Alizz Islamic Bank: Annual Report 2018

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1. EXCELLING FOR 5 YEARS ANNUAL REPORT 2018
2. HIS MAJESTY SULTAN QABOOS BIN SAID
3. Alizz Islamic Bank delivers exceptional and sustainable results to our stakeholders by providing superior Shari ’a compliant financial solutions. CONTENTS Founded in November 2012, Alizz Islamic Bank provides wholesale and retail finance through its branch distribution and a variety of alternative electronic channels. We are headquartered in the Central Business District Area in Ruwi, Oman but we plan to decentralize every local Alizz Islamic Bank branch as a head-quarter for satisfying all our customers’ financial needs and helping them succeed financially. The Wholesale Banking Department at Alizz Islamic Bank offers services both in the asset and liability management within the Corporate Banking, Government & Institutional Banking, Project Finance & Investment Banking, Treasury and Capital Market as well as Trade Finance. Oman offers a world of investment opportunities for both local and international companies, whether it’s a small, medium or large business. Alizz is committed to support these opportunities by offering Shari’a compliant banking solutions catered to meet the different needs of your organization or institution regardless of the type of business or the industry operated in. Through our team of dedicated Relationship Managers, we strive to deliver customer service excellence being your trusted banking partner in helping you to make your business succeed. Bank Profile 07 Chairman’s Message 09 Board of Directors 12 Senior Management 13 Corporate Governance Report 2018 15 Shari’a Supervisory Board 31 Fatwas of Shari’a Supervisory Board 33 Management Discussion & Analysis 38 Basel II, Pillar III and Basel III Report 47 Financial Statements 107 2018 Eventful Year 172 Branch Network 179
4. BANK PROFILE OUR MISSION Deliver exceptional and sustainable results to our stakeholders by providing superior Shari ’a compliant financial solutions. OUR VALUES TEAM WORK We build winning teams that are Results-Focused, driven by what creates value for our stakeholders. INTEGRITY We conduct our business in an honest, fair and transparent way, guided by Shari’a principles. EXCELLENCE We are passionate about being the best in everything we do. ANNUAL REPORT 2018 | www.alizzislamic.com 7
5. CHAIRMAN ’S MESSAGE DEAR SHAREHOLDERS It gives me immense pleasure to announce that in 2018 Alizz Islamic Bank SAOG (the Bank) managed to achieve its maiden profit since it started its operations in 2013. Through quality growth of our core business and continuous improvement of risk management, in addition to striving to achieve the highest level of operational efficiency - the Bank will pursue sustained and improved profitability in the coming years aiming at enhancing shareholder and overall stakeholder value. ECONOMIC OVERVIEW AND OUTLOOK The economic conditions showed signs of recovery due to higher than expected oil prices and the gradual impact of Government’s initiatives of economic diversification. Based on 2018 results declared by the Government of Oman, the budget deficit was OMR 2.9 billion which was financed primarily by the issue of bonds and Sukuk in the international market and partly through withdrawal from past years’ reserves. The Banking industry remained resilient in spite of slower credit and financing growth, volatile domestic and regional capital markets and tight liquidity. With anticipated improving economic conditions in 2019, the banking industry is likely to benefit and expected to consolidate in response to market conditions. FINANCIAL PERFORMANCE The Bank witnessed a solid growth in all core business areas which resulted in an increase in financing receivables by 20.2% to reach OMR 553.3M in 2018 from OMR 460.2M at the end of 2017. Furthermore, deposits increased by 23.6% to reach OMR 586.4M. The Bank’s revenue from financing and investing activities increased by 45.8% to OMR 30.8M in 2018 from OMR 21.2M in 2017. The Bank reported a net operating profit of OMR 3.2M versus a net operating loss of OMR 1.6M last year and a net profit of OMR 2.0 M in 2018 versus a net loss of OMR 2.9M in 2017. This resulted in an impressive 166.9% year-on-year growth. The Bank managed to enhance its yield on assets, fee income and witnessed improvement in other key performance indicators including net profit margin and cost-to-income ratio. ANNUAL REPORT 2018 | www.alizzislamic.com 9
6. STRATEGIC INITIATIVES AWARDS The Bank will continue to focus on driving profitability from its core business growth , while striving to maintain asset quality. Technology remains the top priority and the Bank endeavors to enhance its digital footprint in line with global trends. Substantial investment is being made to automate the internal processes to maximize the customer experience in all touch points. The Bank received many awards in recognition of its banking services, product offerings and service to the community.  Reflecting the success of the Bank in 2018, the Bank received the award for Best Arabian Management Team at the Arab Best Awards. Also, as a testament of the phenomenal marketing efforts in raising brand awareness, Alizz Islamic Bank received the award for Best Islamic Banking Brand in Oman at the Global Brand Awards. Also, the products suite and services are being further enhanced to cater for different segments of society in line with the evolution of Islamic banking in the Sultanate. INVESTING IN OUR PEOPLE AND COMMUNITY At Alizz Islamic Bank, we firmly believe in investing in our people and contributing to the community. The Bank strives to recruit talented and ambitious Omani nationals and provide them appropriate training in Islamic Banking to prepare them for future leadership roles in line with the vision of the Government. The Bank enjoys a high Omanisation ratio of 90.3% and we will endeavor to increase it further. Since 2018, oversight of Corporate Social Responsibility (CSR) resides with the Management’s Corporate Social Responsibility Committee, which is responsible for reviewing the CSR strategy, including reports on the Bank’s social performance and benchmarking. Our new CSR investment strategy, places priority on organizations that help the youth in communities across our footprint reach their full potential. We strongly believe that focusing on the health, well-being and education of the youth will help build stable and prosperous communities well into the future. BOARD OF DIRECTORS The Bank was also awarded for Excellence in Islamic Banking at the Oman Banking and Finance Awards. Additionally, the bank received the award for Best CSR Bank in Oman at the Global Banking and Finance Awards for being at the forefront of supporting social development initiatives in the Sultanate. IN CONCLUSION The Board of Directors is deeply grateful to His Majesty Sultan Qaboos bin Said for his vision and guidance in leading Oman along its path of growth and prosperity during the last 48 years of his leadership. I would like to offer upmost appreciation to our devoted customers and respected shareholders. I would like to thank our highly committed Board of Directors and the Shari’a Supervisory Board for their guidance as well as the Bank’s management and employees for their outstanding contribution and for their enduring loyalty, integrity and commitment to excellence. I would also like to convey my appreciation to the Central Bank of Oman and the Capital Market Authority for their continued guidance and support. TAIMUR A AL SAID Chairman 10 ANNUAL REPORT 2018 | www.alizzislamic.com ANNUAL REPORT 2018 | www.alizzislamic.com 11
7. SENIOR MANAGEMENT H .H. Al Sayyid Taimur Bin Asa’d Al Said Chairman Mohammed Shukri Ghanem Ahmed Abdullah Al Khonji Shabib Mohammed Al Darmaki Vice Chairman Board Member Board Member Front Row - From Left | Mohammed Al Balushi: AGM - Chief Human Resource Officer | Ghalib Al Busaidi: GM - Group Head Wholesale Banking | Honorable Salaam Said Al Shaksy: Chief Executive Officer | Moosa Al Jadidi: GM - Chief Operating Officer | Pete Bynre: AGM - Chief Audit Executive Back Row - From Left 12 Mohamed Rashed Al Suwaidi Obaid Hilal Al Kaabi Saleh Nasser Al Araimi Board Member Board Member Board Member ANNUAL REPORT 2018 | www.alizzislamic.com | | | | Sufyan Maysara Yassin: Head of Shari’a Audit & Compliance | Mohammed Al Ghassani: AGM – Head of Retail Distribution & Wealth Management Ahmed Al Rawahi: AGM - Head of Treasury & Capital Markets | Ali Al Zadjali: AGM - Head of Compliance Fadellah Sulieman: Legal Advisor & Company Secretary | Faisal Zakaria: AGM: Chief Financial Officer | Venkatesh Kallur: Chief Risk Officer Mustafa Al Lawati: AGM – Head of Investment Banking, Project Finance & Syndications | Yasir Al Azzawi: AGM - Head of Mid Corporate & SME Banking ANNUAL REPORT 2018 | www.alizzislamic.com 13
8. CORPORATE GOVERNANCE REPORT ANNUAL REPORT 2018 | www.alizzislamic.com ANNUAL REPORT 2018 | www.alizzislamic.com 15
9. CORPORATE GOVERNANCE REPORT – 2018 The Corporate Governance report as per the Code of Corporate Governance, the best international governance practices, deals with the way companies are managed and led, defines the roles of the Directors and formalises the internal control processes within the Bank. The Board of Directors of Alizz Islamic Bank SAOG (the Bank) supports the establishment of a governance culture at the Bank. Accordingly, the Board and its Committees continuously evaluate and improve their governance practices, policies and procedures. The Board also ensures that the Bank applies the principles of the Capital Market Authority’s (the CMA) Code of Corporate Governance (the Code) as well as the regulations for Corporate Governance of Banking and Financial Institutions issued by the Central Bank of Oman. As an Islamic bank, Alizz Islamic Bank also applies the Central Bank of Oman regulation for Islamic banking institutions. BOARD OF DIRECTORS The Board of Directors is responsible for the supervision and control of the Bank. The Board also directs, agrees and approves the objectives of the Bank, its strategies and policies. The Board of Directors also reviews the performance of the Bank in relation to its stated objectives. APPOINTMENT OF DIRECTORS The Board is comprised of seven members who have been elected by the shareholders in March 2016 for a period of three years. The current term of all the Directors expires in 2019. Accordingly a new Board will be elected by the shareholders in March 2019. PROCESS OF NOMINATION OF THE DIRECTORS The nomination of the Directors is done as per the Bank’s Articles of Association and the CMA Code of Corporate Governance. Shareholders retain the power to elect any candidate to the Board irrespective of any recommendation to be made by the Board. INFORMATION GIVEN TO THE BOARD The Directors are given timely information so as to maintain full and effective control over strategic, financial, operational, compliance and governance issues. On appointment, each Director receives an induction pack which contains information regarding the Bank and is advised of the legal, regulatory and other obligations of a joint stock company’s Director. The following tables show the position of each of the current Board members: Table 1 Name of the Directors Representing HH Al Sayyid Taimur A Al Said - Chairman Huriah Company LLC Mr. Mohamed Shukri Ghanem – Vice Chairman First Energy Oman Mr. Shabib Mohamed Al Darmaki – Member Civil Services Employees’ Pension Fund Mr. Ahmed Abdullah Al Khonji– Member Al Khonji Development and investment Mr. Mohamed Rashid Alhurr Al Suwaidi - Member Aabar Investments Company Mr. Obaid Helal Mohammed Al Kaabi – Member Himself Mr. Saleh Nasser Al Araimi - Member Himself Category of the Director* NEX-NIND NEX-NIND NEX-IND NEX-IND NEX-NIND NEX-IND NEX-IND *NEX: Non-Executive Director, IND: Independent, NIND: Non Independent Table 2 Name of the Directors HH Mr. Mr. Mr. Mr. Mr. Mr. Al Sayyid Taimur A. Al Said - Chairman Mohamed Shukri Ghanem – Vice Chairman Shabib Mohamed Al Darmaki – Member Ahmed Abdullah Al Khonji – Member Mohamed Rashid Alhurr Al Suwaidi – Member Obaid Helal Mohammed Al Kaabi – Member Saleh Nasser Al Araimi – Member Other Board Committees Membership* EXCOM, N&RC EXCOM, N&RC BAC BRCC, BAC BAC , BRCC BRCC, N&RC EXCOM, N&RC Member of other S.A.O.G Boards Nil Nil 2 NIL Nil Nil 2 No. of Board Meetings attended 8 3 8 7 7 8 7 Attended last AGM (Yes/No/NA) Yes No Yes Yes Yes Yes Yes *BAC: Board Audit Committee, BRCC: Board Risk and Compliance Committee, EXCOM: Executive Committee of the Board, N&RC: Board Nomination and Remuneration Committee. NUMBER AND DATES OF BOARD MEETINGS COMPOSITION OF THE BOARD The Board held eight meetings during 2018. They were on 28 January, 29 March, 26 April, 23 May, 29 July, 29 October, 13 November and 12 December 2018. The maximum interval between two Board meetings was ninety days. This is in compliance with the Code of Corporate Governance, which requires meetings to be held within a maximum time gap of four months. No Director is a member of the Board of more than four public joint stock companies or banks whose principal place of business is in the Sultanate of Oman, or a Chairman of more than two such companies. REMUNERATION TO BOARD AND TOP MANAGEMENT The sum of the benefits (e.g. salaries, perquisites, gratuity, pension, bonus etc.) paid to the top five senior managers of the Bank in 2018 is RO 928,852/Staff service contracts duration is 2 to 3 years for expatriate officers and determined by the prevailing labour laws for Omanis. The notice period is between one to six months. As all members of the Board are Non-executive Directors, accordingly no fixed remuneration or performance linked incentives are applicable. The Nonexecutive Directors are paid sitting fees and reimbursement of expense for attending the Board and committee meetings. 16 ANNUAL REPORT 2018 | www.alizzislamic.com ANNUAL REPORT 2018 | www.alizzislamic.com 17
10. The details of the sitting fees paid or accrued for payment to the Board members during 2018 are as follows : Table 3 Name of the Directors HH Al Sayyid Taimur A. Al Said - Chairman Mr. Mohamed Shukri Ghanem – Vice Chairman Mr. Shabib Mohamed Al Darmaki – Member Mr. Ahmed Abdullah Al Khonji – Member Mr. Mohamed Rashid Alhurr Al Suwaidi – Member Mr. Obaid Helal Mohammed Al Kaabi – Member Mr. Saleh Nasser Al Araimi – Member Total Total fees “RO” 9,200 4,900 7,600 6,200 7,700 6,200 8,200 50,000 •• The Committee will have access to Board Members, external auditors and outside counsel, including access to all relevant information, as necessary to carry out its activities, while considering relevant jurisdictional regulations/laws. •• The Audit Committee shall report to the Board of Directors on Internal Audit findings and escalate material issues. BOARD RISK AND COMPLIANCE COMMITTEE The Board Risk and Compliance Committee comprises of three members and met four times during the year 2018. The names of the members appear in the table below: Table 5 Name Mr. Ahmed Abdullah Al Khonji Mr. Mohamed Rashid Alhurr Al Suwaidi Mr. Obaid Hilal Mohammed Al Kaabi The total hotel and travel expense related to the Board members during 2018 is RO 21,256 Position Chairman Member Member Meetings Attended 4 4 3 Remarks As at the end of 2018, The Board of Directors has four committees, the Executive Committee, the Audit Committee, the Risk and Compliance Committee and the Nomination and Remuneration Committee. The Committee is responsible for assisting the Board in fulfilling its oversight responsibilities pertaining to risk management and compliance; recognising compliance as a core risk management activity within the Bank. By establishing, monitoring and reviewing internal control, compliance and risk management policies, processes and systems within the Bank, this ensures conformity with regulatory requirements as well as alignment with leading standards such as Basel. BOARD AUDIT COMMITTEE AUTHORITY BOARD COMMITTEES The Audit Committee comprises of three members. The committee has met four times in 2018. The composition of the Audit Committee and particulars of meetings attended by the members of the Audit Committee are given in the table below: Table 4 Name Mr. Shabib Mohamed Al Darmaki Mr. Ahmed Abdullah Al Khonji Mr. Mohamed Rashid Alhurr Al Suwaidi Position Chairman – Independent Member – Independent Member – Non – Independent Meetings attended 4 4 3 Remarks The Committee has the overall responsibility of nominating the external auditor, assessing the Internal Audit findings, providing direction for implementation of audit recommendations and overseeing the Internal Audit activities undertaken within the internal control environment and regulatory compliance framework of the Bank. AUTHORITY •• Recommend to the Board of Directors, who shall in turn present to the General Assembly, the appointment and compensation of the external auditor to conduct the Bank’s annual audit. •• The Audit Committee shall be responsible for the evaluation of Internal Audit function and shall maintain oversight of the work of external auditor and approve all auditing and permitted non-audit services performed by them. 18 ANNUAL REPORT 2018 | www.alizzislamic.com The key areas of authority for the Risk & Compliance Committee to oversee on behalf of the Bank are: •• Aggregate risk exposure and the level of risk assumed for the Bank. •• Risk management and compliance decisions for the Bank. •• The effectiveness of the risk management and compliance systems and controls. •• Management’s compliance with established risk-related limits and policies. •• Management’s adherence to statutory compliance requirements; AML, KYC, reporting, etc. •• The performance of the Bank’s risk and Compliance functions. In relation to credit risk, the Committee shall only be involved in overseeing risk policies, validity of models, delegations of authority and financing exposure and concentration. Aspects related to the continuing management of credit risk decisions shall be delegated by the Board separately to the Executive Committee. •• In the Committees capacity to oversee compliance related matters, the Committee will have access to the Banks Executive/Senior Management, external auditors and outside counsel. The Committee will also be privy to all relevant information, as necessary to carry out its activities. EXECUTIVE COMMITTEE OF THE BOARD (EXCOM) The Executive Committee of the Board comprises of three members and met eight times during the year 2018. The names of the members and their positions are as set out in the table continued on the next page: ANNUAL REPORT 2018 | www.alizzislamic.com 19
11. BOARD MEMBERS PROFILE Table 6 Name HH Al Sayyid Taimur A . Al Said Mr. Mohamed Shukri Ghanem Mr. Saleh Nasser Al Araimi Position Chairman Member Member Meetings Attended 7 5 7 Remarks His Highness Sayyid Taimur Asaad Al Said – Chairman The objective of the Board Executive Committee (EXCOM) is to assist the Board in overseeing the Management of the Bank. EXCOM is responsible for the reviewing, monitoring and approval of key financial and non-financial business, investments and operational decisions for the Bank within the authority prescribed by the Board. The EXCOM shall assist the Board in fulfilling its oversight responsibilities in relation to granting credit (as delegated by the Board), making settlements, and cancellation of debt decisions and on exceptions that represent unusual credit risks. AUTHORITY •• The Committee is primarily a decision-making body and a forum where the Committee Members can take more time to deliberate on issues addressed to them, before either approving or providing their recommendations to the Board. •• Reviewing and making recommendations to the Board annually with respect to the composition, size and needs of the Board and its Committees. •• Reviewing periodically the overall corporate governance principles, procedures and practices of the Bank and make recommendations to the Board as appropriate. •• Reviewing and recommending to the General Assembly via the Board of Directors, the remuneration of the Board and various B oard committees. NOMINATION AND REMUNERATION COMMITTEE OF THE BOARD The Nomination and Remuneration Committee of the Board comprises of four members and met three times during 2018. The names of the members and their positions are as set out in the table below: Table 7 Name Mr. Saleh Nasser Al Araimi HH Al Sayyid Taimur A. Al Said Mr. Mohamed Shukri Ghanem Mr. Obaid Helal Mohammed Al Kaabi Position Chairman Member Member Member Meetings attended 3 3 2 1 Remarks Mr. Mohamed Shukri Ghanem – Vice Chairman Mr. Mohamed Ghanem was elected as a Board Member at Alizz Islamic Bank in November 2012. Mr. Mohamed Ghanem is the Chief Executive Officer of First Energy Bank - Bahrain, and a Board Member of the following entities: •• Chairman of MENAdrill Investment Company. •• Chairman of ADCAN Pharma LLC - UAE. •• Chairman of Medisal Pharmaceuticals Industry LLC – UAE. •• Vice Chairman of Alizz Islamic Bank - Oman, and member of the Executive Committee of the Board. •• Board Member of Al Salam Bank - Bahrain, and Member of Executive Committee of the Bank. Mr. Ghanem holds a Bachelor of Arts in Business from Webster University (School of Business and Technology) in Vienna as well as an MBA from Glamorgan University. Mr. Shabib Mohamed Al Darmaki – Director AUTHORITY •• The Committee authorizes the CEO to setup the Human Resources Management Committee (HRMC) comprising of members of Senior Management to deal with such authorized matters as set out in the Management Committee Charter and as approved by the CEO. •• The Committee is authorized by the Board of Directors to commission any reports or surveys that it deems necessary to help it fulfill its obligations. •• The Committee is authorized by the Board to exercise the authorities vested in it, if any, vide the Human Resources Authority Matrix approved by the Board. •• The Committee is authorized by the Board to seek any information it requires from the CEO in order to perform its duties. •• The Committee is authorized to obtain any outside legal or other professional advice, when required. •• The Committee is accountable to the full Board and all actions of the Committee require ratification by the full Board at Board meetings. 20 His Highness Sayyid Taimur was elected Chairman of Alizz Islamic Bank in November 2012. In his capacity, His Highness aims to work closely with the Board of Directors and Management Team to establish a solid framework for Islamic finance in the Sultanate of Oman. Guided by the Bank’s core values of Community, Respect, Relationships and Pride, His Highness envisions Alizz Islamic Bank to become a progressive, open-minded, modern and uniquely Omani bank, a bank holding the same Islamic values that bind the community we serve. With a proven track record in the business and financial services sectors, His Highness has served on the Board of Directors of a leading financial institution and currently is a government official. As an active member of the community, His Highness takes great pride in his role as the Patron of several non-profit organisations. An advocate of innovation and entrepreneurship, His Highness continuously seeks to unlock the potential of young people by empowering them with the means to develop their skills and capacities. He believes that investing in youth today will reap great rewards in the future. ANNUAL REPORT 2018 | www.alizzislamic.com Mr. Shabib Al Darmaki was elected as a Board Member at Alizz Islamic Bank in November 2012. He is currently Director General of the Civil Service Employees Pension Fund in Oman. He holds directorship positions of key institutions that benefit from his vast knowledge and experience in finance, audit and pension fund management. These institutions range from Shell Oman Marketing, Oman National Investment and Development, National Investment Funds Company, Oman Housing Bank and Al Batinah Hotels, where Mr. Al Darmaki utilizes an intrinsic understanding of business strategies that align financial goals in an Islamic setting. Honed from a highly impressive career in finance and audit, Mr. Al Darmaki provides insight and guidance to the Board of Directors of Alizz Islamic Bank, thus strengthening the bank’s leadership and governance. Building on the strongest of financial and business foundations, Mr. Al Darmaki brings to the Board of Alizz Islamic Bank an enviable reputation and financial acuity that strengthens the pillars of the Bank in its regional goal to provide a pure Islamic Shari’a compliant corporate and personal service. Mr. Al Darmaki’s experience will assists the Bank in its goals to adopt and implement a range of new products and services that meet the needs of the customers through challenging existing banking principles. Mr. Al Darmaki holds a Master of Science in Accounting from Oklahoma City University, USA as well as a Bachelor of Science in Business from Hilwan University, Cairo, Egypt. ANNUAL REPORT 2018 | www.alizzislamic.com 21
12. Mr . Ahmed Abdullah Al Khonji – Director SHARI’A SUPERVISORY BOARD Mr. Ahmed Al Khonji was elected as a Member at Alizz Islamic Bank Board in November 2012. He is one of the Directors of Al Khonji Holding Group L.L.C, a company with investments in the retail, trading and real estate development and management. The Shari’a Supervisory Board comprises of three members and met five times during the year. The names of the members and their positions are as set out in the table below: Mr. Al Khonji has a career spanning over twenty five years holding key positions in Omani health policy strategic planning. Table (8) Aligned to the values of Islamic Banking, Mr. Al Khonji adds an exceptional socially inclusive mandate to the banks Board through an extensive career honed within the health care, investment and commerce sectors of Oman. Mr. Al Khonji’s other remits within a community context include Board positions on the Road Safety Association and The Oman Association of Consumer Protection. Mr. Al Khonji holds a Bachelor of Science in Business Management from the University of Northern Colorado, USA as well as a Master in Public Management from Carnegie Mellon University, Pittsburgh, USA. Name Sheikh Dr. Mohammad Abdul Rahim Sultan Al Olama Sheikh Dr. Osama Mohammed Saad Bahar Sheikh Nasser bin Yousef Al Azri Position Chairman Member Member Meetings Attended 5 5 5 Mr. Mohamed Rashed Alhurr Al Suwaidi was elected as a Board Member in Alizz Islamic Bank in March 2016. An independent Shari’a Supervisory Board approves all Alizz Islamic Banking products and services. The members of Shari’a Board are the scholars with knowledge and expertise in Islamic jurisprudence. No funds pertaining to Alizz Islamic Bank will be invested in non Shari’a compliant assets or taken from any non Shari’a compliant sources. Alizz Islamic Bank offers its customers peace of mind with each product or service offered through a Fatwa certificate, which is signed by the Shari’a Board. Mr. Al Suwaidi has worked with Abu Dhabi Investment Authority (ADIA) UAE, in their Equities Department and later with International Petroleum Investments Company (IPIC) in their Investment Department, where he gained valuable experience. The existence of the Shari’a Supervisory board (SSB) contributes to further assurance to the shareholders and depositors, and without any doubt, confidence is one of the most important success factors for banks. He is currently working as Head of Investments at Aabar Investments and is a member of their Executive Team. Mr. Al Suwaidi is also a Board Member at Virgin Galactic, Wessal Capital, Palmassets and Dead Sea Resort The General Meeting appoints the SSB based on the Board of Directors nomination, consists of not less than three members. Mr. Obaid Hilal Obaid Mohamed Al Kaabi – Director •• To approve the bank’s products and services. •• To approve the standard agreements and contracts pertaining to the bank’s financial transactions. •• To give a Shari’a opinion regarding the products introduced by the bank and issue fatwas on the questions and transactions submitted to it. •• To follow up the bank’s operations and check its activities, to make sure that the concluded transactions are comprehended within the approved products by the Board. •• To present and suggest the possible Shari’a solutions for the problems of the financial transactions inconsistent with the principles and provisions of Islamic Shari’a as well find alternatives for the products repugnant to the Shari’a rules •• To declare its objections to the transactions repugnant to the provisions of Islamic Shari’a and correct it or stop it and advise the concerned department to not repeat it. The written objection shall be addressed to the Board of Directors. •• To review the reports of the Shari’a Audit and Compliance Department concerning the audit of the bank’s transactions and to determine to which extent such transactions are compliant with the provisions of Islamic Shari’a and the fatwas and resolutions of the Board. •• To ensure that the distribution of the profits among Shareholders and Depositors and bearing of any losses are calculated in accordance to the Islamic Shari’a principle. •• To present an annual report to the General Assembly of the Bank that encompasses the Board’s opinion regarding the bank’s transactions and operations performed during the year and to which extent the bank’s management has committed to the Board fatwas’, decisions and direction. Mr. Mohamed Rashed Alhurr Al Suwaidi – Director Mr. Obaid Hilal Obaid Mohamed Al Kaabi was elected Alizz Islamic Bank’s board member in March 2016 Mr. Al Kaabi is a Retired Officer from the UAE Armed Forces and has an educational background as a Bachelor of Military Sciences and Management. Besides his extensive and proud experience in the Armed Forces, he has also worked as the Director General of United International for Companies Representation and the Director General of Business Support at Das. Mr. Saleh bin Nasser Al Araimi – Director Mr. Saleh bin Nasser Al-Araimi was elected Alizz Islamic Bank’s board member in March 2016. Mr. Al Araimi is a seasoned and experienced professional in the social security, financial and investments fields. Before joining Alizz Islamic Bank, he was the General Manager of the Public Authority for Social Insurance - a place where he worked for almost 20 years.   Mr. Al Araimi also worked for close to 20 years at the Ministry of Social Affairs and Labor (now called the Ministry of Social Development) - where he held a number of positions including the Director General of Social Affairs and GM - Administration & Finance to name a few. Mr. Al Araimi has also handled various roles in banks and investment companies including Bank Dhofar, Oman Housing Bank, Oman Development Bank, Oman Integrated Tourism Fund, Bank Muscat, National Investment Funds Company (NIFCO) and Mazoon First Investment Fund. He has further held various roles of responsibility in private sector companies, such as Al Sharqiya University, Oman Fisheries, Shell Marketing Company and Oman Cement Company. Plus he also has experience in working with international organisations such as the International Social Security Association (ISSA) Geneva where he was the Chairman of the Technical Commission on Investment of Social Security Funds. The main Roles and Responsibilities of the SSB are: Mr. Al Araimi holds a Bachelor Degree in Business Administration from the University of Cairo, besides an Executive MBA from the University of Lincoln, UK. 22 ANNUAL REPORT 2018 | www.alizzislamic.com ANNUAL REPORT 2018 | www.alizzislamic.com 23
13. SITTING FEES AND REMUNERATION OF THE SHARI ’A SUPERVISORY BOARD The details of the sitting fees paid or accrued for payment to the Shari’a Supervisory Board during 2018 are as follows: Table 9 Name of the Directors Sheikh Dr. Mohammad Abdul Rahim Sultan Al Olama Sheikh Dr. Osama Mohammed Saad Bahar Sheikh Nasser bin Yousef Al Azri Total Total fees “RO” 2,000 2,000 2,000 6,000 Table 10 Sheikh Al Azri has extensive knowledge and expertise in Islamic and judiciary laws. He has also authored several papers and research studies, and attended prominent Islamic conferences such as those held by the International Islamic Fiqh Academy. He received a High Diploma degree in Jurisprudence from the Institute of Shari’a Sciences in Oman. COMPOSITION OF THE MANAGEMENT: Total Remuneration “RO” 16,000 12,000 12,000 40,000 The Bank’s management includes the Chief Executive Officer as the leader of the organization whose appointment, functions and package are determined by the Board. The other senior management are appointed to assist the CEO and to lead the organization. The following table gives details of the top five management officers along with their positions: Table 11 The total hotel and travel expense related to the Shari’a Supervisory Board during 2018 is RO 4,820. SHARI’A SUPERVISORY BOARD MEMBERS PROFILE Sheikh Dr. Mohammad Abdul Rahim Sultan Al Olama - Chairman Sheikh Dr. Mohammad Abdul Rahim Sultan Al Olama is a member of the Grand Islamic Scholars Body in Dubai, an Associate Professor of the School of Shari’a at the United Arab Emirates University in Al Ain and an acknowledged expert in Shari’a finance. Dr. Al Olama is also the head of the Fatwa Committee of the Zakat Funds in the United Arab Emirates. Dr. Al Olama has written extensively on modern Islamic finance and has presented numerous research papers at various international conferences. He currently serves on a number of Shari’a boards representing Islamic financial institutions and Takaful companies, some of which include Dubai Islamic Bank, al hilal bank, Emirates Islamic Bank, Noor Islamic Bank, Dar Al Takaful, Mawarid Finance and Manazel Real Estate. Dr. Al Olama holds a PhD in Comparative Islamic Law from Umm Al Qurra University in Mecca, Saudi Arabia. Sheikh Dr. Osama Mohammed Saad Bahar – Member Sheikh Dr. Bahar is a prominent, highly-respected Shari’a scholar from Bahrain. He is currently the Head of the Internal Sharia Compliance and member of the Fatwa and Shari’a Supervisory Board at First Energy Bank. He has also held senior positions at Islamic banks in Bahrain including Head of Shari’a Compliance at Al Salam Bank as well as the Chairman and Executive Member of the Shari’a Supervisory Board at Capinnova Investment Bank, an investment arm wholly owned by Bank of Bahrain and Kuwait in Bahrain. His expertise extends across structuring Islamic financial products, preparing Shari’a contracts as well as authoring research papers on Islamic Banking and finance. Sheikh Dr. Bahar sits on a number of Shari’a Supervisory Boards including, Ithmaar Bank, Global Banking Corporation, International Investment Bank, Sakana Holistic Housing Solutions and Reef Real Estate Finance Company. 24 Sheikh Nasser bin Yousef Al Azri – Member Sheikh Nasser bin Yousif Al Azri is currently the Director of the Fatwa Department at the Ministry of Awqaf and Religious Affairs in Oman and an Interim Secretary at the Grand Mufti’s Office. He is also an active member of several committees at the Ministry responsible for Mosques, Zakat, Hajj, Publications and Book Revision. Prior to his current capacity, Sheikh Al Azri held a number of prestigious positions including Judge Assistant at the Ministry of Justice and Researcher in Islamic Affairs at the Ministry of Awqaf and Religious Affairs. The SSB members are also entitled to receive remuneration in addition to the sitting fees. The table below gives details of the remuneration paid to the SSB members: Name of the Directors Sheikh Dr. Mohammad Abdul Rahim Sultan Al Olama Sheikh Dr. Osama Mohammed Saad Bahar Sheikh Nasser bin Yousef Al Azri Total Sheikh Bahar received his Doctorate degree from Lahaye University in Holland, his Master’s Degree from Al Emam Al Awzae University in Lebanon and his Bachelor’s degree in Islamic Shari’a from Prince Abdul Qader University of Islamic Studies in Algeria. ANNUAL REPORT 2018 | www.alizzislamic.com Name Mr. Salaam Said Al Shaksy Mr. Ghalib Fawzy Al Busaidi Mr. Moosa Al Jadidi Mr. Mohamed Al Balushi Mr. Pete Byrne Position Chief Executive Officer General Manager, Head of Wholesale Banking General Manager, Chief Operating Officer AGM, Chief Human Resources Officer AGM, Chief Audit Executive SENIOR MANAGEMENT PROFILE Honorable. Salaam Said Al Shaksy – Chief Executive Officer The Honorable Salaam Said Al Shaksy, is Chief Executive Officer of Alizz Islamic Bank, overseeing the strategic direction of Oman’s newest dedicated Islamic Bank providing innovative financial solutions and products adhered by Islamic Shari’a. He joined Alizz Islamic Bank as Chief Executive Officer on June 4, 2014. Al Shaksy is a Member of Oman’s State Council and Deputy Head of its Economic Committee. He is also a member of the Board of Directors of Oman Oil Company and Chairman of its Board Audit and Risk Committee. His other appointments include: Member of the Board and Board Executive Committee of Al Raff’d Fund (Oman’s Government funded SME fund); Chairman of Oman’s Investment Stabilization Fund; Member of the Advisory Board at The College of Economics & Political Science, Sultan Qaboos University; and Chairman of The Shaksy Group Prior to joining Alizz, he served as Chief Executive Officer of National Bank of Oman between 2010 and 2014, leading its turnaround and transformation during this period. Al Shaksy has held a number of senior executive positions including CEO of Dubai Banking Group, CEO of Dubai Islamic Investment Group and Deputy ANNUAL REPORT 2018 | www.alizzislamic.com 25
