recognised as a separate asset or liability. In transactions in which the Bank neither retains nor transfers substantially all of the risks and rewards of ownership of a financial asset and it retains control over the asset, the Bank continues to recognise the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred asset. (b) Financial liabilities The Bank derecognises a financial liability when its contractual obligations are discharged or cancelled or expired. Notes to the Consolidated Financial Statements 4. Modifications of financial assets and financial liabilities (a) Financial assets If the terms of a financial asset are modified, the Bank evaluates whether the cash flows of the modified asset are substantially different. If the cash flows are substantially different, then the contractual rights to cash flows from the original financial asset are deemed to have expired. In this case, the original financial asset is derecognised and a new financial asset is recognised at fair value. If the cash flows of the modified asset carried at amortised cost are not substantially different, then the modification does not result in derecognition of the financial asset. In this case, the Bank recalculates the gross carrying amount of the financial asset and recognises the amount arising from adjusting the gross carrying amount as a modification gain or loss in profit or loss. If such a modification is carried out because of financial difficulties of the borrower, then the gain or loss is presented together with impairment losses. In other cases, it is presented as interest income. (b) Financial liabilities The Bank derecognises a financial liability when its terms are modified and the cash flows of the modified liability are substantially different. In this case, a new financial liability based on the modified terms is recognised at fair value. The difference between the carrying amount of the financial liability extinguished and the new financial liability with modified terms is recognised in profit or loss. 5. Impairment The Bank recognises loss allowances for ECL on the following financial instruments that are not measured at FVSI:  financial assets that are debt instruments;  lease receivables;  financial guarantee contracts issued; and  loan commitments issued. No impairment loss is recognised on equity investments.
141.  debt investment securities that are determined to have low credit risk at the reporting date; and  other financial instruments on which credit risk has not increased significantly since their initial recognition. The Bank considers a debt security to have low credit risk when their credit risk rating is equivalent to the globally understood definition of ‘investment grade’. 12-month ECL are the portion of ECL that result from default events on a financial instrument that are possible within the 12 months after the reporting date. If the expected restructuring will result in derecognition of the existing asset, then the expected fair value of the new asset is treated as the final cash flow from the existing financial asset at the time of its derecognition .This amount is included in calculating the cash shortfalls from the existing financial asset that are discounted from the expected date of derecognition to the reporting date using the original effective interest rate of the existing financial asset. Credit-impaired financial assets At each reporting date, the Bank assesses whether financial assets carried at amortised cost are credit-impaired. A financial asset is “credit-impaired” when one or more events that have detrimental impact on the estimated future cash flows of the financial asset have occurred. Measurement of ECL Evidence that a financial asset is credit-impaired includes the following observable data: ECL are a probability-weighted estimate of credit losses. It is measured as follows:  significant financial difficulty of the borrower or issuer;  financial assets that are not credit-impaired at the reporting date: as the present value of all cash shortfalls (i.e. the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Bank expects to receive);  a breach of contract such as a default or past due event;  the restructuring of a loan or advance by the Bank on terms that the Bank would not consider otherwise;  it is becoming probable that the borrower will enter bankruptcy or other financial reorganisation; or  financial assets that are credit-impaired at the reporting date: as the difference between the gross carrying amount and the present value of estimated future cash flows;  the disappearance of an active market for a security because of financial difficulties.  undrawn loan commitments: as the present value of the difference between the contractual cash flows that are due to the Bank if the commitment is drawn down and the cash flows that the Bank expects to receive; and A loan that has been renegotiated due to deterioration in the borrower’s condition is usually considered to be credit-impaired unless there is evidence that the risk of not receiving contractual cash flows has reduced significantly and there are no other indicators of impairment. In addition, a retail loan that is overdue for 90 days or more is considered impaired.  financial guarantee contracts: the expected payments to reimburse the holder less any amounts that the Bank expects to recover. Restructured financial assets If the terms of a financial asset are renegotiated or modified or an existing financial asset is replaced with a new one due to financial difficulties of the borrower, then an assessment is made of whether the financial asset should be derecognised and ECL are measured as follows: If the expected restructuring will not result in derecognition of the existing asset, then the expected cash flows arising from the modified financial asset are included in calculating the cash shortfalls from the existing asset. In making an assessment of whether an investment in sovereign debt is credit-impaired, the Bank considers the following factors.  The market’s assessment of creditworthiness as reflected in the yields.  The rating agencies’ assessments of creditworthiness.  The country’s ability to access the capital markets for new debt issuance.  The probability of debt being restructured, resulting in holders suffering losses through voluntary or mandatory debt forgiveness. 2018 The Bank measures loss allowances at an amount equal to lifetime ECL, except for the following, for which they are measured as 12-month ECL: 139 Notes to the Consolidated Financial Statements Annual Report About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information
142. Annual Report 2018 140 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information  The international support mechanisms in place to provide the necessary support as ‘lender of last resort’ to that country, as well as the intention, reflected in public statements, of governments and agencies to use those mechanisms. This includes an assessment of the depth of those mechanisms and, irrespective of the political intent, whether there is the capacity to fulfil the required criteria. Presentation of allowance for ECL in the Statement of Financial Position Loss allowances for ECL are presented in the statement of financial position as follows:  financial assets measured at amortised cost: as a deduction from the gross carrying amount of the assets;  where a financial instrument includes both a drawn and an undrawn component, and the Bank cannot identify the ECL on the loan commitment component separately from those on the drawn component: the Bank presents a combined loss allowance for both components. The combined amount is presented as a deduction from the gross carrying amount of the drawn component. Any excess of the loss allowance over the gross amount of the drawn component is presented as a provision. Notes to the Consolidated Financial Statements unless repossessed, is not recorded on the Bank’s statement of financial position. However, the fair value of collateral affects the calculation of ECL. It is generally assessed, at a minimum, at inception and re-assessed on a periodic basis. However, some collateral, for example, cash or market securities relating to margining requirements, is valued daily. To the extent possible, the Bank uses active market data for valuing financial assets held as collateral. Non-financial collateral, such as real estate, is valued based on data provided by third parties such as mortgage brokers, or based on housing price indices. Collateral repossessed The Bank’s accounting policy under IFRS 9 remains the same as it was under IAS 39. The Bank’s policy is to determine whether a repossessed asset can be best used for its internal operations or should be sold. Assets determined to be useful for the internal operations are transferred to their relevant asset category at the lower of their repossessed value or the carrying value of the original secured asset. Assets for which selling is determined to be a better option are transferred to assets held for sale at their fair value (if financial assets) and fair value less cost to sell for non-financial assets at the repossession date in, line with the Bank’s policy. Write-off Loans and debt securities are written off (either partially or in full) when there is no realistic prospect of recovery. However, financial assets that are written off could still be subject to enforcement activities in order to comply with the Bank’s procedures for recovery of amounts due. 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. Collateral valuation To mitigate its credit risks on financial assets, the Bank seeks to use collateral, where possible. The collateral comes in various forms, such as cash, securities, letters of credit/guarantees, real estate, receivables, inventories, other non-financial assets and credit enhancements such as netting agreements. The Bank’s accounting policy for collateral assigned to it through its lending arrangements under IFRS 9 is the same as it was under IAS 39. Collateral, 6. Financial guarantees and loan commitments “Financial guarantees” are contracts that require the Bank to make specified payments to reimburse the holder for a loss that it incurs because a specified debtor fails to make payment when it is due in accordance with the terms of a debt instrument. ‘Loan commitments’ are firm commitments to provide credit under pre-specified terms and conditions. Financial guarantees issued or commitments to provide a loan at a below-market profit rate are initially measured at fair value and the initial fair value is amortised over the life of the guarantee or the commitment. Subsequently, they are measured as follows:  from 1 January 2018: at the higher of this amortised amount and the amount of loss allowance; and  Before 1 January 2018: at the higher of this amortised amount and the present value of any expected payment to settle the liability when a payment under the contract has become probable.
143.  from 1 January 2018: the Bank recognises loss allowance;  Before 1 January 2018: the Bank recognises a provision in accordance with lAS 37 if the contract was considered to be onerous. 7. Foreign Currencies The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the year adjusted for the effective profits rate and payments during the year and the amortised cost in foreign currency translated at the exchange rate at the end of the year. Realised and unrealised gains or losses on exchange are credited or charged to the interim condensed consolidated statement of comprehensive income. Foreign currency differences arising on translation are generally recognised in profit or loss. However, foreign currency differences arising from the translation of availablefor-sale equity instruments (before 1 January 2018) or equity investments in respect of which an election has been made to present subsequent changes in fair value in OCI (from 1 January 2018) are recognised in OCI. The monetary assets and liabilities of foreign subsidiaries are translated into SAR at rates of exchange prevailing at the date of the interim condensed consolidated statement of financial position. The statements of income of foreign subsidiaries are translated at the weighted average exchange rates for the year. 8. Rendering of services The Bank provides various services to its customer. These services are either rendered separately or bundled together with rendering of other services. The Bank has concluded that revenue from rendering of various services related to payment service system, share trading services, remittance business, SADAD and Mudaraba (i.e. subscription, management and performance fees), should be recognised at the point when services are rendered i.e. when performance obligation is satisfied. 1. Financing and Investment The Bank offers non-profit based products including Mutajara, instalment sales, Murabaha and Istisnaa to its customers in compliance with Sharia rules. The Bank classifies its principal financing and investment as follows: i. Held at amortised cost – such financing and certain investments which meets the definition of loans and receivables under IAS 39, are classified as held at amortised cost, and comprise Mutajara, instalment sale, Istisnaa, Murabaha and credit cards operations accounts balances. Investments held at amortised cost are initially recognised at fair value and subsequently measured at amortised cost (using effective yield basis) less any amounts written off, and allowance for impairment. Financings are non-derivative financial assets originated or acquired by the Bank with fixed or determinable payments. Financings are recognised when cash is advanced to borrowers. They are derecognised when either borrower repays their obligations, or the financings are sold or written off, or substantially all the risks and rewards of ownership are transferred. All financing are initially measured at fair value, plus incremental direct transaction costs (above certain threshold) and are subsequently measured at amortised cost using effective yield basis. Following the initial recognition, subsequent transfers between the various classes of financings is not ordinarily permissible. The subsequent period-end reporting values for various classes of financings are determined on the basis as set out in the following paragraphs. ii. Held to Maturity – Investments having fixed or determinable payments and fixed maturity that the Group has the positive intention and ability to hold to maturity are classified as held to maturity. Held to maturity investments are initially recognised at fair value including direct and incremental transaction costs and subsequently measured at amortised cost, less provision for impairment in value. Amortised cost is calculated by taking into account any discount or premium on acquisition using an effective yield basis. Any gain or loss on such investments is recognised in the consolidated statement of income when the investment is derecognised or impaired. 2018 The Bank has issued no loan commitments that are measured at FVSI. For other loan commitments: 141 Notes to the Consolidated Financial Statements Annual Report About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information
144. Investments classified as held to maturity cannot ordinarily be sold or reclassified without impacting the Group ’s ability to use this classification. However, sales and reclassifications in any of the following circumstances would not impact the Group’s ability to use this classification. Annual Report 142 Notes to the Consolidated Financial Statements 2018 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information  Sales or reclassifications that are so close to maturity that the changes in market rate of commission would not have a significant effect on the fair value.  Sales or reclassifications after the Group has collected substantially all the assets’ original principal.  Sales or reclassifications attributable to non-recurring isolated events beyond the Group’s control that could not have been reasonably anticipated. iii. Held as FVSI – Investments in this category are classified as either investment held for trading or those designated as FVSI on initial recognition. Investments classified as trading are acquired principally for the purpose of selling or repurchasing in the short term. These investments comprise mutual funds and equity investments. Such investments are measured at fair value and any changes in the fair values are charged to the consolidated statement of income. Transaction costs, if any, are not added to the fair value measurement at initial recognition of FVSI investments and are expensed in the consolidated financial statements. Investment income and dividend income on financial assets held as FVSI are reflected under other operating income in the consolidated statement of income. Investments at FVSI are not reclassified subsequent to their initial recognition, except that non-derivative FVSI instruments, other than those designated as FVSI upon initial recognition, may be reclassified out of the FVSI (i.e. trading) category if they are no longer held for the purpose of being sold or repurchased in the near term, and the following conditions are met:  If the financial asset would have met the definition of financing and receivables, if the financial asset had not been required to be classified as held for trading at initial recognition, then it may be reclassified if the entity has the intention and ability to hold the financial asset for the foreseeable future or until maturity.  If the financial asset would not have met the definition of financing and receivables, and then it may be reclassified out of the trading category only in “rare circumstances”. iv. Available-for-sale – Available-for-sale investments are those non-derivative equity securities which are neither classified as Held to maturity investments, financing nor designated as FVSI, that are intended to be held for an unspecified period of time, which may be sold in response to needs for liquidity or changes in special commission rates, exchange rates or equity prices. Investments which are classified as “available-for-sale” are initially recognised at fair value including direct and incremental transaction costs and subsequently measured at fair value except for unquoted equity securities whose fair value cannot be reliably measured are carried at cost. Unrealised gains or losses arising from changes in fair value are recognised in other comprehensive income until the investment is derecognised or impaired whereupon any cumulative gain or loss previously recognised in other comprehensive income are reclassified to consolidated statement of income. A security held as available-for-sale may be reclassified to “Other investments held at amortised cost” if it otherwise would have met the definition of “Other investments held at amortised cost” and if the Bank has the intention and ability to hold that financial asset for the foreseeable future or until maturity. 2. Impairment of financial assets Held at amortised cost An assessment is made at the date of each consolidated statement of financial position to determine whether there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the financial asset or a group of financial assets and that a loss event(s) 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 difference between the assets carrying amount and the present value of estimated future cash flows is calculated and any impairment loss, is recognised for changes in the asset’s carrying amount. The carrying amount of the financial assets held at amortised cost, is adjusted either directly or through the use of an allowance for impairment account, and the amount of the adjustment is included in the Consolidated Statement of Income.
145. Considerable judgement by management is required in the estimation of the amount and timing of future cash flows when determining the level of provision required . Such estimates are essentially based on assumptions about several factors involving varying degrees of judgment and uncertainty, and actual results may differ resulting in future changes to such allowance for impairment. In addition to the specific allowance for impairment described above, the Bank also makes collective impairment allowance for impairment, which are evaluated on a group basis and are created for losses, where there is objective evidence that unidentified losses exist at the reporting date. The amount of the provision is estimated based on the historical default patterns of the investment and financing counter-parties as well as their credit ratings, taking into account the current economic climate. In assessing collective impairment, the Bank also uses internal loss estimates and makes an adjustment if current economic and credit conditions are such that the actual losses are likely to be greater or lesser than is suggested by historical trends. Loss rates are regularly benchmarked against actual outcomes to ensure that they remain appropriate. The criteria that the Bank uses to determine that there is an objective evidence of impairment loss include:  Delinquency in contractual payments of principal or profit.  Cash flow difficulties experienced by the customer.  Breach of repayment covenants or conditions.  Initiation of bankruptcy proceedings against the customer.  Deterioration of the customer’s competitive position.  Deterioration in the value of collateral. When financing amount is uncollectible, it is written-off against the related allowance for impairment. Such financing is written-off after all necessary procedures have been completed and the amount of the loss has been determined. Financing whose terms have been renegotiated are no longer considered to be past due but are treated as new financing. Restructuring policies and practices are based on indicators or criteria which, indicate that payment will most likely continue. The financing continue to be subject to an individual or collective impairment assessment, calculated using the financing’s original effective yield rate. Financing are generally renegotiated either as part of an ongoing customer relationship or in response to an adverse change in the circumstances of the borrower. In the latter case, renegotiation can result in an extension of the due date of payment or repayment plans under which the Group offers a revised rate of commission to genuinely distressed borrowers. This results in the asset continuing to be overdue and individually impaired as the renegotiated payments of commission and principal do not recover the original carrying amount of the financing. In other cases, renegotiation lead to a new agreement, this is treated as a new financing. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the customer’s credit rating), the previously recognised impairment loss is reversed by adjusting the allowance for impairment account. The amount of the reversal is recognised in the statement of income as impairment charge. Financial assets are written-off only in circumstances where effectively all possible means of recovery have been exhausted. Collectively assessed impairment allowances are provided for:  Portfolios of homogeneous assets mainly relating to the retail financing portfolio that are individually not significant.  On the corporate portfolio for financing where losses have been incurred but not yet identified, by using historical experience, judgement and statistical techniques. 2018 A specific provision for credit losses due to impairment of a financing or any other financial asset held at amortised cost is established if there is objective evidence that the Bank will not be able to collect all amounts due. The amount of the specific provision is the difference between the carrying amount and the estimated recoverable amount. The estimated recoverable amount is the present value of expected cash flows, including amounts estimated to be recoverable from guarantees and collateral, discounted based on the original effective yield rate. 143 Notes to the Consolidated Financial Statements Annual Report About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information
146. Annual Report 2018 144 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Notes to the Consolidated Financial Statements Available for-sale equity investments 5 . Foreign currencies For equity investments held as available-for-sale, a significant or prolonged decline in fair value below its cost represents objective evidence of impairment. The impairment loss cannot be reversed through the statement of income as long as the asset continues to be recognised i.e. any increase in fair value after impairment has been recorded can only be recognised in equity. On derecognition, any cumulative gain or loss previously recognised in equity is included in the consolidated statement of income for the year. The consolidated financial statements are presented in Saudi Arabian Riyals (“SAR”), which is also the Bank’s functional currency. Each entity determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. Transactions in foreign currencies are translated into SAR at exchange rates prevailing on the dates of the transactions. Monetary assets and liabilities at the year-end (other than monetary items that form part of the net investment in foreign operations are translated into SAR at exchange rates prevailing on the reporting date. 3. De-recognition of financial assets and financial liabilities  A financial asset (or a part of a financial asset, or a part of a group of similar financial assets) is derecognised when the contractual rights to the cash flows from the financial asset expire or the asset is transferred and the transfer qualifies for de-recognition.  A financial liability (or a part of a financial liability) can only be derecognised when it is extinguished, that is when the obligation specified in the contract is either discharged, cancelled or expired. 4. Guarantees In the ordinary course of business the Bank gives guarantees which include letters of credit, letters of guarantee, acceptances and stand-by letters of credit. Initially, the received margins are recognised as liabilities at fair value, being the value of the premium received and included in customers’ deposits in the consolidated financial statements. Subsequent to the initial recognition, the Bank’s liability under each guarantee is measured at the higher of the amortised premium and the best estimate of expenditure required to settle any financial obligations arising as a result of guarantees. Any increase in the liability relating to the financial guarantee is taken to the consolidated statement of income in “impairment charge for credit losses, net”. The premium received is recognised in the consolidated statement of income under “Fees from banking services, net” on a straight line basis over the life of the guarantee. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the year adjusted for the effective profits rate and payments during the year and the amortised cost in foreign currency translated at exchange rate at the end of the year. Foreign exchange gains or losses from settlement of transactions and translation of period end monetary assets and liabilities denominated in foreign currencies are recognised in the consolidated statement of income. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined. As at the reporting date, the assets and liabilities of foreign operations are translated into SAR at the rate of exchange as at the statement of financial position date, and their statement of incomes are translated at the weighted average exchange rates for the year. Exchange differences arising on translation are recognised in the statements of other comprehensive income. When a foreign operation is disposed of such that control, significant influence or joint control is lost, the cumulative amount in the translation reserve related to that foreign operation is reclassified to the statement of income as part of the gain or loss on disposal. When the Group disposes of only part of its interest in a subsidiary that includes a foreign operation while retaining control, the relevant proportion of the cumulative amount is reattributed to non-controlling interests.