14. Chief Executive Officer of Bank Dhofar (where he led its merger with Majan International Bank in 2002). Between 1994-2000, Al Shaksy headed a group comprising three divisions - retail banking, investment banking and correspondent banking at the National Bank of Oman. He embarked on his banking career with Citibank Global Consumer Business, Dubai, UAE in 1992. His previous roles include Chairman of Oman National Investment Corporation Holding, Deputy Chairman of the Board of Shell Oman Marketing and Chairman of its Board Audit Committee, Deputy Chairman, Muscat Securities Market and Board Member of Bank Muscat. Al Shaksy is the first Omani CEO of a full-fledged Islamic Bank in Oman and has received a number of awards in Banking, including “Banker of the Year 2008” - Banker Middle East. He is also a sought after keynote speaker at global financial conferences. Al Shaksy is a graduate of Boston University, USA, where he received a Bachelor’s Degree in Economics (cum laude), a Masters in Management Information Systems (Honors) and an MBA in Management of Financial Services (High Honors). He has also completed the Senior Executive Program from the London Business School, UK. He is married and has five children. He enjoys boating, chess and photography. Mr. Ghalib Fawzi Al Busaidi – GM, Head of Wholesale Banking Mr. Ghalib Fawzi Al Busaidy is the Head of Wholesale Banking. He joined Alizz Islamic Bank in August 2014 as Chief Financial Officer. He has more than 21 years of experience in the State General Reserve Fund, Oman. Prior to joining Alizz, Al Busaidy was the Deputy CEO for Investments at the State General Reserve Fund, responsible for the key investment functions of public and private markets. Al Busaidy started his career in 1987 in PricewaterhouseCoopers London, United Kingdom. Al Busaidy is a member of the Institute of Chartered Accountants in England and Wales since 1991, and a member of the UK Associates of Corporate Treasurers. He holds a BA “Honors” in Accounting and Finance from Middlesex University, Business School. Al Busaidy has also completed the Investment Management Program (London Business School), High Performance Boards (Lausanne, Swizerland), and Interest Rate Risk Management Program (New York Institute of Finance). Mr. Moosa Al Jadidi- GM, Chief Operating Officer Mr. Moosa Al Jadidi is the Chief Operating Officer. He joined Alizz Islamic Bank in August 2014. He is a seasoned banker with more than 17 years of work experience. Prior to joining Alizz, Al Jadidi was the Deputy General Manager of Retail and Private Banking at National Bank of Oman. Al Jadidi commenced his banking career at the National Bank of Oman as a sales representative for one year. In 2001, he was appointed as Manager Of Private & Privilege Banking where he managed the privilege banking account across 50 branches. He later moved to Bank Muscat as Manager of Private & Priority Banking. Al Jadidi is an associate of the Canadian Institute of Bankers and is also a certified private banker. Mr. Mohamed Al Balushi – AGM - Chief Human Resources Officer Mr. Mohammed Al Balushi was appointed as Head of Human Resources at Alizz Islamic Bank in September 2013. He joins Alizz Islamic Bank from Bank Dhofar where he had served in a number of roles since 1994, finally attaining the position of Assistant General Manager Human Resources & Training and Development, a position he had held since 2006. Parallel to his career in the banking industry, Mohammed Al Balushi was also a part time lecturer at the College of Banking and Financial Studies. Mr. Al Balushi adds an exceptional range of HR and Banking skills, responsibilities and expertise honed through a successful career within the banking sector in Oman. His 20 years of banking experience, leadership, HR strategic planning, as well as performance management, career development, recruitment and manpower planning will become an invaluable asset to Alizz Islamic Bank. Mr. Al Balushi’s other remits have included acted as a Secretary to the HR Committee of the Board at Bank Dhofar, and represented several other executive management committees,(HR Management Committee, Disciplinary Committee, Grievance Committee and Staff Recognition Committee) as well as College Academic Advisory Committee at the College of Banking and Financial Studies. Mr. Al Balushi holds a postgraduate Certificate in Human Resource Development 26 ANNUAL REPORT 2018 | www.alizzislamic.com and Performance Management from the University of Leicester in the United Kingdom, as well as a Master of Business Administration (MBA) from the University of Wales, Cardiff, United Kingdom. He also holds a number of professional qualifications and accreditations in the field of HR and banking including Associate of Canadian Institute of Bankers (ACIB) and a holder of an Advanced Human Resource Executive Certificate - University of Michigan - Ross School of Business – USA. Mr. Pete Byrne – AGM - Chief Audit Executive Mr. Pete Byrne was appointed as Head of Internal Audit for Alizz Islamic Bank in September 2013. He is responsible for providing assurance as to the integrity of the banks systems and operations to both the board and management of the bank as well as to the bank’s customers and stakeholders. Prior to his appointment, Mr. Byrne worked at Bank Sohar, joining them in October 2008 to become that bank’s first Head of Audit, a position he held for almost five years. Previous to working in Oman, he was based in Dublin in the Republic of Ireland where he was Head of Audit for Bank of Scotland (Ireland), a subsidiary of the HBOS group. Mr. Byrne has worked in financial services for the past 29 years and brings a wealth of experience to the role, having worked in all areas of banking operations, including IT through his time in audit. Mr. Byrne is a Chartered Member of the Institute of Internal Auditors (CMIIA), a Certified Internal Auditor (CIA) and holds the Institute of Internal Auditors (IIA) Qualification in Audit Leadership (QIAL). He is also a Certified Risk Management Assurance professional (CRMA), has been accredited as a Certified Fraud Examiner by the Association of Certified Fraud Examiners (CFE) and holds a Diploma in Islamic Finance from the Chartered Institute of Management Accountants. MARKET PRICE DATA: The following table shows the high, low, and average prices of the Bank’s shares and compares the Bank’s performance against the broad index of banks and investment companies during 2018. Alizz AND MSM BANK & INVESTMENT INDEX - FY 2018 Table 12 Date (GMT) 31/01/2018 28/02/2018 29/03/2018 30/04/2018 30/05/2018 28/06/2018 31/07/2018 30/08/2018 30/09/2018 28/10/2018 28/11/2018 31/12/2018 ALIZZ ISLAMIC BANK Open High Low 0.077 0.079 0.077 0.074 0.074 0.072 0.079 0.081 0.079 0.076 0.076 0.076 0.080 0.080 0.080 0.080 0.080 0.080 0.079 0.080 0.079 0.090 0.090 0.088 0.085 0.085 0.085 0.089 0.089 0.089 0.090 0.090 0.090 0.090 0.090 0.090 ANNUAL REPORT 2018 | www.alizzislamic.com Last 0.079 0.072 0.079 0.076 0.080 0.080 0.079 0.088 0.085 0.089 0.090 0.090 Date (GMT) 31/01/2018 28/02/2018 29/03/2018 30/04/2018 31/05/2018 28/06/2018 31/07/2018 30/08/2018 30/09/2018 31/10/2018 29/11/2018 31/12/2018 FINANCIAL SECTOR Open High Low 7383.79 7443.46 7374.54 7354.82 7377.76 7354.82 7151.08 7160.68 7120.36 7241.11 7288.19 7241.11 7159.23 7184.59 7125.17 7071.21 7079.47 7056.29 6697.77 6740.60 6697.77 6914.39 6945.83 6889.14 6992.45 7044.73 6992.45 6908.37 6927.31 6908.37 6869.76 6895.65 6869.76 6843.82 6859.11 6800.83 Last 7375.74 7364.51 7121.43 7266.84 7184.28 7056.29 6737.50 6891.94 7032.54 6925.43 6890.27 6827.20 27
15. RELATED PARTY TRANSACTIONS Table 13 Details of all transactions where a Director and /or other related parties might have a potential interest are provided to the Board for their review and approval, and the interested Director neither participates in the discussions, nor do they vote on such matters. SN 1 2 3 4 5 6 On a quarterly basis, the details of the related party transactions are submitted to the Board for review and approval as part of approving the bank’s quarterly financial statements. Details of all the related party transactions are provided to the shareholders as part of the financial statements submitted for approval at the Annual General Meeting. INTERNAL CONTROL REVIEW The Board gives great importance to maintaining a strong control environment and Board review has covered all controls, including financial, operational, compliance and risk management. The Board has established a management structure that clearly defines roles and responsibility and reporting lines and has approved the policies. Financial information is prepared using appropriate accounting policies that are consistently applied. Operational procedures and controls have been established to facilitate complete, accurate and timely processing of transactions and the safeguarding of assets through policies and procedures manuals, desk performance instructions and other circulars. SHAREHOLDERS Communication with shareholders and investors The Board is committed to ensure that all material information relating to the Bank’s business operations is regularly communicated to its stakeholders and investors. All material information relating to the Bank, its products, its operations and annual and quarterly financial statements are posted on the Bank’s website. The Bank’s web-site address is. www.alizzislamic.com The quarterly, half-yearly, and annual results of operations of the Bank are published in leading Arabic and English newspapers in the Sultanate of Oman. After completion of the statutory audit, the annual report and summary financial statements are sent by post to all shareholders along with the notice of the forthcoming Annual General Meeting of the Bank. The Bank will not distribute dividend for 2018. Distribution of Shareholding: Major shareholders (5% and above) 28 Shareholder Aabar Investments Tasemeem Real Estates First Energy Oman Huriah Company Al Khonji Holding Civil Service Employees Pension Fund A copy of the Management Discussion and Analysis is circulated as part of the Annual report. There are no Global Depository Receipts/Warrants or any convertible instruments outstanding. NON COMPLIANCE Since the issuance of the Code of Corporate Governance by the Capital Market Authority, the Bank has developed its Corporate Governance framework, which includes the Bank’s Corporate Governance Policy, Related Party Transactions Policy, Disclosure Policy, Code of Ethics for both its Board as well as staff. In addition, the Bank has developed a board induction pack, which is proven to be beneficial for all Directors to understand the banking regulations of Oman and a basic understanding of the Alizz operations model. The Bank has conducted several training sessions for its Directors. In addition the Bank is in the process of introducing a job description for the Chairman of the Bank in 2019. There has neither been any non-compliance of legal requirements nor any penalties or strictures imposed by the regulators on any matters relating to the Capital Market Authority over the last three years. The Bank has been imposed penalties of RO 24,500 by Central Bank of Oman for non-compliance over the last three years as follows: SR. No 1 2 Year 2016 2017 Reference No. 2.1.2.1 7.3 .2.1.a 3 2018 6.1.2.1 4 2018 8.5.2.1 details The maximum credit card limits allowed by the Bank exceeded the CBO prescribed limits. The Bank had not adhered to the Fatawa, associated controls and subsequent cautions given by the Shari’a Supervisory Board (SSB) regarding operations of the Wakala product. the bank was wrongly calculating the maturity of financing in MAL and rate sensitive assets in SAL statement . (BM955) The Bank had disclosed the names of two of its customers and facility allowed to them in the annual financial statement. (Section 70(b) of banking Law 2000) Total ANNUAL REPORT 2018 | www.alizzislamic.com Percentage 20.00% 15.00% 15.00% 10.00% 07.00% 05.60% ANNUAL REPORT 2018 | www.alizzislamic.com Amount 4,000 12,500 4,000 4,000 24,500 29
16. Further , the regulatory non-compliances as per the CBO regulations are as follows: SR. No 1 Cause Minimum Capital Requirement 2 3 Small and Medium Enterprises Financing Rate Retail and Corporate Financing Ratio 4 Liquidity Mismatch 5 Financing against Real Estate Issue The Bank’s capital is below the regulatory threshold of OMR 100 million. CBO has given dispensation till 31 December 2019 to comply with the regulatory capital requirement Bank’s total financing to SME was 3.61% against CBO prescribed target of 5% The ratio of Retail and Corporate Financing was 48:52 as compared to the CBO required ratio of 50:50 The Bank breached the maturity mismatch limit of 15% as at 31 December 2018. The gap in 9-12 month bucket was 38.03% Financing against real estate was 136% as compared to the regulatory limit of 60% AUDITORS: During the Annual General Meeting, your Board of Directors intends to propose for Shareholder’s approval the appointment of external Auditors for 2018 as per statutory requirements. SHARI’A SUPERVISORY BOARD REPORT Sheikh Dr. Mohamed Abdul Raheem Sultan Al Ulamaa Chairman of the Board Pursuant to the guidelines set out in the Islamic Banking Regulatory Framework issued by the Central Bank of Oman, the Shari’a Supervisory Board prepares a comprehensive report on the business and transactions of the bank during the year. The objective of this report is to illustrate the extent of the Bank’s compliance with Shari’a rules and principles and with Fatwas and resolutions of the Shari’a Supervisory Board. The shareholders of the company appointed KPMG as its auditors for 2018. KPMG is a leading audit, tax and advisory firm in Oman and is part of KPMG Lower Gulf, established in 1973. KPMG in Oman employs more than 180 people, amongst whom are 5 partners, 6 directors and 30 managers, including Omani nationals. KPMG is a global network of professional firms providing audit, tax and advisory services. KPMG operates in 153 countries and has around 207,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. During the year 2018, RO 34,500/- was paid/accrued for the external auditors towards the audit and RO 8,450/- towards other professional services. Sheikh Dr. Usama Mohamed Saad Bahar Member of the Board The Board of Directors declares its liability for preparation of the financial statements in accordance with the applicable standards and rules. The Board of Directors confirms that there are no material issues that affect the continuation of the Bank and its ability to continue its operations during the next financial year. Taimur A. Al Said Chairman Sheikh Naser bin Yusuf bin Naser Al Azri Member of the Board ANNUAL REPORT 2018 | www.alizzislamic.com The responsibility of ensuring that the bank is operating in accordance with the rules and principles of Islamic Shari’a rests with the management. The management is responsible for the activities and business of the bank and carrying them according to the basis on which the activity and the business of the bank is based which is full compliance with the rules and principles of Islamic Shari’a. Our responsibility is to express independent Shari’a opinion based on our review of the documents that we perused and prepare a report for you. We have reviewed the bases of the Bank’s business, financial results, investments and other operations with the objective of expressing an opinion on whether the bank has complied with Shari’a rules and principles in the light of Fatwas, resolutions and directives were issued during the financial year ended 31 December 2018. For the year under review, the Board has conducted a review of the effectiveness of the Bank’s internal control policies and procedures and is satisfied that the Bank’s internal control is effective and that appropriate procedures are in place to implement the code’s requirements. 30 Praise be to Allah and to the messenger, Mohamed, May Blessing of Allah be upon Him. To the shareholders of Alizz Islamic Bank PROFILE OF STATUTORY AUDITORS DECLARATION REPORT OF THE SHARI’A SUPERVISORY BOARD TO THE GENERAL ASSEMBLY OF ALIZZ ISLAMIC BANK FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2018 ANNUAL REPORT 2018 | www.alizzislamic.com Therefore, we have reviewed the financial results of the bank, balance sheet and income statement as well as reviewing the placement made with other banks, all of which are Islamic banks and windows. We further reviewed areas of investment in which the bank entered, in addition to our pre-reviews of the investment processes in which the bank entered during the financial year ended 31 December 2018. We have approved Shari’a acceptable transactions and requested to amend which required any amendments in accordance with Shari’a requirements. 31
17. For the purpose of review and to follow up the activities of the bank , the Shari’a Supervisory Board held five meetings during 2018 in addition to responding to many enquiries communicated to it through email or phone. The Shari’a Supervisory Board reviewed the reports submitted by the Shari’a Audit & Compliance Department on all products and operations of the bank during this period and made the appropriate decisions in their regard either through approving the reported cases or providing appropriate solutions for such cases. We have obtained the information and interpretations that we considered as necessary to provide us with adequate evidences that are sufficient to enable us to give reasonable assurance that the bank did not breach the rules and principles of Shari’a, within the scope of the Bank’s different activities and businesses reviewed by the Shari’a Supervisory Board. In our opinion First : In its different activities, investments, deposits and businesses during the financial year ended 31 December 2018, the bank has complied with Islamic Shari’a rules and principles, in the view of documents that were made available to us, taking into consideration Shari’a amendments and treatments that we have requested on the transactions, contracts and investments presented to us and amended those that require any amendments. FATWAS OF SHARI’A SUPERVISORY BOARD 1. The possibility of considering an old vehicle’s value as a down payment for financing a new vehicle A customer has applied for an Auto Finance to purchase new vehicle through offering his/her old vehicle to the Auto Agency in order to consider its value as a down payment for the new vehicle. So what are the required legitimate procedures to carry out this transaction? Shari’a Supervisory Board’s resolution: It is permissible to consider the value of the old vehicle as a down payment for the new one if the said value has been defined on the basis of the Auto Agency evaluation or on an evaluation of a third party, provided that, the customer and the seller shall sign a termination agreement before the bank purchases the new required vehicle from the Auto agency by a local purchase order. 2. Zakat of rental revenues : Second : Whereas the Board of Directors of the bank is not authorized to pay Zakat on behalf of the shareholders, the responsibility for payment of Zakat on the Bank’s shares lays at the part of the shareholders in compliance with the third pillar of Islam. The Shari’a Audit & Compliance Department in the Bank will calculate the amount payable and will inform the shareholders accordingly. As stated in the Zakat Accounting Standard, which issued by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) that, Zakat shall be calculated on the basis of the net assets. Is the Bank obliged to pay zakat on the rental assets until the expiry of the entire Ijara lease period (which may reach up to 25 years) or to pay Zakat on the revenues of the Ijara agreements up to one year? Third : The allocation of weightages, distribution of profits, and charging of losses relating to investment accounts conform to the basis that have been approved by the Shari’a Supervisory Board and in accordance with Islamic Shari’a rules and principles. Shari’a Supervisory Board’s resolution: Zakat shall be paid on the rental revenues earned by the Bank during the fiscal year, and not on the coming years that the bank is yet to earn. Forth : The revenues that do not comply with the Shari’a rules were forfeited and credited to Charity Account, in an intention to disburse them after the approval of the Shari’a Supervisory Board of the Bank. 3. Zakat of Wakalah investment Deposits: While issuing this report, the Board confirms that the use of any document, instrument or contract or entering into any agreement or investment or carrying out any of the activities shall be approved in advance by the Shari’a Supervisory Board to ensure that it complies with Shari’a requirements and the correct procedures shall be put into consideration while executing them. According to the Accounting Standards of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), the due payable obligations during the fiscal year and the unrestricted investment account holders’ rights should be deducted. Therefore, do all the deposits of the Wakalah Investment be deducted from Zakat Funds when calculating the net assets of the bank on which zakat is due, or just the funds of Wakalah Investment which will be due payable during the upcoming year? The Shari’a Supervisory Board would like to avail this opportunity to emphasize to the executive management of the Bank the importance of providing training to all the Bank’s staff for to avoid mistakes or their reoccurrence. Shari’a Supervisory Board’s resolution: The due payable funds of Wakalah Investment are to be deducted from Zakat Funds within the year only. The Shari’a Supervisory Board would like to congratulate the bank for its good approach in complying with the rules and principles of Islamic Shari’a for the sake of almighty Allah and we pray to almighty Allah to bestow his blessing in our livelihood and business. May Prayers and Blessings of Allah be on His Prophet Mohammed. 4. Fees on terminating Wakalah investment at the request of the customer (Wakeel): The Bank offers the Wakalah Investment scheme to corporate customers at an agreed maturity date, however, the customer who is the (Wakeel) may request from the bank, who is the (Muwakil) to terminate the Wakalah investment contract before the agreed maturity date. Is the bank entitled to charge the (Wakeel) by a compensation fees as (fixed fees or a percentage from the invested amount) whenever he/she require a termination for the Wakalah Investment contract before its maturity date, where the bank in such cases, shall act on the procedures of terminating the Wakalah Investment contract or search for another investor (Wakeel)? Date: 21 Jamada Al Akhira 1440 Hijri coinciding with 26th February 2019. Shari’a Supervisory Board’s resolution: The Bank shall be entitled to accept the termination of the Wakalah Investment contract without receiving compensation fees, on a condition by not claiming for profit, unless profits have already been achieved in the period prior to the termination action. The Bank has the right to claim for a compensation from the customer (Wakeel) if there is a loss arising from the Infringement of the customer (Wakeel), or as a result of his/her default or of his/her breaching the contract terms . 32 ANNUAL REPORT 2018 | www.alizzislamic.com ANNUAL REPORT 2018 | www.alizzislamic.com 33
18. 5 . Wakalah investment in a specific project for a Non-profitable Company. 8. Lease periods in an Ijarah service contract Is it permissible to conclude Wakalah investment with a company that does not achieve net profits but it has a specific project among its business profile that achieves profits? Is it permissible for the Bank to charge fees against preparing documents and approving credit? Shari’a Supervisory Board’s resolution: There is no objection to invest in specific projects that are often profitable and it is permissible for the bank to charge fees against preparing documents and approving credit, on condition that, these said fees shall be actual and not exaggerated fees. 6. Cash compensation from the contractor against defects in leased property A customer who has been financed through Ijarah Muntahia Bittamleek would like to build an additional floor on that rented house. However, the engineering reports and laboratory tests of the structure of the house confirmed that the concrete structure of the building is weak and as a result some cracks have been appeared on the existing structure, and it will not be possible to build an additional floor on the same building. Since the contractor, in accordance with the Omani Law, is responsible for defects and errors that appear in the building within ten years from the date of completion of the construction; the contractor has proposed to repair the structure of the building with the help of a competent company. However, the customer did not agree to the repairing proposal, since it is expected that, the weakness of the concretes will also include the bases and bottom foundations of the building and its upper layers as well. So the customer demands to demolish the entire house and rebuild the structure again. Accordingly, the contractor and the customer agreed that, the contractor shall pay to the Bank, a monetary compensation equivalent to the repairing cost – approximately about 70% of the rebuilding cost of the house and the bank will use the compensation amount to pay part of the existing fixed lease of the contract of the Ijarah Muntahia Bittamleek. The customer will continue renting the same house, as the expected damage to the concrete columns will only happen if an additional upper floor is built on the existing structure. He/she will continue utilizing the house, until he/ she desire to demolish the house and the needed documents and approvals are obtained. As the building area will then be larger for two floors, can the customer then apply for another financing transaction from the bank? Shari’a Supervisory Board’s resolution: Shari’a Supervisory Board believes that, The Bank is entitled for the monetary compensation, because it is landlord of the property, and the compensation against the defect is the right of the bank who is the property landlord. It is permissible for the bank to set off/settle the fixed rental, which is due for the bank, from the compensation amount. In case of reconstruction or repairing the building, the said fixed rental shall be at the expenses of the bank, as long as the lease of Ijarah remains and the benefit is receivable. 7. Non-renewal at the expiry date of the Wakalah investment In some of the Wakalah investment transactions, the (Wakil) may delay in paying the invested amount and its achieved profits for several days after the end of the maturity date of the Wakalah investment. This occurs due to not renewing the Wakalah investment, because of the absence of the customer , the customer being out of the country , or because of lack of liquidity on the maturity date , as a result of late collection of outstanding dues from various bodies . Shari’a Supervisory Board’s resolution: The contract of Wakalah investment shall ensure an inclusion of legal involvement that allows for automatic renewal in case of no objection from any of the concern parties for the renewal within a certain period. This decision applies to new contracts. As for the previous contracts, it shall not be automatically renewed, but shall end at maturity and it must be matured. A new contract will then be made from the date of renewal and not from the expiry date. 34 ANNUAL REPORT 2018 | www.alizzislamic.com The Bank provides the Ijarah service product to all its retail customers since the inception of its operations. Therefore, in order to meet the growing customer needs for products that are Shari’a compliant, the Bank would like to provide the Ijara product to its corporate customers. The bank proposes to use the same Ijarah product for corporate customers by adding one feature of dividing the lease period into rental periods instead of being a one-time lease for the duration of the financing. In order to ensure Shari’a principles, each Ijarah service will be subject to the approval of the Shari’a Supervisory Board. Is it permissible to specify multiple rental periods within the period of Ijarah in financing through Ijarah service contract? Shari’a Supervisory Board’s resolution: There is no objection to execute this proposal as long as the kind of service and the rental period is specified. 9. Paying Wakalah’s profit: Some corporate customers would like to make payments to the bank, based on predicted profits, during the Wakalah Investment period, whereas the same amount will be settled on the maturity date of the Wakalah investment. What is the legitimate? Shari’a Supervisory Board’s resolution: It is permissible for the customer to make payments to the bank based on predicted profit during the Wakalah investment period, on the condition that , the paid profits amount shall be subject to the settlement along with the achieved profit at the maturity date of the Wakalah investment, while the financial statements are to be provided in order to compare the achieved net profit at the end of the investment period with the predicted profit, as mentioned in the Wakalah investment contract . 10.Selling the bank’s share after paying the last payment amount (In Diminishing Musharaka to build a property) In accordance with the procedures of Home Finance, property construction through Diminishing Musharaka has been authorized by the respected Shari’a Supervisory Board of the Bank to start selling its shares to the customer after receiving the completion certificate. However the issuing of the certificate from the municipality takes two or three months from the date of completion of the construction. The bank therefore proposes to start selling its share in the property to the customer as on the date of the payment of the last installment, whereas the engineering consultant shall approve the completion of the construction stages in the application of the last installment payment. Shari’a Supervisory Board’s resolution: As long as the bank owns its full shares in the property, there is no objection to start selling these shares, on a condition that, to obtain the certificate of the engineering consultant confirming the completion of the construction, the Bank may ask/request the customer to obtain the completion certificate from the municipality within six months. 11.Adding the property maintenance cost to the fixed rental fees: A customer has submitted an application to obtain financing in Ijarah Muntahia Bittamleek for a 13-year-old house which needs maintenance. The customer already has received a quote from a contracting company for the necessary maintenance of the house. Is it permissible to finance the said customer to purchase the particular house and to execute the maintenance through the Ijarah Muntahia Bittamleek? ANNUAL REPORT 2018 | www.alizzislamic.com 35
19. MANAGEMENT DISCUSSION & ANALYSIS REPORT Shari’a Supervisory Board’s resolution: There is no objection to finance the necessary maintenance according to the following: 1. The bank shall purchase the property from the seller. 2. The bank shall conclude a maintenance contract with a contracting company for the required maintenance. 3. The bank shall pay the agreed maintenance cost to the contractor immediately, post-dated, or in installments according to the maintenance stages. 4. The bank shall conclude Ijarah Muntahia Bittamleek with the customer. 5. The maintenance cost shall be added to the fixed rental fees as mentioned in the contract. 12.The permissibility for identifying the goods value by foreign currency in the Murabaha contract One of our customers imports equipment and trucks from Europe, Japan and the United Kingdom by means of documentary credits (acceptance) for one year. Upon the arrival of the equipment and documents, the Murabaha sale contract are to be signed, but the equipment prices will be paid to the supplier after one year according to the agreement. Since the payment of the equipment value will be paid to the supplier in foreign currency after a year, this exposes the bank and the customer for the risk of exchange rate changes. Therefore, the customer has requested to enter into a contract of selling the murabaha in foreign currency and then transfer the price to the Omani local currency at the prevailing exchange rate on the day of payment on which the customer will pay to the supplier. We ask the distinguished Shari’a Supervisory Board to express its opinion on this matter. Shari’a Supervisory Board’s resolution: There is no objection in identifying the goods value by foreign currency in the Murabaha contract and to transfer the price of the goods to the Omani local currency at the prevailing exchange rate on the date of payment to the supplier, if the customer would like to pay the full value of the goods on the day of the currency exchange. It is permissible for the bank to keep the Murabaha in foreign currency, and also permissible for the bank and the customer to enter into an agreement to pay in foreign currency at the prevailing exchange rate at that time of each installment payment. 13.Payment of the customer’s contribution in the home finance through Ijara, the Ijara Mawsoofah Fe Al Dhimmah or in the Diminishing Musharaka directly to the contractor / property seller When providing the customers by home finance through the Ijara Mawsoofah Fe Al Dhimmah or in the Diminishing Musharakah, some of the customers are paying directly to the contractor in case the finance is for home finance (construction) , or to the property seller in case the finance is for home finance (purchase) to finance purchasing of ready built property . We would like to get the opinion of the esteemed Shari’a Supervisory Board on the permissibility of this attributes, while a document or receipt voucher shall be provided by the customer. Shari’a Supervisory Board’s resolution There is no objection, if the Musharaka of the customer in paying the legal percentage which it is due on him/her, and he/she shall submit acceptable document or receipt voucher confirming the payment process. In case the payment is directly made to the contractor by the customer, the contract between the bank and the contractor shall be on the remaining finance fund. 36 ANNUAL REPORT 2018 | www.alizzislamic.com ANNUAL REPORT 2018 | www.alizzislamic.com 37