147. These consolidated financial statements comprise the financial statements of the Bank and its subsidiaries as set out in note 1 to these financial statements (collectively referred to as “the Group”). The financial statements of subsidiaries are prepared for the same reporting year as that of the Bank, using consistent accounting policies. control until the date the Group ceases to control the subsidiary. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Bank loses control over a subsidiary, it:  derecognises the assets and liabilities of the subsidiary  derecognises the cumulative translation differences recorded in shareholder’s equity Subsidiaries are investees controlled by the Group. The Group controls an investee if it is exposed to, 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. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until the date when control ceases.  recognises the fair value of the consideration received The consolidated financial statements have been prepared using uniform accounting policies and valuation methods for like transactions and other events in similar circumstances. Specifically, the Group controls an investee if and only if the Group has: Intra-group balances and any income and expenses arising from intra-group transactions, are eliminated in preparing these consolidated financial statements.  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 amount of its returns. When the Group has less than majority of the voting or similar rights of an investee entity, the Bank considers all relevant facts and circumstances in assessing whether it has power over the entity, including:  The contractual arrangement with the other vote holders of the investee  Rights arising from other contractual arrangements  The Bank’s voting rights and potential voting rights granted by equity instruments such as shares The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the statement of comprehensive income from the date the Group gains  recognises the fair value of any investment retained  recognises any surplus or deficit in profit or loss  reclassifies the parent’s share of components previously recognised in OCI to profit or loss or retained earnings, as appropriate as would be required if the Bank had directly disposed of the related assets or liabilities. Investment in associate An associate is an entity over which the Bank exercises significant influence (but not control), over financial and operating policies and which is neither a subsidiary nor a joint arrangement. Investments in associates are initially recognised at cost and subsequently accounted for under the equity method of accounting and are carried in the consolidated statement of financial position at the lower of the equity-accounted or the recoverable amount. Equity-accounted value represents the cost plus post-acquisition changes in the Bank’s share of net assets of the associate (share of the results, reserves and accumulated gains/losses based on latest available financial statements) less impairment, if any. The previously recognised impairment loss in respect of investment in associate can be reversed through the consolidated statement of income, such that the carrying amount of the investment in the statement of financial position remains at the lower of the equity-accounted (before provision for impairment) or the recoverable amount. On derecognition the difference between the carrying amount of investment in the associate and the fair value of the consideration received is recognised in the consolidated statement of income. 2018 (b) Basis of consolidation 145 Notes to the Consolidated Financial Statements Annual Report About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information
148. Annual Report 2018 146 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Notes to the Consolidated Financial Statements (c) Trade date All regular way purchases and sales of financial assets are recognised and derecognised on the trade date (i.e. the date on which the Bank commits to purchase or sell the assets). Regular way purchases or sales of financial assets require delivery of those assets within the time frame generally established by regulation or convention in the market place. All other financial assets and financial liabilities (including assets and liabilities designated at fair value through statement of income) are initially recognised on the trade date at which the Group becomes a party to the contractual provisions of the instrument. (d) Offsetting financial instruments Financial assets and financial liabilities are offset and are reported net in the consolidated statement of financial position when there is a legally enforceable right to set off the recognised amounts, and when the Group intends to settle on a net basis, or to realise the asset and settle the liability simultaneously. Income and expenses are not offset in the consolidated statement of income unless required or permitted by any accounting standard or interpretation, and as specifically disclosed in the accounting policies of the Bank. (e) Revenue recognition The following specific recognition criteria must be met before revenue is recognised. Income from Mutajara, Murabaha, investments held at amortised cost, instalment sale, Istisnaa financing and credit cards services is recognised based on the effective yield basis on the outstanding balances. The effective yield is the rate that exactly discounts the estimated future cash receipts through the expected life of the financial asset (or, where appropriate, a shorter period) to the carrying amount of the financial asset . When calculating the effective yield, the Group estimates future cash flows considering all contractual terms of the financial instrument but excluding future credit losses. Fees and commissions are recognised when the service has been provided. Financing commitment fees that are likely to be drawn down and other credit related fees are deferred (above certain threshold) and, together with the related direct cost, are recognised as an adjustment to the effective yield on the financing. When a financing commitment is not expected to result in the draw-down of a financing, financing commitment fees are recognised on a straight-line basis over the commitment period. Fee and commission income that are integral to the effective interest rate on a financial asset or financial liability are included in the effective interest rate. Portfolio and other management advisory and service fees are recognised based on the applicable service contracts, over the period when the service is being provided i.e. related performance obligation is satisfied. Fee and commission income that are integral to the effective interest rate on a financial asset or financial liability are included in the effective interest rate. Portfolio and other management advisory and service fees are recognised based on the applicable service contracts, over the period when the service is being provided i.e. related performance obligation is satisfied. Fees received for asset management, wealth Management, financial planning, custody services and other similar services that are provided over an extended period of time, are recognised over the period when the service is being provided i.e. related performance obligation is satisfied . Asset management fees related to investment funds are recognised over the period the service is being provided. The same principle applies to Wealth management and Custody Services that are continuously recognised over a period of time. Dividend income is recognised when the right to receive income is established which is generally when the shareholders approve the dividend. Dividends are reflected as a component of net trading income, net income from FVSI financial instruments or other operating income based on the underlying classification of the equity instrument.
149. Net trading income results from trading activities and include all realised and unrealised gains and losses from changes in fair value and related gross investment income or expense , dividends for financial assets and financial liabilities held for trading and foreign exchange differences. Net income from FVSI financial instruments relates to financial assets and liabilities designated as FVSI and includes all realised and unrealised fair value changes, investment income, dividends and foreign exchange differences. (f ) Other real estate The Bank, in the ordinary course of business, acquires certain real estate against settlement of financing. Such real estate are considered as assets held for sale and are initially stated at the lower of net realisable value of due financing and the current fair value of the related properties, less any costs to sell (if material). No depreciation is charged on such real estate. Rental income from other real estate is recognised in the consolidated statement of income. Subsequent to initial recognition, any subsequent write down to fair value, less costs to sell, are charged to the consolidated statement of income. Any subsequent revaluation gain in the fair value less costs to sell of these assets, to the extent this does not exceed the cumulative write down previously recognised are recognised, in the consolidated statement of income. Gains or losses on disposal are recognised in the consolidated statement of income. Property and equipment is stated at cost less accumulated depreciation and accumulated impairment loss. Land is not depreciated. The cost of other property and equipment is depreciated using the straight-line method over the estimated useful life of the assets, as follows:  Leasehold land improvements over the lesser of the period of the lease or the useful life - Buildings 33 years - Leasehold building improvements over the lease period or 3 years, whichever is shorter - Equipment and furniture 3 to 10 years The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the date of each statement of financial position. Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in consolidated statement of income. All assets are reviewed for impairment at each reporting date and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Any carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. (h) Customers’ deposits Customer deposits are financial liabilities that are initially recognised at fair value less transaction cost, being the fair value of the consideration received, and are subsequently measured at amortised cost. (g) Investment properties Investment properties are held for long-term rental yield and are not occupied by the Group. They are carried at cost, and depreciation is charged to the consolidated statement of income. The cost of investment properties is depreciated using the straight-line method over the estimated useful life of the assets. (i) Provisions Provisions are recognised when the Bank has present legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. 147 (h) Property and equipment 2018 Foreign currency exchange income/loss is recognised when earned/incurred. Notes to the Consolidated Financial Statements Annual Report About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information
150. 148 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Notes to the Consolidated Financial Statements (j) Accounting for leases Annual Report 2018 1. Where the Group is the lessee Leases that do not transfer to the Group substantially all of the risk and benefits of ownership of the asset are classified as operating leases. Consequently, all of the leases entered into by the Bank are all operating leases. Payments made under operating leases are charged to the consolidated statement of income on a straight-line basis over the period of the lease. (m) Special commission excluded from the consolidated statement of income In accordance with the Sharia Authority’s resolutions, special commission income (non-Sharia compliant income) received by the Bank, is excluded from the determination of financing and investment income of the Bank, and is transferred to other liabilities in the consolidated statement of financial position and is subsequently paid-off to charities institution. (n) Provisions for employees’ end of service benefits 1. Where the Group is the lessor When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of penalty, net of anticipated rental income (if any), is recognised as an expense in the period in which termination takes place. The Group evaluates non-lease arrangements such as outsourcing and similar contracts to determine if they contain a lease which is then accounted for separately. The provision for employees’ end of service benefits is accrued using actuarial valuation according to the regulations of Saudi labour law and local regulatory requirements. (o) Share-based payments The Bank’s founders had established a share-based compensation plan under which the entity receives services from the eligible employees as consideration for equity instruments of the Bank which are granted the employees. (p) Mudaraba funds When assets are transferred under a finance lease, including assets under Islamic lease arrangements (e.g. Ijara Muntahia Bittamleek or Ijara with ownership promise) (if applicable) the present value of the lease payments is recognised as a receivable and disclosed under “Financing”. The difference between the gross receivable and the present value of the receivable is recognised as unearned finance income. Lease income is recognised over the term of the lease using the net investment method, which reflects a constant periodic rate of return. (k) Cash and cash equivalents For the purposes of the consolidated statement of cash flows, ‘cash and cash equivalents’ include notes and coins on hand, balances with SAMA (excluding statutory deposits) and due from banks and other financial institutions with original maturity of 90 days or less from the date of acquisition which are subject to insignificant risk of changes in their fair value. (l) Short-term employee benefits Short-term employee benefits are measured on an undiscounted basis and are expensed as the related service is provided. The Group carries out Mudaraba transactions on behalf of its customers, and are treated by the Group as being restricted investments. These are included as off balance sheet items. The Group’s share of profits from managing such funds is included in the Group’s consolidated statement of income. (q) Zakat As per the SAMA Circular No. 381000074519 dated 11 April 2017 and subsequent amendments through certain clarifications relating to the accounting for zakat and income tax (“SAMA Circular”), the Zakat and Income tax are to be accrued on a quarterly basis through shareholders equity under retained earnings. (r) Investment management services The Bank provides investment management services to its customers, through its subsidiary which include management of certain mutual funds. Assets held in trust or in a fiduciary capacity are not treated as assets of the Group and, accordingly, are not included in the Group’s consolidated financial statements. The Group’s share of these funds is included under FVSI investments. Fees earned are disclosed in the consolidated statement of income.
151. The Bank provides its customers with banking products based on interest avoidance concept and in accordance with Sharia regulations . The following is a description of some of the financing products: Mutajara financing: It is a financing agreement whereby the Bank purchases a commodity or an asset and sells it to the client based on a purchase promise from the client with a deferred price higher than the cash price, accordingly the client becomes debtor to the Bank with the sale amount and for the period agreed in the contract. Instalment sales financing: It is a financing agreement whereby the Bank purchases a commodity or an asset and sells it to the client based on a purchase promise from the client with a deferred price higher than the cash price. Accordingly the client becomes a debtor to the Bank with the sale amount to be paid through instalments as agreed in the contract. Istisnaa financing: It is a financing agreement whereby the Bank contracts to manufacture a commodity with certain known and accurate specifications according to the client’s request. The client becomes a debtor to the Bank for the manufacturing price, which includes cost plus profit. Murabaha financing: It is a financing agreement whereby the Bank purchases a commodity or asset and sells it to the client with a price representing the purchase price plus a profit known and agreed by the client which means that the client is aware of the cost and profit separately. 2018 (s) Bank’s products definition 149 Notes to the Consolidated Financial Statements Annual Report About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information
152. 150 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information 4 Notes to the Consolidated Financial Statements Cash and Balances with SAMA and Other Central Banks Annual Report 2018 Cash and balances with SAMA and central banks as of 31 December comprise the following : 2018 (SAR ’000) Cash in hand Statutory deposit 2017 (SAR ’000) 8,133,635 8,595,037 19,444,194 17,952,252 293,214 425,071 Mutajara with SAMA 15,375,000 21,310,111 Total 43,246,043 48,282,471 Current account with SAMA In accordance with the Banking Control Law and regulations issued by SAMA, the Bank is required to maintain a statutory deposit with SAMA and central banks at stipulated percentages of its customers’ demand deposits, customers’ time investment and other customers’ accounts calculated at the end of each Gregorian calendar month. The above statutory deposits are not available to finance the Bank’s day-to-day operations and therefore are not considered as part of cash and cash equivalents (Note 24), when preparing the consolidated statement of cash flows. 5 Due from Banks and Other Financial Institutions Due from banks and other financial institutions as of 31 December comprise the following: 2018 (SAR ’000) 2017 (SAR ’000) 778,769 825,908 Mutajara 30,029,242 9,883,887 Total 30,808,011 10,709,795 Current accounts The table below depicts the quality of due from banks and other financial institutions as at 31 December: 2018 (SAR ’000) 2017 (SAR ’000) 29,801,590 10,142,259 Non-investment grade [credit rating (BB+ to B-)] 750,591 436,360 Unrated 255,830 131,176 30,808,011 10,709,795 Investment grade [credit rating (AAA to BBB-)] Total The credit quality of due from banks and other financial institutions is managed using external credit rating agencies. The above due from banks and other financial institution balances are neither past due nor impaired.
153. 6 Notes to the Consolidated Financial Statements 151 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Investments , Net 2017 (SAR ’000) 172,753 124,825 Murabaha with Saudi Government and SAMA 22,477,145 23,452,869 Sukuk 17,395,957 10,605,139 Investment in an associate Investments held at amortised cost Less: Impairment (Stage 1) Total investments held at amortised cost (28,337) 39,844,765 – 34,058,008 Investments held as FVSI Equity investments Mutual funds Sukuk Total investments held as FVSI – 1,141,584 23,487 389,193 800,000 1,941,584 – 412,680 FVOCI investments Equity investments Mutual funds Total FVOCI investments Investments 1,103,463 – 771,293 1,034,286 1,103,463 1,805,579 43,062,565 36,401,092 The designated FVSI investments included above are designated upon initial recognition as FVSI are in accordance with the documented risk management strategy of the Bank. All investments held at amortised costs are neither past due nor impaired as of 31 December 2018. Equity investment securities designated as at FVOCI At 1 January 2018, the Bank designated its equity securities as at FVOCI. In 2017, these investments were classified as available for sale and FVSI. The FVOCI designation was made because the investments are expected to be held for the long-term for strategic purposes. The Bank does not hold these equity investments for trading purposes. None of the material strategic investments were disposed of during 2018, and there were no transfers of any cumulative gain or loss within equity relating to these investments. Annual Report 2018 (SAR ’000) 2018 (a) Investments comprise the following as of 31 December:
154. 152 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Notes to the Consolidated Financial Statements Investment in an associate Annual Report 2018 The Bank owns 22 .5% (31December 2017: 22.5%) shares of Al Rajhi Company for Cooperative Insurance, a Saudi Joint Stock Company. (b) The analysis of the composition of investments is as follows: 2018 Quoted (SAR ’000) Unquoted (SAR ’000) Total (SAR ’000) Murabaha with SAMA – 22,477,145 22,477,145 Sukuk – 18,167,620 18,167,620 1,251,854 Equities – Mutual funds Total 1,251,854 24,362 1,276,216 1,141,584 1,141,584 41,810,711 43,062,565 2017 Quoted (SAR ’000) Unquoted (SAR ’000) Total (SAR ’000) Murabaha with SAMA – 23,452,869 23,452,869 Sukuk – 10,605,139 10,605,139 Equities 896,118 Mutual funds – Total 896,118 23,487 919,605 1,423,479 1,423,479 35,504,974 36,401,092 Gross unrecognised losses (SAR ’000) Fair value (c) The analysis of unrecognised gains and losses and fair values of investments are as follows: 2018 Gross carrying value (SAR ’000) Gross unrecognised gains (SAR ’000) Murabaha with SAMA 22,477,145 1,813 Sukuk – 22,478,958 18,195,957 – Equities 1,276,216 – – 1,276,216 Mutual funds 1,141,584 – – 1,141,584 Total 43,090,902 1,813 134,960 (SAR ’000) 134,960 18,060,997 42,957,755
155. 153 Notes to the Consolidated Financial Statements 2017 Gross unrecognised gains (SAR ’000) Murabaha with SAMA 23,452,869 6,984 Sukuk 10,605,139 – 919,605 – Equities Mutual funds Total 1,423,479 36,401,092 – 6,984 Gross unrecognised losses (SAR ’000) – 45,503 – – Fair value (SAR ’000) 23,459,853 10,559,636 919,605 1,423,479 45,503 36,362,573 2018 (SAR ’000) 2017 (SAR ’000) Murabaha with SAMA 22,477,145 23,452,869 Sukuk – Investment grade 18,195,957 10,605,139 Total 40,673,102 34,058,008 (d) Credit quality of investments Investment grade includes those investments having credit exposure equivalent to Standard & Poor’s rating of AAA to BBB. The unrated category only comprise unquoted sukuks. Fitch has assigned A+ rating to the KSA as a country, as at 31 December 2018. (e) The following is an analysis of foreign investments according to investment categories as at 31 December: 2018 (SAR ’000) 2017 (SAR ’000) 1,539,271 1,545,059 Investments held at amortised cost Sukuk Investments held as FVSI Equity investments Mutual funds Total 21,282 21,300 562,477 347,180 2,123,030 1,913,539 2018 Gross carrying value (SAR ’000) Annual Report About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information
156. Annual Report 2018 154 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Notes to the Consolidated Financial Statements (f ) The following is an analysis of investments according to counterparties as at 31 December: Government and quasi government Companies Banks and other financial institutions Mutual funds 2018 (SAR ’000) 2017 (SAR ’000) 23,840,814 24,820,739 1,279,065 971,969 16,829,439 9,184,905 1,141,584 1,423,479 Less: Impairment (28,337) Net investments 43,062,565 36,401,092 Net financing 7 – Financing, Net 7.1 Financing (a) Net financing as of 31 December comprises the following: 2018 Mutajara Instalment sale Murabaha Credit cards Total Performing Non-performing (SAR ’000) (SAR ’000) Allowance for impairment (SAR ’000) (SAR ’000) 47,552,342 1,024,320 (2,562,159) 46,014,503 175,407,901 591,541 (4,024,656) 171,974,786 14,671,326 662,570 (1,219,747) 14,114,149 1,973,379 11,881 (25,909) 1,959,351 239,604,948 2,290,312 (7,832,471) 234,062,789 Net financing 2017 Mutajara Instalment sale Murabaha Credit cards Total Performing Non-performing (SAR ’000) (SAR ’000) Allowance for impairment (SAR ’000) (SAR ’000) 48,729,890 1,052,534 (2,387,590) 47,394,834 172,631,262 521,289 (1,938,279) 171,214,272 15,058,355 175,196 (1,221,817) 14,011,734 901,097 21,160 (7,524) 914,733 237,320,604 1,770,179 (5,555,210) 233,535,573
157. 155 Notes to the Consolidated Financial Statements About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information (b) The net financing by location, inside and outside the Kingdom, as of 31 December is as follows: Mutajara (SAR ’000) Instalment sale (SAR ’000) Murabaha (SAR ’000) Credit cards (SAR ’000) Total (SAR ’000) 2018 48,576,662 171,615,775 11,108,714 1,978,461 233,279,612 4,383,667 4,225,182 6,799 8,615,648 Annual Report 2018 Description Inside the Kingdom Outside the Kingdom – Gross financing 48,576,662 175,999,442 15,333,896 1,985,260 241,895,260 Allowance for impairment (2,562,159) (4,024,656) (1,219,747) (25,909) (7,832,471) Net financing 46,014,503 171,974,786 14,114,149 1,959,351 234,062,789 2017 Mutajara (SAR ’000) Instalment sale (SAR ’000) Murabaha (SAR ’000) Credit cards (SAR ’000) Total (SAR ’000) 49,782,424 168,822,412 10,192,559 917,103 229,714,498 4,330,139 5,040,992 5,154 9,376,285 173,152,551 15,233,551 922,257 239,090,783 Description Inside the Kingdom Outside the Kingdom Gross financing – 49,782,424 Allowance for impairment (2,387,590) (1,938,279) (1,221,817) (7,524) (5,555,210) Net financing 47,394,834 171,214,272 14,011,734 914,733 233,535,573 The table below depicts the categories of financing as per main business segments at 31 December: 2018 Mutajara Instalment sale Murabaha Retail (SAR ’000) Corporate (SAR ’000) 320,987 48,255,675 48,576,662 169,178,633 6,820,809 175,999,442 373,612 14,960,284 15,333,896 1,985,260 Credit cards Financing, gross Less: Allowance for impairment Financing, net – 1,985,260 171,858,492 70,036,768 241,895,260 (4,050,565) (3,781,906) (7,832,471) 167,807,927 167,807,927 Total (SAR ’000) 66,254,862 66,254,862 234,062,789 234,062,789
158. Notes to the Consolidated Financial Statements Annual Report 2018 156 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information 2017 Mutajara Retail (SAR ’000) Corporate (SAR ’000) Total (SAR ’000) 132,645 49,649,779 49,782,424 164,893,047 8,259,504 173,152,551 Murabaha 414,109 14,819,442 15,233,551 Credit cards 922,257 Instalment sale Financing, gross Less: Allowance for impairment Financing, net – 922,257 166,362,058 72,728,725 239,090,783 (2,023,434) (3,531,776) (5,555,210) 164,338,624 164,338,624 69,196,949 69,196,949 233,535,573 233,535,573 (c) The table below summarises financing balances at 31 December that are neither past due nor impaired, past due but not impaired and impaired, as per the main business segments of the Group: 2018 Neither past due nor impaired (SAR ’000) Retail Corporate Total Past due but not impaired (SAR ’000) Impaired Total (SAR ’000) (SAR ’000) Allowance for impairment (SAR ’000) Net financing (SAR ’000) 170,978,735 276,300 603,457 171,858,492 (4,050,565) 167,807,927 62,082,584 6,267,329 1,686,855 70,036,768 (3,781,906) 66,254,862 233,061,319 6,543,629 2,290,312 241,895,260 (7,832,471) 234,062,789 Impaired Total Net financing (SAR ’000) (SAR ’000) Allowance for impairment (SAR ’000) 2017 Neither past due nor impaired (SAR ’000) Retail Corporate Total Past due but not impaired (SAR ’000) (SAR ’000) 165,405,592 414,018 542,448 166,362,058 (2,023,434) 164,338,624 67,503,558 3,997,436 1,227,731 72,728,725 (3,531,776) 69,196,949 232,909,150 4,411,454 1,770,179 239,090,783 (5,555,210) 233,535,573 Financing past due for less than 90 days is not treated as impaired, unless other available information proves otherwise. “Neither past due nor impaired” and “past due but not impaired” comprise total performing financing.