20. MANAGEMENT DISCUSSION & ANALYSIS REPORT WHOLESALE BANKING The Management Discussion and Analysis report is an update on significant activities of Alizz Islamic Bank (the Bank) for the year ended 31 December 2018. It contains the Bank’s achievements, strategy and key developments in its business and support functions. OMAN’S ECONOMY The economy performed reasonably well in 2018 as higher average oil and gas prices, coupled with increased hydrocarbon output, translated into stronger public finances and export growth. Government revenue increased by over 30% in the January to November period compared to the same period a year earlier, leading the fiscal deficit to reduce by over 40%. The new airport was opened in the city of Duqm in January, reflecting government efforts to develop the free zone and diversify the economy away from its dependence on fossil fuel production. Increased output from the Khazzan-Makarem gas field, stronger fixed investment and the government’s push to strengthen non-hydrocarbon output should support overall economic growth this year. Economics Consensus forecast growth of 3.0% in 2019. THE BANKING SECTOR The Banking industry remained resilient in spite of slower credit and financing growth, volatile domestic and regional capital markets and tight liquidity. Total credit/financing of the banking sector grew by OMR 1.8 billion (7.8%) to reach OMR 24.8 billion and deposits increased by OMR 1.4 billion (2.6%) to reach OMR 22.4 billion. Islamic banking continued to grow in an impressive manner. Islamic financing grew by 18.5% to reach OMR 3.6 billion and deposits increased by 9.6% to reach OMR 3.3 billion. Market share of Islamic banks and windows increased to 14.2% in terms of financing and 14.1% in terms of deposits. The key challenges for the banking sector in 2019 will be the following: •• Lower credit growth •• Maintaining asset quality •• Maintaining profit margins as a result of increase in cost of funds •• Changes in taxation laws and potential implementation of Value Added Tax With anticipated improving economic conditions in 2019, the Banking industry is likely to benefit and expected to consolidate in response to market conditions. FINANCIAL OVERVIEW The Bank achieved its maiden full year profit in 2018 since it commenced operations in September 2013. The Bank witnessed solid growth in all core business areas, which resulted in an increase in financing receivables by 20.2% to reach OMR 553.3 million in 2018 from OMR 460.2 million at the end of 2017. Furthermore, deposits increased by 23.6% to reach OMR 586.4 million. The Bank’s revenue from financing and investing activities increased by 45.8% to OMR 30.8 million in 2018 from OMR 21.2 million in 2017. The Bank reported a net profit of OMR 2.0 million in 2018 versus a net loss of OMR 2.9M in 2017, which resulted in an impressive 166.9% year-on-year growth. Wholesale Banking contributed significantly to the growth of the balance sheet in 2018, both in terms of financing growth as well as deposits. Asset yields were generally ahead of the industry with cost of funds carefully managed through stringent liquidity management processes. Disciplined risk management has also contributed to asset quality and ultimately resulted in lower than industry non-performing assets. The Corporate Banking department played an instrumental role in the exceptional financial results of the bank, performing robustly in challenging market conditions while meeting its objective of growing the asset book in specific target market sectors with enhanced revenue through cross-selling. The Corporate Banking department further enhanced its product range and widened its geographic reach within Oman by effectively using its distribution channels for better services to a broader range of clients. The key success factor during 2018 was a focus on quick turn-around times in meeting customer expectations along with close engagement to minimize the risk of asset deterioration. SME Banking celebrated its first full year of operations in 2018, following a strong performance in the previous year. In 2018, SME Banking focused on customer centric initiatives and enhanced our offering with concerted efforts towards building a complete Shari’a compliant value proposition. Large strides were made toward identifying and onboarding customers, ranging from micro to medium enterprises, enabled our clients to achieve their business objectives. Additionally, the department undertook a number of product enhancements, and successfully launched the Mudaraba based Business Saver account, a call account solution for our SME customers. Furthermore, SME Banking executed some strategic tie-ups, most notably with Al Raffd Fund, a first in the market for an Islamic bank, in addition to a tie up with Prime Business Solutions for their cloud based SPUR ERP system targeted at Small & Medium Enterprises. We also set in motion some longer term initiatives, for which our customers will reap the benefits in 2019, as we strive to continually enhance the SME Banking experience and offering. Our Investment Banking department was established to provide innovative and Shari’a compliant financial solutions in the form of sukuks, equity arrangement, structured financing and advisory services to meet the diverse needs of our valued customers that include sovereigns, government related entities and large corporates. Building on our success as the Joint Lead Manager for the Sultanate of Oman’s debut global 7- year USD 2 billion Sukuk issue in 2017, Alizz Islamic Bank was appointed as the Dealer for the second global sovereign Sukuk issuance by the Sultanate of Oman, worth USD 1.5 billion. Leveraging from this experience we have recently won a prestigious mandate for financial advisory services in the tourism sector. The Investment Banking team also led our Ijarah based funding Sukuk programme, which has generated the required liquidity to help the Bank sustain our own growth plans. Additionally, within the Investment Banking unit, AIB offered project finance and syndication services. The focus was to finance key sectors in Oman to help in the diversification goal of the nation and add tangible value to the community. Accordingly, the focus has predominantly been in education, healthcare, aviation, hospitality and manufacturing. This unit has also actively provided advisory and equity placement services, to its project finance customers. We assisted clients in structuring the project to make it bankable and arrange potential investors and financiers who can fund the project through debt or equity placements. The combination of financing and advisory services provided by the Investment Banking department brings synergies for the project and results in a mutually beneficial situation for both the Customer and the Bank alike. The Government and Institutional Banking Division had a significant role in raising deposits for the balance sheet growth achieved in 2018. A key focus was ensuring close management of the Bank’s cost of funds through the raising of deposits in close tandem with the growth of assets. The Treasury & Capital Markets team continued to play a pivotal role in ensuring that all businesses have sufficient liquidity to meet their growth objectives, whilst managing payments, receipts and financial risk. With the ever-increasing pace of regulatory changes, the Treasury & Capital Markets unit has transitioned into a strategic business partner across all areas of the business. The Bank managed to enhance its yield on assets, fee income and witnessed improvement in other key performance indicators including net profit margin and cost-to-income ratio. 38 ANNUAL REPORT 2018 | www.alizzislamic.com ANNUAL REPORT 2018 | www.alizzislamic.com 39
21. RETAIL BANKING INTERNAL AUDIT Retail Banking witnessed exceptional growth and achieved a number of key milestones in 2018 by continuing to focus on providing value-added products and services to customers . The Bank further augmented the Bank’s digital platforms offering customers more features that enable them to bank from the comfort of their homes. Internal Audit forms the ‘Third Line of Defense’ under the Bank’s risk management model maintaining its independent status by operating under the direction and guidance of the Board Audit Committee and reporting directly to the Audit Committee Chairman. During 2018, the Bank was able to increase the retail customer base by 41.4% reaching more than 42,439 retail customers. Retail liability & assets have shown substantial year on year growth above 75% & 40% respectively on the overall portfolio as compared to 2017. Our flagship product the Bushra Prize Savings account continued to be extremely popular amongst our customer base. It has contributed significantly to the growth of the Bank’s low cost deposit base, achieved in large part due to the products unique new features such as the Bushra loyalty program and innovative sales drives that incorporated Virtual Reality, as well as by introducing exclusive draws such as the Omani National Day draw. Bushra is a Mudaraba based product whereby customers earn expected monthly profit on their savings as well as the chance to win one of the many exciting daily, weekly, monthly, quarterly, half-yearly and annual cash prizes. The Bank also launched PDC Warehousing in 2018 which includes the safekeeping of post-dated cheques until the arrival of the cheques’ realization date thereby ensuring its timely deposit. This service has been well received by our customers. During 2018, the Bank signed a MoU with Takaful Oman, which enabled the bank to provide Motor Takaful to our customer base via the Alizz Islamic Bank branch network. This positioned the bank as a one-stop shop for all customer needs. The Bank launched phase II of the Mobile Banking application that introduced new features such as a zakat calculator, international transfers, qibla locator, paying all utility bills at once and many more exciting features. There has been strong customer adoption of the new app with 39% of the Retail banking customer base on-boarded onto the mobile banking application. This channel migration from physical channels to mobile has enhanced the customer experience further as customer enjoy the convenience of banking anywhere whenever they need. Phase II of the app further cemented the Bank’s image as a leader in innovative technology with customer convenience at the core of our business strategy. Adding to the Banks awards portfolio, the Retail Banking team was recognized by multiple business entities in 2018 and some of the most notable awards were: •• Best Premium Wealth Management Services, ‘THARWA’ – Signature 100 Luxury Awards •• Best Arabian Management Team – Arab Best Awards 2018 •• Excellence in Islamic Banking – Oman Banking Finance Awards 2018 •• Best Islamic Banking Brand, Oman - Global Brand Awards •• Best Customer-Oriented Islamic Banking Brand, Oman - GBM Awards 40 The primary purpose of the Internal Audit activity is to assist management and the Board of Directors of the bank to discharge their responsibilities and accomplish the objectives of the bank by bringing a systematic, disciplined approach to evaluate and improve effectiveness of risk management, control, and governance processes. It does this by assessing risks, controls, ethics, quality, economy and efficiency. The Annual Audit Plan took into account all operations of the Bank, which are audited on a cyclical basis. All audits were performed adhering to the International Standards for the Professional Practice of Auditing. During 2018, all main areas of the Bank’s operations were reviewed to enable us to give an informed view of the state of the Bank’s risk management framework and internal control environment. Areas reviewed included Information Technology, Wholesale and Retail Finance, the Bank’s branch network, and the main support services. COMPLIANCE In 2018, pursuant to the issuance of the revised Law on Combating Money Laundering (AML) and Terrorism Financing (TF) issued via Royal Decree 30/2016, the Central Bank of Oman issued further instructions under the law. The instructions covered various aspects such as risk assessment, due diligence measures and requirements, on-going preventive measures, internal policies, controls and procedures, requirements on carrying out wire transfer and reporting obligations. The compliance department and relevant stakeholders had conducted a comprehensive review of the Bank’s AML policies, practices, and processes systems. Accordingly, necessary changes have been made to combat money laundering and terrorist financing in line with the Laws and legislations of the country and international best practices. AML training of Bank staff has remained the number one focus for AML & TF by educating and re-emphasizing to staff the importance of combating AML and understanding of the processes and controls in place. To further cement the staffs understanding and to ensure continued vigilance, a mandatory AML e-learning module for all staff was also launched that aimed towards this objective. Besides the AML policy, procedures review and trainings, the department had conducted an annual bank wide AML risk assessment taking into consideration various factors such as, customers, products, services, geographical locations, delivery channels, transactions monitoring, and training. The results of the assessment were more than adequate indicating effective controls and systems in place to combat and deter money laundering and terrorist financing. The Compliance team contributed to the bank’s overall objectives in 2018 as follows: •• Provided guidance and advice on how best to implement and comply with Central Bank of Oman guidelines issued. •• Followed-up rigorously on concerns and issues; •• Reviewed various policies and procedures and other documents to ensure alignment with regulatory requirements; •• Administered and managed the Central Bank of Oman annual examination from start to finish; •• Reviewed various Bank’s processes and systems, to identify any gaps and in turn suggested suitable controls to mitigate any compliance risks; •• Played an essential role in obtaining regulatory approvals for various activities, products, services; •• Provided FATCA training for all branches; this course covered the fundamentals of the U.S. Foreign Account Tax Compliance Act (FATCA) Law. ANNUAL REPORT 2018 | www.alizzislamic.com ANNUAL REPORT 2018 | www.alizzislamic.com 41
22. SHARI ’A AUDIT AND COMPLIANCE DEPARTMENT (SACD) As Shari’a compliance is the essence and cornerstone of Islamic banking, the Bank has to ensure that all its products and services are Shari’a compliant. To achieve this, the Bank has appointed a group of eminent Shari’a scholars specialized in the jurisprudence of Islamic transactions to form the Shari’a Supervisory Board (SSB). In addition, the Bank established the Shari’a Audit and Compliance Department (SACD), which has been in operation since the Bank’s launch. The SACD has played various important roles towards their ultimate objective of Shari’a Compliance across all customer dealings, products and services. To that end, the SACD reviews the Bank’s products documentation, processes and procedures to ensure that all of the Bank’s transactions have been conducted in line with Shari’a principles and guidelines. Reports on their findings have been submitted to the SSB and the management who have taken the required steps to further enhance the Bank’s services and products to be in line with Shari’a principles. In 2018, SACD conducted Shari’a training on Shari’a fundamentals, principles and rules, issues, process and documentation of Islamic Financial Transactions. The trainings were given to branch staff, customer service representatives, sales team and Credit Administration team. Furthermore, the SACD has been indispensable in terms of providing Shari’a compliant solutions to the Bank’s customers, especially in terms of corporate customers’ needs where more sophisticated structured products are often required. In addition, the SACD has been involved in the development of various products that were launched during the year, as well as products that are due to be launched in 2019 - all of which has been done under the supervision and guidance of the Shari’a Supervisory Board (SSB). SACD also conducted Shari’a audits on retail banking, corporate banking, and treasury transactions. The SSB held five meetings with full quorum during 2018. It has reviewed 28 products and product related documents and issued 30 Fatwas on various queries. The SSB also reviewed the monthly PDMs, policies, investment proposals, and the Shari’a audit reports and provided appropriate guidance. LEGAL The Legal Affairs Division (LAD) is responsible for the provision of legal advisory services within the Bank and ensuring effective management of legal and contractual risks as per the Islamic Banking Regulatory Framework (IBRF). The Legal Division also represents the Bank in all cases to be filed by or against the Bank, as well as legal supervision of external lawyers that handle the Bank’s legal requirements.  In 2018, LAD has expanded its role to involve in regulatory consultation on legislation requiring legal updates and provided training to the employees of the Bank on the legal aspects of their role.  Among the various responsibilities, LAD was involved in extensively reviewing all Islamic banking products documentation to ensure its adherence to the Omani jurisdiction context. They also provided legal opinion on corporate matters and assisted in the registration of the Bank’s trademarks and patents with the relevant authorities. INFORMATION TECHNOLOGY The bank continued its journey towards providing superior customer service through its digitalization initiatives. The bank introduced additional services in the mobile and internet platform that were previously available only through the branch network. These advances aimed at providing a seamless Omni-channel banking experience that always puts the customer at the forefront. Additionally, the IT department seeks to continuously strengthen and enhance the Bank’s position to drive scalability, agility, resilience and governance. In 2018, IT continued to provide resolute support across the spectrum of the Bank’s departments to produce a scalable and optimal capability for transaction processing, telecommunications, technology and administrative services. The IT team successfully delivered a number of key projects including the implementation of the Bank’s: 42 ANNUAL REPORT 2018 | www.alizzislamic.com •• Diminishing Musharaka for Land, Auto, and Home and Under Construction Financing •• Launched of 2nd phase on the Internet and Mobile Banking Project with many new features geared towards enhancing the customer experience. •• SWIFT Upgrade and Dual Factor Authentication. •• New Prize draws for teachers, women, ROP, and armed forces. •• Enhancements to the Commercial Line Finance product. In addition, IT successfully conducted Disaster Recovery (DR) drills during the year and is continuously working towards enhancing the information security and compliance to meet all regulatory requirements. MARKETING & COMMUNICATIONS The Marketing & Corporate Communications team of Alizz Islamic Bank reinforced the bank’s position as Oman’s most dynamic and innovative bank, staying at the forefront of marketing trends and pushing Alizz Islamic Bank into a league of its own in terms of brand presence and share of voice in Oman. In 2018, the bank became the first bank in the Sultanate to adopt Virtual Reality for marketing. The team’s diligent efforts in enhancing the Bank’s digital presence has placed the bank as the second most followed bank in the Sultanate, ahead of the more established competitors, and the most followed Islamic bank in Oman amongst Islamic banks and Islamic banking windows. Having strong digital positioning reduced marketing costs significantly and has been a more effective marketing tool as the customers were targeted based on geolocation and profile. This maximized the reach of the bank and resulted in an exponential increase in lead generation for the bank and its products. In the past year, the Bank has been on trend when it comes to media consumption preferences as we increased its development of videos for the bank’s digital platform. Such videos have become great channels in raising public awareness about the Bank and its prominence in the field of Islamic Banking. The Bank greatly leveraged its social media prowess to fulfill its ambition in being at the forefront in terms of reaching out to its technologically savvy customer base. This strong digital footprint has ensured that the Bank is a market leader when it comes to digital customer service and experience. The Marketing team has raised their efforts in spreading Islamic banking awareness across the nation. In 2018, the Marketing team, along with the Shari’a department, carried out Islamic banking awareness sessions in leading universities and educational institutions in the country, which includes Shari’a awareness videos on all the bank social media platforms. CORPORATE SOCIAL RESPONSIBILITY (CSR) At Alizz Islamic Bank, we are committed to support the growth and prosperity of our communities. We believe we have the responsibility to give back and make a positive difference in the communities in which we live and work, recognizing that when communities thrive, individuals and businesses do too. In 2018, a key priority for us in this area was investing in health, well-being and education of Omani youth’s futures as well as raising awareness in Islamic Finance as a pathway to community prosperity. The Bank provided support to organizations that are working to build strong and resilient communities. In 2018, Alizz Islamic Bank contributed Omani Rials 30,000 to both social and non-profit causes. Our employees dedicated more than 1000 hours of volunteering and fundraising time in support of local community organizations. The Bank supported their efforts through the employee community programs. At Alizz Islamic Bank, investing in our communities has been a focus since inception of the Bank in 2013. Our goal has always been to help create a better life for people that we serve across the country, and we believe investing in the youth is a crucial component on the path to community prosperity. In 2018, we took a new approach to our community investment strategy. We aimed to support organizations that are committed to helping young people in the community reach their full potential, particularly in the areas of health and well-being, and education. We believe this is an investment in the ANNUAL REPORT 2018 | www.alizzislamic.com 43
23. long-term security , stability and growth of both our communities and our business. Young people are our future leaders, and Alizz Islamic Bank’s goal is to help provide them with the necessary skills and resources they need for success. On Credit Risk, the Bank has established a comprehensive review program on a quarterly basis for large exposures to provide warning signals on deteriorating exposures and to prepare our strategies for the management of those relationships in a proactive manner. Oman is a leader in water resources assessment and management and has an excellent record in related institutional capacity building. Hence it was in the interest of the Bank to support the Middle East Desalination Research Center (MEDRC) to promote water awareness among young Omani school children. With the support of Alizz Islamic Bank, MEDRC hosted over 30 students from Kharees Al Haboos School for boys at their facility in North Al Hail, Seeb. As water challenges will increase significantly in the coming years, raising awareness amongst the future generation of Oman is an integral part supporting the government’s 2020 strategy. The credit underwriting process for Retail Banking was streamlined to allow for faster turnaround while maintaining adequate oversight over the whole process. The governance process on Market Risk was further strengthened by establishing value at risk models and shock analysis for the proprietary investments Portfolio. In line with the spirit of giving during Ramadan, Alizz Islamic Bank (AIB) has continued the ‘Alizz Iftar Sa’yim’ initiative for the fifth year running. Implementing the Islamic principles and values of charity and volunteer work during the blessed month, Alizz Islamic Bank distributed over 500 food packages to low income families throughout major cities in the Sultanate. Furthermore, 20 employees volunteered to support initiatives that have a positive impact on the community. Alizz Islamic Bank refurbished and relaunched the reading and entertainment room in the pediatric ward at Khoula Hospital through the initiative ‘A Book for Every Child’ campaign which aims to promote reading amongst children. This initiative aligns with Alizz Islamic Bank’s Corporate Social Responsibility (CSR) strategy ‘Alizz Cares’. HUMAN RESOURCES (HRD) With the intention of ensuring organizational effectiveness and the maximum return from our most important asset, the people, HRD shifted focus towards strategic human resource development (HRD) from 2018 by setting the foundation for the activities that would be launched in 2019 onwards to align the HRD activities to broader strategic imperatives. Therefore, Learning and Talent development will be the key initiatives in coming years, which in turn will assist us increase the capacity of the Bank to exploit its knowledge and capabilities, as a competitive strategy.   Following the Bank’s Talent Management strategy, we will be prioritizing Leadership development in order to expand the collective capacity of organizational members to engage effectively in leadership roles and processes, with the ultimate goal to draw meaningful and effective collaboration. During the year, HRD diligently worked towards independent, impartial and transparent recruitment process, aiming to select the most suitable individuals who meet the requirements of the roles and prove themselves to be a cultural fit demonstrating Alizz Islamic Bank’s core values of integrity, excellence and teamwork. In 2018, as a part of our Omanisation priorities, the Bank has contributed through Internship programmes for fresh graduate students from different Colleges and Universities to enable them to explore banking careers. The programme has provided the students the opportunity to get a feel of practical work compared to their theoretical aspects of their education.   RISK MANAGEMENT Since inception, the Bank has exerted focused efforts in building a robust, and sustainable risk governance framework and to create the risk awareness culture across all tiers of the organization’s hierarchy. In 2018, the Bank has leveraged on the earlier initiatives to further strengthen its existing policy framework and to realign them to the changing market dynamics. The Bank has established its Enterprise Risk Management (ERM) framework in accordance with the requirements of Basel accord and Islamic Banking Regulatory Framework (IBRF) issued by the Central Bank of Oman (CBO). During 2018, the Bank has taken a comprehensive review of Credit Underwriting Policy Framework & Infrastructure along with all associated risk management policies covering Target Market & Risk acceptance Criteria, Early Warning Indicator (EWI) Framework, Risk Appetite Framework (RAF) & Policy, Stress Testing Policy, Provisioning Policy Framework (IFRS 9 Compliant) and ERM Framework & Policy. 44 ANNUAL REPORT 2018 | www.alizzislamic.com Risk tolerance limits for foreign exchange, profit rate and liquidity risks were realigned. The Bank has enhanced its distribution network to enhance its retail deposit base and currently a plan is put in place with a thrust on low cost deposit mobilization through the retail network. Liquidity is also actively being managed through the ALCO forum, where the Bank is pursuing actively into increasing the sticky and retail deposits along with operationalizing some of the corporate and SME financing relationships. As part of the Business Continuity Management (BCM) Policy Framework, the Bank’s Operational Risk working in close coordination with our IT group has completed the testing of BCM along with the Disaster Recovery Center (DRC). The Bank has implemented Information Security tools to test its resilience towards IT security risks covering Penetration Testing and Vulnerability Assessment, Mock-drill attacks, Security Incidents Event Management (SIEM) solution to mention a few. The Bank has established a Security Operations Centre (SOC) which will help to identify IT security risks on a timely basis. The road ahead for 2019 for Risk Management looks promising, with new initiatives such as Moody’s Risk Rating Model Validation, Calibration and Optimization, Pillar 2 Risk Assessment (Basel mandate), elaborate Stress Testing and Privileged Access Management (PAM) along with automation of IFRS 9 ECL computation. OUTLOOK AND STRATEGIC INITIATIVES FOR 2019 The Bank will continue focusing on healthy growth in its corporate banking assets while protecting margins and asset quality. Apart from the funded business, the Bank will expand its trade finance business to enhance fee income for the Bank. The Bank’s well established Investment Banking Department after managing some prestigious transactions in 2018 is planning to maintain the momentum into 2019. The focus of Retail banking is to mobilize low cost deposits and cards business through innovative product offerings and exemplary customer experience. Delivering an exceptional customer experience continues to be the central focus of the Bank’s strategy, as we aim to be a class apart from our competitors. This will also contribute towards promoting Islamic banking as a strong alternative to conventional banking. The Bank will continue to operate as an efficient and lean organization through the use of technological tools, designing simple and efficient business processes and attracting and retaining quality talent. We are certain that this approach will provide us with a competitive advantage for our long-term growth and success ultimately delivering sustainable returns. Whilst achieving robust growth in core business, the Bank attaches great importance to having a strong risk management and governance framework to ensure sustainability and quality of its earnings. Salaam Al Shaksy Chief Executive Officer ANNUAL REPORT 2018 | www.alizzislamic.com 45
24. BASEL II , PILLAR III & BASEL III REPORT 46 ANNUAL REPORT 2018 | www.alizzislamic.com ANNUAL REPORT 2018 | www.alizzislamic.com 47
25. 1 . INTRODUCTION 4. CAPITAL STRUCTURE Alizz Islamic Bank SAOG (“the Bank”) was incorporated in the Sultanate of Oman, as a public joint stock company to carry out Islamic banking activities in accordance with the principles of Shari’a. The Bank commenced its operations on 30th September 2013 and is currently operating with ten branches. The Bank has established its Enterprise Risk Management (ERM) framework in accordance with the requirements of Basel accord and Islamic Banking Regulatory Framework issued by the Central Bank of Oman (CBO). During 2018, the Bank has implemented a comprehensive review of Credit Underwriting Policy Framework along with all associated risk management policies covering Target Market & Risk Acceptance Criteria (TM&RAC), Early Warning Indicator (EWI) Framework, Risk Appetite Framework (RAF) & Policy, Stress Testing Policy, Provisioning Policy Framework (IFRS 9 Compliant) and ERM Framework & Policy. Basel II, Pillar III disclosures include qualitative and quantitative information about the Bank’s ERM framework, Shari’a governance and capital adequacy. The Bank’s shares are listed on the Muscat Securities Market (MSM) and its principal place of business is in Muscat, Sultanate of Oman. 4.1 Qualitative Disclosure The Bank’s regulatory capital is calculated as per the guidelines issued by the CBO and it includes common share capital. The Bank has an authorized share capital of OMR 200 million divided into 2 billion shares of OMR 0.100 each, while it’s paid up capital is OMR 100 million divided into 1 billion shares of OMR 0.100 each. The regulatory capital is classified into two categories – Tier I and Tier II. The Bank’s Tier I capital comprises of equity shares, legal reserves and retained earnings, reduced by unrealized losses on investments categorized as fair value through equity, intangible assets and deferred tax. Tier II capital comprises of provisions calculated on accounts categorized as Stage 1 and Stage 2 under IFRS 9 subject to a maximum of 1.25% of the credit risk weighted assets. Any unrealized gain on investments categorized as fair value through equity, is discounted by 55%. Equity of Unrestricted Investment Account Holders (URIA) is not considered as part of regulatory capital and the Bank is not reducing its risk weighted assets for jointly financed assets. 4.2 Quantitative Disclosure 2. SCOPE OF APPLICATION 2018 RO 2017 RO Tier I Capital Issued Capital 1 Paid-up capital 2 Legal reserves 3 Accumulated losses 100,000,000 490,681 (22,359,288) 100,000,000 289,969 (22,244,162) Total Gross Tier I Capital 78,131,393 78,045,807 Deductions 4 Cumulative Losses on Fair Value of investment classified as fair value through equity 5 Deferred Tax Asset 6 Intangible Assets, including losses, cumulative unrealised losses recognised directly in equity Tier I capital after all deductions 7 (2,160,515) (2,866,939) (1,534,555) 71,569,384 (118,146) (3,245,479) (1,886,003) 72,796,179 Elements of capital 2.1 Qualitative Disclosures Alizz is an Islamic Bank and is neither part of any group nor has any subsidiary, therefore Basel II and Basel III guidelines are applied at Bank level. As there is no consolidation process, there are no differences in the basis of consolidation for financial reporting and for regulatory purposes. There are no restrictions applicable for transfer of funds or regulatory capital. 2.2 Quantitative Disclosures Due to accumulated losses in the startup phase, Bank’s regulatory capital has fallen below minimum requirement of OMR 100 million. The Bank is in the process of finalizing its action plan to address this matter. The CBO has granted extension till 31 December 2019 to comply with the minimum capital requirement. The Bank does not own any interest in any Takaful company or any other company. 3. MEDIUM AND LOCATION OF DISCLOSURE The Bank’s Pillar 3 disclosure will be made available under the Annual Report (Basel III section) of the Bank’s website at www.alizzislamic.com . 3.1 Basis and Frequency of Disclosure This Pillar 3 disclosure document has been designed to be in compliance with CBO’s Pillar 3 guidelines, and is to be read in conjunction with the Bank’s Financial Statements for financial year ended 31st December 2018. 48 ANNUAL REPORT 2018 | www.alizzislamic.com ANNUAL REPORT 2018 | www.alizzislamic.com 49
26. Elements of capital Tier II Capital 8 Cumulative fair value gains on FVOCI investments (up to 45%) 9 General financing loss provisions / Collective provision Total Tier II capital 10 Deductions 11 Total deductions from Tier II Tier II 12 13 14 15 Capital (Net) Total Regulatory Capital Total amount of unrestricted IAH funds Profit Equalisation Reserve (PER) Investment Risk Reserve (IRR) 2018 RO 2017 RO 567 3,436,709 42,252 5,187,149 3,437,276 5,229,401 - - 3,437,276 5,229,401 75,006,660 134,114,218 - 78,025,580 113,304,461 - 5. CAPITAL ADEQUACY The Bank’s ICAAP is in sync with the Bank’s strategy and addresses capital planning, risk appetite, assessment of all types of material risks, testing the capital requirement under different stress scenarios, capital required for covering all material risks due to current as well as prospective business profile and internal organization and processes to manage the above on an on-going basis. At the Bank level, the overall capital adequacy is assessed through the ICAAP Framework. As a result, the organization has identified material risks and assessed the capital levels consistent with the risks identified. The ICAAP framework determines the level of capital required to support the Bank’s current and projected activities for capital under normal and stressed conditions. The ICAAP report is produced on an annual basis and is duly approved by the Board Risk & Compliance Committee (BRCC) as well as the Shari’a Supervisory Board and the Board of Directors. 5.2.1 Comprehensive Risk Assessment under ICAAP Framework Under the ICAAP methodology, the following risk types are identified and measured: •• Risks captured under Pillar 1 of BASEL III (credit risk, market risk and operational risk); •• Risks not fully captured under Pillar 1 of BASEL III (e.g. Residual Risks); •• Risks not taken into account by Pillar 1 of BASEL III (e.g. Profit Rate Risk in the Banking Book (PRRBB), Liquidity Risk, Business/ Strategic Risk, Reputational Risk, Macroeconomic Risk and Concentration Risk-Name and Economic Sectors); and •• External factors, including changes in economic environment and regulations. 5.2.2 Assessment of Pillar 1 and Pillar 2 Risks under BASEL III regime 5.1 Qualitative Disclosures A strong capital position is essential to the Bank’s business strategy and competitive position. The Bank’s capital strategy focuses on long-term stability, which aims to build and invest in core banking activities. The Bank seeks to maintain adequate levels of capital in order to: •• Support the underlying risks of the Bank’s business; •• Optimize growth; •• Be able to withstand capital demands under market shocks and stress conditions. Strategic, business plans and ICAAP (a reflection of the Bank’s short to medium term strategy, i.e., 3 years and thus ties up the capital planning and risk appetite with the overall strategy of the Bank) are drawn up annually covering at least three years’ horizon. This ensures that risks based on the banks’ Risk Appetite Framework (RAF) & Policy, are assessed and adequate levels of capital is maintained by the Bank to support its strategy. The above takes the following into account: a. Growth of core financing and investment business based on business plans of the various business units (Wholesale Banking, (Large and Mid-Corporate Banking, Treasury and Investment Banking, Project Finance), SME Segment and Retail Banking; b. The funding structure and sources of funding, liabilities and equity, to support the asset growth taking into consideration the need to maintain strong liquidity position based on Basel III guidelines. c. Maintenance of Regulatory capital requirements and Capital Adequacy Ratios. 50 5.2 Internal Capital Adequacy Assessment Process (ICAAP) ANNUAL REPORT 2018 | www.alizzislamic.com The bank quantifies its risks using methodologies that have been reasonably tested and deemed to be accepted in the industry. Where risks are not easily quantified, due to the lack of commonly accepted risk measurement techniques, expert judgment is used to determine the size and materiality of the risk. The Bank’s ICAAP then focuses on the qualitative controls in managing such material, non-quantifiable risks within the established governance framework of the bank. These qualitative measures include the following: •• Adequate governance process through Shari’a Supervisory Board, BRCC, EXCOM and the Board of Directors; •• Adequate systems, procedures and internal controls; •• Effective risk mitigation strategies; and •• Regular monitoring and reporting through various committees and management forums. 5.2.3 Stress Testing The Bank’s stress testing program started in 2014 and has a Board approved Stress Testing Framework and Policy in place. It is embedded in the risk and capital management process. The program serves as a forward looking risk and capital management tool to understand the Bank’s risk profile under extreme but plausible conditions. Such conditions may arise from the macroeconomic, strategic, political and business environmental factors. Under the Alizz Islamic Bank’s (AIB) Stress Testing Policy and Framework, approved by the Board in December 2017, the potential unfavorable effects of stress scenarios on the Bank’s profitability, asset quality, liquidity, risk weighted assets and capital adequacy are modelled. At AIB, the Stress Testing methodology is under constant review by Chief Risk Officer (CRO) to reflect the prevailing regulatory and global best practices along with reflecting the macroeconomic scenarios and is capable of translating the potential risks faced by the Bank into meaningful results. ANNUAL REPORT 2018 | www.alizzislamic.com 51
27. Specifically , the stress testing program is designed with an objective to assess the resilience, solvency, liquidity and profitability of the Bank against various stressed events. Depending on the nature of the risk factor, the impact of the stress testing exercise where applicable, are measured on the following indicators of the Bank: •• Assets quality – increase/decrease in non-performing assets measured in terms of ratio to financing assets; •• Profitability – increase/decrease in the accounting profit & loss; •• Capital adequacy – measured in terms of changes in total amount of capital and the Capital Adequacy Ratio (CAR); •• Liquidity position – measured in terms of changes in key liquidity indicators. The Stress Testing Task Force comprising various risk management teams tables the stress testing reports with CEO and Board Risk Committee before getting approval from Board and discusses the results with regulators during annual bilateral meetings. Approach towards risk weighting of assets funded by Unrestricted Investment Holders (URIA): Assets funded by URIA funds are risk weighted at 100% in view of requirements of the CBO and displaced commercial risk. Capital Adequacy requirements also takes into account the specific risks of the Islamic financing instruments. The financing assets in the books mainly comprise of Ijarah assets-Ijarah muntahia bittamleek, Murabaha, Wakala bil Istithmar, Diminishing Musharaka and Investments in Sukuk and Shari’a compliant Equities. In case of Ijarah financing, the assets are leased to the customer, as such no market risk is accounted for the same. However, in view of the lease rentals due from the customer, charge towards credit risk is accounted based on the amount due from the customer. In case of Murabaha based contracts, in all cases the promise to purchase undertaking is obtained from the customers before issuance of the purchase order or cheque to the seller for purchase of asset, as such no market risk is assumed by the Bank in case of Murabaha based contracts. In case financing is extended under the Wakala bil Istithmar or Diminishing Musharaka structures, the exposures are risk weighted at 100% given the fact that the same are done on an unrestricted basis wherein the risk of loss is assumed by the Bank. Investments in Sukuk comprise of certificates that gives the Bank the entitlement to receive returns on an asset, usufruct and services of which the undivided ownership is transferred to the Sukuk holders. Investments in Sukuk and Shari’a compliant equities are held in the ‘Available for Sale’ category and are marked to market on a daily basis. All assets of the bank are risk weighted according to the CBO guidelines. 5.3 Quantitative Disclosures Capital adequacy ratio, capital requirements for various types of risks and composition of capital is presented as follows: 2018 RO (a) Capital Requirements 52 2017 RO   Risk Weighted Assets (RWA) Capital Requirement Risk Weighted Assets (RWA) Capital Requirement Credit Risk Market Risk Operational Risk Total 457,198,178 9,112,500 25,221,714 491,532,392 54,863,781 1,093,500 3,026,606 58,983,887 414,971,901 25,512,500 27,634,088 468,118,489 49,796,628 3,061,500 3,316,091 56,174,219 ANNUAL REPORT 2018 | www.alizzislamic.com (b) Capital Requirements Details 1 Tier I Capital (after supervisory deductions) 2 Tier II Capital (after supervisory deductions and up to eligible limits) 3 Tier III Capital (up to a limit where Tier II and Tier III does not exceed Tier I) 4 Of which, total eligible tier III capital 5 Risk weighted assets – Banking book 6 Risk weighted assets – operational risk 7 Total Risk Weighted Assets – Banking Book + Operational Risk 8 Minimum required Capital to support RWAs of Banking book and operational risk i) Minimum required Tier I Capital for Banking book and operational risk ii) Tier II Capital required for Banking book and operational risk 9 Tier I Capital available for supporting trading book 10 Tier II Capital available for supporting trading book 11 Risk Weighted Assets – trading book 12 Total Capital required to support trading book 13 Minimum Tier I Capital required for supporting trading book 14 Used Eligible Tier III Capital 15 Total Regulatory Capital 16 Total Risk Weighted Assets – Whole Bank 17 BIS Capital Adequacy Ratio 18 Unused but eligible Tier III Capital 2018 RO 71,569,384 3,437,276 457,198,178 25,221,714 482,419,892 57,890,387 54,453,111 3,437,276 17,116,384 9,112,500 1,093,500 311,648 75,006,660 491,532,392 15.26% - 2017 RO 72,796,179 5,229,401 414,971,901 27,634,088 442,605,989 53,112,719 47,883,318 5,229,401 24,913,180 25,512,500 3,061,500 872,528 78,025,580 468,118,489 16.67% - (C) Capital Adequacy Ratio  Total Risk Weighted Assets (RWA) Total Eligible Capital Capital Adequacy Ratio 2018 RO 491,532,392 75,006,660 15.26% 2017 RO 468,118,489 78,025,580 16.67% ANNUAL REPORT 2018 | www.alizzislamic.com 53
28. (d) Ratio of Total and Tier I Capital to Total RWA Tier 1 Capital Total Capital Total RWA Ratio to Total Capital to RWA Ratio to Tier I Capital to RWA 2018 RO 71,569,384 75,006,660 491,532,392 15.26% 14.56% 2017 RO 72,796,179 78,025,580 468,118,489 16.67% 15.55% (e) Ratio of Total Capital to Total Assets Total Capital Total Assets Total Capital to Total Assets 2018 RO 75,006,660 682,811,847 10.98% 2017 RO 78,025,580 568,957,515 13.71% (f) Disclosure of Capital Requirements according to different risk categories of each Shari’a compliant financing contract   Murabaha receivables Wakala bil Istithmar Ijarah assets-Ijarah muntahia bittamleek Diminishing Musharaka Banks Investments Other assets Letter of Guarantees Letter of Credit Irrevocable financing commitments Total 54 2018 RO Credit Risk Market Risk 11,671,658 13,486,820 19,534,063 5,759,333 309,070 548,249 1,736,941 1,139,851 78,919 598,877 54,863,781 - 2017 RO Credit Risk Market Risk 10,174,796 12,147,489 19,099,942 2,432,286 1,598,836 586,345 1,453,312 1,374,792 205,413 723,418 49,796,629 - ANNUAL REPORT 2018 | www.alizzislamic.com 6. INVESTMENT ACCOUNT HOLDERS (IAH): The Bank accepts funds from investors in Equity of unrestricted investment account holders on Mudaraba basis and in investment accounts on Wakala bil Istithmar basis. As the Bank currently does not accept funds on restricted basis, disclosure provided below are applicable for unrestricted investment account holders. Mudaraba: Under the Mudaraba contracts, Bank participates both as Mudarib (manager) and Rab-al-Mal (investor). Funds provided by investors are on unrestricted basis and are merged with funds of the Bank as Rab-al-Mal and a Mudaraba pool is established in which the assets are invested. Income generated from such assets is distributed in accordance with a transparent arrangement duly approved by the Shari’a Supervisory Board of the Bank. Complete disclosure of policies, procedures, product design/type, and profit allocation basis has been explained in detail in the qualitative disclosure. The Bank currently does not accept funds on restricted basis. Wakala bil Istithmar: Under Wakala bil Istithmar arrangement, the Bank accepts funds from investors as Wakeel and invests in Shari’a compliant assets. Wakeel is entitled to a fixed fee as a lump sum or percentage of fund provided. Expected profit payout is mentioned to investors upfront while any return generated in excess of expected profit is retained by the Bank as Wakeel incentive fee. The Bank should bear the loss in case of Wakeel’s default, negligence or violation of any terms and conditions of the Wakala bil Istithmar agreement, otherwise the loss would be borne by the investor or Muwakil. 6.1 Qualitative Disclosures Disclosures for URIA on Mudaraba basis The Policy governing management of unrestricted funds is in place, the same covers approaches to the management of the investment portfolio, establishment of prudential reserves, calculation, allocation and distribution of profits. Bank has the following two broad categories of Mudaraba based URIA products. •• Saving Accounts •• Term Investment Deposits Saving accounts and Term investment deposits under the Mudaraba contract are available to individual customers while Term deposits under the Mudaraba contract are available to corporate customers and high net-worth individuals. Under saving accounts, the customers have flexibility of withdrawing and enhancing their investment with the Bank at any time without any restrictions. However, customers opting for saving account also accepts lower weightage and corresponding profit payouts as the Bank cannot invest customers’ money in long term assets yielding higher returns. A combination of Qard-Hasan and Mudaraba based Izdihar saving account allows the customer to earn high weightages on the balances in savings account while it allows the customers to withdraw from current account by cheques The Bank also offers prize based Saving Product ‘Bushra’ which is a Mudaraba Savings Account. Customers apart from earning profits out of Mudaraba pool, also stands a chance to win prizes which are provided through Hiba from shareholder’s fund. “Hasalati” which is a children’s savings account is also based on Mudaraba principles. Under the Term Investment deposits, customers are required to maintain their investments with the Bank at contracted tenors. The IAH are allowed to prematurely withdraw their funds. However, the IAH will be paid adjusted profit commensurate to the tenor of their investments remaining with the Bank. The Asset and Liability Committee (ALCO) is the governing body for managing IAH funds while investment and financing decisions have been entrusted to various committees and individuals based on a comprehensive authority matrix duly approved by the Board of Directors. ANNUAL REPORT 2018 | www.alizzislamic.com 55
29. IAH funds are invested and managed in accordance with Shari ’a requirements and the same are monitored by ‘Shari’a’ department of the Bank which reports directly to the Shari’a Supervisory Board. Product information is available on the Bank’s website and is also included in the marketing material available at the branches. The Bank invests the URIA funds in financing and investment assets comingled with Shareholders’ funds. High risk assets such as Equities and Sukuk are funded directly by shareholders’ funds and their investment is duly deducted from shareholders’ funds in Mudaraba pool. Income from Mudaraba pool is reduced by pool expenses comprising general and specific impairment provisions against Mudaraba pool assets. Net pool income is allocated to Mudarib, IAH and Wakala investors’ in accordance with their respective contribution. Income allocated to IAH is reduced by 10% towards Profit Equalization Reserve (PER) if any. The Bank thereafter charges a Mudarib share at a maximum rate of 60% which is approved and declared on a quarterly basis. Remaining distributable profit is further reduced by 10% towards Investment Risk Reserve (IRR). These reserves are created for future contingencies. Net distributable income is distributed to different classes of IAH in accordance with the weightages coinciding with their tenor and amount of the investment which are announced in a transparent manner every month on the Bank’s website and are displayed in the branches. The Bank pay competitive rate of returns to its investors by accepting Displaced Commercial Risk (DCR) based on actual profits. In order to pay its investors competitive rate of return, the Bank may waive partially or entirely its Mudarib share. The Net income from the pool after accounting for the Mudarib share, is further reduced by transfer of income to PER and IRR in line with the Shari’a requirements. The objective of investments of the Bank is to invest the funds without exposing the investors to excessive risks and to provide healthy payouts commensurate with their expectation, therefore, investment in high risk assets namely Sukuk and Equity are made out of shareholders’ funds. During the year 2018, there was no change in the investment strategy of the Bank that affects IAH funds. Further, the approach adopted by the Bank of comingling of funds of IAH and Shareholders continued throughout the year. The Bank does not charge any administrative expenses to the pool as the same are borne by the Bank as Mudarib in lieu of Mudarib share. 6.2 Quantitative Disclosures PER to IAH ratio Profit Equalisation Reserve (PER) Unrestricted IAH funds    2018 RO 2,843,190 0.000% 2017 RO 1,326,291 0.000% 2018 RO 134,114,218 415,274,399 549,388,617 2017 RO 113,304,461 333,861,220 447,165,681 IAH funds by contract type Contract type Mudaraba Wakala bil Istithmar Total Disclosures for URIA on Mudaraba basis Return on Assets (ROA): Amount of total net income (before distribution of profit to unrestricted IAH) / Total amount of assets financed by Shareholders’ equity and minority interests, Unrestricted IAH, and current accounts and other liabilities). 2018 (RO) 35,451,552 625,884,681 5.66% Item Amount of Total Net Income Average amount of assets Return of Assets (ROA) 2017 (RO) 24,649,901 475,301,760 5.19% Return on Equity (ROE): Amount of total net income (after distribution of profit to IAH) / Amount of shareholders’ equity). 2018 (RO) 18,999,348 78,112,352 24.32% 2017 (RO) 12,384,332 79,766,341 15.53% 2018 98% 2% 2017 97% 3% 2018 (RO) 132,258,043 1,856,175 134,114,218 2017 (RO) 110,953,135 2,351,326 113,304,461 2018 2017 2016 60:40 60:40 60:40 2.40 1.45% 0.87% Item Amount of Total Net Income Average amount of shareholder’s equity Return of Equity (ROE) Ratio of profit distributed by type of IAH Item Saving Investment term deposits Equity of unrestricted investment account holders by type Item Saving Investment Term Deposits Total Item *Profit sharing ratio (Mudarib : Investment Account Holders) *Average Profit paid to Investment Account Holders *Note: As AIB is a new organization, we have three years data. 56 ANNUAL REPORT 2018 | www.alizzislamic.com ANNUAL REPORT 2018 | www.alizzislamic.com 57
30. Latest Profit rates paid to investment account holders for the month ended 31 December 2018 Computation of Pool income for the year ended 31 December 2018 is as follows : Item Pool Income Income from Financing Income from Placements   Pool Expenses General Provision Specific Provision   Net Pool Income Mudarib fee Movement to or from PER/IRR Total amount paid to IAH Total amount attributable to Wakala investors and shareholders funds as Rab- al -Mal 2018 (RO)   30,607,417 235,217 30,842,634   (886,158) (585,972) (1,472,130) 29,370,504 (974,977)   28,395,527 2017 (RO)   20,864,684 293,978 21,158,662   (1,547,711) (436,941) (1,984,652) 19,174,010 (287,484) 17,382   18,903,908 PER and IRR ratios: During the year, the Mudaraba pool income was not sufficient to pay market based profit rates and therefore the Bank did not allocate income to PER and IRR and also waived in full or part of its Mudarib share after approval of SSB. This practice is normal for Islamic banks in its early years of their operation. There were no material changes in asset allocation during the last six months. 2018 Item Savings Account Individuals AED Savings Account Individuals GBP Savings Account Individuals OMR Savings Account Individuals USD Savings Account Individuals EUR Gov Waqf And Masjid Savings Account OMR Bushra Prize Saving Account OMR Hasaliti Saving Account OMR Savings Account Izdihar (0-29,999) Savings Account Izdihar (30,000-99,999) Savings Account Izdihar (100,000-499,999) Savings Account Izdihar (500,000-899,999) Savings Account Izdihar (900,000 & above) Term Investment Deposit - Monthly OMR (0-9,999) Term Investment Deposit - Quarterly OMR (0-9,999) Term Investment Deposit - Half Yearly OMR (0-9,999) Term Investment Deposit - Half Yearly OMR (50,000-499,999) Term Investment Deposit - 9 Months OMR (10,000-49,999) Term Investment Deposit - Annually OMR (0-9,999) Term Investment Deposit - Annually OMR (10,000-49,999) Term Investment Deposit - Annually OMR (50,000-99,999) Term Investment Deposit - 2 YEARS OMR (10,000-49,999) Term Investment Deposit - 2 YEARS OMR (50,000-99,999) Term Investment Deposit - 2 YEARS OMR (100,000-499,999) Term Investment Deposit - 5 YEARS OMR (0-9,999) Term Investment Deposit - 5 YEARS OMR (10,000-49,999) Weightages Declared Profit Rate 3.39% 2.26% 7.15% 3.58% 2.20% 7.15% 7.15% 13.97% 7.15% 47.92% 66.28% 73.13% 84.60% 11.43% 13.97% 19.05% 36.10% 54.21% 66.30% 68.40% 75.20% 77.70% 77.70% 77.70% 85.20% 85.20% 0.11% 0.07% 0.22% 0.11% 0.07% 0.22% 0.22% 0.50% 0.22% 2.00% 2.75% 3.00% 3.50% 0.35% 0.43% 0.65% 1.10% 1.75% 2.25% 2.50% 2.75% 3.25% 3.50% 3.75% 4.00% 4.15% On a monthly basis, the Bank announces profit rates and weightages on its website which can be accessed at http://alizzislamic.com/Personal/RatesWeightages. The Bank has no off-balance sheet exposures arising from investment decisions. Further, the Bank had no limits imposed on the amount that can be invested in any one type of asset. 58 ANNUAL REPORT 2018 | www.alizzislamic.com ANNUAL REPORT 2018 | www.alizzislamic.com 59
31. 7 . RESTRICTED INVESTMENT ACCOUNTS 8.2 Profit Equalization Reserve The Bank does not have any restricted investment accounts as at the reporting date. 8. RETAIL INVESTORS - ORIENTED DISCLOSURES FOR INVESTMENT ACCOUNTS The disclosures mentioned under section 6 above are equally applicable for retail investors. Salient features are reproduced below in a simplified manner. 8.1 Distribution Methodology The Bank abides by the following profit distribution methodology for distributing its profits to IAH. Total income from Islamic financing and placement activities in respect of the common pool is calculated using the best accounting practices in accordance with the Shari’a standards as well as the accounting standards published by Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). The net profit of the pool is calculated in accordance with the following formula: Net income of the pool = (Income from financing & placements) – (General and specific provisions) Net income of the Mudaraba pool is allocated between Shareholders, Wakala customers and IAH according to their respective contribution and tenor of their investments in the common pool. All administrative and general expense (including staff expenses) are borne solely by the shareholders from the date of commencement of the Bank’s operation. Fees, charges (Letters of Credit, Letters of Guarantee, General Banking and allied services) is Bank’s income and such income is not to be included in the common pool. Investment in riskier asset classes such as Sukuk and Equities are made from shareholders’ funds and hence income arising from such investments is not shared in common pool. Depreciation relating to fixed assets owned by the Bank (other than those meant for the investment in the common pool) is not charged to the common pool and is charged to the shareholders. Undesired income relating to the Shari’a repugnant transactions are deducted from the shareholder’s share of profit. Before distributing the net profit of the common pool, PER is established by transferring a suitable percentage (maximum 10%) of the net profit on a monthly basis. Transfers and deductions from this reserve are carried out with prior approval from the Bank’s Shari’a Supervisory Board. The Mudarib’s profit share is calculated by applying a predefined percentage (between the Bank and the IAH) to share the profit from the common pool. The Bank’s share as Mudarib is 60% maximum while IAH share is 40%. Investment Risk Reserve (IRR) is created out of the IAH share of profit (maximum of 10%). In case the balance in the reserve account is not sufficient to pay the desired rate of return, shareholders may forego their share of profit (in full or in part) to the depositors with the approval of the Bank’s Shari’a Supervisory Board. The assessment of provision is made by the Bank on a regular basis. The PER is used for smoothing the returns that are paid to the investment account holders and shareholder. Any loss of IAH is covered from the IRR. Any loss due to negligence or misconduct on the part of the Bank is deducted from the Bank’s share in the profits of the common pool. Any excess of such loss is deducted from the Bank’s share of fund in the common pool. In order to ensure adequate transparency in the payout process, the profit paid to IAH is posted on the Bank’s website at http://alizzislamic. com/Personal/Rates-Weightages 60 ANNUAL REPORT 2018 | www.alizzislamic.com •• The Bank (at its discretion) shall apportion an amount out of the Mudaraba income before allocating the Mudarib share, in order to maintain a certain level of return on investment for IAH. •• The percentage (up to a maximum of 10%) being set aside for the purpose is determined by the management and shall be approved by ALCO. •• The percentage of PER shall be agreed/approved by the IAH at the time of opening the URIA account by signing the terms and conditions. •• The amount accumulated as PER shall be released/distributed in the years of lower performance as decided by the ALCO, subject to approval of SSB. •• Balance of PER shall be maintained as a current account. 8.3 Investment Risk Reserve (IRR) •• The Bank (at its discretion) shall apportion an amount out of the income of IAH, after allocating the Mudarib share, to IRR in order to cater against future losses for Investment accountholders. •• The percentage (upto a maximum of 10%) being set aside for the purpose of PER is determined by the management and shall be approved by ALCO, subject to the approval of SSB. •• The percentage of IRR (upto a maximum 10%) shall be agreed/approved by the IAH at the time of opening the URIA account. •• The amount accumulated as IRR shall be released / distributed to mitigate the account loss as decided by the ALCO. •• Balance of IRR shall be maintained as a current account. The Bank has trained customer services’ representatives in all the branches to provide appropriate guidance to customers in selection of relevant products suitable to the individual investors. Further, complete product booklet is available at the branches and on the Bank’s website which can be referred in case any further clarification is required. The Bank has in place a Customer Complaint & Grievance Management Policy. Customers have been provided the following channels to register their complaints: •• Call Center Contact Number 80072265 •• In person, walk-in-to the Head Office or any branch •• In writing, through a formal complaint to the below address: Head of Service Quality Alizz Islamic Bank SAOG Alizz Tower, P.O. Box 753, CBD Area, PC 112 Sultanate of Oman •• In writing via email ID: customerservice@alizzislamic.com •• Online through the website via “Contact Us” through online the web portal below http://alizzislamic.com/Contact-Us •• Verbally to a member of the sales staff at external sales sites •• Verbally via referrals through the Bank’s staff •• On social media through the portals identified in the website. The Bank has generated and distributed healthy payouts to IAH during 2018 but the same should not be taken as commitment from the Bank for future periods. However, the Bank will make all efforts to enhance and maintain healthy payouts. ANNUAL REPORT 2018 | www.alizzislamic.com 61
32. 9 . RISK MANAGEMENT, RISK EXPOSURES AND RISK MITIGATION: 9.1 General Disclosures The risk environment in which the Bank operates changes continuously, caused by a range of factors, from the transactional level to macroeconomic events. The risk environment therefore requires continuous monitoring and assessment. Initiatives under the Bank’s Enterprise Risk Management program have been a major catalyst and contributor to the enhancement of risk management practices within the Bank. The risk management framework institutionalized across the Bank is designed to meet these challenges as part of Basel program. The Bank’s Six Broad Principles of Risk Management The Six Broad Principles define the accountability, independence, structure and scope of Risk Management. 1. The risk management approach is premised on three lines of defence – risk taking business units, risk control units like Shari’a and Internal Audit. 2. The risk taking units are responsible for the day-to-day management of risks inherent in their business activities while the risk control units are responsible for setting-up the risk management frameworks and developing tools and methodologies for the identification, measurement, monitoring, control and testing of risk. Complementing this is Internal Audit which provides independent assurance of the effectiveness of the risk management approach. 3. At Alizz Islamic Bank (AIB), the Risk Management through the Chief Risk Officer, assume the independent responsibility of reviewing and co-signing the approval through the Management Credit Committee (MCC), of all major credit proposals of the Bank which are prepared, sponsored and recommended by the Business Units. In addition, Enterprise Risk Management (ERM) provides risk oversight and consultancy to all lines of business for the major risk categories including credit risk, market risk, liquidity risk, operational risk and other industry-specific risks that are discussed under Pillar 2 of the BASEL regime. 4. ERM ensures that the core risk policies of the Bank are consistent and current, sets the risk tolerance level through the approved Risk Appetite Framework (RAF) & Policy. Also, ERM is responsible for the execution of various risk policies and related business decisions empowered by the Board. 5. ERM is functionally and organizationally independent of the business units and other risk taking units within AIB. 6. AIB’s Board, through the ALCO, Shari’a Supervisory Board, BRCC and EXCOM, maintains overall responsibility for risk oversight within the Bank. 9.1.1 Qualitative Disclosure: Objective, strategy, policies and procedures: The primary objective of Enterprise Risk Management is to protect the Banks’ assets from the various risks the Bank is exposed to and maximize shareholders value. The Bank is exposed to key risks: credit risk, investment risk, liquidity risk, rate of return risk, market risk, displaced commercial risk, operational risk, and other residual risks like Profit Rate Risk in the Banking Book (PRRBB), Strategic Risk, Reputational Risk, Macroeconomic Risk, Sector and Name Concentration Risk along with Shari’a non-compliance risk. A well-defined risk management framework is in place with the overall responsibility of risk management vested with the Board of Directors managed through the Board Risk and Compliance Committee. 62 ANNUAL REPORT 2018 | www.alizzislamic.com The Board of Directors approve the Bank’s risk management policies which defines the Bank’s risk strategy, which is backed by appropriate qualitative and quantitative parameters, delegation of authorities to the Executive Committee of the Board, Management Credit Committee and Executives to approve financing exposures. The policies and processes for management of risks have proved to be effective. The risk management framework compliments the International Best Practices, Basel Committee, Islamic Financial Services Board and Central Bank of Oman guidelines. The role of the Risk Management Department is to develop and implement the risk policies associated specifically with both quantifiable and nonquantifiable risks arising from the activities of the Bank and manage the day-to-day risks. The risk management function along with the internal audit function of the Bank provides independent assurance that all types of risk are being managed in accordance with the policies set by the Board of Directors. Independent review of the risk management framework is carried out by the Internal Audit function and Compliance function. Shari’a non-compliance risk is monitored and managed by Shari’a compliance unit. Organization: Board Risk & Compliance Committee (BRCC) Chief Executive Officer Chief Risk Officer (CRO) Credit Risk Operational & Market Risk Information Security FRM & Credit Control & Monitoring BASEL & Risk Analytics Risk measurement and reporting system: Credit risk in respect of individual corporate credit covering large, mid-corporate and SME segments is evaluated at the time of initial credit underwriting framework. On an on-going basis, portfolio review and annul reviews take place through Credit Risk Department (CRD) and Credit Control and Monitoring (CCM) Departments of Risk Management Division (RMD). With respect to retail credit, the same is based on approved product programs, exceptions, if any are approved by the relevant approving authorities, ongoing review of retail portfolio is also conducted, these measures help to identify, measure, monitor and mitigate any potential credit risks. Risk artifacts and reports are agenda items at the meetings of the Management Risk Committee and, Board Risk and Compliance Committee along with Board of Directors where deemed applicable. Operational risk is monitored through a review of the Incident Reporting Framework, Risk Control and Self-Assessment (RCSA), Framework and Key Risk Indicator (KRI) Reports, the same is deliberated at the meetings of the Management Risk Committee. With respect to Market Risk: Liquidity risk is identified and measured by the Maturities of Assets and Liabilities statement and liquidity ratios, profit rate risk is identified and measured by the Sensitivity of Assets and Liabilities statement, earnings at risk and economic value. Investments in Sukuk and equity are monitored on a daily basis to ensure its compliance to approved exposure and stop loss limits. Risk reports on market risk are a calendar item at the meetings of the Asset and Liability Management Committee (ALCO), which monitors and controls market risks. ANNUAL REPORT 2018 | www.alizzislamic.com 63
33. Displaced Commercial Risk (DCR): Refers to the market pressure to pay returns that exceed the rate that has been earned on the assets funded by the Unrestricted Investment Account Holders. DCR is managed by the Bank as the Mudarib foregoing a part or in all the share of the earnings. The Bank benchmarks its rates with the other banks in the Sultanate. Policies and practices for mitigating risks: Risk mitigants are obtained wherever possible. In respect of rate of return risk, in financing products wherever repricing is possible, clause to the effect is incorporated in the financing documents. In respect of credit risk efforts are made to obtain collateral by way of mortgage of real estate, plant and & machinery, obtaining individual/corporate guarantees towards facilities granted to individual and legal entities. In case of operational risks, it is ensured that there are in place approved policies and procedures and the same are strictly complied with. The Bank accepts DCR. In order to pay its investors competitive rate of return the Bank may waive partially or entirely its management fee (Mudarib share). Further, no alpha factor is used to discount the assets funded by the IAH funds for capital adequacy purposes, the same are risk weighted at 100%. The Bank accords a great deal of importance to risk management and ensures appropriate investments are made for effective management of risks to support the growth plans of the Bank. Basel II and III: CBO in line with the requirements of Basel III framework, has issued a circular on the capital norms and liquidity ratios: In respect of revised capital norms, Capital Conservation buffer and Counter Cyclical buffer have been made applicable to all Banks in the Sultanate. Capital Conservation buffer has been implemented in a phased manner from the year 2014, whereas Counter Cyclical buffer will be implemented based on the domestic economic situation. CBO requires Banks in the Sultanate of Oman to maintain a Capital Adequacy Ratio (CAR) of 12.875% and the Bank is compliant to the same. With respect to the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR), reporting thereof has already been put in place. Phased-in threshold limit for LCR has been put in place. The Bank is reporting LCR & NSFR at monthly intervals to the Central Bank of Oman. The Bank is in compliance with the LCR threshold of 80% (to reach 100% by 2019) as prescribed by the CBO. 9.2.2 Qualitative Disclosures The Bank has set for itself clear and well defined limits to address different dimensions of credit risk including concentration risk, tenor for each type of financing, exposure limits based on the credit risk rating of the customer. Compliance with the various parameters set in the risk policy is reviewed regularly and variances from the norms are reported to the Board Risk and Compliance Committee for their information and appropriate action. Credit risk is managed by the Credit Risk Management Department. All retail financing applications go through established product programs and retail exceptions along with corporate financing are reviewed by risk, prior to it being submitted to the approving authorities. The financing extended to corporates are risk weighted at 100%. However, in respect of Banks, ratings assigned by Moody’s, S & P and Fitch are taken into account while arriving at the risk weighted assets computations. It is ensured that the financing exposures assumed by the Bank are well within acceptable parameters. Policies and procedures on credit risk are periodically reviewed to ensure that the same are aligned to the current best practices. The existing infrastructure of the financing applications both retail and corporate are reviewed by risk management, approved by delegated authorities and post sanction compliance to covenants being done by an independent department namely credit administration, which ensures that the identified credit risks are duly mitigated at the inception of the providing credit. Regular review of the portfolio and annual reviews ensures proper monitoring of the credit risks at an individual level in case of corporate financing and at a portfolio level in case of retail financings. Credit risk makes up the largest part of the Bank’s risk exposure. 9.1.2 Quantitative: Bank applies same treatment for calculation of risk weighted assets for assets financed exclusively by the shareholders and the Mudaraba pool. Detailed disclosures have been provided under Credit Risk section. Types of Credit Risk: Financing contracts mainly comprise Due from banks, Murabaha receivables, Diminishing Musharaka and Ijarah Muntahia Bittamleek. Due from Banks: Due from banks comprise Wakala bil Istithmar. 9.2 Credit Risk: Credit risk is the potential loss resulting from the failure of a customer or counter party to honor its financial or contractual obligations in accordance with the agreed terms. The Bank is exposed to credit risk through its financing and investing activities. The function of credit risk management is to maximize the Bank’s return by maintaining credit risk exposure within acceptable parameters. 9.2.1 IFRS 9 Implementation The Bank has developed a suite of models to calculate Expected Credit Losses (ECL) of the overall Credit Portfolio to comply with the IFRS 9 standard. Accordingly, the provisioning policy is updated reflecting the IFRS 9 requirements. The ECLs calculator implemented at the Bank is as per IFRS 9 Framework and is in a way that satisfies the following requirements: •• The ECL estimate is unbiased. In other words, the ECL is estimated in a manner that ensures its estimated value equals the mean of the distribution of possible credit loss values; 64 •• A range of possible outcomes are considered; •• The ECL is probability-weighted value of the credit losses that are expected to occur should any of these outcomes transpire during the life cycle of the asset; •• The time value of money is considered; and •• Consideration is given to past events, current conditions and forecasts of future economic conditions. Reasonable and supportable information is used based on the Macro-economic conditions. th st •• The ECL model was implemented based on Sept 30 2017 data as a pilot and promoted to production based on Dec 31 , 2017 data. ANNUAL REPORT 2018 | www.alizzislamic.com Wakala bil Istithmar: Bank appoints the customer as Wakil to invest the funds to achieve an expected profit with a fee. Murabaha Receivables: The Bank finances these transactions through buying the commodity which represents the object of the Murabaha contract and then resells this commodity to the purchase orderer (customer). The sale price (cost plus profit margin) is repaid in bullet payment or in installments by the customer over the agreed period. The transactions are secured at times by the object of the Murabaha contract (in case of real estate finance) and other times by a total collateral package securing the facilities given to the customer. Diminishing Musharaka: Musharaka is a form of partnership between the bank and its clients whereby each party contributes to the capital of the partnership in equal of varying degrees to acquire an asset, whereby each of the parties becomes an owner of the capital. Client purchases the Bank’s shares in the asset gradually until he becomes the full owner of the asset. Client can use the Bank’s portion in the asset in exchange of paying the maintenance and takaful expenses related to Bank’s portion. ANNUAL REPORT 2018 | www.alizzislamic.com 65