159. Notes to the Consolidated Financial Statements 157 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information 7 .2 Allowance for impairment of financing 2018 Retail (SAR ’000) Corporate (SAR ’000) Total (SAR ’000) Closing allowance as at 31st December 2017 (calculated under IAS 39) 2,023,434 3,531,776 5,555,210 Amounts restated through opening retained earnings 3A (iii) 1,863,397 1,019,291 2,882,688 Opening impairment allowance as at 1 January 2018 (calculated under IFRS 9) 3,886,831 4,551,067 8,437,898 Charge for the year, net Bad debts written off against provision Balance at the end of the year 1,774,673 982,523 2,757,196 (1,610,939) (1,751,684) (3,362,623) 4,050,565 3,781,906 167,807,927 66,254,862 7,832,471 234,062,789 2017 Retail (SAR ’000) Corporate (SAR ’000) Total (SAR ’000) Balance at beginning of the year 3,088,691 3,544,010 6,632,701 Charge for the year, net 1,575,624 1,063,367 2,638,991 (2,640,881) (1,075,601) (3,716,482) Bad debts written off against provision Balance at the end of the year 2,023,434 3,531,776 164,338,624 69,196,949 5,555,210 233,535,573 (b) The following table shows reconciliations from the opening to the closing balance of the impairment allowance for financings to customers at amortised cost. 2018 12 month ECL (SAR ’000) Lifetime ECL not credit impaired (SAR ’000) Lifetime ECL credit impaired (SAR ’000) Total (SAR ’000) Balance at 1 January 2018 2,643,679 4,094,076 1,700,143 8,437,898 Transfer to 12 month ECL 411,893 (411,893) Transfer to Lifetime ECL not credit impaired (38,177) 112,134 (73,957) – (8,766) (329,629) 338,395 – Financings to customers at amortised cost Transfer to Lifetime ECL credit impaired Charge for the period Write-offs Balance as at 31 December 2018 – – 138,418 361,338 2,468,622 2,968,378 (497,701) (465,137) (2,399,785) (3,362,623) 2,649,346 3,360,889 3,360,889 2,033,418 2,033,418 8,043,653 8,043,653 Closing balance as at 31 December 2018 includes impairment allowance related to off balance amounting to SAR 211 Mn. which is accounted for in other liabilities. Closing balance of Lifetime ECL credit impaired differs from total reported Non-Performing Loans (NPL) due to IFRS 9 implementation. Annual Report 2018 (a) The movement in the allowance for impairment of financing for the years ended 31 December is as follows:
160. 158 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Notes to the Consolidated Financial Statements 7 .3 Impairment charge movement Annual Report 2018 The details of the impairment charge on financing for the year recorded in the consolidated statement of income is as follows: 2018 (SAR ’000) 2017 (SAR ’000) Charge for the year for on balance sheet 2,968,378 2,638,991 Charge for the year for off balance sheet (211,182) Recovery of written off financing, net Allowance for impairment, net – (1,226,250) (1,091,414) 1,530,946 1,547,577 2018 (SAR ’000) 2017 (SAR ’000) 30,551,173 33,802,769 7.4 Financing include finance lease receivables, which are as follows: Gross receivables from finance lease Less than 1 year 1 to 5 years 4,485 1,234,258 22,201,101 24,357,231 8,345,587 8,211,280 30,551,173 33,802,769 Unearned future finance income on finance lease (4,593,105) (4,903,943) Net receivables from finance lease 25,958,068 28,898,826 Over 5 years
161. Notes to the Consolidated Financial Statements 8 159 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Property and Equipment , Net Buildings (SAR ’000) (SAR ’000) Leasehold land and buildings improvements (SAR ’000) Equipment and furniture Total 2018 (SAR ’000) (SAR ’000) Cost 2,009,863 3,219,265 932,383 4,533,276 10,694,787 Additions At 1 January 2017 310,996 459,651 9,288 1,034,027 1,813,962 Disposals (263) (429) (39,284) (39,976) 2,320,596 3,678,487 941,671 5,528,019 12,468,773 23,229 502,482 34,242 959,949 1,519,902 (26,159) (35,391) (61,550) 4,180,969 949,754 6,452,577 13,927,125 At 31 December 2017 Additions Disposals At 31 December 2018 – 2,343,825 – – Accumulated depreciation At 1 January 2017 – 352,187 888,632 2,968,806 4,209,625 Charge for the year – 58,684 14,403 367,479 440,566 Disposals – (430) (39,115) (39,545) At 31 December 2017 – 410,441 903,035 3,297,170 4,610,646 Charge for the year – 65,388 13,628 363,155 442,171 Disposals – (23,279) (23,279) At 31 December 2018 – – – – 475,829 916,663 3,637,046 5,029,538 Net book value At 31 December 2018 2,343,825 3,705,140 33,091 2,815,531 8,897,587 At 31 December 2017 2,320,596 3,268,046 38,636 2,230,849 7,858,127 Buildings include work-in-progress amounting to SAR 2,172 Mn. as at 31 December 2018 (2017: SAR 1,803 Mn.). Equipment and furniture includes information technology-related assets having net book value of SAR 2,573 Mn. as at 31 December 2018 (2017: SAR 2,082 Mn.). 9 Investment Properties, Net Investment properties consist of properties acquired by the Group in the year 2016. The net book value of the investment properties approximates the fair value. Annual Report Land 2018 Property and equipment, net comprises the following as of 31 December:
162. 160 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Notes to the Consolidated Financial Statements 10 Other Assets , Net Annual Report 2018 Other assets, net comprise the following as of 31 December: 2018 (SAR ’000) 2017 (SAR ’000) Receivables, net 879,916 1,270,554 Prepaid expenses 393,317 714,996 Assets in transit subject to financing 574,905 574,921 Accrued income 273,846 497,979 Cheques under collection 324,636 494,009 Advance payments 266,634 407,982 72,106 147,106 843,885 907,917 3,629,245 5,015,464 2018 (SAR ’000) 2017 (SAR ’000) Other real estate Others, net Total 11 Due to Banks and Other Financial Institutions Due to banks and other financial institutions comprise the following as of 31 December: 925,945 1,066,474 Banks’ time investments 6,363,679 4,456,093 Total 7,289,624 5,522,567 2018 (SAR ’000) 2016 (SAR ’000) 268,416,842 251,729,768 18,689,225 15,917,263 6,803,058 5,409,414 293,909,125 273,056,445 Current accounts 12 Customers’ Deposits Customers’ deposits by type comprise the following as of 31 December: Demand deposits Customers’ time investments Other customer accounts Total The balance of the other customers’ accounts includes margins on letters of credit and guarantees, cheques under clearance and transfers.
163. Customers ’ deposits by currency comprise the following as of 31 December: Saudi Arabian Riyals Foreign currencies Total 2018 (SAR ’000) 2016 (SAR ’000) 282,460,829 260,388,240 11,448,296 12,668,205 293,909,125 273,056,445 2018 (SAR ’000) 2017 (SAR ’000) 13 Other Liabilities Other liabilities comprise the following as of 31 December: 3,602,605 3,436,195 Provision for employees’ end of service benefits (see Note 25) 901,970 848,422 Accrued expenses 974,599 837,597 56,350 16,854 Accounts payable Charities (see Note 31) Zakat payable 6,348,660 Other 3,366,879 3,647,530 Total 15,251,063 8,786,598 – 14 Share Capital The authorised, issued and fully paid share capital of the Bank consists of 1,625 million shares of SAR 10 each (2017: 1,625 million shares of SAR 10 each). 15 Statutory and Other Reserves The Banking Control Law in Saudi Arabia and the By-Laws of the Bank require a transfer to statutory reserve at a minimum of 25% of the annual net income for the year. Such transfers continue until the reserve equals the paid up share capital. This reserve is presently not available for distribution. Previously, the Bank was recording the amount of Zakat it calculates in other reserves until the final amount of Zakat payable can be determined. 2018 161 Notes to the Consolidated Financial Statements Annual Report About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information
164. Annual Report 2018 162 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Notes to the Consolidated Financial Statements As a major event , during the year, the Bank reach a settlement agreement with the General Authority for Zakat & Income Tax (GAZT ), to settle the Zakat Liability amounting to SAR 5,405,270,925 for previous years and until the end of the financial year 2017. The settlement agreement requires the Bank to settle the 20% of the agreed Zakat liability in the current year and the remaining to be settled over the period of five years. Accordingly the Bank have adjusted Zakat for the previous years and until the end of financial year 2017 through its retained earnings. As a result of the settlement agreement the Bank have agreed to withdraw all of the previous appeals which were filed with the competent authority with respect to Zakat. Furthermore, Zakat for 2018 is amounted to SAR 943,389,178. In addition, there is 48 million has been paid related to ZAKAT 2017 and other payment. In addition, other reserves includes FVOCI investments reserve, foreign currency translation reserve and employee share plan. The movements in FVOCI investments, foreign currency reserves, and employee share plan are summarised as follows: 2018 Balance at beginning of the year Impact of adopting IFRS 9 Net change in fair value Exchange difference on translation of foreign operations Balance at the end of the year FVOCI investments (SAR ’000) Foreign currency translation (SAR ’000) Employee share plan (SAR ’000) (80,130) (74,311) 37,110 Total (SAR ’000) (117,331) (129,789) – – (129,789) (49,798) – – (49,798) – (52,637) – (259,717) (52,637) (126,948) 37,110 (349,555) 2017 Balance at the beginning of the year Net change in fair value Net amount transferred to consolidated statement of income Exchange difference on translation of foreign operations Balance at the end of the year Available-for-sale investments (SAR ’000) Foreign currency translation (SAR ’000) Employee share plan (SAR ’000) 58,179 (147,935) 37,110 201,825 (340,134) – (80,130) – – 73,624 (74,311) Total (SAR ’000) (52,646) – 201,825 – (340,134) – 73,624 37,110 (117,331)
165. Notes to the Consolidated Financial Statements 16 Commitments and Contingencies 163 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Provisions have been made for some of these legal cases based on the assessment of the Bank ’s legal advisors. (b) Capital commitments As at 31 December 2018, the Bank had capital commitments of SAR 170 million (2017: SAR 629 million) relating to contracts for computer software update and development, and SAR 65 million (2017: SAR 410 million) relating to building new workstation, and development and improvement of new and existing branches. (c) Credit related commitments and contingencies The primary purpose of these instruments is to ensure that funds are available to customers as required. Credit related commitments and contingencies mainly comprise letters of guarantee, standby letters of credit, acceptances and unused commitments to extend credit. Guarantees and standby letters of credit, which represent irrevocable assurances that the Bank will make payments in the event that a customer cannot meet his obligations to third parties, carry the same credit risk as financing. Letters of credit, which are written undertakings by the Bank on behalf of a customer authorising a third party to draw drafts on the Bank up to a stipulated amount under specific terms and conditions, are collateralised by the underlying shipments of goods to which they relate, and therefore, carry less risk. Acceptances comprise undertakings by the Bank to pay bills of exchange drawn on customers. The Bank expects most acceptances to be presented before being reimbursed by the customers. Cash requirements under guarantees and letters of credit are considerably less than the amount of the commitment because the Bank does not expect the third party to draw necessarily funds under the agreement. Commitments to extend credit represent unused portions of authorisation to extended credit, principally in the form of financing, guarantees and letters of credit. (d) Credit related commitments and contingencies With respect to credit risk relating to commitments to extend unused credit, the Bank is potentially exposed to a loss in an amount which is equal to the total unused commitments. The likely amount of loss, which cannot be reasonably estimated, is expected to be considerably less than the total unused commitments, since most commitments to extend credit are contingent upon customers maintaining specific credit standards. The total outstanding commitments to extend credit do not necessarily represent future cash requirements, as many of these commitments could expire without being funded. Annual Report As at 31 December 2018, there were certain legal proceedings outstanding against the Bank in the normal course of business including those relating to the extension of credit facilities. Such proceedings are being reviewed by the concerned parties. 2018 (a) Legal proceedings
166. Notes to the Consolidated Financial Statements 164 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information 1 . The contractual maturities of the Bank’s commitments and contingent liabilities are as follows at 31 December: 2018 From 3 to 12 months (SAR ’000) From 1 to 5 years (SAR ’000) Letters of credit 562,899 417,925 1,945 Acceptances 261,183 208,706 Letters of guarantee 1,270,202 2,405,041 1,159,962 41,956 4,877,161 Irrevocable commitments to extend credit 2,459,684 2,901,726 855,965 265,061 6,482,436 Total 4,553,968 5,933,398 2,017,872 307,017 12,812,255 Over 5 years (SAR ’000) Total Annual Report 2018 Less than 3 months (SAR ’000) Over 5 years (SAR ’000) – – – Total (SAR ’000) 982,769 469,889 2017 Letters of credit Acceptances Letters of guarantee Irrevocable commitments to extend credit Total Less than 3 months (SAR ’000) From 3 to 12 months (SAR ’000) From 1 to 5 years (SAR ’000) 1,027,240 82,382 68,626 – – – (SAR ’000) 1,178,248 313,137 117,327 1,790,856 1,986,680 1,183,423 8,396 4,969,355 430,464 875,279 2,983,742 2,969,064 161,284 6,989,369 4,006,512 5,170,131 4,221,113 169,680 13,567,436 2018 (SAR ’000) 2017 (SAR ’000) 11,704,696 10,728,656 1,107,559 2,838,780 12,812,255 13,567,436 2. The analysis of commitments and contingencies by counterparty is as follows as at 31 December: Corporates Banks and other financial institutions Total (d) Operating lease commitments The future minimum lease payments under non-cancelable operating leases, where the Bank is the lessee, are as follows as at 31 December: 2018 (SAR ’000) 2017 (SAR ’000) 400 41,163 1 to 5 years 234,652 197,712 Over 5 years 52,458 56,362 287,510 295,237 Less than 1 year Total
167. Notes to the Consolidated Financial Statements 165 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information 17 Net Financing and Investment Income 2017 (SAR ’000) Corporate Mutajara 2,176,364 2,049,915 Instalment sale 9,055,152 8,533,438 684,999 691,807 Financing Murabaha Investments and other 1,092,878 673,238 Mutajara with banks 563,249 517,212 Income from sukuk 186,815 115,394 13,759,457 12,581,004 (346,796) (360,084) Murabaha with SAMA Gross financing and investment income Return on customers’ time investments Return on due to banks and financial institutions’ time investments (159,928) (191,503) Return on customers’, banks’ and financial institutions’ time investments (506,724) (551,587) 13,252,733 12,029,417 2018 (SAR ’000) 2017 (SAR ’000) 1,334,378 1,060,165 Drafts and remittances 397,142 437,953 Credit cards 499,007 400,823 Other electronic channel related 920,795 821,598 Brokerage and Asset Management 398,725 335,706 Other 362,150 358,759 3,912,197 3,415,004 Net financing and investment income 13,252,733 18 Fee From Banking Services, Net Fee from banking services, net for the years ended 31 December comprise the following: Fee income: Financing related Total fee income Fee expenses: ATM Interchange related Fee from banking services, net (810,911) (717,796) 3,101,286 2,697,208 Annual Report 2018 (SAR ’000) 2018 Net financing and investment income for the years ended 31 December comprises the following:
168. 166 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Notes to the Consolidated Financial Statements 19 Other Operating Income Annual Report 2018 Other operating income for the years ended 31 December comprises the following : Dividend income (Loss)/Gain on sale of property and equipment, net 2018 (SAR ’000) 2017 (SAR ’000) 39,852 30,176 (115) 594 115,280 81,592 Share in earnings of associate 47,928 35,545 Gain/(loss) on investments held as FVSI 14,600 12,635 Rental income from investment property – Income from sale of various investments 3,374 (32,000) Loss on sale of other real state – – Gain on sale of equity investment Other income, net Total 72,144 24,150 100,330 209,695 336,390 20 Salaries and Employees’ Related Benefits The following tables provide an analysis of the salaries and employees’ related benefits for the years ended 31 December: 2018 Variable compensations paid Number of employees Fixed compensation (SAR ’000) Cash (SAR ’000) Shares 17 31,515 18,352 35,712 1,460 391,876 57,459 15,818 463 146,484 32,964 15,534 Other employees 11,592 1,876,868 197,110 18,360 Total 13,532 2,446,743 305,885 85,424 Executives Employees engaged in risk-taking activities Employees engaged in control functions Accrued fixed compensations in 2018 148,136 – – Other employees’ costs 214,570 – – Gross total 13,532 2,809,449 305,885 85,424
169. Notes to the Consolidated Financial Statements 167 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information 2017 Executives 18 Employees engaged in risk-taking activities Fixed compensation (SAR ’000) Cash (SAR ’000) 29,328 18,588 Shares 30,577 1,486 384,212 63,815 17,155 363 169,956 27,097 12,221 Other employees 11,210 1,769,152 171,720 17,468 Total 13,077 2,352,648 281,220 77,421 Employees engaged in control functions Accrued fixed compensations in 2018 241,622 – – Other employees’ costs 219,648 – – Gross total 13,077 13,684 2,813,918 2,873,687 281,220 286,329 77,421 6,797 Salaries and employees’ related benefits include end of services, General Organisation for Social Insurance, business trips, training and other benefits. As the Kingdom of Saudi Arabia is part of the G-20, instructions were given to all financial institutions in the Kingdom to comply with the standards and principles of Basel II and the Financial Stability Board. SAMA, as the regulatory for financial institutions in Saudi Arabia, issued regulations on compensations and bonus in accordance with the standards and principles of Basel II and the Financial Stability Board. In light of the above SAMA’s regulations, the Bank issued compensation and bonuses policy which was implemented after the Board of Directors approval. The scope of this policy is extended to include the Bank and its subsidiary companies (local and international) that are operating in the financial service sector. Accordingly, it includes all official employees, permanent and temporary contracted employees and service providers (contribution in risk position if SAMA allows the use of external resources). For consistency with other banking institutions in the Kingdom of Saudi Arabia, the Bank has used a combination of fixed and variable compensation to attract and maintain talent. The fixed compensation is assessed on a yearly basis by comparing it to other local banks in the Kingdom of Saudi Arabia including the basic salaries, allowance and benefits which is related to the employees’ ranks. The variable compensation is related to the employees performance and their compatibility to achieve the agreed on objectives. It includes incentives, performance bonus and other benefits. Incentives are mainly paid to branches’ employees whereby the performance bonuses are paid to head office employees and others who do not qualify for incentives. These bonuses and compensation are approved by the Board of Directors as a percentage of the Bank’s income. Annual Report Number of employees 2018 Variable compensations paid
170. 168 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Notes to the Consolidated Financial Statements 21 Other General and Administrative Expenses Annual Report 2018 Other general and administrative expenses for the years ended 31 December comprises the following : 2018 (SAR ’000) 2017 (SAR ’000) Communications & Utilities Expenses 356,061 310,007 Maintenance & Security Expenses 415,660 400,168 Cash Feeding & Transfer Expenses 327,112 329,331 Software & IT Support Expenses 178,317 161,396 Other Operational Expenses 648,368 470,150 1,925,518 1,671,052 Total 22 Earnings Per Share Earnings per share for the years ended 31 December 2018 and 2017 have been calculated by dividing the net income for the year by the weighted average number of shares outstanding. The weighted average number of ordinary shares outstanding during the year is the number of ordinary shares outstanding at the beginning of the year, adjusted by the number of ordinary shares bought back or issued during the period multiplied by a time-weighting factor, if any. The time-weighting factor is the number of days that the shares are outstanding as a proportion of the total number of days in the year. 23 Paid and Proposed Gross Dividends and Zakat The Bank distributed dividends for the first half of 2018 amounting to SAR 3,250,000 thousand (i.e. SAR 2 per share) (2017: SAR 2,437,500 thousand (i.e. SAR 1.5 per share). Also the Bank proposed final dividends for the year 2018 amounting to SAR 3,656,250 thousand (i.e. SAR 2.25 per share) (2017: SAR 4,062,500 thousand i.e. SAR 2.5 per share). 24 Cash and Cash Equivalents Cash and cash equivalents included in the consolidated statement of cash flows comprise the following: 2018 (SAR ’000) 2017 (SAR ’000) Cash in hand 8,133,635 8,595,037 Due from banks and other financial institutions maturing within 90 days from the date of purchased 5,984,654 891,976 293,214 425,071 Mutajara with SAMA 15,375,000 21,310,111 Total 29,786,503 31,222,195 Balances with SAMA and other central banks (current accounts)
171. Notes to the Consolidated Financial Statements 169 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information 25 Employee Benefit Obligations 25 .2 The amounts recognised in the statement of financial position and movement in the obligation during the year based on its present value are as follows: 2018 (SAR ’000) 2017 (SAR ’000) Defined benefit obligation at the beginning of the year 848,422 761,671 Current service cost 107,685 97,475 Interest cost 85,995 34,579 Benefits paid (140,132) (74,824) Remeasurement loss/(gain) Defined benefit obligation at the end of the year – 29,521 901,970 848,422 2018 (SAR ’000) 2017 (SAR ’000) 106,152 97,475 25.3 Charge/(reversal) for the year Current service cost Past service cost 1,533 – 107,685 97,475 2018 (SAR ’000) 2017 (SAR ’000) 25.4 Remeasurement recognised in other comprehensive income (Gain)/loss from change in demographic assumptions – 601 (Gain)/loss from change in experience assumptions – 20,094 (Gain)/loss from change in financial assumptions – 8,826 – 29,521 Annual Report The Bank operates an end of service benefit plan for its employees based on the prevailing Saudi Labour Laws. Accruals are made in accordance with the actuarial valuation under the projected unit credit method while the benefit payments obligation is discharged as and when it falls due. 2018 25.1 General description
172. Annual Report 2018 170 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Notes to the Consolidated Financial Statements 25 .5 Principal actuarial assumptions (in respect of the employee benefit scheme) 2018 2017 Discount rate 5.00% 4.50% Expected rate of salary increase 3.00% 3.50% 60 years for male employees and 55 for female employees 60 years for male employees and 55 for female employees Normal retirement age Assumptions regarding future mortality are set based on actuarial advice in accordance with the published statistics and experience in the region. 25.6 Sensitivity of actuarial assumptions The table below illustrates the sensitivity of the defined benefit obligation valuation as at 31 December 2018 to the discount rate (5%), salary escalation rate (3.00%), withdrawal assumptions and mortality rates. 2018 Impact on defined benefit obligation – Increase/(Decrease) Change in assumption Increase in assumption (SAR ’000) Decrease in assumption (SAR ’000) +/- 100 basis points (96,511) 115,452 +/- 100 basis points 117,256 (99,217) Increase or decrease by 20% 9,020 (10,824) Base Scenario Discount rate Expected rate of salary increase Normal retirement age 13,684 2017 6,797 Impact on defined benefit obligation – Increase/(Decrease) Base Scenario Change in assumption Increase in assumption (SAR ’000) Decrease in assumption (SAR ’000) Discount rate +/- 100 basis points (84,916) 121,031 Expected rate of salary increase +/- 100 basis points 120,796 (86,419) Increase or decrease by 20% 13,800 Normal retirement age 13,684 The above sensitivity analyses are based on a change in an assumption holding all other assumptions constant. (3,252) 6,797
173. Notes to the Consolidated Financial Statements 171 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information 25 .7 Expected maturity 901,970 Less than a year 1-2 years 2-5 years Over 5 years Total 2018 As at 31 December 2018 61,300 71,836 244,884 572,808 950,828 Annual Report Expected maturity analysis of undiscounted defined benefit obligation for the end of service plan is as follows: The weighted average duration of the defined benefit obligation is 15 years. 26 Operating Segments The Bank identifies operating segments on the basis of internal reports about the activities of the Bank that are regularly reviewed by the chief operating decision-maker, principally the Chief Executive Officer, in order to allocate resources to the segments and to assess its performance. For management purposes, the Bank is organised into the following four main businesses segments: Retail segment: Includes individual customer deposits, credit facilities, customer debit current accounts (overdrafts) and fees from banking services. Corporate segment: Incorporates deposits of VIP, corporate customers deposits, credit facilities, and debit current accounts (overdrafts). Treasury segment: Includes treasury services, Murabaha with SAMA and international Mutajara portfolio and remittance business. Investment services and brokerage segments: Includes investments of individuals and corporates in mutual funds, local and international share trading services and investment portfolios. Transactions between the above segments are on normal commercial terms and conditions. Assets and liabilities for the segments comprise operating assets and liabilities, which represents the majority of the Bank’s assets and liabilities.