34. Ijarah Muntahia Bittamleek : The legal title of the assets under Ijarah Muntahia Bittamleek only passes to the lessee at the end of the Ijarah term, through consideration, provided that all the Ijarah installments are settled. Application of IFRS 9 Corporate Financing Risk: includes management of all corporate and financial institutions exposures. The individual proposals are subject to credit review by the Risk Management department of the Bank. The comments of the Risk Management department along with the clarifications/responses to the same form part of the financing proposal. Renewals and reviews are subject to the same process. Each proposal is also reviewed to established concentration limits – economic sector, financing tenor, credit risk rating. All corporate financing proposals are approved either by the Management Credit Committee, Executive Committee of the Board or the Board of Directors based on delegation of authority. Corporate and financial institutions financing proposals are subject to annual review. 1. 2. 3. Sovereign Risk: Sovereign risk is managed in the same manner as credit risk, i.e. an assessment is made as to the level of exposure in a country, taking into account all relevant risk factors. Specific sovereign limits are established for each country based on its sovereign ratings assigned by external rating agencies and in the absence of such ratings, the specific country is treated as unrated. The sovereign limits matrix is part of the Credit Risk Appetite Manual approved by the Board of Directors. Bank Counterparty Risk: Exposures to Banks are guided by risk assessment based on latest ratings assigned by external rating agencies. Where a Bank is unrated an independent assessment of the Bank is carried out based on quantitative and qualitative factors. It is ensured that the overall exposure to overseas counterparties shall be within the specific country limits approved by the Board. Retail Financing Risk: Parameters of retail financing are in strict compliance to CBO guidelines. Retail financing product programs are updated/revised on an on-going basis, the same are also subject to annual review. Approval authority has been delegated to the officials of Retail Banking Department, with exceptions required to be approved by the Management Credit Committee. However, all retail financing proposals are reviewed by the Risk Management Department. Retail financing is reviewed on a portfolio basis. Credit Risk Rating: The Bank has in place a Credit Risk Rating system from Moody’s to rate its corporate customers. The Credit Risk is measured on a 22 point credit rating scale, with rating 8 onwards would be considered default cases. Default cases would be segregated based on IFRS 9 and timebased criterion of past due days and/or qualitative parameters prescribed by CBO. The Bank uses the Moody’s, Fitch and Standard & Poors rating for risk weighting its assets. The ratings are used for Sovereign and Bank exposures. Past-due Financing Exposure: Past due and impaired financing assets are classified based on the guidelines provided by the CBO and IFRS 9. Specific and General Provisions is provided on the exposures in line with aforesaid guidelines. However, comprehensive risk management systems in the Bank ensures minimal impact of impairment. Detailed policy providing guidelines for classification of the assets and provisioning thereof are in place at the Bank through Provisioning Policy. No of days past due* Remain past due for 60 days or more but less than 90 days Remain past due for 90 days but less than 180 days Remain past due for 180 days or more but less than 365 days Remain past due for 365 or more days Restructured accounts categorized as standard Classification Special Mention Sub-standard Doubtful Loss Standard-Restructured Provisioning requirement Nil 25% 50% 100% 15% *apart from number of days past due qualitative criteria has been prescribed for corporate financing accounts. 66 ANNUAL REPORT 2018 | www.alizzislamic.com IFRS 9 requires that the impairment model apply to all of the following: Financial assets measured at amortized cost; Financial assets mandatorily measured at Fair Value Through Other Comprehensive Income (FVTOCI) except equity instruments; Financial commitments when there is a present obligation to extend credit (except where these are measured at Fair Value Through Profit & Loss (FVTPL)); a. Financial guarantee contracts to which IFRS 9 is applied (except those measured at FVTPL); b. Lease receivables within the scope of IAS 17 Leases; and c. Contract assets within the scope of IFRS 15 Revenue from Contracts with Customers (i.e. rights to consideration following transfer of goods or services). Measurement of impairment of financial instruments under IFRS 9 In accordance with IFRS 9, the Bank shall measure expected credit losses (ECL) of a financial instrument in a way that reflects: 1. An unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes 2. The time value of money; and 3. Reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions. 4. The ECL calculation is done based on the Risk Rating of the contract, Probability of Default (PD) mapped to each risk rating, Loss Given Default (LGD) and Exposure at Default (EAD). 5. The Bank will use the Basel mandated LGD of 45% for all Corporate, SME, Project Finance and Wealth Management along with Retail Obligors and for all Sovereign Banks, Multilateral Development Banks, and Government entities, the LGD is taken at 0% and Public Sector Enterprises and Banks to be treated at 45% LGD. All Off-Balance sheet exposures that are 100% and above cash margin collateralized, the LGD will be 0%, 6. The Risk Rating mapped to the PD percentages. The same is used in ECL calculations under IFRS 9. 7. The two macroeconomic indicators used for calculating the ECL for the life cycle of the asset are as follows: a. Oil Revenue and b. GDP Growth The guiding principle of the IFRS 9 ECL model is to reflect the deterioration or improvement in the credit quality of financial instruments. The amount recognized as a loss allowance or provision depends on the extent of credit deterioration since initial recognition. There are two measurement bases which recognize ECLs depending on the “Stage” in which the financial instrument is: •• 12-month ECLs, which applies to all financial instruments (from initial recognition), provided there is no significant deterioration in credit quality. Such financial instruments are said to be in Stage 1, and are typically the performing assets of the Bank. •• Lifetime ECLs, which applies when a significant increase in the credit risk has occurred on an individual or collective basis. Such financial instruments are said to be either in Stage 2 or 3. Stage 3 assets are considered under-performing and credit-impaired respectively. ANNUAL REPORT 2018 | www.alizzislamic.com 67
35. Certain criteria (called Staging Criteria) are set out by IFRS 9 regulation and complemented by CBO regulation, to determine what constitutes a Significant Increase in Credit Risk (SICR) for the purposes of staging of financial instruments. All criteria require the attention of Relationship Managers (RMs) and RMD in order to determine if there is evidence of increased credit risk. Any instance of each occurring would result in the movement of an account from stage 1 to 2. The criteria will not apply at point of origination (new exposures) which will initially be assigned to Stage 1. In line with IFRS 9, the staging is assessed at an individual financing contract level and not at a customer level. A customer can have some financings in Stage 1 and others in Stage 2. An account will be moved back from Stage 2 to 1 once no Stage 2 criteria apply, as defined below. IFRS 9 Staging Criteria & Assumptions Migration Assumptions Corporate/SME/ Wealth Management 68 Staging Criteria & Assumptions Stage 1 to Stage 2 Generalizations/ Exceptions Stage 2 to Stage 3 •• All accounts/customers under both stages 1 & 2 are considered at contract-level. •• All accounts/customers under stage 3 are considered at customer-level (CIF). •• A contract having a DPD that ranges from 31 days up to 89 days is taken under stage 2. All other Contracts with a DPD of 1 day to 30 days will be in stage 1. •• A contract having a DPD that ranges from 31 days up to 89 days is taken under stage 2. Anything above said threshold will be in stage 3 & is therefore considered to be NPA. •• If an account is having multiple contracts and one of the contract migrates from stage 1 to stage 2 due to the number of days past due, only that specific contract will migrate to Stage 2 in the account; since stage 2 classification is being looked at from a contract-level perspective. •• When a certain account having multiple contracts migrates from stage 2 to stage 3 due to the number of days past due, an entire shift in the account as a whole is imperative (at CIF level) since stage 3 classification is being looked at from a customer-level perspective. •• Once a particular contract enters stage 2, it remains there for a period of 12 months once the contract passes the rebuttal period of 30 days during which time the concerned & respective division/ department can work with the Obligor and regularize the contract with no past dues. Execution of government-related contracts/works which in turn directly impacts the receivables of a particular company is one of the few examples of such documents. •• Once a particular account enters stage 3 irrespective of the number of contracts pertaining to it, it remains there for a period of 12 months, unless for a proper justification substantiated by documentaryevidence/s which are to be submitted by the concerned & respective division/ department. Execution of government related contracts/works which in turn directly impacts the receivables of a particular company is one of the few examples of such documents. •• All restructured accounts/customers are considered at stage 2, irrespective of the number of contracts. ANNUAL REPORT 2018 | www.alizzislamic.com Migration Assumptions Retail Portfolio Staging Criteria & Assumptions Stage 1 to Stage 2 Stage 2 to Stage 3 •• All accounts/customers under both stages 1 & 2 are considered at contract-level. •• All accounts/customers under stage 3 are considered at customer-level (CIF). •• A contract having a DPD that ranges from 31 days up to 89 days is taken under stage 2. Anything below said threshold will be in stage 1. •• A contract having a DPD that ranges from 31 days up to 89 days is taken under stage 2. Anything above said threshold will be in stage 3 & is therefore considered to be NPA. •• When a certain account having multiple contracts migrates from stage 1 to stage 2 due to the number of days past due, an entire shift in the account as a whole is not a definitive outcome since stage 2 classification is being looked at from a contract-level perspective. •• When a certain account having multiple contacts migrates from stage 2 to stage 3 due to the number of days past due, an entire shift in the account as a whole is imperative since stage 3 classification is being looked at from a customer-level perspective. •• Once a particular contract enters stage 2, it remains there for a period of 3 months, unless for a proper justification substantiated by documentaryevidence/s which are to be submitted by the concerned & respective division/ department within the designated rebuttal period of 30 days. •• Once a particular account enters stage 3 irrespective of the number of contracts pertaining to it, it remains there for a period of 3 months, unless for a proper justification substantiated by documentary-evidence/s which are to be submitted by the concerned & respective division/department. Generalizations/ Exceptions •• All restructured accounts/customers are considered at stage 2, irrespective of the number of contracts. •• Cases of deceased customers are considered at stage 1, irrespective of the number of contracts due to the bank’s takaful-covering policy for such cases. Concentration risk: Concentration of credit risk arises when a number of customers are engaged in similar business activities, located in the same geographical region, or those which have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political and/or other conditions. Concentration of exposure to counterparties, geographies and sectors are governed and monitored according to regulatory norms and limits prescribed in the approved policies. Credit Risk Mitigation: The Bank uses a variety of tools to mitigate its credit risk, the primary one being that of securing the exposures by suitable collaterals. While existence of collaterals is not a precondition for financing; in practice, a large part of existing exposures is fully or partially collateralized. As an inherent nature of Islamic products, Bank has ownership of underlying asset of Ijarah and Diminishing Musharakah. Additionally, the Bank has policies on the type of assets that can be accepted as collateral. In general, all collaterals are required to be valued periodically depending on the collateral type. The legal validity and enforceability of the documents used for collateral have been established by qualified personnel including lawyers. The collaterals that are accepted by the Bank as credit risk mitigants are cash or near cash (such as fixed deposits, marketable securities such as Stocks and Sukuk etc.), Bank payment guarantee/stand-by LCs, mortgage over immoveable property (real estate, warehouses etc.), mortgage over machinery and equipment and Government or Corporate Guarantees of companies. No securities are pledged to the Bank. The Bank has subscribed to the simplified approach for collateral recognition under the standardized approach, where 0% risk weight is assigned for the exposures covered by cash collateral. All other financing exposures to corporate and retail are assigned 100% risk weight (except retail mortgage financings, which are assigned 35% risk weight). ANNUAL REPORT 2018 | www.alizzislamic.com 69
36. 9 .2.3 Quantitative Disclosures 70 Geographical Concentration of net credit risk exposure 31 December 2018 GROSS CREDIT RISK EXPOSURE Balances with Central Bank of Oman Due from Banks Financial assets at fair value through other comprehensive income Financial assets at amortised cost Wakala bil Istithmar Murabaha receivables Ijarah muntahia bittamleek Diminishing Musharaka Contingent liabilities and commitments Total 2018 RO Percentage (%) 56,545,029 8% 9,446,999 1% 21,143,545 3% 18,095,000 3% 112,471,071 16% 105,734,786 15% 268,687,045 38% 73,111,436 10% 50,803,814 6% 716,038,725 100% 2017 RO Percentage (%) 22,255,745 4% 22,522,495 4% 41,313,573 7% 0% 101,345,962 16% 84,789,578 14% 240,911,794 39% 39,128,374 6% 65,920,397 11% 618,187,918 100% AVERAGE RISK EXPOSURE Balances with Central Bank of Oman Due from Banks Financial assets at fair value through other comprehensive income Financial assets at amortised cost Wakala bil Istithmar Murabaha receivables Ijarah muntahia bittamleek Diminishing Musharaka Contingent liabilities and commitments Total 2018 RO Percentage (%) 39,400,387 6% 15,984,747 2% 31,304,602 5% 9,047,500 1% 106,908,517 16% 95,262,182 14% 254,799,420 38% 56,119,905 8% 58,362,106 10% 667,189,365 100% 2017 RO Percentage (%) 16,081,370 3% 27,585,072 5% 25,265,919 5% 0% 78,596,680 15% 73,237,395 14% 213,761,327 40% 25,879,267 5% 68,979,843 13% 529,386,872 100% ANNUAL REPORT 2018 | www.alizzislamic.com CLASS OF FINANCIAL ASSET Balances with Central Bank of Oman Due from banks Financial assets at fair value through other comprehensive income Financial assets at amortised cost Wakala bil Istithmar Murabaha receivables Ijara muntahia bitamleek Diminishing Musharaka Contingent Liabilities and Commitments Total Oman RO 56,545,029 16,503,794 18,095,000 111,542,706 104,243,923 264,997,859 72,528,324 50,803,814 695,260,449 GCC RO 688,649 3,367,445 4,056,094 Rest of the world RO 8,758,350 1,262,863 10,021,213 Total RO 56,545,029 9,446,999 21,134,102 18,095,000 111,542,706 104,243,923 264,997,859 72,528,324 50,803,814 709,337,756 GCC RO 5,826,049 6,207,735 12,033,784 Rest of the world RO 1,696,446 605,470 2,301,916 Total RO 22,255,745 22,522,495 41,313,573 100,305,502 83,183,614 237,964,599 38,752,764 65,920,397 612,218,689 Geographical Concentration of net credit risk exposure 31 December 2017 CLASS OF FINANCIAL ASSET Balances with Central Bank of Oman Due from banks Financial assets at fair value through other comprehensive income Financial assets at amortised cost Wakala bil Istithmar Murabaha receivables Ijara muntahia bitamleek Diminishing Musharaka Contingent Liabilities and Commitments Total ANNUAL REPORT 2018 | www.alizzislamic.com Oman RO 22,255,745 15,000,000 34,500,368 100,305,502 83,183,614 237,964,599 38,752,764 65,920,397 597,882,989 71
37. Economic /Industry sector concentration risk 31 December 2018   Construction and real estate Banks and financial institutions Sovereigns Trading and manufacturing Personal Other Services Total Due from banks RO  9,446,999 9,446,999 Financing RO 84,941,619 106,701,668 256,463,114 111,897,937 560,004,338 Past due and impaired financing 31 December 2018 Investments RO 3,507,783 34,467,899 1,262,863 39,238,545 Total RO 84,941,619 12,954,782 34,467,899 106,701,668 256,463,114 113,160,800 608,689,882 Contingent Liabilities and Commitments RO 17,649,364 15,763,305 13,365,240 4,025,905 50,803,814 Construction and real estate Banks and financial institutions Sovereigns Trading and manufacturing Personal Other Services Total Due from banks   22,522,495 22,522,495 Financing RO 89,512,357 53,315,190 219,746,487 103,601,674 466,175,708   Neither past due and non-performing RO Past due but performing RO Non-performing RO Total RO 112,082,110 100,657,516 253,417,647 70,493,752 536,651,025 238,961 3,498,960 10,251,157 2,617,684 16,606,762 150,000 1,578,310 5,018,241 6,746,551 112,471,071 105,734,786 268,687,045 73,111,436 560,004,338 Neither past due and non-performing RO Past due but performing RO Non-performing RO Total RO 99,644,790 79,532,974 211,823,615 36,621,118 427,622,497 1,701,172 5,076,163 28,164,327 2,507,256 37,448,918 180,441 923,852 1,104,293 101,345,962 84,789,578 240,911,794 39,128,374 466,175,708 Type of financing contract Wakala bil Istithmar Murabaha receivables Ijarah muntahia bittamleek Diminishing Musharaka Total Past due and impaired financing 31 December 2017 Economic/Industry sector concentration risk 31 December 2017     Investments RO 3,832,658 36,232,342 1,400,659 41,465,659 Total RO 89,512,357 26,355,153 36,232,342 53,315,190 219,746,487 105,002,333 530,163,862 Contingent Liabilities and Commitments RO 25,957,320 7,962,040 11,676,419 20,324,618 65,920,397     Type of financing contract Wakala bil Istithmar Murabaha receivables Ijarah muntahia bittamleek Diminishing Musharaka Total Disclosure of each financing product by residual maturity has been provided under liquidity risk section. Investments in Sukuk and Equities are financed exclusively by shareholders while financing and placements are financed jointly by shareholders and IAH. 72 ANNUAL REPORT 2018 | www.alizzislamic.com ANNUAL REPORT 2018 | www.alizzislamic.com 73
38. Past due and impaired financing by Sector 31 December 2018 Sector Import Trade Export Trade Wholesale & Retail Trade Mining & Quarrying Construction & Real Estate Manufacturing Electricity, Gas & Water Transport & Communication Services Personal Financing Agriculture & Allied Activities Financing to Non-Residents All Others Total Stage 1 RO 16,491,633 14,508,893 62,139,510 72,183,591 27,965,000 6,128,354 53,585,735 253,492,121 1,161,990 1,886,500 14,138,113 523,681,440 Movement of Provision 31 December 2018 Stage 2 RO 86,895 92,131 3,079,220 17,695,143 3,338,522 36,251 2,207,912 2,083,043 957,230 29,576,347 Stage 3 RO 591,635 5,111,638 154,509 888,769 6,746,551 Gross Exposure RO 16,578,528 14,601,024 3,670,855 84,946,291 75,522,113 27,965,000 6,164,605 55,948,156 256,463,933 1,161,990 1,886,500 15,095,343 560,004,338 * Above amount of sector wise financing exclude gross credit card receivables of RO 1,608,161. Expected credit losses on credit card portfolio amount to RO 42,100.     Provision at beginning of the year Charge for the year - Stage 1 Charge for the year - Stage 2 Charge for the year - Stage 3 Charge for the year Provision at end of the year Wakala bil Istithmar RO 1,430,574 (485,813) (91,598) 75,202 (502,209) 928,365 Murabaha receivables RO 640,704 12,041 223,596 625,954 861,591 1,502,295 Ijarah muntahia bittamleek RO 3,621,998 (563,715) 17,988 601,482 55,755 3,677,753 Diminishing Musharaka RO 180,934 294,550 107,627 402,177 583,111 Others RO 243,553 (97,759) 14,040 85,776 2,057 245,610 Total RO 6,117,763 (840,696) 271,653 1,388,414 819,371 6,937,134 Murabaha receivables RO 1,092,726 392,999 113,380 506,379 6,859 1,605,964 Ijarah muntahia bittamleek RO 2,200,218 453,417 293,560 746,977 2,947,195 Diminishing Musharaka RO 126,301 249,309 249,309 375,610 Others RO 82,273 6,884 92,824 99,708 46,367 228,348 Total RO 4,059,992 1,554,595 529,764 2,084,359 53,226 6,197,577 Movement of Provision 31 December 2017     Provision at beginning of the year Charge for the year-Portfolio Release / (charge) for the year-Specific Reserve profit Provision at end of the year Wakala bil Istithmar RO 558,474 451,986 30,000 481,986 1,040,460 Details of Donation against late payments received from customers, Profit forfeited transferred to Charity account and its disposition. Item Sources of charity funds Undistributed charity funds at beginning of the year Donation against late payments received from customers Forfeit of non-Shari’a compliant income Total sources of funds during the year Uses of charity funds University and school students Philanthropic societies Aid to needy families Total uses of funds during the year Undistributed charity funds at end of the year 74 ANNUAL REPORT 2018 | www.alizzislamic.com ANNUAL REPORT 2018 | www.alizzislamic.com 2018 RO 2017 RO 26,759 46,966 29,138 102,863 17,954 40,812 16,719 75,485 (80,101) (80,101) 22,762 (48,726) (48,726) 26,759 75
39. 9 .3 Credit Risk Mitigation 9.3.1 Qualitative Disclosures Risk appetite for credit risk is an expression of the amount of risk that the Bank is willing to take in pursuing its strategic objectives. Credit risk arises when the bank deals with an obligor or counterparty and the obligor or counterparty fails to fulfill his part of the agreement. In mitigating credit risk, the bank performs extensive due diligence on the obligor or counterparty analyzing both qualitative and quantitative (usually financial and business) information. The bank uses internal rating tools to determine an Obligor Risk Rating (ORR) that reflects the bank’s judgment regarding the probability of default. Ratings by the major credit rating agencies are also used whenever available. Through the Credit Risk Officers, and the Chief Risk Officer, the Credit Risk is controlled through continuous monitoring and assessment of the obligor or counterparty’s ability to meet obligations through a regular calling program, visits to project sites and post approval a formal annual review of the obligors’ financial position and business status. The credit process seeks to identify problems early on through Early Warning Indicators (EWI) Framework and to take effective remedial action, if needed, to protect the bank’s interests. The bank sets credit limits to restrict the exposure to a single obligor or counterparty. Further restrictions are defined by type of transaction, tenor, repayment terms, and conditions precedent and subsequent. The bank also mitigates its credit risk by requiring tangible collateral where necessary. The Bank also seeks to control portfolio risk - various risks that arise from concentrations that are sensitive to certain parameters such as economic activity, geography, collateral, risk rating etc. To mitigate these concentration risks, the Bank seeks to diversify its portfolio through customer acquisition across economic sectors and by diversifying the type of financing in terms of the short term working capital financing and the typically longer term fixed capital expenditure and project financing, which the Bank undertakes on a selective basis and through syndication arrangements, needs of its clients. Obligor and Sector Financing Concentrations are monitored by RMD periodically or regulatory through the CRO Dashboard and are regularly reviewed by the Chief Risk Officer and the Head of Credit Risk. These are reviewed annually by the Board Risk & Compliance Committee. Concentrations in terms of funding sources are also monitored and diversification strategies in terms of reducing dependency on the large funds’ providers are regularly followed. The following financing portfolio concentrations are monitored on an ongoing basis: •• •• •• •• •• •• Business Segments; Economic Sectors; Single Groups/Obligor; Banks & Non-Bank Financial Institutions; Risk Rating; Types of Collaterals (specifically those secured by real estate) The Bank continually updates its credit polices to reflect economic, market and legal realities. The collaterals that is accepted by the Bank as credit risk mitigants are cash (Hamish Jiddiyyah) or near cash (such as fixed depositsProfit Sharing Investment Account (PSIA), marketable securities such as Stocks and Sukuk etc.), Bank payment guarantee/stand-by LCs, mortgage over immoveable property (real estate, warehouses etc.), mortgage over machinery and equipment, Individual and Corporate Guarantees. 76 ANNUAL REPORT 2018 | www.alizzislamic.com All other financing exposures to corporate and retail are assigned 100% risk weight without taking benefit of the value of the collateral and the same treatment is applied for assets leased under Ijarah Muntahia Bittamleek (except retail mortgage financings, which are assigned 35% risk weight). In general, all collaterals are required to be valued periodically depending on the collateral type. The legal validity and enforceability of the documents used for collateral have been established by qualified personnel, including lawyers. Wherever third party guarantee is taken as risk mitigants, risk weight applicable to the customer is considered and no consideration to the risk weight applicable to the guarantor is taken into account. Collaterals must meet the following criteria to qualify as acceptable collateral: •• Assets must be maintaining their value, at the level prevalent at inception, until settlement date of the facility; •• Such assets should be easily convertible in cash (liquidity); •• There should be a reasonable market for the assets (marketability); •• The Bank should be able to enforce its rights over the asset if necessary (enforceability). The Bank has subscribed to the simplified approach for collateral recognition under the standardized approach, where 0% risk weight is assigned for the exposures covered by cash collateral. All other financing exposures to corporate and retail are assigned 100% risk weight without taking benefit of the value of the collateral and the same treatment is applied for assets leased under Ijarah Muntahia Bittamleek (except retail mortgage financings, which are assigned 35% risk weight). 9.3.2 Quantitative Disclosures Bank does not reduce its risk weighted assets by value of collaterals as a risk mitigation and apply risk weights on the gross outstanding balances of various exposures. Carrying amount of assets under Ijarah Muntahia Bittamleek as of reporting date is RO 264,997,859/- Rating distribution RATING 1 2 3 4 5 6 7 Stage 2 Stage 3 Total Financing – rated Unrated Financing Total ANNUAL REPORT 2018 | www.alizzislamic.com 2018 RO 15,597,000 34,206,000 19,050,000 138,748,000 32,947,000 26,749,000 29,610,000 6,798,000 303,705,000 256,299,338 560,004,338 2017 RO 10,520,000 25,112,000 21,060,000 110,936,000 39,705,000 42,782,000 24,364,754 1,128,429 275,608,183 190,567,525 466,175,708 77
40. 9 .4 Liquidity Risk: 9.4.1 Qualitative Disclosures Reporting and measurement of liquidity risks Liquidity may be defined as a Bank’s ability to ensure the availability of funds to meet all on-balance sheet and off-balance sheet commitments at a reasonable price. Liquidity risk can in turn be defined as the risk to earnings and capital arising from a Bank’s potential inability to meet its liabilities when they become due, without incurring unacceptable losses. Conversely, liquidity risk also manifests itself in the form of opportunity losses due to holding excess liquidity relative to liabilities. Liquidity risk is measured using the stock and cash flow approaches. Important liquidity ratios and the Maturities of Assets and Liabilities statement is a calendar item at the meetings of the ALCO. ALCO meets at monthly intervals or shorter frequencies to ensure an effective monitoring of the liquidity position. Expected inflow and outflow of funds are factored into the Maturities of Assets and Liabilities statement and resultant gaps are monitored to ensure that the gap limits are within the CBO and internal approved limits. The Bank has a comprehensive liquidity risk management structure in place. The Market Risk Manual provide detailed guidelines for measurement and management of liquidity risks. The strategy of the Bank in management of liquidity risk is to minimize the resultant impact on the earnings of the Bank. The Bank’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Bank’s reputation. A comprehensive Contingency Funding Framework and Policy is in place, it defines the strategy for handling a liquidity crisis, planning under alternative scenarios and alert levels. The Bank takes a two-tiered approach to Liquidity Risk Management: Going concern liquidity management: the management of the liquidity position within specified parameters to ensure all claims on account of liabilities can be met on a timely basis. Event risk liquidity management: ensuring that in the event of either a firm-specific or general market event, the Bank is able to generate sufficient liquidity to withstand a short term liquidity crisis. Treasury department maintains a portfolio of short-term liquid assets, largely made up of short-term liquid investment securities and inter-Bank placements, to ensure that sufficient liquidity is maintained within the Bank as a whole. Liquidity requirements are met from deposits in current accounts and URIA by IAH. 9.4.2 Quantitative Ratios Ratios Financing Ratio Financing to customers to total assets Equity to total assets Liquidity coverage ratio Net stable funding ratio 2018  Percentage 84.17% 81.03% 11.41% 162.12% 74.70% 2017  Percentage 84.13% 80.89% 13.76% 254.08% 55.30% The Bank is subject to liquidity gap limits prescribed by the CBO and for areas where discretion is given to the Bank, internal mismatch limits by currency have been put in place. Conservative internal limits are in place vis-à-vis the limits prescribed by CBO. The Liquidity Coverage Ratio (LCR) is intended to promote short-term resilience to potential liquidity disruptions. Maintenance of the LCR by the Bank as per Regulatory prescriptions assures that the Bank has sufficient high-quality liquid assets at all times. The level of LCR is monitored by the Bank at monthly intervals. The Bank has diversified source of funding, funds are mobilized in Current accounts from individuals and corporates, these funds are not accounted as unrestricted basis. Funds are mobilized in Savings and Term Deposits accounts from individuals and corporates, these funds are accepted on the basis of Mudaraba and are on an unrestricted basis. The Bank does raise funds in the inter-bank market both locally and regionally from Islamic banks. Placement of funds in inter-bank market is made only with Islamic banks. The Bank has in place a Market Risk Manual which addresses Liquidity Risk and the Bank has also in place a Liquidity Contingency Policy. The Bank has implemented an Asset Liability Management application. This application enables the generation of reports on liquidity, repricing and Fund Transfer Pricing. 78 ANNUAL REPORT 2018 | www.alizzislamic.com ANNUAL REPORT 2018 | www.alizzislamic.com 79
41. The table below summarizes the maturity analysis of financing and various categories of funding : 2018 Assets Cash and balances with Central Bank of Oman Due from Banks Financial assets at fair value through OCI Financial assets at amortized cost Wakala bil Istithmar Murabaha receivables Ijarah assets – Ijarah Muntahia Bittamleek Diminishing Musharaka Property and equipment Intangibles Deferred tax asset Other assets Total Assets Up to 1 month RO 1 to 6 months RO 6 months to 1 year RO 80 1 to 5 years RO Over 5 years RO Total RO 61,465,699 9,446,092 - - - 500,000 - 61,965,699 9,446,092 16,363,102 13,625,125 7,704,445 3,367,000 34,348,913 22,843,820 1,404,000 2,543,705 10,751,980 50,953,328 41,730,660 18,095,000 10,071,635 21,213,018 21,134,102 18,095,000 111,542,706 104,243,923 1,355,527 435,686 - 7,804,223 2,337,573 - 11,286,343 2,694,565 11,472,299 102,233,430 23,562,669 2,866,939 - 142,318,336 43,497,831 2,984,349 1,534,555 - 264,997,859 72,528,324 2,984,349 1,534,555 2,866,939 11,472,299 110,395,676 70,701,529 40,152,892 221,347,026 240,214,724 682,811,847 Liabilities, Equity of unrestricted Investment Accountholders and Owners’ Equity Due to Banks 6,160,000 Customers’ Current Accounts 7,396,511 12,943,660 7,396,377 Customers’ Wakala 26,178,199 115,331,683 150,034,325 Other Liabilities 12,344,944 Total Liabilities 39,734,710 128,275,343 169,775,646 Equity of unrestricted investment accountholders 7,645,304 13,382,149 13,704,397 Total Owners’ Equity Total Liabilities, equity of investment accountholders and owners’ equity Net Gap Cumulative Net Gap 2017 47,380,014 63,015,662 63,015,662 141,657,492 (70,955,963) (7,940,301) 183,480,043 (143,327,152) (151,267,453) 102,468,088 102,468,088 9,245,472 21,679,726 30,925,198 6,160,000 36,982,020 415,692,021 12,344,944 471,178,985 66,004,873 - 32,959,873 77,936,266 133,696,596 77,936,266 168,472,961 52,874,065 (98,393,388) 141,821,337 98,393,387 (0) 682,811,847 (0) (0) ANNUAL REPORT 2018 | www.alizzislamic.com Up to 1 month RO 1 to 6 months RO 6 months to 1 year RO 1 to 5 years RO Over 5 years RO Total RO 26,311,236 22,522,495 - - - 382,000 - 26,693,236 22,522,495 33,699,238 3,248,139 40,071,287 31,974,486 14,963,840 1,242,286 669,632 10,329,095 16,962,146 44,282,890 17,000,000 10,359,650 41,313,573 100,305,502 83,183,614 7,409,141 183,720 - 32,549,445 2,596,651 - 30,271,432 3,115,981 9,611,093 90,692,393 20,588,846 3,245,479 - 77,042,188 12,267,566 3,479,157 1,886,003 - 237,964,599 38,752,764 3,479,157 1,886,003 3,245,479 9,611,093 93,373,969 122,155,709 55,239,519 175,771,754 122,416,564 568,957,515 40,641,499 40,641,499 6,826,202 55,402,117 62,228,319 5,775,000 27,304,809 333,861,220 10,423,588 377,364,617 56,652,231 - 28,326,115 78,288,437 113,304,461 78,288,437 97,293,730 78,478,024 46,426,307 168,842,871 (46,426,307) - 568,957,515 - Assets Cash and balances with Central Bank of Oman Due from Banks Financial assets at fair value through OCI Financial assets at amortised cost Wakala bil Istithmar Murabaha receivables Ijarah assets – Ijarah Muntahia Bittamleek Diminishing Musharaka Property and equipment Intangibles Deferred tax asset Other assets Total Assets Liabilities, Equity of unrestricted Investment Accountholders and Owners’ Equity Due to Banks 5,775,000 Customers’ Current Accounts 5,460,962 9,556,683 5,460,962 Customers’ Wakala 17,274,775 87,337,604 133,205,225 Other Liabilities 10,423,588 Total Liabilities 28,510,737 96,894,287 149,089,775 Equity of unrestricted investment accountholders 5,665,223 11,330,446 11,330,446 Total Owners’ Equity Total Liabilities, equity of investment accountholders and owners’ equity Net Gap Cumulative Net Gap ANNUAL REPORT 2018 | www.alizzislamic.com 34,175,960 59,198,009 59,198,009 108,224,733 13,930,976 73,128,985 160,420,221 (105,180,702) (32,051,718) 81