174. Notes to the Consolidated Financial Statements (a) The Bank’s total assets and liabilities, together with its total operating income and expenses, and net income, as of and for the years ended 31 December for each segment are as follows: 2018 Annual Report 2018 172 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Total (SAR ’000) Investment services and brokerage segment (SAR ’000) (SAR ’000) 62,102,390 111,970,301 3,033,161 365,003,830 273,503,541 18,947,567 23,868,335 130,369 316,449,812 Financing and investments income from external customers 8,968,075 2,790,552 1,976,310 24,520 13,759,457 Inter-segment operating income/(expense) 1,154,739 (697,360) (457,379) 10,122,814 2,093,192 1,518,931 24,520 13,759,457 (124,676) (213,870) (159,928) (8,250) (506,724) Net financing and investment income 9,998,138 1,879,322 1,359,003 16,270 13,252,733 Fees from banking services, net 1,848,899 570,304 283,358 398,725 3,101,286 143,513 40,892 571,399 Retail segment Corporate segment Treasury segment (SAR ’000) (SAR ’000) Total assets 187,897,978 Total liabilities Gross financing and investment income Return on customers’, banks’ and financial institutions’ time investments Exchange income, net Other operating income, net Total operating income 25,019 12,015,569 – – – – 755,804 62,699 121,977 209,695 2,490,518 2,276,459 536,972 17,319,518 (5,769) (415,035) (7,358) (14,009) Impairment charge for financing, net (1,177,409) (302,894) (50,643) Other operating expenses (4,095,037) (322,513) (490,076) (141,908) (5,049,534) Total operating expenses (5,687,481) (632,765) (554,728) (147,677) (7,022,651) 6,328,088 1,857,753 1,721,731 389,295 10,296,867 Depreciation Net income for the year – (442,171) (1,530,946)
175. 173 Notes to the Consolidated Financial Statements 2017 (SAR ’000) (SAR ’000) 63,535,245 92,783,499 2,927,835 343,116,528 249,429,672 21,288,466 16,107,112 540,360 287,365,610 8,230,257 2,862,192 1,466,239 22,316 12,581,004 984,000 (648,377) (335,623) 9,214,257 2,213,815 1,130,616 (75,531) (240,145) (235,911) Net financing and investment income 9,138,726 1,973,670 894,705 22,316 12,029,417 Fees from banking services, net 327,915 2,697,208 Corporate segment Treasury segment (SAR ’000) (SAR ’000) Total assets 183,869,949 Total liabilities Financing and investments income from external customers Inter-segment operating income/(expense) Gross financing and investment income Return on customers’, banks’ and financial institutions’ time investments 1,758,574 573,605 37,114 Exchange income, net 427,996 50,714 363,129 Other operating income, net 131,306 Total operating income Depreciation 11,456,602 – – 22,316 – – – 12,581,004 (551,587) 841,839 105,063 100,021 336,390 2,597,989 1,400,011 450,252 15,904,854 (5,910) (410,957) (10,866) (12,834) Impairment charge for financing, net (1,191,115) (355,917) (545) Other operating expenses (3,985,776) (460,695) (218,634) (130,880) (4,795,985) Total operating expenses (5,587,847) (827,478) (232,013) (136,790) (6,784,128) 5,868,755 1,770,511 1,167,998 313,462 9,120,726 Total (SAR ’000) 307,933,365 Net income for the year – (440,566) (1,547,577) (b) The Group’s credit exposure by business segments as of 31 December is as follows: 2018 Consolidated balance sheet assets Commitments and contingencies excluding irrevocable commitments to extend credit Retail segment Corporate segment Treasury segment (SAR ’000) (SAR ’000) (SAR ’000) Investment services and brokerage segment (SAR ’000) 158,519,040 52,392,321 94,463,095 2,558,909 – 6,329,819 – – 6,329,819 2018 Total Investment services and brokerage segment (SAR ’000) Retail segment Annual Report About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information
176. Notes to the Consolidated Financial Statements 174 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Annual Report 2018 2017 Consolidated balance sheet assets Commitments and contingencies excluding irrevocable commitments to extend credit Retail segment Corporate segment Treasury segment (SAR ’000) (SAR ’000) 164,609,073 62,660,677 – (SAR ’000) Investment services and brokerage segment (SAR ’000) (SAR ’000) 51,727,163 2,927,835 281,924,748 6,776,468 – – Total 6,776,468 27 Financial Risk Management 27.1 Credit risk The Bank’s activities expose it to a variety of financial risks and those activities involve the analysis, evaluation, acceptance and management of some degree of risk or combination of risks. Taking risk is core to the banking business, and these risks are an inevitable consequence of participating in financial markets. The Bank’s aim is therefore to achieve an appropriate balance between risk and return and minimise potential adverse effects on the Bank’s financial performance. Credit risk is considered to be the most significant and pervasive risk for the Bank. The Bank takes on exposure to credit risk, which is the risk that the counter-party to a financial transaction will fail to discharge an obligation causing the Bank to incur a financial loss. Credit risk arises principally from financing (credit facilities provided to customers) and from cash and deposits held with other banks. Further, there is credit risk in certain off-balance sheet financial instruments, including guarantees relating to purchase and sale of foreign currencies, letters of credit, acceptances and commitments to extend credit. Credit risk monitoring and control is performed by the CRMG which sets parameters and thresholds for the Bank’s financing activities. The Bank’s risk management policies, procedures and systems are designed to identify and analyse these risks and to set appropriate risk mitigates and controls. The Bank reviews its risk management policies and systems on an ongoing basis to reflect changes in markets, products and emerging best practices. Risk management is performed by the Credit and Risk Management Group (“CRMG”) under policies approved by the Board of Directors. The CRMG identifies and evaluates financial risks in close co-operation with the Bank’s operating units. The most important types of risks identified by the Bank are credit risk, liquidity risk and market risk. Market risk includes currency risk, profit rate risk, operational risk and price risk. (a) Credit risk measurement (i) Financing The Bank has structured a number of financial products which are in accordance with Sharia law in order to meet the customers demand. These products are all classified as financing assets in the Bank’s consolidated statement of financial position. In measuring credit risk of financing at a counterparty level, the Bank considers the overall credit worthiness of the customer based on a proprietary risk methodology. This risk rating methodology utilises a 10 point scale based on quantitative and qualitative factors with seven performing categories (rated 1 to 7) and three non-performing categories (rated 8-10). The risk rating process is intended to advise the various independent approval authorities of the inherent risks associated with the counterparty and assist in determining suitable pricing commensurate with the associated risk.
177. (ii) Credit risk grades For corporate exposures, the Bank allocates each exposure to a credit risk grade based on a variety of data that is determined to be predictive of the risk of default and applying experienced credit judgment. Credit risk grades are defined using qualitative and quantitative factors that are indicative of risk of default. These factors vary depending on the nature of the exposure and the type of borrower. Credit risk grades are defined and calibrated such that the risk of default occurring increases exponentially as the credit risk deteriorates so, for example, the difference in risk of default between credit risk grades 1 and 2 is smaller than the difference between credit risk grades 2 and 3. Each corporate exposure is allocated to a credit risk grade at initial recognition based on available information about the borrower. Exposures are subject to ongoing monitoring, which may result in an exposure being moved to a different credit risk grade. The monitoring of corporate exposure involves use of the following data.  Information obtained during periodic review of customer files – e.g. audited financial statements, management accounts, budgets and projections.  Data from credit reference agencies, press articles, changes in external credit ratings.  Actual and expected significant changes in the political, regulatory and technological environment of the borrower or in its business activities. Credit risk grades are a primary input into the determination of the term structure of PD for exposures. The Bank collects performance and default information about its customers analysed by segment as well as by credit risk grading. The Bank employs analytical techniques incorporating internal default estimates backed by transition matrices published by external agencies to construct PD term structures that can be applied to each exposure based on the its remaining lifetime. These PD tern structures are then adjusted to incorporate the impact of macroeconomic outlook to arrive at a forward looking estimate of PD across the lifetime. For retail exposure, borrower and loan specific information collected at the time of application, repayment behaviour etc. are used to construct risk based segmentation using Chi-square Automatic Interaction Detection (CHAID) (or Decision Tree) technique. Risk segments are constructed to identify and aggregate customer with similar risk characteristics. For each risk segment thus formed, PD term structures are constructed using historical data that can be applied to each exposure based on its remaining lifetime. Based on consideration of a variety of external actual and forecast information from published sources, the Bank formulates a forward looking adjustment to PD term structures to arrive at forward looking PD estimates across the lifetime using macro economic models. Risk rating 1 Exceptional – Obligors of unquestioned credit standing at the pinnacle of credit quality. Risk rating 2 Excellent – Obligors of the highest quality, presently and prospectively. Virtually no risk in lending to this class, Cash flows reflect exceptionally large and stable margins of protection. Projected cash flows including anticipated credit extensions indicate strong liquidity levels and debt service coverage. Balance Sheet parameters are strong, with excellent asset quality in terms of value and liquidity. 175 (iii) Generating the term structure of PD 2018 Specific provisions are evaluated individually for all different types of financing, whereas additional provisions are evaluated based on collective impairment of financing, and are created for credit losses where there is objective evidence that the unidentified potential losses are present at the reporting date. The amount of the specific provision is the difference between the carrying amount and the estimated recoverable amount. The collective provision is based upon deterioration in the internal credit ratings allocated to the borrower or group of borrowers. These internal grading take into consideration factors such as the current economic condition in which the borrowers operate. Any deterioration in country risk, industry, as well as identified structural weaknesses or deterioration in cash flows. Notes to the Consolidated Financial Statements Annual Report About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information
178. Risk rating 3 Risk rating 8 Superior – Typically obligors at the lower end of the high quality range with excellent prospects. Very good asset quality and liquidity. Consistently strong debt capacity and coverage. There could however be some elements, which with a low likelihood might impair performance in the future. Substandard – Obligors in default and 90 Days Past Due on repayment of their obligations. Unacceptable business credit. Normal repayment is in jeopardy, and there exists well defined weakness in support of the same. The asset is inadequately protected by the current net worth and paying capacity of the obligor or pledged collateral. Specific provision raised as an estimate of potential loss. Annual Report 176 Notes to the Consolidated Financial Statements 2018 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Risk rating 4 Good – Typically obligors in the high end of the medium range who are definitely sound with minor risk characteristics. Elements of strength are present in such areas as liquidity, stability of margins, cash flows, diversity of assets, and lack of dependence on one type of business. Risk rating 5 Satisfactory – These are obligors with smaller margins of debt service coverage and with some elements of reduced strength. Satisfactory asset quality, liquidity, and good debt capacity and coverage. A loss year or declining earnings trend may occur, but the borrowers have sufficient strength and financial flexibility to offset these issues. Risk rating 6 Adequate – Obligors with declining earnings, strained cash flow, increasing leverage and/or weakening market fundamentals that indicate above average risk, such borrowers have limited additional debt capacity, modest coverage, average or below average asset quality and market share. Present borrower performance is satisfactory, but could be adversely affected by developing collateral quality/adequacy etc. Risk rating 9 Doubtful – Obligors in default and 180 Days Past Due (DPD) on their contracted obligations, however in the opinion of the management recovery/ salvage value against corporate and real estate obligors is a possibility, and hence write-off should be deferred. Full repayment questionable. Serious problems exist to the point where a partial loss of principle is likely. Weaknesses are so pronounced that on the basis of current information, conditions and values, collection in full is highly improbable. Specific provision raised as an estimate of potential loss. However, for retail obligors (except real estate) and credit cards, total loss is expected. A 100% Specific Provisioning must be triggered followed by the write-off process should be effected as per Al Rajhi Bank write-off policy. Risk rating 10 Loss – Obligors in default and 360 Days Past Due (DPD) on their obligations. Total loss is expected. An uncollectible assets which does not warrant classification as an active asset. A 100% Specific Provisioning must be triggered followed by the write-off process should be effected as per Al Rajhi Bank write-off policy. Risk rating 7 (iv) ECL – Significant increase in credit risk Very high risk – Generally undesirable business constituting an undue and unwarranted credit risk but not to the point of justifying a substandard classification. No loss of principal or profit has taken place. Potential weakness might include a weakening financial condition, an unrealistic repayment program, inadequate sources of funds, or a lack of adequate collateral, credit information or documentation. The entity is undistinguished and mediocre. No new or incremental credits will generally be considered for this category. When determining whether the risk of default on a financial instrument has increased significantly since initial recognition, the Bank considers reasonable and supportable information that is relevant and available without undue cost or effort. This includes both quantitative and qualitative information and analysis, based on the Bank’s historical experience and expert credit assessment and including forward-looking information.
179. The Bank considers all investment grade debt securities issued by sovereigns including Gulf Corporation Council (GCC) countries to have low credit risk. (v) Determining whether credit risk has increased significantly In determining whether credit risk has increased significantly since initial recognition, the Bank uses its internal credit risk grading system, external risk ratings, quantitative changes in PDs, delinquency status of accounts, expert credit judgement and, where possible, relevant historical experience. The credit risk of a particular exposure is deemed to have increased significantly since initial recognition base on quantitative assessment and/or using its expert credit judgment and, where possible, relevant historical experience, the Bank may determine that an exposure has undergone a significant increase in credit risk based on particular qualitative indicators that it considers are indicative of such and whose effect may not otherwise be fully reflected in its quantitative analysis on a timely basis. As a backstop, the Bank considers that a significant increase in credit risk occurs no later than when an asset is more than 30 days past due. Days past due are determined by counting the number of days since the earliest elapsed due date in respect of which full payment has not been received. Due dates are determined without considering any grace period that might be available to the borrower.  The criteria are capable of identifying significant increases in credit risk before an exposure is in default;  The criteria do not align with the point in time when an asset becomes 30 days past due; and  There is no unwarranted volatility in loss allowance from transfers between 12-month PD (stage 1) and lifetime PD (stage 2). The Bank classifies its financial instruments into stage 1, stage 2 and stage 3, based on the applied impairment methodology, as described below: Stage for financial instruments where there has not been a significant increase in credit risk since initial 1 recognition and that are not credit-impaired on origination, the Bank recognises an allowance based on the 12-month ECL. All accounts at origination would be classified as Stage 1. Stage for financial instruments where there has been a significant increase in credit risk since initial 2 recognition but they are not credit-impaired, the Bank recognises an allowance for the lifetime ECL for all financings categorised in this stage based on the actual/expected behavioural maturity profile including restructuring or rescheduling of facilities. Stage for credit-impaired financial instruments, the Bank recognises the lifetime ECL. Default identification 3 process i.e. DPD of 90 or more is used as stage 3. (vi) Modified financial assets The contractual terms of a loan may be modified for a number of reasons, including changing market conditions, customer retention and other factors not related to a current or potential credit deterioration of the customer. An existing loan whose terms have been modified may be derecognised and the renegotiated loan recognised as a new loan at fair value in accordance with the accounting policy. 177 The Bank monitors the effectiveness of the criteria used to identify significant increases in credit risk by regular reviews to confirm that: 2018 For Corporate portfolio, the Bank’s assessment of significant increase in credit risk is based on facility level except for watch-list accounts whereby Bank assessment is based on counterparty. Significant increase in credit risk assessment for retail loans is carried out at customer level within same product family. All the exposures which are considered to have significantly increased in credit risk are subject to lifetime ECL. Notes to the Consolidated Financial Statements Annual Report About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information
180. Annual Report 2018 178 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information The Bank renegotiates loans to customers in financial difficulties (referred to as ‘forbearance activities’ to maximise collection opportunities and minimise the risk of default. Under the Bank’s forbearance policy, loan forbearance is granted on a selective basis if the debtor is currently in default on its debt or if there is a high risk of default, there is evidence that the debtor made all reasonable efforts to pay under the original contractual terms and the debtor is expected to be able to meet the revised terms. The revised terms usually include extending the maturity, changing the timing of profit payments and amending the terms of loan covenants. Both retail and corporate loans are subject to the forbearance policy. Forbearance is a qualitative indicator of a significant increase in credit risk and an expectation of forbearance may constitute evidence that an exposure is credit-impaired/ in default. A customer needs to demonstrate consistently good payment behaviour over a period of 12 months before the exposure is no longer considered to be credit-impaired/ in default. (vii) Definition of “Default” The Bank considers a financial asset to be in default when:  The borrower is unlikely to pay its credit obligations to the Bank in full, without recourse by the Bank to actions such as realising security (if any is held); or  The borrower is past due more than 90 days on any material credit obligation to the Bank. Overdrafts are considered as being past due once the customer has breached an advised limit or been advised of a limit smaller than the current amount outstanding. In assessing whether a borrower is in default. the Bank considers indicators that are:  Qualitative – e.g. breaches of covenant; Notes to the Consolidated Financial Statements (viii) Incorporation of forward looking information The Bank 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. Based on consideration of a variety of external actual and forecast information from published sources, the Bank formulates a forward looking adjustment to PD term structures to arrive at forward looking PD estimates across the lifetime using macroeconomic models. The Bank considers scenarios in range of 3-5 years horizon (consistent with forecast available from public sources) beyond which long term average macroeconomic conditions prevail. Externally available macroeconomic forecast from International Monetary Fund (IMF) and Saudi Arabian Monetary Authority (SAMA) are used for making base case forecast. For other scenarios, adjustment are made to base case forecast based on expert judgement. The base case represents a most-likely outcome as published by external sources. The other scenarios represent more optimistic and more pessimistic outcomes. Economic Indicators Weightage 2018 % GDP growth rate 56.29 Government expenditure to GDP 43.71 Predicted relationships between the key indicators and default and loss rates on various portfolios of financial assets have been developed based on analysing historical data. (ix) Measurement of ECL The Bank measures an ECL at an individual instrument level taking into account the projected cash flows, PD, LGD, CCF and discount rate.  Quantitative – e.g. overdue status and non-payment on another obligation of the same issuer to the Bank; and The key inputs into the measurement of ECL are the term structure of the following variables:  Based on data developed internally and obtained from external sources. i. probability of default (PD); ii. loss given default (LGD); Inputs into the assessment of whether a financial instrument is in default and their significance may vary over time to reflect changes in circumstances. iii. exposure at default (EAD).
181. PD estimates are estimates at a certain date , which are calculated based on statistical rating models, and assessed using rating tools tailored to the various categories of counterparties and exposures. These statistical models are based on internally compiled data comprising both quantitative and qualitative factors. If a counterparty or exposure migrates between ratings classes, then this will lead to a change in the estimate of the associated PD. PDs are estimated considering the contractual maturities of exposures and estimated prepayment rates. EAD represents the expected exposure in the event of a default. The Bank derives the EAD from the current exposure to the counterparty and potential changes to the current amount allowed under the contract including amortisation. The EAD of a financial asset is its gross carrying amount. For lending commitments and financial guarantees, the EAD includes the amount drawn, as well as potential future amounts that may be drawn under the contract, which are estimated based on historical observations and forwardlooking forecasts. The period of exposure limits the period over which possible defaults are considered and thus affects the determination of PDs and measurement of ECLs (especially for Stage 2 accounts with lifetime ECL). (x) Credit quality analysis (a) The following table sets out information about the credit quality of Financings measured at amortised cost. 2018 12 month ECL (SAR ’000) Life time ECL not credit impaired (SAR ’000) Lifetime ECL credit impaired (SAR ’000) Total (SAR ’000) Carrying amount distribution by Grades Grade 1-3/(Aaa - A3) Grade (4-6)/(Baa1 - B3) 8,322,229 44,981,511 Grade 7- Watch list/(Caa1 – C) – Non-performing – – 12,217,422 2,918,751 – – 8,322,229 – 57,198,933 – 2,918,751 1,686,855 1,686,855 53,213,740 15,136,173 1,686,855 70,036,768 Total Retail (un-rated) 168,182,212 3,072,823 603,457 171,858,492 Total Carrying amount 221,395,952 18,208,996 2,290,312 241,895,260 Total Corporate and non-performing 179 For Retail portfolio, bank uses internal LGD models to arrive at the LGD estimates. For Corporate portfolio, bank used supervisory estimates of LGD. 2018 These parameters are generally derived from internally developed statistical models and other historical data. They are adjusted to reflect forward-looking information as described above. Notes to the Consolidated Financial Statements Annual Report About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information
182. 180 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Notes to the Consolidated Financial Statements (xi) Financings Annual Report 2018 (a) The net financing concentration risks and the related provision, by major economic sectors at 31 December are as follows: 2018 Allowance for impairment (SAR ’000) Net financing (SAR ’000) NonPerforming (SAR ’000) Commercial 19,670,493 746,180 (618,139) 19,798,534 Industrial 28,007,663 774,347 (696,112) 28,085,898 Description Building and construction Consumer Services Performing (SAR ’000) 3,442,028 71,682 (82,411) 3,431,299 171,255,069 603,423 (470,400) 171,388,092 16,295,853 80,751 (75,584) 16,301,020 Agriculture and fishing 467,960 Others 465,882 – 467,960 13,929 (6) 479,805 239,604,948 2,290,312 (1,942,652) 239,952,608 Collective allowance for impairment (5,889,819) (5,889,819) Balance (7,832,471) 234,062,789 Allowance for impairment (SAR ’000) Net financing (SAR ’000) NonPerforming (SAR ’000) Commercial 26,967,699 513,822 (263,818) 27,217,703 Industrial 19,443,855 564,975 (518,704) 19,490,126 3,504,017 107,193 (178,804) 3,432,406 165,819,609 542,448 (641,327) 165,720,730 20,099,055 41,741 (25,689) 20,115,107 Total – 2017 Description Building and construction Consumer Services Agriculture and fishing Others Total Performing (SAR ’000) 1,464,247 – – 1,464,247 22,122 – – 22,122 237,320,604 1,770,179 (1,628,342) 237,462,441 Collective allowance for impairment (3,926,868) (3,926,868) Balance (5,555,210) 233,535,573
183. Notes to the Consolidated Financial Statements 181 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information (b) The tables below set out the aging of financing past due but not impaired as of 31 December: Mutajara (SAR ’000) Instalment sale (SAR ’000) Credit cards Total (SAR ’000) (SAR ’000) 5,640,509 180,122 31-60 days 338,418 40,829 12,700 391,947 61-90 days 288,367 26,209 16,475 331,051 6,267,294 247,160 29,175 6,543,629 up to 30 days Total Fair value of collateral 485,726 – – – 5,820,631 485,726 2017 Age up to 30 days Mutajara (SAR ’000) Instalment sale (SAR ’000) Credit cards Total (SAR ’000) (SAR ’000) 2,645,513 256,582 31-60 days 437,734 82,667 10,627 531,028 61-90 days 914,189 51,569 12,573 978,331 3,997,436 390,818 23,200 4,411,454 Total Fair value of collateral 594,752 – – – 2,902,095 594,752 The Banks in the ordinary course of lending activities hold collaterals as security to mitigate credit risk in financings . These collaterals mostly include time, demand, and other cash deposits, financial guarantees, local and international equities, real estate and other fixed assets. Real estate collaterals against financing are considered as held for sale and included in other assets. (c) The table below sets out gross balances of individually impaired financing, together with the fair value of related collateral held by the Group as at 31 December: The collaterals are held mainly against commercial and consumer loans and are managed against relevant exposures at their net realisable values. For financial assets that are credit impaired at the reporting period, quantitative information about the collateral held as security is needed to the extent that such collateral mitigates credit risk. Individually impaired financing 2018 Fair value of collateral Retail (SAR ’000) Corporate (SAR ’000) Total (SAR ’000) 603,457 1,686,855 2,290,312 485,726 485,726 – 2017 Individually impaired financing Fair value of collateral Retail (SAR ’000) Corporate (SAR ’000) Total (SAR ’000) 542,448 1,227,731 1,770,179 594,752 594,752 – Annual Report Age 2018 2018
184. Notes to the Consolidated Financial Statements Annual Report 2018 182 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information (d) The table below stratify credit exposures from corporate financing by ranges of loan-to-value (LTV) ratio. LTV is calculated as the ratio of the gross amount of the financing or the amount committed for loan commitments to the value of the collateral. The gross amounts exclude any impairment allowance. 2018 (SAR ’000) 2017 (SAR ’000) 7,368,209 2,965,647 51-70% 12,531,682 5,490,525 71-90% 20,630,702 8,113,447 91-100% 17,198,582 35,060,621 More than 100% 2,492,999 986,265 Total exposure 60,222,174 52,616,505 Less than 50% (b) Settlement risk The Bank is also exposed to settlement risk in its dealings with other financial institutions. This risk arises when the Bank pays its side of the transaction to the other bank or counterparty before receiving payment from the third party. The risk is that the third party may not pay its obligation. While these exposures are short in duration but they can be significant. The risk is mitigated by dealing with highly rated counterparties, holding collateral and limiting the size of the exposures according to the risk rating of the counterparty. (c) Risk limit control and mitigation policies The responsibility for credit risk management is enterprise-wide in scope. Strong risk management is integrated into daily processes, decision making and strategy setting, thereby making the understanding and management of credit risk the responsibility of every business segment. The following business units within the Bank assist in the credit control process:  Corporate Credit Unit  Credit Administration, Monitoring and Control Unit  Remedial Unit  Credit Policy Unit  Retail Credit Unit The monitoring and management of credit risk associated with these financing are made by setting approved credit limits. The Bank manages limits and controls concentrations of credit risk wherever they are identified - in particular, to individual customers and groups, and to industries and countries. Concentrations of credit risks arise when a number of customers are engaged in similar business activities, activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentrations of credit risks indicate the relative sensitivity of the Bank’s performance to developments affecting a particular industry or geographical location. The Bank seeks to manage its credit risk exposure through diversification of its financing to ensure there is no undue concentration of risks with to individuals or groups of customers in specific geographical locations or economic sectors. The Bank manages credit risk by placing limits on the amount of risk accepted in relation to individual customers and groups, and to geographic and economic segments. Such risks are monitored on a regular basis and are subject to an annual or more frequent review, when considered necessary. Limits on the level of credit risk by product, economic sector and by country are reviewed at least annually by the executive committee. Exposure to credit risk is also managed through regular analysis on the ability of customers and potential customers to meet financial and contractual repayment obligations and by revising credit limits where appropriate.
185. c .1 Collateral The Bank implements guidelines on the level and quality of specific classes of collateral, The principal collateral types are:  Mortgages over residential and commercial properties.  Cash, shares, and general assets for customer.  Shares for Murabaha (collateralised share trading) transactions. The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit carry the same credit risk as traditional banking products of the Bank. Documentary and commercial letters of credit – which are written undertakings by the Bank on behalf of a customer authorising a third party to draw drafts on the Bank up to a stipulated amount under specific terms and conditions, are collateralised by the underlying goods to which they relate, and therefore, risk is partially mitigated. (d) Impairment and provisioning policies Allowance for impairment is recognised for financial reporting purposes only for stage 3 losses that have been incurred at the statement of financial position date based on objective evidence of impairment, and management judgment. The table below sets out the maximum exposure to credit risk at the reporting date without considering collateral or other credit enhancements and includes the off-balance sheet financial instruments involving credit risks as at 31 December: 2018 (SAR ’000) 2017 (SAR ’000) 22,477,145 23,452,869 Sukuk 18,195,957 10,605,139 Due from banks and other financial institutions 30,808,011 10,709,795 On-balance sheet items Investments: Murabaha with Saudi Government and SAMA Financing, net 66,254,862 69,196,949 Retail 167,807,927 164,338,624 Total on-balance sheet items 305,543,902 278,303,376 Letters of credit and acceptances 1,452,658 1,608,712 Letters of guarantee 4,877,161 4,969,355 Corporate Off-balance sheet items: Irrevocable commitments to extend credit Total off-balance sheet items Maximum exposure to credit risk 6,482,436 6,989,368 12,812,255 13,567,435 318,356,157 291,870,811 The above table represents a worst case scenario of credit risk exposure to the Bank at 31 December 2018 and 2017, without taking account of any collateral held or other credit enhancements attached. For on-balance-sheet assets, the exposures set out above are based on net carrying amounts as reported in the consolidated statement of financial position. 183 Commitments to extend credit represent unused portions of authorisations to extend credit in the form of further financing products, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Bank is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments, as most commitments to extend credit are contingent upon customers maintaining specific credit standards. 2018 Some other specific control and mitigation measures are outlined below: Notes to the Consolidated Financial Statements Annual Report About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information
186. Annual Report 2018 184 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information 27 .2 Liquidity risk Liquidity risk is the risk that the Bank will be unable to meet its payment obligations associated with its financial liabilities when they fall due and to replace funds when they are withdrawn. The consequence may be the failure to meet obligations to repay deposits and financing parties and fulfil financing commitments. Liquidity risk can be caused by market disruptions or by credit downgrades, which may cause certain sources of funding to become unavailable immediately. Diverse funding sources available to the Bank help mitigate this risk. Assets are managed with liquidity in mind, maintaining a conservative balance of cash and cash equivalents. Liquidity risk management process The Bank’s liquidity management process is as monitored by the Bank’s Asset and Liabilities Committee (ALCO), includes:  Day-to-day funding, managed by Treasury to ensure that requirements can be met and this includes replenishment of funds as they mature or are invested;  Monitoring balance sheet liquidity ratios against internal and regulatory requirements;  Managing the concentration and profile of debt maturities;  Maintain diversified funding sources; and  Liquidity management and asset and liability mismatching. Monitoring and reporting take the form of analysing cash flows of items with both contractual and non-contractual maturities. The net cash flows are measured and ensured that they are within acceptable ranges. The Treasury/ ALCO also monitors, the level and type of undrawn lending commitments, usage of overdraft facilities and the potential impact of contingent liabilities such as standby letters of credit and guarantees may have on the Bank’s liquidity position. Notes to the Consolidated Financial Statements The tables below summarise the maturity profile of the Bank’s assets and liabilities, on the basis of the remaining maturity as of the consolidated statement of financial position date to the contractual maturity date. Management monitors the maturity profile to ensure that adequate liquidity is maintained, Assets available to meet all of the liabilities and to cover outstanding financing commitments include cash, balances with SAMA and due from banks. Further, in accordance with the Banking Control Law and Regulations issued by SAMA, the Bank maintains a statutory deposit equal to a sum not less than 7% of total customers’ deposits, and 4% of total other customers’ accounts. In addition to the statutory deposit, the Bank maintains a liquid reserve of not less than 20% of the deposit liabilities, in the form of cash, gold or assets which can be converted into cash within a period not exceeding 30 days. Also, the Bank has the ability to raise additional funds through special financing arrangements with SAMA including deferred sales transactions. The contractual maturities of financial assets and liabilities as of 31 December based on discounted cash flows are as follows. The table below reflect the expected cash flows indicated by the deposit retention history of the Group. Management monitors rolling forecast of the Group’s liquidity position and cash and cash equivalents on the basis of expected cash flows. This is carried out in accordance with practice and limits set by the Group and based on the pattern of historical deposit movement. In addition, the Group’s liquidity management policy involves projecting cash flows in major currencies and considering the level of liquid assets necessary to meet these, monitoring balance sheet liquidity ratios against internal and external regulatory requirements and maintaining debt financing plans.
187. 185 Notes to the Consolidated Financial Statements 2018 3 to 12 months (SAR ’000) 1 to 5 years (SAR ’000) Over 5 years (SAR ’000) No Fixed Maturity (SAR ’000) Total (SAR ’000) – 7,755,399 43,246,043 – 1,056,251 30,808,011 Assets Cash and balance with SAMA and central banks 35,490,644 Due from banks and other financial institutions 10,569,683 8,273,620 Corporate Mutajara 14,480,073 15,127,724 13,950,532 2,456,174 – 46,014,503 Instalment sale 10,769,129 30,019,044 101,794,885 29,391,728 – 171,974,786 Murabaha 1,193,548 4,462,625 5,665,908 2,792,068 – 14,114,149 Credit cards 1,959,351 – 1,959,351 – – 10,908,457 Financing, net – – – – – – Investments Investment in an associate Investments held at amortised cost – 370,447 213,900 – FVOCI investments – – – Other assets, net – – – Total 1,941,584 14,118,036 Investments held as FVSI 74,832,876 60,038,498 3,951,361 2,583,028 Demand deposits 19,701,796 32,451,597 Customers' time investments 17,027,753 1,661,472 1,662,667 1,359,251 – 146,437,818 172,753 25,142,380 – 1,103,463 – 61,058,566 172,753 – 39,844,765 – 1,941,584 – 1,103,463 13,824,422 13,824,422 22,636,073 365,003,830 755,235 7,289,624 Liabilities Due to banks and other financial institutions Other customer accounts Other liabilities – – – 173,021,496 – 3,781,140 – – 43,241,953 – 268,416,842 – – 18,689,225 – – 6,803,058 – 15,251,063 15,251,063 Total Liabilities 42,343,577 38,055,348 176,802,636 43,241,953 16,006,297 316,449,812 Gap 32,489,299 21,983,150 (30,364,818) 17,816,613 6,629,775 48,554,019 17,816,613 6,629,775 32,489,299 2018 Less than 3 months (SAR ’000) Annual Report About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information
188. Notes to the Consolidated Financial Statements 186 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information 2017 Annual Report 2018 Less than 3 months (SAR ’000) 3 to 12 months (SAR ’000) 1 to 5 years (SAR ’000) Over 5 years (SAR ’000) No Fixed Maturity (SAR ’000) Total (SAR ’000) 8,523,591 48,282,471 976,844 10,709,795 Assets Cash and balance with SAMA and central banks Due from banks and other financial institutions 39,758,880 – – 1,349,887 – 1,240,890 6,019,134 1,123,040 Corporate Mutajara 3,496,901 31,085,237 6,603,136 6,209,560 – 47,394,834 Instalment sale 3,252,120 37,121,858 109,151,183 21,689,108 – 171,214,269 Murabaha 4,812,673 3,318,574 3,173,356 2,707,131 – 14,011,734 – 914,733 Financing, net Credit cards 914,733 – – – Investments Investment in an associate Investments held at amortised cost – 999,925 – – – 7,135,000 389,193 Investments held as FVSI – – FVOCI investments – – – Other assets, net – – – Total 54,476,122 77,544,806 127,801,755 – 25,923,083 – 1,829,066 – 59,480,988 124,825 – 124,825 34,058,008 – 389,193 – 1,829,066 2,262,542 2,262,542 11,887,802 331,191,470 750,308 5,522,567 Liabilities Due to banks and other financial institutions 4,772,259 – Demand deposits 18,476,965 30,434,129 Customers' time investments 14,502,218 1,415,045 Other customer accounts 1,322,061 1,080,801 Other liabilities 7,921,322 – – 162,265,008 – 3,006,552 – – 40,553,666 – – 251,729,768 – 15,917,263 – – 5,409,414 – – 7,921,322 Total 46,994,825 32,929,975 165,271,560 40,553,666 750,308 286,500,334 Gap 7,481,297 44,614,828 (37,469,805) 18,927,322 11,137,494 44,691,136
189. 187 Notes to the Consolidated Financial Statements About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information The following tables disclose the maturity of contractual financial liabilities on undiscounted cash flows as at 31 December : Due to banks and other financial institutions Customer deposits Other liabilities Total 3 to 12 months (SAR ’000) 3,957,968 2,602,328 41,238,211 36,835,111 – 45,196,179 – 39,437,439 1 to 5 years (SAR ’000) – Over 5 years (SAR ’000) – 175,521,784 43,065,449 – – 175,521,784 No fixed maturity (SAR ’000) 763,202 – Total (SAR ’000) 7,323,498 296,660,555 15,276,565 15,276,565 43,065,449 16,039,767 319,260,618 Over 5 years (SAR ’000) No fixed maturity (SAR ’000) Total 2017 Less than 3 months (SAR ’000) Due to banks and other financial institutions Customer deposits Other liabilities Total 4,780,239 39,389,542 – 44,169,781 3 to 12 months (SAR ’000) – 33,037,784 – 33,037,784 1 to 5 years (SAR ’000) – 160,724,895 – 160,724,895 – 42,449,658 – 42,449,658 757,436 – (SAR ’000) 5,537,675 275,601,879 7,934,568 7,934,568 8,692,004 289,074,122 The cumulative maturities of commitments and contingencies are given in Note 16 (c) 1 of the consolidated financial statements. 27.3 Market risks The Bank is exposed to market risks, which is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in market prices. Market risks arise on profit rate products, foreign currency and mutual fund products, all of which are exposed to general and specific market movements and changes in the level of volatility of market rates or prices such as profit rates, foreign exchange rates and quoted market prices. Market risk exposures are monitored by Treasury/Credit and Risk department and reported to ALCO on a monthly basis. ALCO deliberates on the risks taken and ensure that they are appropriate. (a) Market risks – Speculative operations The Bank is not exposed to market risks from speculative operations. The Bank is committed to Sharia guidelines which does not permit it to enter into contracts or speculative instruments such as hedging, options, forward contracts and derivatives. (b) Market risks – Banking operations The Bank is exposed to market risks, which is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in market prices. Market risks arise on profit rate products, foreign currency and mutual fund products, all of which are exposed to general and specific market movements and changes in the level of volatility of market rates or prices such as profit rates, foreign exchange rates and quoted market prices. Annual Report Less than 3 months (SAR ’000) 2018 2018
190. Notes to the Consolidated Financial Statements 188 Cash flow profit rate risk is the risk that the future cash flows of a financial instrument will fluctuate due to changes in market profit rates . The Bank does not have any significant exposure to the effects of fluctuations in prevailing level of market profit rates on its future cash flows as a significant portion of profit earning financial assets and profit bearing liabilities are at fixed rates and are carried in the financial statements at amortised cost. In addition to this, a substantial portion of the Bank’s financial liabilities are non-profit bearing. Annual Report Profit rate risk 2018 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Commission rate risk arises from the possibility that the changes in profit rates will affect either the fair values or the future cash flows of the financial instruments. The Board has established commission rate gap limits for stipulated periods. The Bank monitors positions daily and uses gap management strategies to ensure maintenance of positions within the established gap limits. The following table depicts the sensitivity to a reasonable possible change in profit rates, with other variables held constant, on the Bank’s statement of income or equity. The sensitivity of the income is the effect of the assumed changes in profit rates on the net income for one year, based on the floating rate non-trading financial assets and financial liabilities held as at 31 December 2018 and 2017. The sensitivity of equity is same as sensitivity of income since the Bank does not have fixed rate FVOCI financial assets as at 31 December 2018 and 2017. All the banking book exposures are monitored and analysed in currency concentrations and relevant sensitivities are disclosed in SAR million. 2018 Currency SAR Increase in basis +25 Decrease in basis Currency SAR -25 Sensitivity of gross financing and investment income As at 31 December (SAR Mn.) Average Maximum for Minimum (SAR Mn.) (SAR Mn.) (SAR Mn.) 201 204 216 193 Sensitivity of gross financing and investment income As at 31 December (SAR Mn.) Average Maximum for Minimum (SAR Mn.) (SAR Mn.) (SAR Mn.) (201) (204) (216) (193) 2017 Currency SAR Increase in basis +25 Decrease in basis Currency SAR -25 Sensitivity of gross financing and investment income As at 31 December (SAR Mn.) Average Maximum for Minimum (SAR Mn.) (SAR Mn.) (SAR Mn.) 202 191 209 169 Sensitivity of gross financing and investment income As at 31 December (SAR Mn.) Average Maximum for Minimum (SAR Mn.) (SAR Mn.) (SAR Mn.) (202) (191) (209) (169) *Profit rate movements affect reported equity through retained earnings, i.e. increases or decreases in financing and investment income.