42. 9 .5 Market Risk: 9.5.1 Qualitative Disclosure Market risk is defined as the risk of losses in the value of on or off-balance sheet financial instruments caused by changes in market prices or rates including changes in profit rates, foreign exchange rates and commodity prices. A Treasury and Capital Markets Policy is in place which provides detail guidelines for management of market risk. The capital charge for market risk is computed as per the standardised approach. Regulatory/In-house policy limits and guidelines as approved by the Board are strictly adhered to, deviations if any are immediately escalated and action taken wherever necessary. The principal categories of market risk faced by the Bank are set out below: Foreign exchange risk: Foreign exchange risk is the risk that the foreign currency positions taken by the Bank may be adversely affected due to volatility in foreign exchange rates. The responsibility for management of foreign exchange risk rests with the Treasury and Capital Market Department of the Bank. Foreign exchange risk management in the Bank is ensured through regular measurement and monitoring of open foreign exchange positions. The foreign exchange transactions carried out by the Bank are on behalf of customers and are on a back-to-back basis. No proprietary foreign exchange positions are assumed by the Bank. The Bank conservatively restricts its Net Open Position below 39.2% of the net-worth of the Bank vis-à-vis the Regulatory limit of 40%. Limits are in place for individual currencies too. Profit Rate Risk in the Banking Book (PRRBB): Profit rate risk in the banking book is the risk that the Bank will incur a financial loss as a result of mismatch in the profit rate on the assets and investment account holders. The profit distribution is based on profit sharing agreements instead of guaranteed return to investment account holders, therefore, the Bank is not subject to any significant profit rate risk. However, the profit sharing arrangements will result in displaced commercial risk when the Bank’s results do not allow the Bank to distribute profits in line with the market rates. In respect of monitoring the impact of profit rate changes on the earnings and economic value of the Bank, the Bank has developed suitable measurement approaches. The measurement systems for profit rate sensitivity analysis are: traditional maturity gap analysis (to measure the profit rate sensitivity of earnings), and duration (to measure profit rate sensitivity of capital). The results of the sensitivity analysis are a calendar item at the meetings of the ALCO. Price risk: Price Risk is the risk of reduction in the market value of the Bank’s portfolio as a result of diminution in the market value of individual investment. The responsibility for management of investment price risk rests with the Treasury under the supervision and guidance from the ALCO of the Bank. The Bank’s investments are approved by the appropriate authorities and are subject to rigorous due diligence. The Sukuk investments are held in the Available for Sale. Category investments held in the Available for Sale Category are marked to market on a daily basis based on their market value. The market value of the investments is monitored against the stop loss limits and market trends of the individual investment. The equity investments are held in the Available for Sale category, the same are monitored on a daily basis vis-à-vis the rates available on recognized stock exchanges, against the stop loss limits prescribed by the Bank. The Bank allocates capital for its investment portfolio based on the Basel II standardized approach. 82 ANNUAL REPORT 2018 | www.alizzislamic.com Investments in Sukuk and Equity are made after a detailed due diligence of the Issuer/Company, and approved by the Management Credit Committee with a risk review thereon provided by the Risk Management department. Investments are made in Shari’a compliant equities which are liquid and actively traded on recognized exchanges. Investment in Sukuk are made in Sukuk issued by Regional Sovereigns and Corporates of repute for which an active secondary market exists. The investments in Sukuk and equities are part of the Banking Book, classified as Available for Sale, made with the objective of earning constant periodic returns on Sukuk and dividend on Equities, the same are not held for speculative purposes. Commodity risk: The Bank does not have exposure to the commodity market. The various techniques used by the Bank for the purposes of measuring and monitoring of market risk are as follows: • • • • • Overnight open positions Stop loss limits Profit rate gap analysis Earnings at Risk Economic Value Lists for the above mechanisms are approved by the Board based on the recommendations of ALCO. Treasury and Capital Markets department and Risk Management department of the Bank monitors the positions vis-à-vis the limits approved by the Board. Foreign Exchange Risk: The Bank has exposure in foreign exchange and as such is exposed to foreign currency risk. However, significant amount of foreign currency are either in GCC currencies or USD which are effectively pegged to OMR, therefore result of any sensitivity analysis will not be material. Profit Rate Risk in the Banking Book (PRRBB): The Bank measures the PRRBB by computing the earnings at risk and Economic Value of Equity (EVE) by using the methodology prescribed in the Basel document – Principles for Management and Supervision of Interest Rate Risk – July 2004 Price Risk: The Bank’s investment in Sukuk and Equity held in the Available for Sale Category are marked to market on a daily basis. Reports on market risk is a calendar agenda item at the meetings of the ALCO which is held on a monthly basis. The Bank employs four categories of stress testing, profit rates, foreign exchange rates, equity prices and Sukuk prices. For each category the worst possible shocks that might realistically occur in the market are considered for stress testing. 9.5.2 Quantitative Disclosures The Bank hold its investment portfolio in the banking book and not in the trading book. Total amount of assets subject to market risk by type of assets Breakdown of market RWA by: Market risk position Foreign exchange risk ANNUAL REPORT 2018 | www.alizzislamic.com RWA (RO’000) 2018 2017 9,113 25,513 83
43. Foreign Exchange Risk   Foreign Exchange - NOP Percentage of NOP to Regulatory Capital Regulatory Ceiling Amount subject to Market Risk (RO’000) 2018 2017 9,107 24,866 30% 82.00% 30,003 31,210 Price Risk Impact of 10% fall in price Investment type Change in price Regional Listed Sukuk 10% Regional Listed Equities 10% Regional Unlisted Funds 10% Total   Value at risk of Bank’s equity portfolio computed at 99% confidence interval comes to OMR -13,409/-. Effect on equity 1,974,034 14,034 126,286 2,114,354 9.6 Operational Risk: 9.6.1 Qualitative Disclosure Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. Operational risk arises throughout the bank and from almost any activity. Operational risk excludes credit risks – the risks arising from financial transactions entered into with obligors or counterparties in which the obligor or counterparty fails to honour its part of the transaction. The Bank has an independent Operational Risk Department under Chief Risk Officer which is tasked with monitoring and controlling the Operational Risks of the Bank. Functions of this department are guided by the Operational Risk Policy and Framework. To institutionalize the assessment and mitigation of operational risks, the Business Environment and Internal Control Framework is established as part of ERM program. In addition, the Bank has implemented Business Continuity and Disaster Recovery program. This will reduce the potential Operational risk. 9.6.2 Management and Monitoring of Operational Risk The established Operational Risk Management (ORM) Framework is designed to maintain dependency between the risk management and the risk champions/owners represented by the various business groups within the bank. While keeping the responsibility of managing the business within the business groups common grounds were established to involve the operational risk management team in facilitating the risk identification, measurement and assessing of risks and relevant controls, including documenting and tracking the risk mitigation plans, or risk acceptance. During the year, the operational risk management team conducted specialized training workshops and data gathering through meetings with business and senior management endeavouring to gain a clear understanding of business directions by cascading the relevant business unit strategic objectives. The approach is designed to associate the management directions, with the allocated operational risk appetite, and the risk profile. 84 ANNUAL REPORT 2018 | www.alizzislamic.com In preparation for and before commencing the risk identification and assessment activity across the bank, a comprehensive risk awareness program was developed and implemented involving management, risk champions and respective risk owners. Covering all business and support units within the bank specific risk profiles containing key and significant risks presented at their residual values was arrived at after detailed assessment and testing of the respective controls. A detailed risk heat-map is formed in consultation with business group management to draw their attention to significant and key risks that requires management attention and action on a priority basis. The key methods used to manage and monitor operational risks are as follows: 9.6.3 Risk & Control Self-Assessment (RCSA) The risk register and corresponding action plans are maintained and updated regularly. The review cycle involves discussions with the members of Management Risk Committee (MRC) to seek directions on risk acceptance and treatment including decision for taking actions to review and to improve the control environment. The progress on risk mitigation action plans and the movement of risk measurement across the risk heat-map is also monitored and discussed with the respective management. 9.6.4 Key Risk Indicators (KRIs) A special series of workshops were conducted to produce the first list of KRIs. Based on their nature these are defined and assessed in coordination with the respective business and risk owners addressing mainly critical processes. The process includes setting means of collecting required data, analysis and management expectations for certain indicators set as acceptable threshold to create means of leading or lagging warning signals. It also involves consolidating certain common KRIs that requires actions at the bank wide level. The bank aims to improve on the KRI list to create meaningful and business relevant risk indicators. 9.6.5 Loss Data Management (LDM) The Operational Risk team monitors and maintains a detailed register of all operational risk losses and near-miss incidents. These are linked to the respective risk profiling and key risk register, guiding the business management to direct their efforts to improve their controls and the respective services or products. Those are classified and reported based on the Basel III loss events type. 9.6.6 Business Continuity Management (BCM) The Bank has developed and maintained a full-fledged Business Continuity Management (BCM) program that focuses on protecting the human life and building the continuity and recovery capabilities of key processes and assets. The program is structured based on international standards, best practices, and CBO requirements and its scope extends to include: •• Crisis Management and Response •• Safety and Security •• People Continuity •• Business Recovery •• IT Disaster Recovery The Bank’s BCM program is ongoing and is regularly reviewed by internal and external stakeholders. These features enhance the Bank’s readiness and the capabilities to respond to and manage adverse events, protect key assets, and continue critical processes. The results are minimized negative impacts, enhanced performance and reputation, and compliance to regulatory requirements. ANNUAL REPORT 2018 | www.alizzislamic.com 85
44. 9 .6.7 Outsourcing Complying with CBO regulations on outsourcing, the Operational Risk Management team is involved in reviewing the risk assessment related to outsourcing of material banking activities. This involves a diligent review of operational risks and business continuity requirements that are associated with the outsourced activity. 9.6.8 Anti-Fraud Management The bank has established an Enterprise Anti-Fraud program in coordination with several internal stakeholders, aiming to prevent and reduce to the minimum losses arising from internal and external frauds. This function is currently in the process of transitioning to Operational Risk unit as part of RMD reengineering efforts. The bank wide anti-fraud awareness program has already been conducted and the Bank is preparing for a bank wide fraud risk assessment exercise which will be linked to the existing risk profile and control registers. 9.6.9 Measurement of Operational Risk (OR) Capital Charge Operational Risk capital charge is calculated using the Basic Indicator Approach (BIA) as per CBO and BASEL III regime. The BIA for operational risk capital charge calculation applies an alpha (15%) to the average of positive gross income that was achieved over the previous three years by the Bank. The Bank aims to move towards the Alternative Standardized Approach (ASA) for Operational Risk Capital Charge Calculation in the coming years. In this context, the Bank will formally seek CBO approval for adopting the ASA as and when a prudent judgement call is made. The Bank will also continue to collect loss data history and compare those against the allocated capital per business lines in preparation for the Advanced Approaches that the Bank is planning to implement in the long term as per revised BASEL III guidelines. 9.6.10 Quantitative Disclosure RO Item Net income from financing and investing activities Bank’s income from own investments Other income - net Gross Income Net return on equity of unrestricted investment accountholders Profit on wakala bil Istithmar payable Net Operating Income Average Income Gross Income times of Alpha (15%) Operational risk based on Basic Indicator Approach 2018 30,842,634 1,827,108 2,781,810 35,451,552 (1,868,213) (14,583,991) 18,999,348 15,117,626 2,267,644 28,345,549 2017 21,158,662 1,049,041 2,442,198 24,649,901 (1,038,807) (11,226,762) 12,384,332 15,261,731 2,289,260 28,615,746 2016 12,528,708 286,876 1,153,615 13,969,199 13,969,199 10,567,646 1,585,147 19,814,336 Amount of non-shari’a compliant income transferred to charity was OMR 29,138. 9.7 Rate of Return Risk 9.7.1 Qualitative Disclosure Rate of return risk arises from the possibility that changes in return rates will affect future profitability or the fair value of financial instruments. The Bank is exposed to rate of return risk as a result of mismatches in repricing of assets and liabilities. The profit rate risk may arise due to the financing and investing activities. In addition, rate of return risk can also affect the Bank through market wide changes that are brought on by changes in the economy. The effect of the market rates is reflected and can be seen in the Bank’s pricing of contracts as they carry competitive pricing that prevails in the market. When risks are high, the market tends to place a higher rate of return to maintain the risk /return profile. Accordingly, the market reduces the rate of return when it identifies a decrease in the market wide risk that would be reflected by banks decreasing their rate of return pricing. As a strategy for managing the rate of return risk in the banking book, the Bank •• Has identified the profit rate sensitive products and activities it wishes to engage in; •• Makes efforts to match the amount of floating rate assets with floating rate liabilities in the banking book The Bank uses the following tools for profit rate risk measurement in the banking book: •• Re-pricing gap analysis which measures the arithmetic difference between the profit-sensitive assets and liabilities in the banking book in absolute terms; and •• Computing the Earnings at Risk and Economic value assuming a 200 bps shift in profit rates. The Bank’s cautious asset liability strategy avoids funding short term financing facilities from long term investments. The Bank has implemented a system to measure the profit rate risk through the use of gap analysis based on repricing buckets. The statement of Sensitivity of Assets and Liabilities, results of the assumed shift in profits rates on the economic value and earnings at risk is a calendar item at the meetings of the ALCO, which reviews the same and actions points are determined. 9.7.2 Quantitative Disclosure Average yield on bank’s financial assets and liabilities is as follows Item Due from banks Wakala bil Istithmar Murabaha receivables Ijarah Muntahia Bittamleek Diminishing Musharaka Investments Due to banks’ Customer Wakala bil Istithmar Equity of Unrestricted Investment Accountholders in percentage 2018 1.99 5.77 5.91 5.64 6.01 4.51 1.86 3.81 2.40 2017 1.40 5.78 5.61 5.16 5.40 3.40 0.99 3.86 1.45 The sensitivity analysis of the impact of profit rate movement in the market by 200 basis points showed it would have a negative impact on the income of the Bank by RO 2.09 million. 86 ANNUAL REPORT 2018 | www.alizzislamic.com ANNUAL REPORT 2018 | www.alizzislamic.com 87
45. The table below summarizes the sensitivity of profit bearing assets and liabilities : Up to 3 months RO 1-3 years RO 3-5 years RO 5-20 years RO 0ver 20 years Non-sensitive RO RO 1,262,863 93,380,123 94,642,986 56,665,157 56,665,157 18,095,000 35,637,727 53,732,727 25,893,844 25,893,844 140,337 112,440 252,777 3-6 months 6-12 months RO RO Total RO 2018 Cash and balances with Central Bank of Oman Balances due from other bank Investments Financing Fixed Assets Other Assets Total Asset 9,446,092 16,372,899 261,059,392 286,878,383 Current Deposits Saving Deposit Time Deposits Balances due to other Banks Profit Payable & Other Liabilities Provisions (others) Capital Reserves Retained Earnings Others (IRS) 44,731,163 6,160,000 - 132,210,976 53,256,914 129,666,050 614,066 - (1,754,997) 93,080,803 - 13,094,360 - 1,000,000 - - 119,330,371 119,330,371 - 132,210,976 - 334,829,290 6,160,000 11,730,878 12,344,944 100,000,000 100,000,000 2,454,809 2,454,809 (22,359,288) (22,359,288) (404,258) (2,159,255) Total 50,891,163 186,081,956 127,911,053 93,080,803 13,094,360 1,000,000 - 210,752,512 Gap 235,987,220 (105,030,382) (33,268,067) (36,415,646) 40,638,367 24,893,844 Cumulative Gap 235,987,220 487,445 80,564,129 81,051,574 130,956,838 97,688,771 61,273,125 61,965,699 2,870,558 4,518,904 14,339,238 83,694,399 61,965,699 9,446,092 39,229,102 553,312,812 4,518,904 14,339,238 682,811,847 682,811,847 252,777 (127,058,113) 101,911,492 126,805,336 127,058,113 - - 9.8 Displaced Commercial Risk (DCR) 9.8.1 Qualitative Disclosure The Bank has adopted a policy of pooling the shareholder and IAH funds, the assets and investments financed by the pool are after a detailed due diligence is conducted by the business and reviewed by risk management department on individual counterparties. Moreover, the exposures are regularly monitored to ensure that the same are performing and if any adverse trend is observed, remedial measures are initiated. On a quarterly basis, the profit earned by the Mudaraba Pool is reviewed against the market trends and profit is paid to the IAH in line with the market returns. Allocation is made to the prudential reserves: PER and IRR only if surplus is available. Most of the times a part of the Mudarib share of profit is allocated towards the IAH. 9.8.2 Quantitative Disclosure There are no benchmark rates in existence to provide comparison of historical profit pay out by the Bank to the customers against the benchmarks. Profit rate and weightages assigned have been mentioned in Unrestricted investment accounts holders section. Allocations to PER has been mentioned in Unrestricted Investment account holders section. 9.9 Contract Specific Risks 9.9.1 Qualitative Disclosure The Risk Appetite Framework document of the Bank has provided limits for the purpose of financing, i.e. Working Capital, Term Finance, Project Finance and Trade Finance. Defined within the purpose of financing are the various Shari’a compliant financing contracts that can be used. The risk weighting requirement for each of the Shari’a compliant financing contracts, based on the risk profile of the customer as provided in the IBRF is taken into account for the purposes of computing the CAR of the Bank. 9.9.2 Quantitative Disclosure Credit risk weighted assets by type of financing contracts is as follows: Financing Contracts   Murabaha receivables Wakala bil Istithmar Ijarah assets-Ijarah muntahia bittamleek Diminishing Musharaka Letter of Guarantees Letter of Credit Irrevocable financing commitments Total Risk Weighted Assets 2018 2017 97,263,813 84,647,192 112,390,168 101,315,962 162,783,850 140,362,753 47,994,445 39,128,374 9,498,760 11,456,599 657,659 1,711,774 4,990,650 6,028,458 435,579,345 384,651,112 DCR refers to the amount of risks that are transferred to shareholders in order to protect the IAH from bearing some or all of the risks to which they are contractually exposed under Mudaraba financing contracts. The risk sharing is achieved by the creation of prudential reserves and the Mudarib foregoing in full or in part his share of profit. This ensures smoothening of the returns to the IAH and enables payment of returns that are competitive in the marketplace. Bank has in place a Profit Distribution Policy which provides detailed guidelines for creation of PER and IRR to mitigate DCR in case Mudaraba Pool performance is not in line with the market trends. 88 ANNUAL REPORT 2018 | www.alizzislamic.com ANNUAL REPORT 2018 | www.alizzislamic.com 89
46. 10 . General Disclosure from Corporate Governance 10.2 Quantitative Disclosure 10.1 Qualitative Disclosure Corporate Governance deals with the way companies are managed and led, defines the roles of the Directors and formalizes the internal control process within the institution. The Board of Directors of the Bank supports the establishment of a governance culture at the Bank. Accordingly, the Board and its Committees continuously evaluate and improve their governance practices, policies and procedures. The Board also ensures that the Bank applies the principles of the Capital Market Authority’s (the CMA) Code of Corporate Governance (the Code) as well as the regulations for Corporate Governance of Banking and Financial Institutions issued by the Central Bank of Oman. As an Islamic Bank, AIB also applies the Central Bank of Oman regulation for Islamic banking institutions. The Bank has complied with all the applicable standards of Auditing and Accounting Organisation of Islamic Financial Institution (AAOIFI) and relevant International Financial Reporting Standards (IFRS). General Disclosure about Consumer As part of the overall consumer engagement we have implemented blended approach to disclosure for all product & service information to customers. The following approaches has been used to publicize product & service information to customers: •• Product brochures and flyers containing specific product mechanism and features has been published •• Product information is published on the Bank’s website •• We have produced and printed a booklet that contains all Frequently Asked Questions about Islamic Banking business. •• All front end facing sales and service staff has been trained on Islamic Banking concepts and product offerings to be able to answer customer queries. Additionally, back office team members have been trained to ensure Shari’a compliance in operational process flows. •• All Call Centre staff has been trained and equipped to handle all customer related inquires. •• Social media platforms have been used to interact with all public •• Press releases are published frequently to inform the public of AIB’s services and products •• Face to face meetings with media, government agencies and NGO’s The Customer Service Staff at the branch and Call Centre note down the customer complaints and coordinate with the relevant stakeholder, who in turn initiates measure for resolving the same. A draft document is in place. Corporate Social Responsibility At Alizz Islamic Bank, CSR is used to compliment the Banks mission to deliver exceptional and sustainable results to our Shareholders. This is carried out by integrating social concerns into our values, strategy and operational transparency. We are therefore committed to play a leading role in the communities we serve.   This year CSR activities will be channeled in two main direction: •• Provide support to a cause that is close to the Omani community •• Engage with bank staff to encourage the spirit of volunteerism 90 ANNUAL REPORT 2018 | www.alizzislamic.com Balances with related party and transactions with them during 2018 are as follows: Related party transactions for 2018 ASSETS Wakala bil Istithmar Murabaha receivables Ijarah assets-Ijarah muntahia bittamleek Other assets Liabilities Current account Customer Wakala bil Istithmar Other liabilities Equity of unrestricted investment Accountholders Contingent Liabilities and Commitments Directors 2018 RO 2,300 2,300 Total 2018 2017 RO RO 6,050,000 3,092,668 89,889 61,703 605,121 651,625 24,757 70,458 6,769,767 3,876,454 43,857 43,857 183,443 183,443 1,072,799 1,072,799 1,635,105 125,000 1,760,105 1,116,656 1,116,656 1,818,548 125,000 1,943,548 4,145 - 319 - 133,030 651,486 130,874 647,829 137,175 651,486 131,193 647,829 ITEM Income Income from financing and investing activities Other income Expenses Return on equity of IAH before Bank’s share as a Mudarib Profit on Wakala bil Istithmar payable Board expenses Shari’a board expense Other expenses ANNUAL REPORT 2018 | www.alizzislamic.com 2017 RO 6,095 6,095 Other related parties 2018 2017 RO RO 6,050,000 3,092,668 89,889 61,703 605,121 651,625 22,457 64,363 6,767,467 3,870,359 Amount in RO 2018 RO 2017 RO 426,293 6,620 432,913 257,716 83,956 341,672 253 1,096 71,256 50,820 1,093,763 1,217,188 537 4,071 72,721 52,987 1,032,085 1,162,401 91
47. Amount in RO 2018 2017 RO RO     903,425 829,351 25,427 25,290 928,852 854,641 ITEM Compensation of key management personnel is as follows: Salaries and allowances End of service benefits   The external Shari’a audit for the period from 1st January 2018 to 31 December 2018 has been executed in this year. The external shari’a audit report is shared with auditor. The external shari’a audit report is shared with auditor. 11.2 SSB Meetings During the year five SSB meetings were conducted with full quorum. SSB has reviewed 28 products and product related documents and issued 30 Fatawas on various queries. SSB also reviewed the quarterly PDMs, policies, investment proposals, and the Shari’a audit reports and provided the related guidance to rectify the mistakes and eliminate the mistakes in future. 11.3 Trainings 11. Shari’a Governance Framework The Shari’a governance framework in the Bank comprises of the Shari’a Supervisory Board (SSB) at the Board level. The Shari’a Audit and Compliance department (SACD) in the Bank is headed by the Internal Shari’a Reviewer (ISR). Internal Shari’a Reviewer (ISR) reports functionally to Shari’a Supervisory Board and to CEO with respect to administrative matters. SSB decisions and guidelines are communicated to Bank management through SACD because the responsibility for observing and implementing Shari’a guidelines rests with the management of the Bank. Shari’a guidelines issued by SSB are binding on the Bank. SSB issues a report to shareholders of the Bank regarding compliance of the Bank’s activities with Shari’a guidelines. SSB has approved Shari’a Audit Charter, Shari’a Compliance Manual and Shari’a non-compliance Risk Policy. ISR is an experienced professional and he is the Secretary of SSB in addition to his duties. SACD is divided into Shari’a Compliance Unit (SCU) and Shari’a Audit Unit (SAU) managed by Head of Shari’a compliance unit and Head of Shari’a audit unit respectively. Shari’a Compliance Unit facilitates the management in ensuring compliance with Shari’a guidelines as manifested by the SSB on a day to day basis in all the Bank’s business activities, operations and transactions. Additionally, SCU provides appropriate recommendations to improve and enhance the compliance with Shari’a guidelines. This is done through review and approval of the contracts, agreements, policies, procedures, products’ manuals, process flows, core banking system, application of accounting standards, transaction, fees, charges, commissions, financial and management reporting etc. SCU is also responsible for the Shari’a non-compliance risk management function. The mechanism of common pool and distribution of profit to various investment deposit classes is closely monitored by SCU. Shari’a Audit Unit assists the ISR and SSB in forming post facto opinion on the extent of the Shari’a compliance of the Bank’s operation. SAU examines and evaluates the extent of compliance with Shari’a standards, principles, rules, Fatwa, and resolutions issued by SSB through actual audit on the business transactions. Its activities cover planning, executing, communicating, reporting and following up of audit findings included in the Shari’a audit plan. Shari’a audit on the Banks transactions has been conducted as follows DEPARTMENTS   Retail Banking:  Murabaha, Ijarah, Forward Ijarah, Service Ijara Corporate Banking:  Murabaha, Ijarah, Wakala, Forward Ijarah, Diminishing Musharakah and Trade Finance Treasury: Interbank Wakala, FX Wa’ad invemsent Third Party Contracts: All service contracts 92 11.1 External Shari’a Audit Percentage of total executed transactions 2018 2017 70% 60% 100% 100% 60% 100% 50% 50% ANNUAL REPORT 2018 | www.alizzislamic.com SACD conducted total 83 hours of trainings for 235 staffs on Shari’a Rules in Islamic Financial Transactions Islamic banking fundamentals, products, process and documentation. It covered 82% of the staff. The trainings are provided to branch staff, customer service representatives, sales team and credit administration. The bank also launched E-Learning system including Islamic Banking course to ensure interactive design and convenience to access 24/7 from range of devices such as mobile, Tablet, iPad etc. The total number of employees who completed the course amounted to 289. 11.4 Zakah Zakah is calculated in accordance with FAS 9 - Zakah issued by Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) using the net assets method. Whereas the Board of Directors of the bank is not authorized to pay the Zakah on behalf of the shareholders, the responsibility for payment of Zakah on the Bank’s shares lays at the part of the shareholders. The Bank calculates the “Zakah base” based on audited financial statements and after approval from Shari’a Supervisory Board, notify the Shareholders of their pro-rata share of the Zakah payable annually. Payment of Zakah on the Investment Accounts and other Accounts is the responsibility of Investments Account Holders. 11.5 Earnings Prohibited by Shari’a and Donation against Late Payment The Bank is committed to avoid recognising any income generated from non-Shari’a-compliant sources such as late payment fee received due to the delay in instalment payment and profit from Shari’a non-compliant transactions as instructed by SSB. Accordingly, all non-Shari’a-compliant income is credited to a charity account where the Bank uses these funds for charitable purposes. In addition to the previous years undistributed charity amount of RO 26,759 during the year ended 2018, RO 76,104 has been credited to charity account being income prohibited by Shari’a and donation due to late payment. The charity fund of OMR 80,101 is distributed to charity organisation as approved by SSB. Remaining charity amount of RO 22,762 shall be distributed in the first quarter of the financial year. 11.6 Remuneration of and Shari’a Supervisory Board (SSB) Following remuneration of Shari’a Board has been approved by the general assembly; Chairman: RO 16,000/- per annum Member: RO 12,000/- per annum each Sitting Fee of Shari’a Board has been approved by the general assembly: Chairman and Members RO 400/- per meeting each ANNUAL REPORT 2018 | www.alizzislamic.com 93
48. 12 . Basel III 12.1 Capital Disclosure The below capital disclosures are prepared in accordance with the requirements of the CBO Circular BM 1114 ‘Regulatory Capital and Composition of Capital Disclosure Requirements under Basel III’ issued on 17 November 2013. Common Equity Tier 1 capital: instruments and reserves 1 Directly issued qualifying common share capital (and equivalent for non-joint stock companies) plus related stock surplus 2 Retained earnings 3 Accumulated other comprehensive income (and other reserves) 4 Directly issued capital subject to phase out from CET1 (only applicable to non-joint stock companies)   Public sector capital injections grandfathered until 1 January 2018 5 Common share capital issued by subsidiaries and held by third parties (amount allowed in group CET1) Common Equity Tier 1 capital before regulatory adjustments 6    Common Equity Tier 1 capital: regulatory adjustments   7 Prudential valuation adjustments 8 Goodwill (net of related tax liability) 9 Other intangibles other than mortgage-servicing rights (net of related tax liability) 10 Deferred tax assets that rely on future profitability excluding those arising from temporary differences (net of related tax liability) 11 Cash-flow hedge reserve 12 Shortfall of provisions to expected losses 13 Securitisation gain on sale (as set out in paragraph 14.9 of CP-1) 14 Gains and losses due to changes in own credit risk on fair valued liabilities. 15 Defined-benefit pension fund net assets 16 Investments in own shares (if not already netted off paid-in capital on reported balance sheet) 17 Reciprocal cross-holdings in common equity 18 Investments in the capital of banking, financial, insurance and takaful entities that are outside the scope of regulatory consolidation, net of eligible short positions, where the bank does not own more than 10% of the issued share capital (amount above 10% threshold) 19 Significant investments in the common stock of banking, financial, insurance and takaful entities that are outside the scope of regulatory consolidation, net of eligible short positions (amount above 10% threshold) 20 Mortgage Servicing rights (amount above 10% threshold) 21 Deferred tax assets arising from temporary differences (amount above 10% threshold, net of related tax liability) 22 Amount exceeding the 15% threshold 94 100,490,681 (22,359,288) 78,131,393 2,160,515 1,534,555 2,866,939 - - ANNUAL REPORT 2018 | www.alizzislamic.com Common Equity Tier 1 capital: regulatory adjustments   23 of which: significant investments in the common stock of financials 24 of which: mortgage servicing rights 25 of which: deferred tax assets arising from temporary differences 26 National specific regulatory adjustments REGULATORY ADJUSTMENTS APPLIED TO COMMON EQUITY TIER 1 IN RESPECT OF AMOUNTS SUBJECT TO PRE-BASEL III TREATMENT 27 Regulatory adjustments applied to Common Equity Tier 1 due to insufficient Additional Tier 1 and Tier 2 to cover deductions Total regulatory adjustments to Common equity Tier 1 28 Common Equity Tier 1 capital (CET1) 29 Additional Tier 1 capital: instruments 30 Directly issued qualifying Additional Tier 1 instruments plus related stock surplus 31 of which: classified as equity under applicable accounting standards 5 32 of which: classified as liabilities under applicable accounting standards 6 33 Directly issued capital instruments subject to phase out from Additional Tier 1 34 Additional Tier 1 instruments (and CET1 instruments not included in row 5) issued by subsidiaries and held by third parties (amount allowed in group AT1) 35 of which: instruments issued by subsidiaries subject to phase out Additional Tier 1 capital before regulatory adjustments 36 - 6,562,009 71,569,384 - Additional Tier 1 capital: regulatory adjustments 37 38 39 42 Investments in own Additional Tier 1 instruments Reciprocal cross-holdings in Additional Tier 1 instruments Investments in the capital of banking, financial, insurance and takaful entities that are outside the scope of regulatory consolidation, net of eligible short positions, where the bank does not own more than 10% of the issued common share capital of the entity (amount above 10% threshold) Significant investments in the capital of banking, financial, insurance and takaful entities that are outside the scope of regulatory consolidation (net of eligible short positions) National specific regulatory adjustments REGULATORY ADJUSTMENTS APPLIED TO ADDITIONAL TIER 1 IN RESPECT OF AMOUNTS SUBJECT TO PRE-BASEL III TREATMENT Regulatory adjustments applied to Additional Tier 1 due to insufficient Tier 2 to cover deductions - 43 Total regulatory adjustments to Additional Tier 1 capital - 44 Additional Tier 1 capital (AT1) - 45 Tier 1 capital (T1 = CET1 + AT1) 40 41 ANNUAL REPORT 2018 | www.alizzislamic.com - - 71,569,384 95
49. Tier 2 46 47 48 49 50 51 capital : instruments and provisions Directly issued qualifying Tier 2 instruments plus related stock surplus Directly issued capital instruments subject to phase out from Tier 2 Tier 2 instruments (and CET1 and AT1 instruments not included in rows 5 or 34) issued by subsidiaries and held by third parties (amount allowed in group Tier 2) of which: instruments issued by subsidiaries subject to phase out Provisions Tier 2 capital before regulatory adjustments 3,437,276 3,437,276 Tier 2 capital: regulatory adjustments 52 53 54 Investments in own Tier 2 instruments Reciprocal cross-holdings in Tier 2 instruments Investments in the capital of banking, financial, insurance and takaful entities that are outside the scope of regulatory consolidation, net of eligible short positions, where the bank does not own more than 10% of the issued common share capital of the entity (amount above the 10% threshold) Significant investments in the capital banking, financial, insurance and takaful entities that are outside the scope of regulatory consolidation (net of eligible short positions) National specific regulatory adjustments REGULATORY ADJUSTMENTS APPLIED TO TIER 2 IN RESPECT OF AMOUNTS SUBJECT TO PRE-BASEL III TREATMENT - 57 Total regulatory adjustments to Tier 2 capital - 58 Tier 2 capital (T2) 59 Total capital (TC = T1 + T2) 55 56 Risk Weighted Assets   RISK WEIGHTED ASSETS IN RESPECT OF AMOUNTS SUBJECT TO PRE-BASEL III TREATMENT 60 60a 60b 60c 96 Total risk weighted assets (60a+60b+60c) Of which: Credit risk weighted assets Of which: Market risk weighted assets Of which: Operational risk weighted assets - - 3,437,276 75,006,660 491,532,392 457,198,178 9,112,500 25,221,714 ANNUAL REPORT 2018 | www.alizzislamic.com Capital Ratios 61 Common Equity Tier 1 (as a percentage of risk weighted assets) 62 Tier 1 (as a percentage of risk weighted assets) 63 Total capital (as a percentage of risk weighted assets) 64 Institution specific buffer requirement (minimum CET1 requirement plus capital conservation buffer plus countercyclical buffer requirements plus G-SIB/D-SIB buffer requirement expressed as a percentage of risk weighted assets) 65 of which: capital conservation buffer requirement 66 of which: bank specific countercyclical buffer requirement 67 of which: D-SIB/G-SIB buffer requirement 68 Common Equity Tier 1 available to meet buffers (as a percentage of risk weighted assets) National minima (if different from Basel III) 69 National Common Equity Tier 1 minimum ratio (if different from Basel 3 minimum) 70 National Tier 1 minimum ratio (if different from Basel 3 minimum) 71 National total capital minimum ratio (if different from Basel 3 minimum) Amounts below the thresholds for deduction (before risk weighting) 72 Non-significant investments in the capital of other financials 73 Significant investments in the common stock of financials 74 Mortgage servicing rights (net of related tax liability) 75 Deferred tax assets arising from temporary differences (net of related tax liability) Applicable caps on the inclusion of provisions in Tier 2 76 77 78 79 Provisions eligible for inclusion in Tier 2 in respect of exposures subject to standardised approach (prior to application of cap) Cap on inclusion of provisions in Tier 2 under standardised approach Provisions eligible for inclusion in Tier 2 in respect of exposures subject to internal ratings-based approach (prior to application of cap) Cap for inclusion of provisions in Tier 2 under internal ratings-based approach Capital instruments subject to phase-out arrangements (only applicable between 1 Jan 2018 and 1 Jan 2022) 80 Current cap on CET1 instruments subject to phase out arrangements 81 Amount excluded from CET1 due to cap (excess over cap after redemptions and maturities) 82 Current cap on AT1 instruments subject to phase out arrangements 83 Amount excluded from AT1 due to cap (excess over cap after redemptions and maturities) 84 Current cap on T2 instruments subject to phase out arrangements 85 Amount excluded from T2 due to cap (excess over cap after redemptions and maturities) ANNUAL REPORT 2018 | www.alizzislamic.com 14.56 14.56 15.26 7.625 0.625 2.63 7.625 9.625 12.625 2,866,939 3,437,276 560,004,338 - - 97