191. 189 Notes to the Consolidated Financial Statements About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Commission sensitivity of assets , liabilities and off balance sheet items 3 to 6 months (SAR ’000) 6 to 12 months (SAR ’000) 1 to 5 years (SAR ’000) Over 5 years (SAR ’000) NonCommission Sensitive Total (SAR ’000) – 8,133,635 43,246,043 – 1,056,251 30,808,011 – 172,753 172,753 Assets Cash and balance with SAMA 35,112,408 Due from banks and other financial institutions 11,306,178 – – 987,681 – 7,810,067 9,647,834 Investments Investment in an associate Investments held at amortised cost – – 23,952,560 – – – 13,318,036 2,574,169 Investments held as FVSI – – – 1,941,584 Available-for-sale investments – – – 1,103,463 – 39,844,765 1,941,584 – 1,103,463 – 46,014,503 Financing, net Corporate Mutajara 17,239,834 19,924,825 3,958,429 4,891,415 Instalment sale 13,409,580 13,669,220 21,812,332 99,409,717 23,673,937 Murabaha 4,064,638 4,406,381 182 4,784,157 858,791 Credit cards 1,959,351 Other assets Total assets – – – – – – – – – – 107,044,549 38,988,108 33,581,010 132,051,159 30,151,944 – 171,974,786 – – 13,824,422 14,114,149 1,959,351 13,824,422 23,187,061 365,003,830 Liabilities Due to banks and other financial institutions 6,534,389 Customer deposits 53,768,764 Customers’ time investments Other customer accounts Other liabilities – – – 12,293,302 23,253,246 17,027,753 213,057 1,448,415 1,362,776 311,575 589,356 – – – 179,101,531 – 4,539,350 – 755,235 7,289,624 – – 268,416,843 – – 18,689,225 – – 6,803,057 – 15,251,063 15,251,063 – 16,006,298 316,449,812 Total liabilities 78,693,681 12,817,934 25,291,017 Gap 28,350,868 26,170,174 8,289,993 (51,589,722) 30,151,944 7,180,763 48,554,018 Profit rate sensitivity – On statement of financial positions 28,350,868 26,170,174 8,289,993 (51,589,722) 30,151,944 7,180,763 48,554,018 Profit rate sensitivity – Off statement of financial positions 439,043 – – 183,640,881 – – Total profit rate sensitivity gap 27,911,825 26,170,174 8,289,993 Cumulative profit rate sensitivity gap 27,911,825 54,081,999 62,371,992 27,911,825 54,081,999 62,371,992 – (51,589,722) 30,151,944 10,782,270 41,990,464 – 439,043 7,180,763 48,114,975 48,114,975 90,228,289 Annual Report Less than 3 months (SAR ’000) 2018 2018
192. Notes to the Consolidated Financial Statements Annual Report 2018 190 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information The Bank manages exposure to the effects of various risks associated with fluctuations in the prevailing levels of market commission rates on its financial position and cash flows . The Board sets limits on the level of mismatch of commission rate reprising that may be undertaken, which is monitored daily by Bank Treasury. The table below summarises the Bank’s exposure to profit rate risks. Included in the table are the Bank’s financial instruments at carrying amounts, categorised by the earlier of contractual repricing or maturity dates. The Bank is exposed to profit rate risk as a result of mismatches or gaps in the amounts of assets and liabilities and off balance sheet instruments that mature or re-price in a given period. The Bank manages this risk by matching the re-pricing of assets and liabilities through risk management strategies. 2017 Less than 3 months (SAR ’000) 3 to 6 months (SAR ’000) 6 to 12 months (SAR ’000) 1 to 5 years (SAR ’000) Over 5 years (SAR ’000) Non Commission Sensitive Total (SAR ’000) – 8,595,037 48,282,471 – 1,123,040 10,709,795 – 124,825 124,825 Assets Cash and balance with SAMA 39,687,434 Due from banks and other financial institutions 2,217,734 – 113,993 – 5,905,141 – 1,349,887 Investments Investment in an associate Investments held at amortised cost – 23,300,000 – 2,025,000 – – – 7,135,000 1,598,008 – 34,058,008 1,829,066 – 1,829,066 – 47,394,834 Investments held as FVSI – – – – 389,193 Available-for-sale investments – – – – 389,193 Financing, net Corporate Mutajara 15,075,878 19,326,741 3,443,515 7,637,634 1,911,066 Instalment sale 19,190,499 10,039,850 18,901,845 104,625,719 18,456,359 – 171,214,272 3,768,368 2,666,288 1,687,143 3,178,456 2,711,479 – 14,011,734 Murabaha Credit cards Other assets Total assets 914,733 – 104,154,647 – – – – – – – – 34,171,873 29,937,642 123,926,696 26,895,171 – 914,733 4,537,079 4,537,079 14,379,981 333,466,010 Liabilities Due to banks and other financial institutions 4,772,259 Customer deposits 50,426,040 Customers’ time investments Other customer accounts Other liabilities Total liabilities – – 11,529,046 21,807,626 14,885,092 91,881 940,423 1,083,604 247,747 468,623 – 71,166,995 – 11,868,674 – 23,216,672 – 167,967,056 – – 750,308 – – – 171,576,495 15,917,263 5,409,414 3,609,439 – 5,522,567 251,729,768 – 8,455,319 8,455,319 – 9,205,627 287,034,463
193. 191 Notes to the Consolidated Financial Statements 2017 3 to 6 months (SAR ’000) 6 to 12 months (SAR ’000) 1 to 5 years (SAR ’000) Over 5 years (SAR ’000) Non Commission Sensitive (SAR ’000) Gap 32,987,652 22,303,199 6,720,970 (47,649,799) 26,895,171 5,174,354 46,431,547 Profit rate sensitivity – On statement of financial positions 32,987,652 22,303,199 6,720,970 (47,649,799) 26,895,171 5,174,354 46,431,547 Profit rate sensitivity – Off statement of financial positions 472,420 – – – – Total – Total profit rate sensitivity gap 32,515,232 22,303199 6,720,970 (47,649,799) 26,895,171 Cumulative profit rate sensitivity gap 32,515,232 50,538,583 58,740,173 13,056,216 41,907,813 27,911,825 54,081,999 62,371,992 472,420 5,174,354 45,959,127 – 87,071,372 The tables below summarise the Bank’s exposure to foreign currency exchange rate risk at 31 December 2018 and 2017 and the concentration of currency risks. Included in the table are the Bank’s financial instruments at carrying amounts, categorised by currency: 2018 UAE Dirham (SAR ’000) Japanese Yen (SAR ’000) Euro (SAR ’000) Malaysian Ringgit (SAR ’000) 29,291 193,088 US Dollar Other Total (SAR ’000) Pound Sterling (SAR ’000) (SAR ’000) (SAR ’000) 568,393 15,538 504,016 1,336,273 30,803 Assets Cash and cash equivalents 25,946 Due from banks and other financial institutions 117,748 Financing, net Investments Fixed assets Other assets, net Total assets – 5,302 520,081 1,979,909 – 4,564,609 5,077,371 – 375 1,305,296 1,132,989 – 6,578 41,423 269,965 – 1,258 174,711 63,244 183,029 6,799,208 9,091,871 – – – 1,226 – 144,919 5,302 145,528 721,623 3,520,994 – 3,778,869 13,420,848 – 255,390 2,694,050 993 36,782 356,966 332 17,209 256,754 47,665 5,313,890 21,585,885 Liabilities Due to banks and other financial institutions 5,169 569,557 3,304,930 17 (564,139) 3,315,605 9,629 2,284 109,079 5,146,634 1,268,627 48,735 4,863,308 11,448,296 Other liabilities 17,305 699 97,032 117,000 695,523 8,882 196,799 1,133,241 Total liabilities 27,005 2,983 211,280 5,833,192 5,269,080 57,634 4,495,969 15,897,143 117,914 2,319 28,250 966,017 3,822,791 (9,969) 817,921 5,688,743 117,914 2,319 (28,250) 966,017 3,822,791 817,921 5,688,743 Customer deposits Net 71 – (9,969) 2018 Less than 3 months (SAR ’000) Annual Report About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information
194. Notes to the Consolidated Financial Statements 192 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information 2017 Annual Report 2018 UAE Dirham (SAR ’000) Japanese Yen (SAR ’000) Euro (SAR ’000) Malaysian Ringgit (SAR ’000) 23,232 US Dollar Other Total (SAR ’000) Pound Sterling (SAR ’000) (SAR ’000) (SAR ’000) 356,412 370,979 21,031 587,309 1,384,791 195,812 858,354 554,364 33,096 393 1,634,458 864,990 – Assets Cash and cash equivalents 25,828 Due from banks and other financial institutions 72,459 Financing, net – 3,393 705,180 2,422,658 – 257,432 2,757,273 – 3,724,296 13,636,871 36,702 227,247 (24) 34,003 286,898 54,652 5,344,922 20,715,738 – – Investments – – 5,522,749 4,389,826 Fixed assets 55 – 5,174 42,091 142,676 549 Other assets, net – – 655 191,139 61,125 225,266 8,605,203 6,383,960 Total assets 98,342 3,393 Liabilities Due to banks and other financial institutions 2,085 1,100,092 493,262 18 501,812 2,109,445 3,711 2,639 186,830 6,865,588 1,054,707 56,596 4,498,133 12,668,204 Other liabilities 13,926 910 60,415 91,245 414,488 7,750 218,845 807,579 Total liabilities 29,813 3,549 249,330 8,056,925 1,962,457 64,364 5,218,790 15,585,228 Net 68,529 (156) (24,064) 548,278 4,421,503 (9,712) 126,132 5,130,510 548,278 4,421,503 126,132 5,130,510 Customer deposits 12,176 68,529 – (156) (24,064) (9,712) Foreign currency risks Currency risk represents the risk of change in the value of financial instruments due to changes in foreign exchange rates. The Bank management has set limits on positions by currencies, which are regularly monitored to ensure that positions are maintained within the limits. The table below shows the currencies to which the Bank has a significant exposure as at 31 December 2018 on its non-trading monetary assets and liabilities and forecasted cash flows. The analysis calculates the effect of reasonable possible movement of the currency rate against SAR, with all other variables held constant, on the statement of income (due to the fair value of the currency sensitive non-trading monetary assets and liabilities) and equity. A positive effect shows a potential increase in the statement of income statement of income or equity, whereas a negative effect shows a potential net reduction in the statement of income or statement of changes in shareholders’ equity.
195. Effect on net income (SAR Mn.) Effect on equity (SAR Mn.) AED +/-2 2,358 2,358 USD +/-2 76,146 76,146 EUR +/-5 -768 -768 INR +/-5 1,813 1,813 PKR +/-5 547 547 Change in currency rate in % Effect on net income (SAR million) Effect on equity (SAR million) Currency exposures as at 31 December 2017 AED +/-2 2.12 2.12 USD +/-2 88.66 88.66 EUR +/-5 -0.98 -0.98 INR +/-5 0.40 0.40 PKR +/-5 0.87 0.87 Currency position The Bank manages exposure to the effects of fluctuations in prevailing foreign currency exchange rates on its financial position and cash flows. The Board of Directors sets limits on the level of exposure by currency and in total for both overnight and intraday positions, which are monitored daily. At the end of the year, the Bank had the following significant net exposures denominated in foreign currencies: US Dollar Japanese Yen Euro Pound Sterling Others Total 2018 (SAR ’000) (Long/(short) 2017 (SAR ’000) (Long/(short) 3,807,308 4,432,919 2,319 -157 -15,364 -19,569 -7,569 -9,713 282,013 115,844 4,068,707 4,519,324 193 Change in currency rate in % 2018 Currency exposures as at 31 December 2018 Notes to the Consolidated Financial Statements Annual Report About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information
196. 194 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Notes to the Consolidated Financial Statements (c) Price risk Annual Report 2018 The Bank has certain investments which are carried at fair value through the income statement (FVSI) and includes investments in quoted mutual funds and other investments. Price risk arises due to changes in quoted market prices of these mutual funds. As these investments are in a limited number of funds and are not significant to the total investment portfolio, the Bank monitors them periodically and determines the risk of holding them based on changes in market prices. Other investments have little or no risks as these are bought for immediate sales. Investments are made only with a confirmed sale order and therefore involve minimal risk.  Equity price risk Equity risk refers to the risk of decrease in fair values of equities in the Bank’s non-trading investment portfolio as a result of reasonable possible changes in levels of equity indices and the value of individual stocks. The effect on the Bank’s equity investments held as FVOCI/available-for-sale due to reasonable possible change in prices, with all other variables held constant is as follows: 31 December 2018 Local Market indices Local Share Equity 31 December 2017 Change in equity price % Effect in SAR million Change in equity price % Effect in SAR million + /- 10 +/- 107,910 + /- 10 +/- 77,129 (d) Operational risk Operational risk is the risk of loss resulting from inadequate or failed internal processes, people, systems, and external events. Operational risk is inherent in most of the Bank’s activities this necessitates an integrated approach to the identification, measurement and monitoring of operational risk. An Operational Risk Management Unit (ORMU) has been established within the Credit and Risk Management Group which facilitates the management of Operational Risk within the Bank. ORMU facilitates the management of Operational Risk by setting policies, developing systems, tools and methodologies, overseeing their implementation and use within the business units and providing ongoing monitoring and guidance across the Bank. The three primary operational risk management processes in the Bank are Risk Control Self Assessment, Operational Loss Database and eventual implementation of Key Risk Indicators which are designed to function in a mutually reinforcing manner.
197. (a) The distribution by the geographical region of the major categories of assets, liabilities, commitments, contingencies and credit exposure accounts as of 31 December is as follows: 2018 Kingdom of Saudi Arabia (SAR ’000) Other GCC and Middle East (SAR ’000) Europe 43,169,276 56,311 9,224,158 19,835,928 755,337 2,100,074 (SAR ’000) North America (SAR ’000) South East Asia (SAR ’000) Other Countries (SAR ’000) Total (SAR ’000) Assets Cash and balances with SAMA and central banks Due from banks and other financial institutions – – 61,154 20,456 919,489 – 11,945 43,246,043 30,808,011 Financing, net 42,890,888 1,023,541 – 46,014,503 167,591,118 2,885,814 – – 1,497,854 – 171,974,786 Murabaha 9,018,760 1,932,928 – – 3,162,461 – 14,114,149 Credit cards 1,952,552 5,575 – – 1,224 – 1,959,351 Corporate Mutajara Instalment sale – – Investments, net – – – 172,753 38,132,001 349,095 – – 1,363,669 – 39,844,765 Investments held as FVSI 1,896,758 33,234 375 – 11,217 – 1,941,584 FVOCI investments 1,103,463 – – – 1,103,463 Investment in an associate Investments held at amortised cost Total 172,753 315,151,727 – – 26,122,426 2,855,786 61,154 – – 6,976,370 11,945 351,179,408 Liabilities Due to banks and other financial institutions 6,401,763 44,133 – Customer deposits 284,200,248 4,847,634 – Total 290,602,011 4,891,767 – Commitments and contingencies 6,141,044 98,315 Credit exposure (stated at credit equivalent value) 4,401,104 – 2,262 – 329,267 – 329,267 514,461 – 7,289,624 4,860,064 1,179 293,909,125 5,374,525 1,179 301,198,749 – 88,198 – 6,329,819 – 2,081,332 – 6,482,436 Annual Report 28 Geographical Concentration 2018 195 Notes to the Consolidated Financial Statements About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information
198. Notes to the Consolidated Financial Statements Annual Report 2018 196 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information 2017 Kingdom of Saudi Arabia (SAR ’000) Other GCC and Middle East (SAR ’000) 47,364,215 563,370 2,873,774 6,298,191 Europe (SAR ’000) North America (SAR ’000) South East Asia (SAR ’000) Other Countries (SAR ’000) Total (SAR ’000) Assets Cash and balances with SAMA and central banks Due from banks and other financial institutions – 233,716 – 271,962 354,887 1,030,678 – 1,474 48,282,472 10,709,795 Financing, net Corporate Mutajara Instalment sale Murabaha Credit cards 45,733,013 – 1,661,821 – – – 47,394,834 166,922,446 2,553,313 – – 1,680,651 – 171,156,410 9,003,654 1,167,348 – – 3,840,732 – 14,011,734 889,808 3,789 – – 1,365 – 894,962 – – – 124,825 Investments, net Investment in an associate Investments held at amortised cost Investments held as FVSI FVOCI investments Total 124,825 – – 32,512,949 177,189 – – 1,367,870 – 34,058,008 2,188 288,893 393 – 121,206 – 412,680 1,636,474 168,191 – – 915 307,140,977 11,220,284 1,895,930 271,962 6,615 251,218 1,805,580 8,398,304 1,474 467,968 3,198 328,928,931 Liabilities Due to banks and other financial institutions 4,371,081 422,487 Customer deposits 261,776,977 4,429,765 Total 266,148,058 4,852,252 6,615 10,167,478 406,234 2,818 5,109,109 178,503 1,409 Commitments and contingencies Credit exposure (stated at credit equivalent value) – – 251,218 6,849,703 – 5,522,567 273,056,445 7,317,671 3,198 278,579,012 – 2,989,605 1,300 13,567,435 – 1,486,847 600 6,776,468
199. 2018 Kingdom of Saudi Arabia (SAR ’000) GCC and Middle East (SAR ’000) South East of Asia (SAR ’000) Total (SAR ’000) Non-performing Corporate Mutajara 991,751 5,959 26,610 1,024,320 Instalment sale 534,309 14,942 16,969 591,541 Murabaha 536,865 108,621 17,084 662,570 7 11,881 (2,958) (842,373) Credit cards 11,874 – Allowance for impairment of financing Corporate Mutajara (837,349) Instalment sale (453,000) (10,185) (4,244) (467,429) Murabaha (504,296) (108,500) (17,084) (629,880) Credit cards (2,970) (2,066) – – (2,970) 2017 Kingdom of Saudi Arabia (SAR ’000) GCC and Middle East (SAR ’000) South East of Asia (SAR ’000) Total (SAR ’000) 4,333 1,222,314 11,267 521,287 Non-performing Corporate Mutajara Instalment sale Murabaha 1,217,981 495,193 – 5,418 5,418 19,168 – 1,992 21,160 Corporate Mutajara (982,385) – (3,609) (985,994) Instalment sale (620,357) Credit cards – – 14,827 Allowance for impairment of financing Murabaha Credit cards Refer to Note 7 (a) for performing financing. – (4,792) (10,149) (4,491) (634,997) – (1,020) (1,020) – (1,539) (6,331) 2018 (b) The distributions by geographical concentration of non-performing financing and allowance for impairment of financing as of 31 December are as follows: 197 Notes to the Consolidated Financial Statements Annual Report About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information
200. Notes to the Consolidated Financial Statements 198 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information 29 Fair Value of Financial Assets and Liabilities Annual Report 2018 Determination of fair value and fair value hierarchy The Bank uses the following hierarchy for determining and disclosing the fair value of financial instruments : Level 1: Quoted prices in active markets for the same instrument (i.e. without modification or additions). Level 2: Quoted prices in active markets for similar assets and liabilities or other valuation techniques for which all significant inputs are based on observable market data. Level 3: Valuation techniques for which any significant input is not based on observable market data. Fair 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 takes place either: – In the accessible principal market for the asset or liability, or – In the absence of a principal market, in the most advantageous accessible market for the asset or liability. Carrying amounts and fair value: The following table shows the carrying amount and fair values of financial assets and financial liabilities, including their levels in the fair value hierarchy. It does not include fair value information for financial assets and financial liabilities not measured at fair value if the carrying amount is a reasonable approximation of fair value. 31 December 2018 Carrying value (SAR ’000) Level 1 (SAR ’000) Level 2 (SAR ’000) Level 3 (SAR ’000) Total (SAR ’000) Financial assets Financial assets measured at fair value Investments held at FVSI 1,141,584 FVOCI investment 1,103,463 Sukuk – 1,079,101 1,141,584 – 1,141,584 – 24,362 1,103,463 800,000 – – 800,000 800,000 30,808,011 – – 30,701,027 30,701,027 22,477,145 – – 22,478,958 22,478,958 Financial assets not measured at fair value Due from banks and other financial institutions Investments held at amortised cost – Murabaha with Saudi Government and SAMA 17,395,957 – – 17,274,997 17,274,997 Gross financing 241,895,260 – – 242,364,635 242,364,635 Total 315,621,420 313,643,979 315,864,664 – Sukuk 1,079,101 1,141,584 Financial liabilities Financial liabilities not measured at fair value 7,289,624 – – 7,287,557 7,287,557 Customers’ deposits 293,909,125 – – 293,909,125 293,909,125 Total 301,198,749 – – 301,196,682 301,196,682 Due to banks and other financial institutions
201. 199 Notes to the Consolidated Financial Statements About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information 31 December 2017 Level 1 (SAR ’000) Level 2 (SAR ’000) Level 3 (SAR ’000) 389,193 23,487 Total (SAR ’000) Financial assets Financial assets measured at fair value Investments held at FVSI Available-for-sale investments 412,680 1,805,579 – 771,293 1,034,286 412,680 – 1,805,579 Financial assets not measured at fair value Due from banks and other financial institutions 10,709,795 – – 10,698,223 10,698,223 – Murabaha with SAMA 23,452,869 – – 23,459,853 23,459,853 – Sukuk 10,605,139 – – 10,559,636 10,559,636 Gross Financing 239,090,783 – – 248,834,350 248,834,350 Total 286,076,845 293,575,549 295,770,321 Investments held at amortised cost 771,293 1,423,479 Financial liabilities Financial liabilities not measured at fair value Due to banks and other financial institutions 5,522,567 – – 5,522,554 5,522,554 Customers’ deposits 273,056,445 – – 273,056,440 273,056,440 Total 278,579,012 – – 278,578,994 278,578,994 FVSI and FVOCI investments classified as Level 2 include mutual funds, the fair value of which is determined based on the latest reported net assets value (NAV) as at the date of statement of consolidated financial position. The Level 3 financial assets measured at fair value represent investments recorded at cost. The carrying value of these investments approximate fair value. Gross financing classified as Level 3 has been valued using expected cash flows discounted at relevant SIBOR as at 31 December 2018. Investments held at amortised cost, due to/from banks and other financial institution have been valued using the actual cash flows discounted at relevant SIBOR/SAMA Murabaha rates as at 31 December 2018. The value obtained from the relevant valuation model may differ from the transaction price of a financial instrument. The difference between the transaction price and the model value commonly referred to as “day one profit and loss” is either amortised over the life of the transaction, deferred until the instrument’s fair value can be determined using market observable data, or realised through disposal. Subsequent changes in fair value are recognised immediately in the statement of income without reversal of deferred day one profits and losses. During the current year, no financial assets/liabilities have been transferred between Level 1 and/or Level 2 fair value hierarchy. Annual Report 2018 Carrying value (SAR ’000)
202. 30 Related Party Transactions In the ordinary course of business , the Bank transacts business with related parties. The related party transactions are governed by limits set by the Banking Control Law and the regulations issued by SAMA. The nature and balances resulting from such transactions as at and for the year ended 31 December are as follows: Annual Report 200 Notes to the Consolidated Financial Statements 2018 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information 2018 (SAR ’000) 2017 (SAR ’000) Mutajara 69,967 39,163 Contingent liabilities* 16,634 – Current accounts 77,788 586 10,242,942 1,585,464 6,913,183 16,334 Related parties Members of the Board of Directors Companies and establishments guaranteed by members of the Board of Directors Mutajara Contingent liabilities* Other major shareholders (above 5% equity share) Mutajara – Contingent liabilities* – Current accounts – Other liabilities – 3,308,232 – – 26,067 Associate Contributions receivable 252,706 121,017 Payable against claims 144,640 150,243 Bank balances 274,705 289,236 *off balance sheet items.
203. Income from financing and other 2018 (SAR ’000) 2017 (SAR ’000) 139,496 194,190 68,272 49,860 Employees’ salaries and benefits (air tickets) 4,142 4,253 Rent and premises related expenses 2,238 1,131 Mudaraba fees 1,059,392 1,339,545 Claims incurred and notified during the period 900,207 1,139,983 Claims paid 905,840 1,023,048 5,945 5,418 Contribution – Policies written Board of Directors’ remunerations The amounts of compensations recorded in favour of or paid to the Board of Directors and the Executive Management Personnel during the years ended 31 December are as follows: 2018 (SAR ’000) 2017 (SAR ’000) Short-term benefits 85,579 37,866 Provision for end of service benefits 11,536 1,280 The executive management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Banks directly or indirectly. 2018 Income and expenses pertaining to transactions with related parties included in the consolidated financial statements for the years ended 31 December are as follows: 201 Notes to the Consolidated Financial Statements Annual Report About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information
204. 202 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Notes to the Consolidated Financial Statements 31 Mudaraba Funds Annual Report 2018 Mudaraba funds as of 31 December comprise the following : Customers’ Mudaraba and investments 2018 (SAR ’000) 2017 (SAR ’000) 21,070,580 21,199,185 – Current accounts, metals Total 21,070,580 2,031 21,201,216 Mudaraba and investments represents customer’s investment portfolio managed by Al Rajhi Capital Company and are considered as off balance sheet. consistent with the accounting policies of the Group, such balances are not included in the consolidated financial statements as these are held by the Group in fiduciary capacity. 32 Special Commissions Excluded from the Consolidated Statement of Income The following represents the movements in charities account, which is included in other liabilities (see Note 13): 2018 (SAR ’000) 2017 (SAR ’000) Balance at beginning of the year 16,854 23,785 Additions during the year 40,520 5,201 Payments made during the year (1,024) (12,132) Balance at end of the year 56,350 16,854 33 Investment Management Services The Group offers investment services to its customers. The Group has established a number of Mudaraba funds in different investment aspects. These funds are managed by the Bank’s Investment Department, and a portion of the funds is also invested in participation with the Group. The Group also offers investment management services to its customers through its subsidiary, which include management of funds with total assets under management of SAR 41,294 Mn. (2017: SAR 26,595 Mn.). The mutual funds are not controlled by the Bank and neither are under significant influence to be considered as associates. Mutual funds’ financial statements are not included in the consolidated statement of financial position of the Group. The Group’s share of investments in these funds is included under investments, and is disclosed under related party transactions. Funds invested by the Group in those investment funds amounted to SAR 1,142 Mn. at 31 December 2018 (2017: SAR 1,423 Mn.).
205. 34 Capital Adequacy The Bank ’s objectives when managing capital are, to comply with the capital requirements set by SAMA to safeguard the Bank’s ability to continue as a going concern; and to maintain a strong capital base. Capital adequacy and the use of regulatory capital are monitored daily by the Bank’s Management, SAMA requires the banks to hold the minimum level of the regulatory capital and also to maintain a ratio of total regulatory capital to the risk-weighted assets at or above 8%. The Bank monitors the adequacy of its capital using ratios established by SAMA. These ratios measure capital adequacy by comparing the Bank’s eligible capital with its consolidated statement of financial position, commitments and contingencies, to reflect their relative risk as of 31 December 2018 and 2017. Credit risk weighted assets Operational risk weighted assets 2018 (SAR ’000) 2017 (SAR ’000) 222,309,112 219,687,988 28,094,351 26,832,383 4,102,847 4,594,750 254,506,310 251,115,121 Tier I – capital 48,554,018 55,750,918 Tier II – capital 2,778,864 2,746,100 51,332,882 58,497,018 Tier I ratio (%) 19.08 22.20 Tier I and II ratio (%) 20.17 23.29 Market risk weighted assets Total Pillar I – risk weighted assets Total Tier I and II capital Capital Adequacy Ratio 35 Standards Issued but not yet Effective IFRS 16 “Leases” IFRS 16 – “Leases”, applicable for the period beginning on or after 1 January 2019. The new standard eliminates the current dual accounting model for lessees under IAS 17, which distinguishes between on-balance sheet finance leases and off-balance sheet operating leases. Instead, IFRS 16 proposes on-balance sheet accounting model. The impact is not material for the Bank. IAS 19 “Employee Benefits” Plan Amendment, Curtailment or Settlement (Amendments to IAS 19) to harmonise accounting practices and to provide more relevant information for decision-making. An entity applies the amendments to plan amendments, curtailments or settlements occurring on or after the beginning of the first annual reporting period that begins on or after 1 January 2019. These amendments are not expected to have material impact on the consolidated financial statements of the Group. 2018 203 Notes to the Consolidated Financial Statements Annual Report About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information
206. Annual Report 2018 204 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Notes to the Consolidated Financial Statements 36 Approval of the Board of Directors The consolidated financial statements were approved by the Board of Directors on 5 Jumada II 1440H (corresponding to 10 February 2019). 37 Comparative Figures Figures have been rearranged or reclassified wherever necessary for the purpose of better presentation, however, no significant rearrangements or reclassifications have been made in these consolidated financial statements. 38 Other Adjustment The Bank has conducted a review of the timing of the recognition of up-front fees and special commission income relating to retail credit products. As a result of the review, the method of the application of the accounting policy on timing of the recognition of up-front fees and special commission income has been amended to appropriately reflect the systematic deferral of the recognition of such income. Based on materiality considerations, an adjustment of SAR 799.356 Mn. was only made to the opening retained earnings as at 1 January 2018 with a corresponding adjustment to deferred income as at that date. 39 Subsequent Events The Board of Directors proposed, on 3 January 2019, a distribution of final dividends to the shareholders for the year amounting to SAR 3,656.25 Mn., of SAR 2.25 per share. In addition, the Board of Directors has recommended to increase the share capital to SAR 25,000 Mn. by granting share dividends of 7 shares for every 13 shares owned. The Board’s proposal is subject to the approval of the Extraordinary General Assembly in the next meeting.
207. (a) The main body overseeing remuneration in Al Rajhi Bank – KSA (The Bank), on behalf of the Board of Directors is the Nominations and Compensation Committee (Compensation Committee). The Compensation Committee current members are Alaa Shakeeb Al-Jabri (Chairperson), Khalid Abdulrahman Al-Quiz, Abdulaziz Khalid Al-Ghefaily, and Raed Abdullah Al-Tamimi. In line with SAMA Rules on Compensation Practices, the Compensation Committee main purposes include; recommendation for the selection of Board, Committee members and Senior Executives; to recommend policies that determine salaries and remuneration aligned with regulations and compensation best practices for the Board, Committee members, and Senior Executives. The Bank’s compensation policy, provided that there is no inconsistency with the legal and regulatory requirements of the host country, will apply to Al Rajhi Banking and Investment Corporation and to all its majority-owned subsidiaries both domestic and foreign operating in the financial sector. The Bank’s compensation policy, covers employees, outsourced personnel, and service providers. The Bank participates in the following salary benchmarking exercises to maintain awareness of the market trends, salaries, and benefits; Hay Group, Mclagan and the Institute of Finance (formerly the Institute of Bankers). Senior Executives have been interpreted as the CEO, his key direct reports and employees requiring SAMA no-objection. Employees engaged in risk taking activities have been interpreted as Supervisors and above in Retail Banking Group, Corporate Banking Group and Treasury Group, excluding the Senior Executives. Employees engaged in control functions have been interpreted as Supervisors and above in Internal Audit Group, Compliance Group, Finance Group, Governance and Legal Group and the Credit and Risk Group, excluding the Senior Executives. (b) The Bank’s compensation philosophy is derived from a commitment to attract, retain, develop, motivate, and equitably compensate employees of the highest calibre and talent in recognition to their relative contribution in effectively conducting the business of the Bank and in achieving the Bank strategic goals and building sustainable succession pipeline. The Bank seeks to provide employees with a compensation package that consists of base salary and allowances that are competitive with those provided by comparable organisations for similar levels of duties and responsibilities. The Bank’s employee’s contracts and the compensation package is built towards rewarding performance with emphasis “At Risk” component to align and encourage behaviours that support Bank values and risk management framework, adherence to the internal control framework, and compliance to regulatory requirements. Annexes to the Bank’s compensation policy are reviewed annually by the Compensation Committee and recommendations for changes are submitted to the Board for approval. The changes are mainly with regards to the eligibility and payment schedule for the annual salary review, the performance bonus; including deferred bonus and the sales incentives. The Bank ensures that performance and remuneration outcomes of all risk and compliance employees are independent of the businesses they oversee and are determined by the reporting managers within these functions directly. Performance is measured using a balanced scorecard model, driven by the Performance Management team within HR. 2018 Pillar 3 qualitative disclosure on remuneration – January 2019 205 Basel 3 Qualitative and Quantitative Disclosures Annual Report About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information
208. Annual Report 2018 206 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Basel 3 Qualitative and Quantitative Disclosures (c) Al Rajhi Bank has defined risk management framework which take into account a range of risks managed by the Bank, risk appetite contains both qualitative and quantitative measures across major risk classes including credit, market, operational and liquidity risk to ensure performance is measured and monitored on risk adjusted basis. Al Rajhi Bank’s compensation policy was designed within a risk reward framework. Risk factors are an integral part of the balanced scorecard for Senior Managers performance management. Risk measures thresholds have been defined which are required triggers for variable and long-term bonuses qualifying assessments. The Chief Risk Officer reviews and provides input on the incentive plan taking into consideration the risk and return trade-off. To ensure long term and other risk factors are fully considered, the proportion of the variable bonus that is deferred increases with levels of seniority. (d) Individual remuneration outcomes are discretionary and linked to both Al Rajhi Bank and individual performance outcomes for all Senior Managers and material risk takers. Al Rajhi Bank implements an online balanced scorecard performance management framework, based on the Kaplan model. The KPI’s are cascaded down from the Bank level, down to individual employees and each employee’s KPI are measured based on the financial, processes, customer service and people elements, as appropriate for their job and seniority level. For senior staff, there are some standard KPI’s that ensure that adherence to regulations, Risk and compliance are constantly considered. Each individual’s performance is assessed at year end against their agreed balanced scorecard of financial and non-financial objectives. The Bank operates within a natural performance distribution curve, per group, as follows: 5% to be rated as exceptional, 20% to be rated as outstanding, 65% to be rated as Strong, 5% to be rated as average, and the remaining 5% to be rated as poor. (e) To encourage employees to have a longer-term view, the Bank defers part of the Bonus for eligible Senior Managers and outstanding managers. This deferral is in the form of shares vested over three years as follows; 1/3 at the beginning of the second year, 1/3 at the beginning of the third year and the remaining 1/3 at the beginning of the fourth year. The Bank’s compensation includes the provision to initiate claw back on past bonuses or holdback on the deferred bonus in instances, inter-alia, where an employee’s specific deal has failed or are incurring losses or in relation to gross misconduct, consistent disregard of bank policy, compliance breaches. (f ) The Bank’s total compensation approach comprises fixed and variable compensation. The fixed compensation includes basic salary, which reflects seniority, experience and skills and is benchmarked to the KSA banking sector. Other fixed compensation includes the KSA standard guaranteed payments for housing, transport and 13th and 14th months, known in Al Rajhi Bank, as Ramadan and year end payments. The variable compensation, for business groups, are paid either on a monthly, quarterly, half-yearly or annual basis, depending on the business group, product type or seniority and individual performance. For the Head office and other support functions, the variable pay is mainly in the form of individual annual performance bonus and is based on seniority and individual performance. For Senior Staff, at least 40% of their bonus is deferred. In line with the SAMA Rules on compensation practices, both, the incentive plans and the Bonus plans (including the deferred bonus) are approved by both the Chief Risk Officer and the Board of Directors.
209. Basel 3 Qualitative and Quantitative Disclosures Remuneration amount 1 . Fixed remuneration Number of employees Senior Management Other material risk-takers 17 1233 2. Total fixed remuneration (3+5+7) 31,515 358,204 3. of which: Cash based 30,536 338,930 4. of which: Deferred 5. of which: Shares or other shares-linked instruments 6. of which: Deferred 7. of which: Other forms 979 19,274 8. of which: Deferred 17 1,233 9. Variable remuneration Number of employees 10. Total variable remuneration (11+13+15) 33,026 56,186 11. of which: Cash based 18,352 49,117 12. of which: Deferred 21,038 8,749 13. of which: Shares or other shares-linked instruments 14,674 7,069 14. of which: Deferred 15. of which: Other forms 16. of which: Deferred 64,541 414,390 17. Total remuneration (2+10) REM2: Special payments Special payment Guaranteed bonus Sign-on awards Severance payments Number of employees Total amount Number of employees Total amount Number of employees Total amount Senior Management N/A N/A N/A N/A N/A N/A Other material risk-takers N/A N/A N/A N/A N/A N/A 2018 207 REM1 Remuneration awarded during the fiscal year Annual Report About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information
210. Basel 3 Qualitative and Quantitative Disclosures Annual Report 2018 208 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information REM3 : Deferred remuneration Deferred and retained remuneration a b c d e Total amount of outstanding deferred remuneration Of which: Total amount of outstanding deferred and retained remuneration exposed to ex post explicit and/or implicit adjustment Total amount of amendment during the year due to ex post explicit adjustments Total amount of amendment during the year due to ex post implicit adjustments Total amount of deferred remuneration paid out in the financial year Senior Management Cash Shares 0 0 0 0 0 10,395,099 10,395,099 0 0 13,463,533 0 0 0 0 0 0 0 0 0 0 0 2,753,439 39,648,502 39,648,502 0 19,145,439 0 0 Cash-linked instruments Other Other material risk-takers Cash Shares Cash-linked instruments Other 0 0 0 0 0 Total 50,043,601 50,043,601 0 0 35,362,411
211. About this Report 210 Consolidated Statement of Financial Position in USD 211 Consolidated Statement of Income in USD 212 Five Year Summary in USD 213 GRI Content Index 214 Glossary of Key Islamic Finance Terms 217 Corporate Information 219 2018 Annual Report Supplementary Information 209 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information
212. Annual Report 2018 210 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information About this Report Report structure This Annual Report of Al Rajhi Bank provides the reader with a clear and concise picture of how the Bank plans to execute strategy (as far as it is prudent to disclose such information) in light of the mega trends shaping its operating environment. The Report describes the planned course of action by which the Bank will navigate known and unknown waters as it perpetuates the value creation process in the short, medium and long term. The Report covers the various aspects of the Bank’s business and the interrelationships between them as it provides the reader with a clearer understanding of future direction. The preparation of our Annual Report strengthened and reinforced integrated thinking across the Bank, making the Bank more sustainable in creating value over the long term. In preparing this Report, we drew mainly on the concepts, principles, and guidelines from the following sources:  International Integrated Reporting Framework (www.theiirc.org)  The Smart Integrated Reporting MethodologyTM  Global Reporting Initiative Sustainability Reporting Guidelines – GRI Standards (www.globalreporting.org) Financial reporting and sustainability reporting are integrated throughout the contents of this Report to highlight the broad concept of value creation and capital formation. Continuing its leadership role in the digital sphere, the Bank has provided an interactive online report which complements the printed report while serving the diverse information needs of its many stakeholder groups. Our key stakeholder groups have been taken into account when deciding on material aspects to report on, such as topics that reflect the Bank’s significant economic, environmental, and social impacts which, in turn, can significantly influence stakeholder decisions. The Bank’s reporting focuses on aspects that are material or important – those that may substantively affect the Bank’s ability to create value over the short, medium and long term and which have a significant probability of occurrence. Compliance Covering the 12-month period from 1 January to 31 December 2018, this Report is consistent with the Bank’s usual annual reporting cycle for financial and sustainability reporting. The contents of the Report are in compliance with all applicable laws, regulations and standards, and guidelines for voluntary disclosures. Additional details can be found in the Corporate Governance Report (pages 85 to 111), Financial Statements and the Notes thereon (pages 113 to 204), and in the Independent Auditors’ Report (pages 114 and 119). When launching new ventures and initiatives the Group always takes into consideration the financial, economic, social, and environmental consequences of its actions. With its best in class systems and risk management processes, the Bank is in complete compliance with all local regulatory requirements. Queries Your comments or questions on this Report are always welcome. In this regard the Bank invites you to contact: IR@alrajhibank.com.sa Report boundary The Financial Statements within this Report illustrate the consolidated performance of the entire Group, comprising Al Rajhi Bank (referred to as “the Bank” in this Report) and its subsidiaries (collectively referred to as the “Group”, detailed in Note 1 on page 125). Reporting on the Bank’s social and environmental impact within the Management Discussion and Analysis, generally excludes these entities, which account for a small portion of the Group’s revenue, assets, and workforce. When contributions by other Group entities are discussed they are referred to as “Group” or “Consolidated”.
213. Consolidated Statement of Financial Position in USD As at 31 December 2018 (USD ’000) 2017 (USD ’000) 11,532,278 12,875,326 8,215,470 2,855,945 211 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Due from banks and other financial institutions Investments 11,483,351 9,706,958 Financing, net 62,416,744 62,276,153 346,024 350,402 2,372,690 2,095,501 Other assets 967,799 1,337,457 Total Assets 97,334,355 91,497,741 1,943,900 1,472,685 Investment property Property and equipment, net Liabilities and Shareholders’ Equity Liabilities Due to banks and other financial institutions 78,375,767 72,815,052 Other liabilities 4,066,950 2,343,093 Total Liabilities 84,386,617 76,630,829 Share capital 4,333,333 4,333,333 Statutory reserve 4,333,333 4,333,333 (93,215) 1,408,449 3,399,286 3,708,463 975,000 1,083,333 Total Shareholders’ Equity 12,947,738 14,866,911 Total Liabilities and Shareholders’ Equity 97,334,355 91,497,741 Customer deposits Shareholders’ Equity Other reserves Retained earnings Proposed gross dividends and Zakat The Consolidated Statement of Financial Position and the Consolidated Statement of Income given on pages 211 and 212 are solely for the convenience of shareholders, investors, bankers and other users of Financial Statements and do not form part of the financial statements. Exchange rate of SAR 3.75 per US dollar has been used for the above conversion of SAR Financial Statements into US dollar. Annual Report Cash and balances with Saudi Arabian Monetary Agency (“SAMA”) and other central banks 2018 Assets
214. 212 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Consolidated Statement of Income in USD 2018 (USD ’000) 2017 (USD ’000) 3,669,189 3,354,934 (135,126) (147,090) 3,534,062 3,207,845 Fee from banking services, net 827,010 719,255 Exchange income, net 201,548 224,490 55,919 89,704 4,618,538 4,241,294 749,186 750,378 83,885 82,937 Depreciation and amortisation 117,912 117,484 Other general and administrative expenses 513,471 445,614 Impairment charge for financing, net 408,252 412,687 Total operating expenses 1,872,707 1,809,101 Net income for the year 2,745,831 2,432,194 1,625 1,625 1.69 1.50 For the years ended 31 December Annual Report 2018 Income Gross financing and investment income Return on customers’, banks’ and financial institutions’ time investments Net financing and investment income Other operating income, net Total operating income Expenses Salaries and employees’ related benefits Rent and premises related expenses Weighted average number of shares outstanding (million) Basic and diluted earnings per share (in USD) Exchange rate of SAR 3.75 per US dollar has been used for the above conversion of SAR Financial Statements into US dollar.
215. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Five Year Summary in USD 2017 2016 2015 2014 3 ,534 3,208 2,977 2,656 2,618 2018 2018 Operating results for the year, USD million Net financing and investment income Total operating income 4,619 4,241 4,076 3,666 3,645 Total operating expenses 1,873 1,809 1,909 1,764 1,822 Net income 2,746 2,432 2,166 1,901 1,823 Total comprehensive income 2,719 2,407 2,192 1,845 1,806 Financing, net 62,417 62,276 59,998 56,058 54,917 Customer deposits 78,376 72,814 72,691 68,327 68,287 Total assets 97,334 91,498 90,590 84,165 82,057 Total liabilities 84,387 76,631 76,737 71,728 70,884 Total shareholders’ equity 12,948 14,867 13,853 12,437 11,172 Assets and liabilities, USD million Profitability Return on average assets, % 2.90 2.67 2.48 2.29 2.33 Return on average equity, % 19.80 16.94 16.49 16.11 17.01 Basic and diluted earnings per share, USD 1.69 1.50 1.33 1.17 1.12 Dividend per share, USD 1.13 0.66 0.60 0.67 0.73 Tier I, % 19.08 22.20 20.86 19.74 18.48 Tier I and II, % 20.17 23.29 21.98 20.83 19.59 12,732 13,077 13,684 12,374 11,761 Regulatory ratios Capital adequacy ratio: Growth Staff Nos. Branches (Nos.) ATMs (Nos.) POS Terminals (Nos.) 551 554 539 525 501 5,006 4,794 4,475 4,500 3,997 83,958 74,612 62,118 51,000 32,792 Exchange rate of SAR 3.75 per US dollar has been used for the above conversion of SAR Financial Statements into US dollar. Annual Report For the years ended 31 December 213 Key indicators from the consolidated financial statements for the years ended 31 December
216. 214 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information GRI Standard /Disclosure GRI Content Index Page No. Omission Annual Report 2018 GRI 101: Foundation 2016 GRI 102: General Disclosures 2016 Organisational profile 102-1 Name of the organisation 102-2 Activities, brands, products and services 102-3 Location of headquarters 102-4 Location of operations 102-5 Ownership and legal form 102-6 Markets served 6 6-7 Corporate Information 6 6 6-7 102-7 Scale of the organisation 102-8 Information on employees and other workers 6-9 102-9 Supply chain 102-10 Significant changes to the organisation and its supply chain 102-11 Precautionary principle or approach Not reported 102-12 External initiatives Not reported 102-13 Membership of associations Not reported 70-77 Not reported About this report Strategy 102-14 Statement from senior decision-maker 12 Ethics and integrity 102-16 Values, principles, standards, and norms of behaviour 6 Governance 102-18 Governance structure 87 Stakeholder engagement 102-40 List of stakeholder groups 36 102-41 Collective bargaining agreements 102-42 Identifying and selecting stakeholders 36 102-43 Approach to stakeholder engagement 36 102-44 Key topics and concerns raised 37 Not applicable Reporting practice 102-45 Entities included in the consolidated financial statements 102-46 Defining report content and topic boundaries 102-47 List of material topics 102-48 Restatements of information 102-49 Changes in reporting 102-50 Reporting period 125 About this report GRI index Topics page About this report None About this report 102-51 Date of most recent report 102-52 Reporting cycle About this report 31 December 2017 102-53 Contact point for questions regarding the report About this report 102-54 Claims of reporting in accordance with the GRI Standards About this report 102-55 GRI content index 102-56 External assurance 214-215 None
217. GRI Standard /Disclosure GRI Content Index Page No. Omission 215 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information GRI 200: Economic Explanation of the material topic and its boundaries 103-2 The management approach and its components 201-3 Defined benefit plan obligations and other retirement plans 6 26-30 Annual Report 103-1 2018 GRI 201: Economic performance 2016 169 GRI 202: Market presence 2016 103-1 Explanation of the material topic and its boundaries 103-2 The management approach and its components 202-2 Proportion of senior management hired from the local community 6 26-30 70 GRI 203: Indirect economic impacts 2016 103-1 Explanation of the material topic and its boundaries 103-2 The management approach and its components 203-2 Significant indirect economic impacts 6 26-30 82 GRI 205: Anti-corruption 2016 103-1 Explanation of the material topic and its boundaries 103-2 The management approach and its components 26-30 6 205-1 Operations assessed for risks related to corruption 38-39 GRI 307: Environmental compliance 2016 103-1 Explanation of the material topic and its boundaries 103-2 The management approach and its components 307-1 Non-compliance with environmental laws and regulations 6 26-30 Compliant GRI 400: Social GRI 401: Employment 2016 103-1 Explanation of the material topic and its boundaries 103-2 The management approach and its components 26-30 6 401-1 New employee hires and employee turnover 70-72 401-2 Benefits provided to full-time employees that are not provided to temporary or part-time employees 125 GRI 404: Training and education 2016 103-1 Explanation of the material topic and its boundaries 103-2 The management approach and its components 6 404-1 Average hours of training per year per employee 73-75 404-2 Programs for upgrading employee skills and transition assistance programmes 73-75 404-3 Percentage of employees receiving regular performance and career development reviews 26-30 75 GRI 406: Non-discrimination 103-1 Explanation of the material topic and its boundaries 103-2 The management approach and its components 406-1 Incidents of discrimination and corrective actions taken 6 26-30 None
218. 216 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information GRI Standard /Disclosure GRI Content Index Page No. Annual Report 2018 GRI 413: Local communities 2016 103-1 Explanation of the material topic and its boundaries 103-2 The management approach and its components 413-1 Operations with local community engagement, impact assessments, and development programmes 6 26-30 82 GRI 418: Customer privacy 2016 103-1 Explanation of the material topic and its boundaries 103-2 The management approach and its components 418-1 Substantiated complaints concerning breaches of customer privacy and losses of customer data 6 26-30 78 GRI 419: Socio-economic compliance 2016 103-1 Explanation of the material topic and its boundaries 103-2 The management approach and its components 419-1 Non-compliance with laws and regulations in the social and economic area 6 26-30 81 Omission
219. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Bai al Arboon down payment sale A sale agreement In which a down payment is provided in advance as part payment towards the price of the commodity for reserving the commodity . The down payment is forfeited if the buyer does not return to take the commodity and the seller is entitled to sell the commodity. Bai Al Ajel deferred payment sale A sale on a deferred payment basis. Equipment or goods are sold by the Bank to the client for an agreed lump sum price which includes the profit required by the Bank without disclosing the cost. The client may pay by instalments within a preagreed period, or in a lump sum. Bai Inah sale and buy-back The sale and buy-back of an asset for a higher price than that for which the seller originally sold it. The seller immediately buys back the asset just sold on a deferred payment basis at a price higher than the original price. This can be seen as a loan in the form of a sale. Eirad credit facilities granted against assignment of an income stream for a specific period. Fiqh Islamic jurisprudence Mudaraba trust financing, profit sharing 217 Financing to give customers an opportunity to invest in property with repayment to the Bank in the form of instalments over a period of time. Ijara Thumma Bai leasing to purchase One of three fundamental prohibitions in Islamic finance (the other two being Riba and Maysir). Gharar is a concept that covers certain types of haram uncertainty whereby one or more parties stand to be deceived through ignorance of an essential element in the contract. Gambling is a form of Gharar because the gambler is ignorant of the result of the gamble. The prohibition on Gharar is often used as the grounds for criticism of conventional financial practices such as short selling, speculation and derivatives. The same principle governing an Ijara contract, but at the end of the lease period the lessee buys the asset for an agreed price through a purchase contract. An investment partnership, whereby the investor (the Rab al mal) provides capital to the entrepreneur (the mudarib) in order to undertake a business or investment activity. While profits are shared on a pre-agreed ratio, losses are born by the investor alone. The mudarib loses only his share of the expected income. Halal lawful, permissible Haram unlawful, forbidden Activities, professions, contracts and transactions that are explicitly prohibited by the Quran or the Sunnah. Hawala bill of exchange, remittance A contract which allows a debtor to transfer his debt obligation to a third party who owes the former a debt. The mechanism of Hawala is used for settling international accounts by book transfers, thus obviating the need for a physical transfer of cash. Ijara leasing A lease agreement whereby a bank or financier buys an item for a customer and then leases it to him over a specific period, thus earning profits for the Bank by charging rental. The duration of the lease and the fee are set in advance. During the period of the lease, the asset remains in the ownership of the lessor (the Bank), but the lessee has the right to use it. After the expiry of the lease agreement, this right reverts to the lessor. Ijarah wa Iqtina buy-back leasing Istisnaa advance purchase of goods or buildings A contract of acquisition of goods by specification or order, where the price is paid in advance, or progressively in accordance with the progress of a job. For example, to purchase a yet to be constructed house, payments would be made to the builder according to the stage of work completed. This type of financing, along with Salam, is used as a purchasing mechanism, and Murabaha and Bai Al Ajel are for financing sales. Kafalah guarantee Sharia principle governing guarantees. It applies to a debt transaction in the event of a debtor failing to pay. Maysir gambling One of three fundamental prohibitions in Islamic finance (the other two being Riba and Gharar). The prohibition on Maysir is often used as grounds for criticism of conventional financial practices such as speculation, conventional insurance and derivatives. The investor has no right to interfere in the management of the business, but he can specify conditions that would ensure better management of his money. In this way Mudaraba is sometimes referred to as a sleeping partnership. A joint Mudaraba can exist between investors and a bank on a continuing basis. The investors keep their funds in a special fund and share the profits before the liquidation of those financing operations that have not yet reached the stage of final settlement. Many Islamic investment funds operate on the basis of joint Mudaraba. Mudarib entrepreneur in a Mudaraba contract The entrepreneur or investment manager in a Mudaraba who puts the investor’s funds in a project or portfolio in exchange for a share of the profits. A Mudaraba is similar to a diversified pool of assets held in a discretionary asset management portfolio. 2018 Akar instalment sale to invest in property Gharar uncertainty Annual Report Ajr commission or fee charged for services Glossary of Key Islamic Finance Terms
220. Annual Report 2018 218 About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Murabaha cost-plus financing A form of credit in which the Bank buys an item and sells it to the customer on a deferred basis . The price includes a profit margin agreed by both parties. Repayment, usually in instalments, is specified in the contract. The legality of this financing technique has been questioned because of its similarity to Riba. However, the modern Murabaha has become a popular financing technique among Islamic banks, used widely for consumer finance, real estate and the purchase of machinery and for financing shortterm trade. Musharaka joint venture, profit and loss sharing An investment partnership in which all partners are entitled to a share in the profits of a project in a mutually agreed ratio. Losses are shared in proportion to the amount invested. All partners to a Musharaka contribute funds and have the right to exercise executive powers in that project, similar to a conventional partnership structure and the holding of voting shares in a limited company. This equity financing arrangement is widely regarded as the purest form of Islamic financing. The two main forms of Musharaka are –  Permanent Musharaka: an Islamic bank participates in the equity of a project and receives a share of the profit on a pro rata basis. The length of contract is unspecified, making it suitable for financing projects where funds are committed over a long period. Glossary of Key Islamic Finance Terms  Diminishing Musharaka: this allows equity participation and sharing of profits on a pro rata basis, and provides a method through which the Bank keeps on reducing its equity in the project, ultimately transferring ownership of the asset to the participants. The contract provides for payment over and above the Bank’s share in the profit for the equity held by the Bank. Simultaneously the entrepreneur purchases some of the Bank’s equity, progressively reducing it until the Bank has no equity and thus ceases to be a partner. Mutajar an asset financing mechanism with deferred payment A financing agreement whereby the bank purchases a commodity or an asset and sells it to the client based on a purchase promise from the client with a deferred price higher than the cash price, thus making the client a debtor to the Bank for the sale amount and for the period agreed in the contract. Qard Hasan benevolent loan A loan contract between two parties for social welfare or for short-term bridging finance. Repayment is for the same amount as the amount borrowed. The borrower can pay more than the amount borrowed so long as it is not stated by contract. Riba interest Tawarruq reverse Murabaha An increase, addition, unjust return, or advantage obtained by the lender as a condition of a loan. Any risk-free or “guaranteed” rate of return on a loan or investment is Riba. Riba in all its forms is prohibited in Islam. In personal financing, a client with a genuine need buys an item on credit from the Bank on a deferred payment basis and then immediately resells it for cash to a third party. In this way, the client can obtain cash without taking out an interest-based loan. In conventional terms, Riba and “interest” are used interchangeably, although the legal notion extends beyond mere interest. Sharia Islamic jurisprudence Sukuk Islamic bond An asset-backed bond which is structured in accordance with Sharia and may be traded in the market. A Sukuk represents proportionate beneficial ownership in the underlying asset, which will be leased to the client to yield the return on the Sukuk. Takaful Islamic insurance Based on the principle of mutual assistance, Takaful provides mutual protection of assets and property and offers joint risk-sharing in the event of a loss by one of the participants. Takaful is similar to mutual insurance in that members are the insurers as well as the insured. Conventional insurance is prohibited in Islam because its dealings contain several haram elements, such as Gharar and Riba. Ujrah fee The financial charge for using services, or Manfaat (wages, allowance, commission, etc.). Waqf charitable trust Zakat religious tax An obligatory contribution which every wealthy Muslim is required to pay to the Islamic state, or to distribute amongst the poor. According to Islam, Zakat – the third pillar of Islam – purifies wealth and souls. Zakat is levied on cash, cattle, agricultural produce, minerals, capital invested in industry and business.
221. About the Bank Value Drivers Leadership Strategy Performance Corporate Governance Financial Reports Supplementary Information Name Auditors Al Rajhi Banking and Investment Corporation PricewaterhouseCoopers KPMG Al Fozan & Partners Commercial Registration No. 1010000096 Registered Logo Head Office/Registered Office 2018 Al Rajhi Bank Al Rajhi Bank 8467, King Fahd Road – Al Muruj District Unit No. 1 Riyadh 12263 – 2743 Kingdom of Saudi Arabia Annual Report Trade Name Tel: +966920003344 (KSA) | +966114603333 (International) Fax: +966114603351, +966114600705 Web: www.alrajhibank.com.sa E-mail: care@alrajhibank.com.sa Legal Form A Saudi joint stock company, formed and licensed pursuant to Royal Decree No. M/59 dated 3 Dhul Qadah 1407H (29 June 1987), in accordance with Article 6 of the Council of Ministers Resolution No. 245, dated 26 Shawal 1407H (23 June 1987). Stock Exchange Listing The shares of the Bank are listed on the Saudi Stock Exchange (Tadawul). Stock code: 1120.SSE Subsidiary Companies and Branches Name of subsidiary 219 Corporate Information Country of operation Country of establishment Al Rajhi Capital Company Kingdom of Saudi Arabia Kingdom of Saudi Arabia Al Rajhi Development Company Limited Kingdom of Saudi Arabia Kingdom of Saudi Arabia Al Rajhi Takaful Agency Company Kingdom of Saudi Arabia Kingdom of Saudi Arabia Al Rajhi Management Services Company Kingdom of Saudi Arabia Kingdom of Saudi Arabia Al Rajhi Corporation Limited Malaysia Malaysia Al Rajhi Bank (Kuwait branch) Kuwait Kingdom of Saudi Arabia Al Rajhi Bank (Jordan branch) Jordan Kingdom of Saudi Arabia
222. Notes
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224. https ://arb.sa/report2018-ar