50. Table 2a – Expansion of Balance Sheet Under Regulatory Scope of Consolidation Step 3: Step Reconciliation of Regulatory Capital: Published financial statements   61,965,699 9,446,092 553,312,812 21,134,102 18,095,000 4,518,904 14,339,238   682,811,847 Under Regulatory scope of consolidation   61,965,699 9,446,092 553,312,812 553,312,812 3,436,709 3,436,709 21,134,102 18,095,000 4,518,904 -1,534,555 14,339,238 -2,866,939 682,811,847   100,490,681   100,490,681       100,490,681 a Reserves & Surplus; of which -22,554,415 -22,554,415   - Amount eligible for CET1 -20,395,160 -20,395,160 b - Investment fair value gains -2,159,255 -2,159,255   - Amount eligible\ for CET2   567 g -2,160,515 e 77,936,266 77,936,266   Deposits Due to Banks and financial institutions Other liabilities & provisions 586,370,637 6,160,000 12,344,944 586,370,637 6,160,000 12,344,944       TOTAL 682,811,847 682,811,847   Year ended 31 December 2018 Assets Cash and balances with CBO Due from Banks Financings – Net, of which: - Advances to domestic customers - Provision against financings, of which: - Amount eligible for T2 - Amount ineligible for T2 Investments at fair value through OCI Investments at amortised cost Fixed assets - Amount eligible for T1 Other assets - Amount eligible for T1 Total Assets Capital & Liabilities Paid-up Capital, of which: - Amount eligible for CET1 - Amount ineligible for CET1 Total Capital 98 Reference             f       c   d   ANNUAL REPORT 2018 | www.alizzislamic.com Common Equity Tier 1 capital: instruments and reserves     Component of regulatory capital reported by Bank Source based on reference numbers/letters of the balance sheet under the regulatory scope of consolidation from step 2 100,490,681 -22,359,288 78,131,393 -4,401,494 -2,160,515 71,569,384 a b   c,d e   Additional Tier 1 capital: instruments 7 Additional Tier 1 capital (AT1) Tier 1 capital (T1 = CET1 + AT1)   71,569,384   Tier 2 capital: instruments and provisions 8 Provisions 9 Fair value reserve gains of AFS investments   Tier 2 capital before regulatory adjustments   Tier 2 capital: regulatory adjustments   Tier 2 capital (T2) Total capital (TC = T1 + T2) 3,436,709 567 3,437,276 3,437,276 75,006,660 f g       1 2 3 4 5 6 Directly issued qualifying common share (and equivalent for non-joint stock companies) capital plus related stock surplus Accumulated loss Common Equity Tier 1 capital before regulatory adjustments Intangible Assets including deferred tax Cumulative Losses on Fair Value Common Equity Tier 1 capital (CET1) MAIN FEATURES OF REGULATORY CAPITAL Table below discloses the key features of all the regulatory capital issued by the Bank; Alizz Islamic Bank SAOG 1 Unique identifier (eg CUSIP, ISIN or Bloomberg identifier for private placement) 2 Governing law(s) of the instrument Regulatory treatment 3 4 5 6 7 Transitional Basel III rules Post-transitional Basel III rules Eligible at solo/group/group & solo Instrument type (types to be specified by each jurisdiction) Amount recognised in regulatory capital (Currency in mil, as of most recent reporting date) ANNUAL REPORT 2018 | www.alizzislamic.com Common Equity Share Capital NA The laws of Oman in the form of Royal Decrees, Ministerial Decisions and CMA and CBO Regulations Common Equity Tier 1 Common Equity Tier 1 Solo Common Equity Share Capital 100 million 99
51. Alizz Islamic Bank SAOG 8 Par value of instrument 9 Accounting classification 10 Original date of issuance 11 Perpetual or dated 12 Original maturity date 13 Issuer call subject to prior supervisory approval 14 Optional call date , contingent call dates and redemption amount 15 Subsequent call dates, if applicable Coupons/dividends*   16 Fixed or floating dividend/coupon 17 Coupon rate and any related index 18 Existence of a dividend stopper 19 Fully discretionary, partially discretionary or mandatory 20 Existence of step up or other incentive to redeem 21 Non cumulative or cumulative 22 Convertible or non-convertible 23 If convertible, conversion trigger (s) 24 If convertible, fully or partially 25 If convertible, conversion rate 26 If convertible, mandatory or optional conversion 27 If convertible, specify instrument type convertible into 28 If convertible, specify issuer of instrument it converts into 29 Write-down feature 30 If write-down, write-down trigger(s) 31 If write-down, full or partial 32 If write-down, permanent or temporary 33 If temporary write-down, description of write-up mechanism 34 Position in subordination hierarchy in liquidation (specify instrument type immediately senior to instrument) 35 Non-compliant transitioned features 36 If yes, specify non-compliant features 100 Common Equity Share Capital 100 million Shareholders’ Equity 02 November 2012 Perpetual No maturity No NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA ANNUAL REPORT 2018 | www.alizzislamic.com 12.2 Liquidity Coverage Ratio The below Liquidity Coverage Ratio return is prepared in accordance with the requirements of the CBO Circular BM 1127 ‘Basel III – Framework of Liquidity Coverage Ratio (LCR) and LCR disclosure standards. Statement of Liquidity Coverage Ratio – 31.12.2018 Stock of HQLA   1 2 3 4 5   6 7 8 9   10 11 12 13 14 15     16 17 18 19 20 Level 1 assets Coins and bank notes Qualifying central bank reserves Qualifying marketable securities from sovereigns, central banks, PSEs and multilateral development banks Domestic sovereign or Central Bank debt for non-0% risk weighted sovereigns Total Level 1 assets Level 2A Sovereign, CB, PSE, multilateral development banks assets (qualifying for 20% risk weighing) Qualifying Corporate debt securities AA- or higher Qualifying Covered bonds AA- or higher Total Level 2A Level 2B Qualifying RMBS Qualifying corporate debt securities, rated between A+ and BBBQualifying common equity shares Total Level 2B (Maximum 15% of HQLA) Total level 2 assets (Maximum 40% of HQLA) Total Stock of high quality liquid assets Cash outflows A. Retail Deposits (Customer Deposits) Demand Deposits + Term Deposits with residual maturity upto 30 days Stable deposits (deposit insurance scheme meets additional criteria) - Stable Deposits - Less Stable Retail Deposits Term Deposits with residual maturity of more than 30 days ANNUAL REPORT 2018 | www.alizzislamic.com Factor Un weighted amount Weighted amount   100% 100% RO   5,420,670 56,545,029 RO   5,420,670 56,545,029 100% 100%     34,467,889 96,433,588   34,467,889 96,433,588   85% 85% 85%     75% 50% 50%             3% 5% 10% 0%   1,403,201 1,403,201 1,403,201 97,836,789     688,993 122,277,988 23,431,995 53,313,663   701,600 701,600 701,600 97,135,188     20,670 6,113,899 2,343,200 - 101
52. Stock of HQLA   21 22 23 24 25 26 27 28 29 30 31 32 33 34 35   36 37 38 39 40 41 42 43   44 B. Unsecured Wholesale Funding Demand and term deposits (less than 30 days) -stable deposits Less Stable deposits Non-financial corporates, sovereigns, central banks and PSE If entire portion covered by deposit insurance Cooperative banks in an institutional network (qualifying deposits with the centralised institution) Other legal entity customers Operational deposits generated by clearing, custody and cash management activities Portion covered by deposit insurance C. Secured Funding Secured funding transactions with a central bank or backed by Level I assets with any counterparty Secured funding transactions backed by Level 2A assets with any counterparty Secured funding transactions backed by non-level 1 or non-level 2A assets with domestic Sovereign, domestic PSE, multilateral development banks as a counterparty Backed by RMBS eligible for inclusion in level 2B Backed by other level 2B assets All other secured funding transactions D. Additional Requirements Liquidity needs (e.g. collateral calls)related to financing transactions, derivatives and other contracts, downgrade of up to 3 notches Market valuation changes on derivatives (largest absolute net 30 day collateral flows realised during preceding 24 months-look back approach) Valuation changes on non-level 1 posted collateral securing derivatives Excess collateral held by a bank related to derivative transactions contractually callable at any time by its counterparty Liquidity needs related to collateral contractually due from reporting bank on derivative transactions Increased Liquidity needs related to derivative transactions that allow collateral substitution to non-HQLA assets Liabilities maturing from SPV’s, ABCP’s and SIV’s etc. (applied to maturing amounts and returnable assets) Asset backed securities (including covered bonds) applied to maturing amounts Currently undrawn portion of credit lines (i) Retail and small business 102 Factor Un weighted amount Weighted amount   5% 10% 40% 20% 25% 100% 25% 5%   RO   597,428 25,793 114,270,610 6,016,278   RO   29,871 2,579 45,708,244 1,504,070   0% 15% - - 25% 25% 50% 100%       100% - - 100% 20% - - 100% - - 100% - - 100% - - 100% 100%   5%   13,466,414   673,321 ANNUAL REPORT 2018 | www.alizzislamic.com Stock of HQLA 45 46 47 48 49 50 51 52 53 54 55     56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 (ii) Non-Financial corporates, Sovereign, CB, PSEs, multilateral development banks credit facility (iii) Non-Financial corporates, Sovereign, CB, PSEs, multilateral development banks -liquidity facility (iv) Banks subject to prudential supervision (v) Other Financial Institutions credit (vi) Other Financial institutions-liquidity (vii) Other Legal entity customers, credit and liquidity facilities Other contingent funding liabilities (L/cs ,LGs) Trade finance Customer short positions covered by other customers’ collateral Any Other outflows Total cash outflows Cash inflows Maturing secured lending transactions backed by following collateral:Level 1 assets Level 2A assets Level 2B assets-eligible RMBS Other assets Margin lending backed by all other collaterals All other assets Amounts to be received from retail counterparties Amounts to be received from non-financial wholesale counterparties from transactions other than those listed. Amounts to be received from financial institutions and central banks from transactions other than those listed Credit or liquidity facilities provided to the reporting bank Operational deposits held at other financial institutions Other contractual cash inflows Net derivatives cash inflows Total cash inflows 75% of outflows Inflows restricted to 75% of outflows Net cash outflow LCR (%) ANNUAL REPORT 2018 | www.alizzislamic.com Factor Un weighted amount Weighted amount 10% RO 15,051,586 RO 1,505,159 0% 15% 25% 50% 50% 100% 50% 22,285,814 12,320,000 383,746,562     3,873,000 1,114,291 12,320,000 71,335,303     1,936,500 50% 18,969,000 9,484,500 100% 0% 0% 100% 100%           22,842,000         0 11,421,000 53,501,477 11,421,000 59,914,303 162.12% 30% 40% 40% 100% 100% 5% 5% 50% 100%     103
53. 12 .3 Leverage Ratio 31st December 2018 Basel III leverage ratio framework and disclosure requirements - Reports for Quarter ended Dec-18 Table 1: Summary comparison of accounting assets vs leverage ratio exposure measure (Please refer to paragraph 52 of Basel III leverage ratio framework and disclosure requirements of BCBS issued in January 2014) (All amounts in OMR’000) Item   Current Quarter Previous Quarter 1 Total consolidated assets as per published financial statements 682,812 669,772 2 Adjustment for investments in banking, financial, insurance or commercial entities that are consolidated for accounting purposes but outside the scope of regulatory consolidation 3 Adjustment for fiduciary assets recognised on the balance sheet pursuant to the operative accounting framework but excluded from the leverage ratio exposure measure 4 Adjustments for derivative financial instruments 5 Adjustment for securities financing transactions (i.e., repos and similar secured lending) 6 Adjustment for off-balance sheet items (i.e., conversion to credit equivalent amounts of offbalance sheet exposures) 24,494 24,730 7 Other adjustments 8 Leverage ratio exposure 707,306 694,502 Table 2: Leverage ratio common disclosure template (Please refer to paragraph 53 of Basel III leverage ratio framework and disclosure requirements of BCBS issued in January 2014) Item   Current Quarter Previous Quarter 1 On-balance sheet items (excluding derivatives and SFTs, but including collateral) 682,812 669,772 2 (Asset amounts deducted in determining Basel III Tier 1 capital) (6,561) (5,537) 3 Total on-balance sheet exposures (excluding derivatives and SFTs) (sum of lines 1 and 2) 676,251 664,235 Derivative Exposures       Replacement cost associated with all derivatives transactions (i.e., net of eligible cash variation 4 margin) 5 Add-on amounts for PFE associated with all derivatives transactions Gross-up for derivatives collateral provided where deducted from the balance sheet assets 6 pursuant to the operative accounting framework 7 (Deductions of receivables assets for cash variation margin provided in derivatives transactions) 8 (Exempted CCP leg of client-cleared trade exposures) 9 Adjusted effective notional amount of written credit derivatives 10 (Adjusted effective notional offsets and add-on deductions for written credit derivatives) - 104 ANNUAL REPORT 2018 | www.alizzislamic.com Table 2: Leverage ratio common disclosure template (Please refer to paragraph 53 of Basel III leverage ratio framework and disclosure requirements of BCBS issued in January 2014) Item   Current Quarter Total derivative exposures (sum of lines 4 to 10) 11 Securities financing transaction exposures     12 Gross SFT assets (with no recognition of netting), after adjusting for sale accounting transactions 13 (Netted amounts of cash payables and cash receivables of gross SFT assets) 14 CCR exposure for SFT assets 15 Agent transaction exposures Total securities financing transaction exposures (sum of lines 12 to 15) 16 Other Off-balance sheet exposures     17 Off-balance sheet exposure at gross notional amount 51,198 18 (Adjustments for conversion to credit equivalent amounts) (20,143) Off-balance sheet items (sum of lines 17 and 18) 19 31,055   Capital and total exposures   Tier 1 capital 20 71,571 Total exposures (sum of lines 3, 11, 16 and 19) 21 707,306 Leverage Ratio     Basel III leverage ratio (%) 22 10.1 ANNUAL REPORT 2018 | www.alizzislamic.com Previous Quarter     53,223 (22,956) 30,267   71,444 694,502   10.3 105
54. FINANCIAL STATEMENTS 106 ANNUAL REPORT 2018 | www.alizzislamic.com ANNUAL REPORT 2018 | www.alizzislamic.com 107
55. STATEMENT OF FINANCIAL POSITION STATEMENT OF INCOME As at 31 December 2018 ASSETS Cash and balances with Central Bank of Oman Due from banks Financial assets at fair value through other comprehensive income Financial assets at amortised cost Wakala bil istithmar Murabaha receivables Ijarah assets-ijarah muntahia bittamleek Diminishing musharaka Property and equipment Intangibles Deferred tax asset Other assets 2018 RO 2017 RO 61 ,965,699 9,446,092 21,134,102 18,095,000 111,542,706 104,243,923 264,997,859 72,528,324 2,984,349 1,534,555 2,866,939 11,472,299 26,693,236 22,522,495 41,313,573 100,305,502 83,183,614 237,964,599 38,752,764 3,479,157 1,886,003 3,245,479 9,611,093 682,811,847 568,957,515 Notes 4 5 6 7 8 9 10 11 13 14 27 15 TOTAL ASSETS LIABILITIES, EQUITY OF UNRESTRICTED INVESTMENT ACCOUNTHOLDERS AND OWNERS’ EQUITY LIABILITIES Due to banks Customers’ current accounts Customers’ wakala bil istithmar Other liabilities 16 17 TOTAL LIABILITIES 6,160,000 36,982,020 415,274,399 12,344,944 5,775,000 27,304,809 333,861,220 10,423,588 470,761,363 377,364,617 EQUITY OF UNRESTRICTED INVESTMENT ACCOUNT HOLDERS 18 134,114,218 113,304,461 OWNERS’ EQUITY Share capital Legal reserve Fair value reserve Restructured financing reserve Impairment reserve Accumulated losses 19 19 19 19 12 100,000,000 490,681 (2,159,255) 1,964,128 (22,359,288) 100,000,000 289,969 (24,254) 266,884 (22,244,162) 77,936,266 78,288,437 682,811,847 568,957,515 TOTAL OWNERS’ EQUITY TOTAL LIABILITIES, EQUITY OF UNRESTRICTED INVESTMENT ACCOUNT HOLDERS AND OWNERS’ EQUITY NET ASSETS PER SHARE 20 0.078 0.078 CONTINGENT LIABILITIES AND COMMITMENTS 21 50,803,814 65,920,397 For the year ended 31 December 2018 2018 RO 2017 RO 30,842,634 21,158,662 (2,843,190) 974,977 (1,868,213) 28,974,421 (1,326,291) 287,484 (1,038,807) 20,119,855 1,827,108 2,781,810   33,583,339 (14,583,991) 18,999,348 1,049,041 2,442,198   23,611,094 (11,226,762) 12,384,332 (8,783,456) (774,067) (470,516) (5,766,275)   (15,794,314) (7,757,161) (798,013) (526,524) (4,927,007)   (14,008,705) 3,205,034 (1,624,373) 26 (819,371)   2,385,663 (2,084,359)   (3,708,732) 27 (378,540) 712,785 2,007,123 (2,995,947) 0.002 (0.003) Notes Income from financing and investing activities 22 Return on equity of unrestricted investment accountholders before bank’s share as a Mudarib Bank’s share as a Mudarib BANK’S SHARE IN INCOME AS MUDARIB AND RAB UL MAAL Bank’s income from own investments Other income - net 23 24 Profit on wakala bil Istithmar payable NET OPERATING INCOME Staff expenses Depreciation Amortisation of intangibles Other general and administrative expenses 13 14 25 TOTAL EXPENSES PROFIT/(LOSS) BEFORE PROVISION FOR IMPAIRMENT AND INCOME TAX Impairment losses PROFIT/(LOSS) BEFORE TAX Income tax PROFIT/(LOSS) FOR THE YEAR PROFIT/(LOSS) PER SHARE 28 The financial statements were approved by the Board of Directors on 30 January 2019 and signed on their behalf by: ............................................. Vice Chairman of the Board ..................................... Chief Executive Officer The attached notes 112 to 171 form part of these Financial Statements. The independent auditors’ report is annexed on page 107 108 ANNUAL REPORT 2018 | www.alizzislamic.com The attached notes 112 to 171 form part of these Financial Statements. The independent auditors’ report is annexed on page 107 ANNUAL REPORT 2018 | www.alizzislamic.com 109
56. STATEMENT OF CASH FLOWS STATEMENT OF CHANGES IN OWNERS ’ EQUITY For the year ended 31 December 2018 For the year ended 31 December 2018 Notes OPERATING ACTIVITIES Profit/(loss) before tax Adjustments for: Depreciation Amortisation Impairment losses 13 14 26 Operating profit / (loss) before changes in operating assets and liabilities Net changes in operating assets and liabilities: Capital deposit with Central Bank of Oman Wakala bil Istithmar Murabaha receivables Ijarah assets-Ijarah muntahia bittamleek Diminishing Musharaka Other assets Customers’ current accounts Customers’ wakala bil Istithmar Other liabilities Equity of unrestricted investment account holders 4 8 9 10 11 15 17 18 Net cash generated from operating activities INVESTING ACTIVITIES Financial assets at fair value through other comprehensive income Financial assets at amortised cost Purchase of property and equipment Additions to intangibles 2018 RO 2017 RO 2,385,663 (3,708,732) 774,067 470,516 819,371   4,449,617 798,013 526,524 2,084,359   (299,836) (118,354) (11,125,109) (20,956,640) (27,763,819) (33,983,061) (1,894,910) 9,677,211 81,413,179 1,937,798 20,809,757 (128,918) (45,498,564) (23,097,890) (54,300,934) (26,498,214) (3,423,261) 5,574,777 129,099,474 4,707,987 48,767,582 22,445,669 34,902,203 (32,139,826) (739,661) (184,714) (752,963) (33,064,201) Net decrese in cash and cash equivalents 21,692,706 1,838,002 Cash and cash equivalents at the beginning of the year 43,034,085 41,196,083 64,726,791 43,034,085 6 7 13 14 Net cash used in investing activities 29 The attached notes 112 to 171 form part of these Financial Statements. The independent auditors’ report is annexed on page 107 110 Share capital RO 100,000,000 100,000,000 - Legal reserve RO 289,969 289,969 200,712 Fair value reserve RO (24,254) (173,257) (197,511) - Impairment reserve RO 266,884 266,884 1,697,244 Restructured financing reserve RO 266,884 (266,884) - - - 162,037 (2,123,781) - - (304,107) 2,007,123 - 162,037 (304,107) 2,007,123 (2,123,781) Balance at 31 December 2018 100,000,000 490,681 (2,159,255) 1,964,128 - (22,359,288) 77,936,266 Balance at 1 January 2017 Loss for the year Investment fair value reserve Transfer to restructured financing reserve Transfer to legal reserve 100,000,000 - 289,969 - (64,393) 40,139 - - 266,884 - (18,981,331) (2,995,947) (266,884) - 81,244,245 (2,995,947) 40,139 - Balance at 31 December 2017 100,000,000 289,969 (24,254)   266,884 (22,244,162) 78,288,437 Balance at 1 January 2018 Changes on initial application of IFRS 9 Restated balance at 1 January 2018 Transfer to reserve Reversal of fair value reserve on disposal of investments Realized loss on investments Profit for the year Net change in fair value Accumulated Total owners’ losses equity RO RO (22,244,162) 78,288,437 79,814 (93,443) (22,164,348) 78,194,994 (1,897,956) - STATEMENT OF SOURCES AND USES OF CHARITY FUND For the year ended 31 December 2018 17,740,364 (18,095,000) (279,259) (119,068) Cash and cash equivalents at end of the year Reserves ANNUAL REPORT 2018 | www.alizzislamic.com 2018 RO 2017 RO Sources of charity funds Undistributed charity funds as at 1 January Donation from customers due to late payment Forfeiture of non-shari’a compliant income Total sources of funds 26,759 46,966 29,138 102,863 17,954 40,812 16,719 75,485 Uses of charity funds Philanthropic societies Total uses of funds during the year Undistributed charity funds as at 31 December (80,101) (80,101) 22,762 (48,726) (48,726) 26,759 The attached notes 112 to 171 form part of these Financial Statements. The independent auditors’ report is annexed on page 107 ANNUAL REPORT 2018 | www.alizzislamic.com 111
57. NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS As at 31 December 2018 As at 31 December 2018 1 . INCORPORATION AND PRINCIPAL ACTIVITIES 2. BASIS OF PREPARATION (continued) Alizz Islamic Bank SAOG (“the Bank”) is incorporated in the Sultanate of Oman (“Oman”), as a public joint stock company to carry out banking activities in accordance with the principles of Islamic Shari’a. The Central Bank of Oman (“CBO”) has issued an islamic banking license to the Bank on 5 September 2013 and the Bank commenced its operations on 30 September 2013. The Bank has ten branches as of 31 December 2018 (31 December 2017: ten branches). At 31 December 2018, the Bank had 299 employees ( 2017: 286 employees) The Bank provides banking services which includes accepting customer deposits and providing financing through various Islamic instruments such as Murabaha, Wakala, Diminishing Musharka, Ijara and other products as defined in the Central Bank of Oman’s Islamic Banking Regulatory Framework. The Bank’s registered office is P.O.Box 753, PC 112, Ruwi, Muscat and its shares are listed on Muscat Securities Market. The Bank is regulated by the CBO and its Shari’a Supervisory Board is entrusted to ensure the Bank’s adherence to Shari’a in carrying out its activities. The Bank has commenced commercial operations on 30 September 2013 and as expected has reported loss during the initial years. As a result the Bank’s minimum capital is below RO 100 million, which is a CBO requirement. The Bank has developed an appropriate strategy to comply with the minimum prescribed capital requirement and remains above the minimum capital adequacy ratio prescribed by CBO (refer note 31). 2 BASIS OF PREPARATION 2.1 Statement of Compliance In accordance with the requirements of Section 1.2 of Title 3 of the Islamic Banking Regulatory Framework (“IBRF”) issued by CBO, the financial statements have been prepared in accordance with Shari’a Rules and Principles as determined by the Shari’a Supervisory Board of the Bank and the Financial Accounting Standards (“FAS”) issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (“AAOIFI”) and other applicable regulations of CBO (refer to note 31 for minimum capital requirements). In accordance with requirements of AAOIFI, matters that are not covered by FAS, the Bank uses guidance from the relevant International Financial Reporting Standards (“IFRS”). Accordingly the financial statements are prepared in accordance with FAS issued by AAOIFI, and is in compliance with the relevant requirements of the Commercial Companies Law of 1974, as amended and the Capital Market Authority. The significant accounting policies are set out in note 3 to the financial statements. Statement of restricted investment accountholders, statement of Qard fund and Zakah are not presented as these are not applicable. 2.2 Basis of Measurement The financial statements are prepared under the historical cost convention except for financial assets which are classified as fair value through other comprehensive income which have been measured at fair value. 2.3 Functional and Presentation Currency The financial statements have been presented in Rial Omani and rounded to the nearest Rial Omani, which is the functional and presentation currency of the Bank. One Rial Omani is equivalent to one thousand Baizas. 112 ANNUAL REPORT 2018 | www.alizzislamic.com 2.4 Use of Estimates and Judgments The preparation of financial statements requires management to make judgments, estimates and assumptions that affect the application of accounting policies and reported amounts of assets and liabilities, income and expenses. The estimates and assumptions are based on various factors including expectation of future events that are believed by the Bank to be reasonable under the circumstances. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. Significant items of financial statements where judgment is exercised are as follows Applicable to year 2018 and 2017 : i) Going concern 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 and will be able to comply with applicable regulatory requirements. Furthermore, management is not aware of any material uncertainties that may cast significant doubt upon the Bank’s ability to continue as a going concern. Therefore, the financial statements have been prepared on the going concern basis. ii) Liquidity The Bank manages its liquidity through consideration of the maturity profile of its assets, liabilities and investment accounts which is set out in the liquidity risk disclosures in note 31(ii). This requires judgment when determining the maturity of assets and liabilities with no specific maturities. iii) Taxation Uncertainties exist with respect to the interpretation of tax regulations and the amount and timing of future taxable income. Further the taxation rules for the Islamic banking are yet to be finalised by the Ministry of Finance. Given the wide range of business relationships and nature of existing contractual agreements, differences arising between the actual results and the assumptions made, or future changes to such assumptions, could necessitate future adjustments to tax income and expense already recorded. The Bank establishes provisions, based on reasonable estimates, for possible consequences of finalisation of tax assessments. The amount of such provision is based on various factors, such as experience of other banks and differing interpretations of tax regulations by the Bank and the responsible tax authority. Deferred tax assets are recognised for all unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilised. Significant management judgment is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and level of future taxable profits together with future tax planning strategies. iv) Depreciation and amortisation In making estimates of the depreciation/amortisation method, the management uses method which reflects the pattern in which economic benefits are expected to be consumed by the Bank. The method applied is reviewed at each financial year end and if there is a change in the expected pattern of consumption of the future economic benefits embodied in the assets, the method would be changed to reflect the change in pattern. ANNUAL REPORT 2018 | www.alizzislamic.com 113
58. NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS As at 31 December 2018 As at 31 December 2018 2 . BASIS OF PREPARATION (continued) 3. SIGNIFICANT ACCCOUNTING POLICIES (continued) 2.4 Use of Estimates and Judgments (continued) 3.3 Murabaha Receivables Applicable to year 2018:v) Financial asset classification Assessment of the business model within which the assets are held and assessment of whether the contractual terms of the financial asset are solely payments of principal and return on the principal amount outstanding. vi) Measurement of the expected credit loss (ECL) allowance The measurement of the expected credit loss allowance for financial assets measured at amortised cost and Fair Value Through Other Comprehensive Income (FVOCI) is an area that requires the use of complex models and significant assumptions about future economic conditions and credit behaviour (e.g the likelihood of customers defaulting and the resulting losses). Explanation of the inputs, assumptions and estimation techniques used in measuring ECL is further detailed in note 3.30, which also sets out key sensitivities of the ECL to changes in these elements. A number of significant judgements are also required in applying the accounting requirements for measuring ECL, such as: (a) Determining criteria for significant increase in credit risk; (b) Choosing appropriate models and assumptions for measurement of ECL; (c) Establishing the number and relative weightings of forward looking scenarios for each type of product/market and the associated ECL; and (d) Establishing groups of similar financial assets for the purposes of measuring ECL. 3. SIGNIFICANT ACCCOUNTING POLICIES These financial statements have been prepared using accounting policies, which are consistent with those used in the preparation of the annual financial statements for the year ended 31 December 2017 except for the adoption of new standards as set out in Note 3.30-changes in accounting policies. 3.1 Cash and Cash Equivalents Cash and cash equivalents as referred to in the statement of cash flows comprise cash in hand, balances with Central Bank (excluding mandatory reserves) and due from/to banks and financial institutions with an original maturity of ninety days or less. Murabaha receivables are stated net of deferred profits, any amounts written off and provision for impaired debts, if any. Murabaha are sales on deferred payment terms. The Bank arranges a murabaha transaction by buying a commodity (which represents the object of the murabaha) and then resells this commodity to the customer (beneficiary) after computing a margin of profit over cost. The sale price (cost plus the profit margin) is repaid in installments by the customer over the agreed period. Promise made in the murabaha by the purchase orderer is obligatory. 3.4 Investment in Ijarah Muntahia Bittamleek These are initially recorded at cost including initial direct costs. Ijarah muntahia bittamleek is a lease whereby the legal title of the leased asset passes to the lessee at the end of the Ijarah (lease term), provided that all Ijarah installments are settled. Depreciation is calculated on Ijarah muntahia bittamleek assets at the rates calculated to write off the cost of each asset over its lease term in a systematic manner. Ijarah income receivables represent outstanding rentals at the end of the year less any provision for doubtful amount. The ijarah income receivable is classified under Profit Receivable from Financing and Investing Activities. 3.5 Wakala bil Istithmar An agreement whereby the principal provides a certain sum of money (Wakala Capital) to an agent, who invests it according to specific conditions in return for a certain fee (a lump sum of money or a percentage of the Wakala Capital). The arrangement may also include agreement on an expected profit rate for principal and incentive fee for Wakeel for performance beyond the agreed expected profit The principal would be responsible to bear any loss of Wakala Capital unless it is due to the negligence of Wakala contractual terms on the part of Wakil. It is stated at cost less impairment, if any. The Bank accepts money from the customer on Wakala bil Isthithmar basis and also invests with other counterparties in accordance with the same arrangements. 3.6 Diminishing Musharaka Diminishing Musharaka is a contract, based on Shirkat-ul-Mulk, between the Bank and a customer for joint ownership of a fixed asset (e.g. house, land, plant or machinery). The Bank divides its share in the fixed asset into units and gradually transfers the ownership of these units to a customer through sale (at carrying value).The use of Bank’s share by the customer is based on the commitment of the customer to bear the cost of maintenance and takaful insurance for the bank’s share in the Musahraka asset. Diminishing Musharaka is stated initially at historical cost of consideration given, less any impairment. 3.2 Due from Banks Due from banks and financial institutions comprise current accounts and interbank Wakala bil Istithmar. Wakala bil Istithmar are stated at Wakala Capital plus accrued expected profit, less provision for impairment, if any. 114 ANNUAL REPORT 2018 | www.alizzislamic.com ANNUAL REPORT 2018 | www.alizzislamic.com 115
59. NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS As at 31 December 2018 As at 31 December 2018 3 . SIGNIFICANT ACCCOUNTING POLICIES (continued) 3. SIGNIFICANT ACCCOUNTING POLICIES (continued) 3.7 Investment Securities 3.8 Other Financial Fssets and Liabilities Policies applicable from 1 January 2018 :Investments which are recognised in the statement of financial position includes •• Financial assets at amortised cost; •• Financial assets at Fair value through comprehensive income (FVOCI); and •• Financial assets at Fair value through profit or loss (FVTPL); 3.8.1 Recognition and Initial Measurement For debt securities measured at FVOCI, gain and losses are recognised in ‘Fair value reserve’ and when it is derecognised, the cumulative gain or loss previously recognised in fair value reserve is reclassified from equity to profit or loss. Policy applicable before 1 January 2018 :Investment securities comprise investments in debt-type and equity-type financial instruments. Investments in instruments are classified into the following categories: •• at amortised cost •• at fair value through equity •• at fair value through statement of income. A debt-type investment is classified and measured at amortised cost only if the instrument is managed on a contractual yield basis or the instrument is not held for trading and has not been designated at fair value through the statement of income or through equity. Investments which have fixed or determinable payments and where the Bank has both the intent and ability to hold to maturity are classified as debt type instrument carried at amortised cost. Such investments are carried at amortised cost, less provision for impairment in value. Amortised cost is calculated by taking into account any premium or discount on acquisition. Any gain or loss on such type of instruments is recognised in the statement of income, when the instruments are de-recognised or impaired. Instruments at fair value through statement of income This includes all equity and debt type instruments held for the purpose of generating profits from the short term market fluctuations. These are subsequently re-measured at fair value. All related realised and unrealised gains or losses are included in the statement of income. Instruments at fair value through equity This includes all equity and debt type instruments that are not fair valued through statement of income or debt type instruments not held at amortised cost. Subsequent to acquisition, investments designated at fair value through equity are re-measured at fair value with unrealised gains or losses recognised proportionately in owners’ equity and equity of investment accountholders until the investment is derecognised or determined to be impaired at which time the cumulative gain or loss previously recorded in owners’ equity or equity of investment accountholders is recognised in the statement of income. Impairment losses on instruments carried at fair value through equity are not reversed through the statement of income and increases in their fair value after impairment are recognised directly in owners’ equity except incase of disposal. 116 ANNUAL REPORT 2018 | www.alizzislamic.com The Bank initially recognises due from banks, financing assets, customer current accounts, due to banks, and financing liabilities on the date at which they are originated. All other financial assets and liabilities are initially recognised on the trade date at which the Bank becomes a party to the contractual provisions of the instrument. A financial asset or financial liability is measured initially at fair value plus, for an item not at fair value through income statement, transaction costs that are directly attributable to its acquisition or issue. 3.8.2 De-recognition of Financial Assets and Financial Liabilities A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognised when: - the right to receive cash flows from the asset has expired; - the Bank retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a ‘pass through’ arrangement; or - the Bank has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. A financial liability is derecognised when the obligation specified in the contract is discharged, cancelled or expires. 3.8.3 Offsetting Financial assets and liabilities are offset only when there is a legal and Shari’a enforceable right to set off the recognised amounts and the Bank intends to either settle on a net basis, or to realise the asset and settle the liability simultaneously. 3.9 Property and Equipment 3.9.1 Recognition and Measurement Property and equipment are measured at cost less accumulated depreciation and impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the assets to a working condition for their intended use, the costs of dismantling and removing the assets and restoring the site on which they are located and capitalised financing costs. When parts of an item of property and equipment have different useful lives, they are accounted for as separate items (major components). The gain or loss on disposal of an item of property and equipment is determined by comparing the proceeds from disposal with the carrying amount of the item of property and equipment, and is recognised in other income/other expenses in statement of income. ANNUAL REPORT 2018 | www.alizzislamic.com 117
60. NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS As at 31 December 2018 As at 31 December 2018 3 . SIGNIFICANT ACCCOUNTING POLICIES (continued) 3. SIGNIFICANT ACCCOUNTING POLICIES (continued) 3.9 Property and Equipment (continued) 3.12 Equity of Unrestricted Investment Accountholders (continued) 3.9.2 Subsequent Costs The cost of replacing a component of property and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Bank and its cost can be measured reliably. The carrying amount of the replaced part is derecognised. The costs of the day-to-day servicing of property and equipment are recognised in statement of income as incurred. Depreciation is recognised in statement of income on a straight-line basis over the estimated useful lives of each part of an item of property and equipment since this closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset and is based on cost of the asset less its estimated residual value. The estimated useful lives are as follows: Computer hardware 5-10 years Leasehold improvements 10 years Furniture and fixture 5 years Useful lives and residual values are reassessed at each reporting date and adjusted prospectively, if appropriate. Item of property and equipment is derecognised when disposed off, replaced or when no future economic benefits are expected from its use. 3.10Intangible Assets Intangible assets (computer software) are amortised over their estimated useful life of 5-10 years, and carried net of accumulated amortisation and impairment losses. For intangible assets with indefinite useful life, impairment in value is reviewed at the reporting date and any impairment in their value is recorded in statement of income. 3.11Due to Banks and Financial Institutions Due to banks and financial institutions comprise of Wakala bil Istithmar. Wakala bil Istithmar are initially recognised at principle, being the fair value of consideration received plus expected accured profit. Subsequently, they are at carrying value. 3.12Equity of Unrestricted Investment Accountholders Equity of investment accountholders are funds held by the Bank in unrestricted investment accounts, which it can invest at its own discretion. Equity of unrestricted investment accountholders comprises of deposits obtained on the basis of Mudaraba and includes accrued profit, profit equalisation reserve and investment risk reserve. The investment account holder authorises the Bank to invest the account holders’ funds in a manner which the Bank deems appropriate without laying down any restrictions as to where, how and for what purpose the funds should be invested. Equity of unrestricted investment accountholders is invested through islamic financing contracts and the income attributable to customers is allocated to investment accounts after setting aside provisions, reserves (Profit equalization reserve and Investment risk reserve) and deducting the Bank’s share of income as a Mudarib. The allocation of income is determined by the management of the Bank within the allowed profit sharing limits as per the terms and conditions of the investment accounts. 118 ANNUAL REPORT 2018 | www.alizzislamic.com Administrative expenses incurred in connection with the management of the funds are borne directly by the Bank and are not charged separately to investment accounts. Investment accounts are carried at their book values and include amounts retained towards profit equalisation and investment risk reserves, if any. Profit equalisation reserve is the amount appropriated by the Bank out of the Mudaraba income, before allocating the Mudarib share, in order to maintain a certain level of return to the deposit holders on the investments. Investment risk reserve is the amount appropriated by the Bank out of the income of investment account holders, after allocating the Mudarib share, in order to cater against future losses for investment account holders. Creation of any of these reserves results in an increase in the liability towards the pool of unrestricted investment accounts. 3.13 Impairment of Non-Financial Assets The carrying amounts of the Bank’s non-financial assets, other than deferred tax assets (where applicable) are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. For goodwill and intangible assets that have indefinite useful lives or that are not yet available for use, the recoverable amount is estimated each year at the same time. An impairment loss is recognised if the carrying amount of an asset or its Cash Generating Unit (“CGU”) exceeds its estimated recoverable amount. The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or CGU. Subject to an operating segment ceiling test, for the purposes of goodwill impairment testing, CGUs to which goodwill has been allocated are aggregated so that the level at which impairment testing is performed reflects the lowest level at which goodwill is monitored for internal reporting purposes. Goodwill acquired in a business combination is allocated to group of CGUs that are expected to benefit from the synergies of the combination. The Bank’s corporate assets do not generate separate cash inflows and are utilised by more than one CGU. Corporate assets are allocated to CGUs on a reasonable and consistent basis and tested for impairment as part of the testing of the CGU to which the corporate asset is allocated. Impairment losses are recognised in statement of income. Impairment losses recognised in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the CGU (group of CGUs) and then to reduce the carrying amount of the other assets in the CGU (group of CGUs) on a pro rata basis. An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. ANNUAL REPORT 2018 | www.alizzislamic.com 119
61. NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS As at 31 December 2018 As at 31 December 2018 3 . SIGNIFICANT ACCCOUNTING POLICIES (continued) 3. SIGNIFICANT ACCCOUNTING POLICIES (continued) 3.14 Revenue Recognition 3.15 Profit on amounts due from banks and financial institutions Profit on amounts due from banks and financial institutions is recognised on a time apportioned basis over the period of the contract based on the Wakala Capital outstanding and the expected profit agreed with counterparties. Expected profit on these is accrued on a time-apportioned basis over the period of the contract based on the wakala capital. 3.16 Current Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date and any adjustments to tax payable in respect of previous years. Income tax is recognised in the statement of income except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Deferred Deferred tax assets or liabilities are calculated using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantially enacted at the reporting date. The carrying amount of deferred income tax assets/liabilities is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. Ijarah muntahia bittamleek Ijarah income is recognised on a time apportioned basis over the Ijarah term and is stated net of depreciation and impairment. In case of Forward Ijarah advance rental (profit) during the construction period will be accounted for on a time-apportioned basis over the construction period on account of rentals. These profit amounts are received either during the construction period as advance rental payment or with the first rental payment after the commencement of the lease. Income related to non performing Ijarah muntahia bittamleek accounts and Ijarah installments that are above 90 days is excluded from the statement of income from the day they become overdue. 3.17 Fees and commission income Fees and commission income including structuring fees is recognised upon rendering of services. 3.18 Provisions Provisions are recognised when the Bank has a present obligation (legal or constructive) arising from a past event and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of obligation. Income from investments Income from investments is recognised when earned. 120 Fair Values of Financial Assets Fair value is determined for each financial asset individually in accordance with the valuation policies set out below: (i) For quoted investments that are traded in the active market, fair value is determined by reference to the quoted market bid prices prevailing on the reporting date. (ii) For unquoted investments, fair value is determined by reference to recent significant buy or sell transactions with third parties that are either completed or are in progress. Where no recent significant transactions have been completed or are in progress, fair value is determined by reference to the current market value of similar investments. For others, the fair value is based on the net present value of estimated future cash flows, or other relevant valuation methods. (iii) For investments that have fixed or determinable cash flows, fair value is based on the net present value of estimated future cash flows determined by the Bank using current profit rates for investments with similar terms and risk characteristics. (iv) Investments which cannot be remeasured to fair value using any of the above techniques are carried at cost, less provision for impairment. Diminishing Musharaka Income from Diminishing Musharaka is recognised when Bank’s right to receive payment is established once the bank sells its shares of the Musharaka asset to the customer. Income related to non-performing customers is excluded from statement of income. Dividends Dividends are recognised when the right to receive payment is established. Taxation Tax expense comprises current and deferred tax. Taxation is provided in accordance with the Omani fiscal regulations relating to banks. Murabaha receivables Profit on Murabaha receivables is recognised when the income is both contractually determinable and quantifiable at the commencement of the transaction. Such income is recognised by proportionately allocating the attributable profits over the deferred period whereby each financial period carries its portion of profits irrespective of when cash is received. Income related to non performing financing installments that are above 90 days is excluded from the statement of income from the day they become overdue. Wakala bil Istithmar Income from Wakala bil Istithmar placements is recognised on a time apportioned basis so as to yield a expected rate of return based on the wakala capital. Bank’s share of income from equity of unrestricted investment accountholders (as Rabalmal and Mudarib) Income is allocated proportionately between equity of unrestricted investment accountholders and shareholders on the basis of their respective investment in the pool before allocation of the Mudarib share of profit. The Bank’s share as a Mudarib for managing the equity of unrestricted investment accountholders is accrued based on the terms and conditions of the related Mudaraba agreements. Expected Profit on Wakala bil Istithmar (banks and non banks) ANNUAL REPORT 2018 | www.alizzislamic.com ANNUAL REPORT 2018 | www.alizzislamic.com 121
62. NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS As at 31 December 2018 As at 31 December 2018 3 . SIGNIFICANT ACCCOUNTING POLICIES (continued) 3. SIGNIFICANT ACCCOUNTING POLICIES (continued) 3.19 Earnings Prohibited by Shari’a 3.23 The Bank is committed to avoid recognising any income generated from non- Shari’a compliant sources. Accordingly, income from nonShari’a compliant sources is credited to a charity fund where the Bank uses these funds for social welfare activities upon approval of Shari’a Supervisory Board. 3.20 Foreign Currencies Investments, financing and receivables that are jointly owned by the Bank and the equity of unrestricted investment accountholders are classified under the caption “jointly financed” in the financial statements. Investments, financing and receivables that are financed solely by the Bank are classified under “self financed”. 3.24 Transactions in foreign currencies are translated into Rial Omani at exchange rates ruling at the value dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated into Rial Omani at exchange rates ruling at the reporting date. The foreign currency gain or loss on monetary items is the difference between amortised costs in the Rial Omani at the beginning of the period, adjusted for effective profit and payments during the period and the amortised costs in foreign currency translated at the exchange rate at the end of the period. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of income. Earnings Per Share (EPS) The Bank presents basic and diluted earnings per share data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to owners of the Bank by the weighted average number of ordinary shares outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to owners and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares. 3.22 Employee Benefits End of service benefits are accrued with the terms of employment of the Bank’s employees at the reporting date, having regard to the requirements of the Omani Labour Law 2003 as amended. Employees’ entitlements to annual leave and leave passage are recognised when they accrue to employees and an accrual is made for the estimated liability arising as a result of such services upto the reporting date. These accruals are recorded in other liabilities. With respect to its national employees, the Bank makes contributions to the Omani Government Social Security Scheme under Royal Decree 72/91 calculated as a percentage of the employees’ salaries. The Bank’s obligations are limited to these contributions. The Bank’s obligation in respect of non-Omani terminal benefits, under an unfunded defined benefits retirement plan, is the amount of future benefit that such employees have earned in return for their service in the current and prior periods. Profit Distribution on Investment Accountholders The Bank abides by the following profit distribution methodology for distributing its profits to Investment accountholders (IAH). Total income from Islamic financing and placement activities in respect of the common pool is calculated using the accounting practices in accordance with the Shari’a standards as well as the Accounting Standards published by Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). The net profit of the pool is calculated as income from financing, investments & placements less collective and specific provisions. Net income of the Mudaraba and Wakala pool is allocated between Shareholders, Wakala customers and IAH according to their respective contribution and tenor of their investments in the common pool. All administrative and general expense (including staff expenses) are borne solely by the shareholders from the date of commencement of the Bank’s operation. Fees and charges pertaining to letters of credit, letters of guarantee, general banking and allied services are Bank’s income and such income is not included in the common pool. Allocation of profit between shareholders and IAH is set at 60:40, however Bank at its discretion lowers percentage of Mudarib share to enhance the share of profit of investment holders in the form of hiba. Depreciation expenses relating to the fixed assets owned by the Bank shall not be charged to any of the above mentioned pool and shall be charged to the shareholders. Undesired income relating to the Shari’a repugnant transactions shall be deducted from their respective pool. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are translated to Rial Omani at the exchange rate at the date that the fair value was determined. Translation differences on non-monetary financial assets and liabilities such as Equity-type instruments at fair value through statement of income are recognised in profit or loss as part of the fair value gain or loss. Translation differences on non-monetary financial assets, such as Equity-type instruments at fair value through equity are included in statement of changes in equity. 3.21 Joint and Self Financed 3.25 Zakah Zakah is calculated in accordance with IFRS 9 Zakah using the net assets method. The Bank will calculate the “Zakah base” based on audited financial statements and after approval from Shari’a Supervisory Board, notify the Shareholders of their pro-rata share of the Zakah payable annually. Payment of Zakah on the Investment Accounts and other Accounts (Depositis) is the responsibility of the accountholders. 3.26 Shari’a Supervisory Board The Bank’s business activities are subject to the supervision of a Shari’a supervisory board consisting of members appointed by the general assembly of shareholders. 3.27 Directors’ Remuneration The Board of Directors’ remuneration is accrued within the limits specified by the Capital Market Authority and the requirements of the Commercial Companies Law 1974 of the Sultanate of Oman, as amended. 3.28 Dividend on Ordinary Shares Dividend on ordinary shares is recognised as liability and deducted from equity in the period when it is approved by the Bank’s shareholders. Interim dividend is deducted from equity when they are paid. 122 ANNUAL REPORT 2018 | www.alizzislamic.com ANNUAL REPORT 2018 | www.alizzislamic.com 123
63. NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS As at 31 December 2018 As at 31 December 2018 3 . SIGNIFICANT ACCCOUNTING POLICIES (continued) 3. SIGNIFICANT ACCCOUNTING POLICIES (continued) 3.29 Segment Reporting 3.30 An operating segment is the component of the Bank that engages in business activities from which it may earn revenues and incur expenses including revenue and expenses that relate to transactions with any of the Bank’s other components whose operating results are reviewed regularly by the management to make decisions about the resources allocated to each segment and assesses its performance and for which discrete financial information is available. The Bank’s primary format for reporting segmental information is business segment, based upon management internal reporting structure. The Bank’s main business segments comprise of retail, corporate and treasury. 3.30 Changes in Accounting Policies 3.30.1 International Financial Reporting Standard 9- Financial Instruments (IFRS 9) The Bank has adopted IFRS 9 issued by International Accounting Standards Board (IASB) effective from 01 January 2018. This required the Bank to change certain accounting policies and adjust certain balances reported earlier. As allowed under transitional provisions of IFRS 9, the Bank did not restate comparative periods and changes were affected through adjustment to the opening balances of accumulated losses and reserves as at 01 January 2018. Accordingly, the information presented in the financial statements 31 December 2017 in regards to transition impact estimates due to implementation of IFRS 9 does not reflect the requirements of IFRS 9 and therefore is not comparable to the transition impact presented in 31 December 2018. Classification and Measurement of financial instruments The classification and measurement is based on the business model for managing the financial asset and contractual cash flow characteristics associated with it. IFRS 9 contains three principal classification categories for financial assets: measured at amortised cost, Fair value through other comprehensive income (FVOCI) and Fair value through profit and loss (FVTPL). - On initial recognition, a financial asset is classified as measured at amortised cost, FVOCI or FVTPL. A financial asset is measured at amortised cost if it meets both of the following conditions and is not designated as at FVTPL; - The asset is held within business model whose objective is to hold assets to collect contractual cash flows: and - The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and profit on the principal amount outstanding. - A debt type instruments e.g. Sukuk is measured at FVOCI only if it meets both of the following conditions and is not designated as FVTPL; - The asset is held within 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 profit. 124 ANNUAL REPORT 2018 | www.alizzislamic.com Changes in Accounting Policies (continued) 3.30.1 International Financial Reporting Standard 9- Financial Instruments (IFRS 9) (continued) For an equity instrument that is not held for trading, the Bank has elected at initial recognition to irrevocably designate those instruments under FVOCI. This election is made on an investment on investment basis. All other financial assets are classified as measured at FVTPL. Under this category, fair value changes are recognised in other comprehensive income (OCI) while dividends are recognised in profit or loss. On disposal of the investment the capital gain/loss is required to remain in OCI and is not transferred to profit or loss. All other financial assets are classified as measured at FVTPL. 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 FVTPL if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise. Business model assessment 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: - 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 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 . Financial assets that are held for trading or managed and whose performance is evaluated on a fair value basis are measured at FVTPL because they are neither held to collect contractual cash flows nor held both to collect contractual cash flows and to sell financial assets. Reclassifications 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. ANNUAL REPORT 2018 | www.alizzislamic.com 125
64. NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS As at 31 December 2018 As at 31 December 2018 3 . SIGNIFICANT ACCCOUNTING POLICIES (continued) 3. SIGNIFICANT ACCCOUNTING POLICIES (continued) 3.30 Changes in Accounting Policies (continued) 3.30.1 International Financial Reporting Standard 9- Financial Instruments (IFRS 9) (continued) Assessment whether contractual cash flows are solely payments of principal and profit For the purposes of this assessment, ‘principal’ is defined as the fair value of the financial asset on initial recognition. ‘Profit’ is defined as consideration for the time value of money and for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic financing risks and costs (e.g. liquidity risk and administrative costs), as well as profit margin. In assessing whether the contractual cash flows are solely payments of principal and profit, 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. Modifications of financial assets 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. Impairment Policy applicable from 1 January 2018 :The Bank recognises impairment provision for ECL on the following financial instruments that are not measured at FVTPL: - financial assets that are debt-type instruments; - financing receivables; - financial guarantee contracts issued; and - financing commitments issued. No impairment loss is recognised on equity investments. The Bank measures impairment provision at an amount equal to lifetime ECL, except for the following, for which they are measured as 12-month ECL: - debt investment securities that are determined to have low credit risk at the reporting date; and - other financial instruments (other than lease receivables) on which credit risk has not increased significantly since their initial recognition Impairment provision for lease receivables are always measured at an amount equal to lifetime ECL. 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. 126 ANNUAL REPORT 2018 | www.alizzislamic.com 3.30 Changes in Accounting Policies (continued) 3.30.1 International Financial Reporting Standard 9- Financial Instruments (IFRS 9) (continued) Policy applicable before 1 January 2018 :The Bank assesses at each reporting date whether there is objective evidence that an asset is impaired. Objective evidence that financial assets (including equity-type investments) are impaired can include default or delinquency by a counterparty/ investee, restructuring of financing facility by the Bank on terms that the Bank would not otherwise consider, indications that a counterparty or issuer will enter bankruptcy, the disappearance of an active market for a security, or other observable data relating to a group of assets such as adverse changes in the payment status of counterparty or issuers or economic conditions that correlate with defaults in the Bank. In addition, for an investment in equity-type instruments, a significant or prolonged decline in its fair value below its cost is an objective evidence of impairment. Investments classified as fair value through equity In the case of investments classified as fair value through equity and measured at fair value, a significant or prolonged decline in the fair value of an investment below its cost is considered in determining whether the investments are impaired. If any such evidence exists for investments classified as fair value through equity, the cumulative loss previously recognised in the statement of changes in owner’s equity is removed from equity and recognised in the statement of income. Impairment losses recognised in the statement of income on these investments are subsequently reversed through equity. The Bank considers significant decline in the value of investment when the value of investment declines by 35% of its initial cost and prolonged if continuous decline in value for more than 12 months as per requirement of Central Bank of Oman. Financial assets carried at amortised cost (including investment in debt-type instruments classified as amortised cost) For financial assets carried at amortised cost, impairment is measured as the difference between the carrying amount of the financial assets and the present value of estimated cash flows discounted at the assets’ original effective profit rate. Losses are recognised in statement of income and reflected in an allowance account. When a subsequent event causes the amount of impairment loss to decrease, the impairment loss is reversed through the statement of income, to the extent of previously recognised impairment losses. The Bank considers evidence of impairment for financial assets carried at amortised cost at both a specific asset and collective level as per requirement of Central Bank of Oman. All individually significant financial assets are assessed for specific impairment. All individually significant financial assets found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Financial assets that are not individually significant are collectively assessed for impairment by grouping assets together with similar risk characteristics. Measurement of ECL IFRS 9 introduces a new expected credit loss (ECL) impairment model for all financial assets and certain off balance sheet commitments and guarantees. The new ECL model results in an provision for credit losses being recorded on financial assets regardless of whether there has been an actual loss event. This differs from the previous approach where the provision was recorded on performing financing is designed to capture only losses that have been incurred whether or not they have been specifically identified. ECL reflects an unbiased, probability-weighted outcome as opposed to the single best estimate allowed under the previous approach. The probability-weighted outcome considers multiple scenarios based on reasonable and supportable forecasts. ANNUAL REPORT 2018 | www.alizzislamic.com 127
65. NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS As at 31 December 2018 As at 31 December 2018 3 . SIGNIFICANT ACCCOUNTING POLICIES (continued) 3. SIGNIFICANT ACCCOUNTING POLICIES (continued) 3.30 Changes in Accounting Policies (continued) 3.30.1 International Financial Reporting Standard 9- Financial Instruments (IFRS 9) (continued) The Bank’s approach leveraged the existing regulatory capital models and processes for Bank’s financing portfolios that use the existing Internal Rating based and behavioral credit models. IFRS 9 considers the calculation of ECL by multiplying the Probability of default (PD), Loss Given Default (LGD) and Exposure at Default (EAD). Impairment model uses a three stage approach based on the extent of credit deterioration since origination: Stage 1: 12-month ECL applies to all financial assets that have not experienced a significant increase in credit risk (SICR) since origination and are not credit impaired. The ECL will be computed using a 12-month PD that represents the probability of default occurring over the next 12 months. For those assets with a remaining maturity of less than 12 months, a PD is used that corresponds to remaining maturity. Stage 2: When a financial asset experiences a SICR subsequent to origination but is not credit impaired, it is considered to be in Stage 2. This requires the computation of ECL based on lifetime PD that represents the probability of default occurring over the remaining estimated life of the financial asset. Stage 3: Financial assets that have an objective evidence of impairment will be included in this stage. Similar to Stage 2, the provision for credit losses will continue to capture the lifetime expected credit losses. The key inputs into the measurement of ECL are the term structure of the following variables: - probability of default (PD); - loss given default (LGD); - exposure at default (EAD) These parameters are generally derived from internally developed statistical models and other historical data. They are adjusted to reflect forward-looking information. Details of these statistical parameters/inputs are as follows: PD – The probability of default is an estimate of the likelihood of default over a given time horizon. EAD – The exposure at default is an estimate of the exposure at a future default date, taking into account expected changes in the exposure after the reporting date. LGD – The loss given default is an estimate of the loss arising in the case where a default occurs at a given time. It is based on the difference between the contractual cash flows due and those that the lender would expect to receive, including from the realization of any collateral. It is usually expressed as a percentage of the EAD. 128 ANNUAL REPORT 2018 | www.alizzislamic.com 3.30 Changes in Accounting Policies (continued) 3.30.1 International Financial Reporting Standard 9- Financial Instruments (IFRS 9) (continued) Assessment of Significant Increase in Credit Risk The expected credit loss model requires the recognition of credit losses based on 12 months of expected losses for performing financing and the recognition of lifetime expected losses on financing that have experienced a significant increase in credit risk since origination. The determination of a significant increase in credit risk takes into account of many different macroeconomic factors and will vary by product and risk segment. The main factors considered in making this determination are relative changes in probability- weighted probability of default since origination and certain criteria such as 30 day past due and watch list status. The assessment of a significant increase in credit risk will require experienced credit judgement.The Bank also considers qualitative factors as per the CBO guidelines [BM 114, para 12(d) ] for assessing the significant increase in credit risk to corporate customers with limit of OMR 500,000 or more. Macroeconomic factors In its models, the Bank relies on a broad range of forward looking information as economic inputs, such as: GDP growth, unemployment rates and oil prices. The inputs and models used for calculating expected credit losses may not always capture all characteristics of the market at the date of the financial statements. To reflect this, qualitative adjustments or overlays are made as temporary adjustments using expert credit judgement. Forward Looking Information (FLI) and Multiple Scenarios The Bank’s ECL provision methodology, requires the Bank to use its experienced credit judgement to incorporate the estimated impact of factors not captured in the modelled ECL results, in all reporting periods. Presentation of provision for ECL in the statement of financial position Impairment provision 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; - financing commitments and financial guarantee contracts: generally, as a provision; - where a financial instrument includes both a drawn and an undrawn component, and the Bank cannot identify the ECL on the financing commitment component separately from those on the drawn component: the Bank presents a combined impairment provision for both components. The combined amount is presented as a deduction from the gross carrying amount of the drawn component. Any excess of the impairment over the gross amount of the drawn component is presented as a provision; and - debt instruments measured at FVOCI: impairment loss has been recognised in the statement of financial position and the same is disclosed and is recognised in the fair value reserve. ANNUAL REPORT 2018 | www.alizzislamic.com 129
66. NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS As at 31 December 2018 As at 31 December 2018 3 . SIGNIFICANT ACCCOUNTING POLICIES (continued) 3. SIGNIFICANT ACCCOUNTING POLICIES (continued) 3.30 Changes in Accounting Policies (continued) 3.30.1 International Financial Reporting Standard 9- Financial Instruments (IFRS 9) (continued) Expected Life When measuring ECL, the Bank considers the maximum contractual period over which the Bank is exposed to credit risk. All contractual terms considered in determination of the expected life, including prepayment options and extension and rollover options. For certain revolving credit facilities that do not have a fixed maturity, the expected life is estimated based on the period over which the Bank is exposed to credit risk and where the credit losses would not be mitigated by management actions. Definition of Default and Write-off The Bank considers a financial asset to be in default when: - The customer 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 customer is past due more than 90 days on any material credit obligation to the Bank. In assessing whether a customer is in default, the Bank considers indicators that are: - qualitative - e.g. breaches of covenant; - quantitative - e.g. overdue status and non-payment on another obligation of the same issuer to the Bank; and - based on data developed internally and obtained from external sources. Inputs into the assessment of whether a financial instrument is in default and their significance may vary over time to reflect changes in circumstances. - 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. Differences in the carrying amounts of financial assets and financial liabilities resulting from the adoption of IFRS 9 are recognised in accumulated losses 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: - The determination of the business model within which a financial asset is held. - The designation and revocation of previous designations of certain financial assets and financial liabilities as measured at FVTPL. - The designation of certain investments in equity instruments not held for trading as at FVOCI. - For financial liabilities designated as at FVTPL, the determination of whether presenting the effects of changes in the financial liability’s credit risk in OCI would create or enlarge an accounting mismatch in profit or loss. - If a debt security had low credit risk at the date of initial application of IFRS 9, then the Bank has assumed that credit risk on the asset had not increased significantly since its initial recognition. 130 ANNUAL REPORT 2018 | www.alizzislamic.com 3.30Changes in Accounting Policies (continued) 3.30.1 International Financial Reporting Standard 9- Financial Instruments (IFRS 9) (continued) The classification and measurement of financial assets and liabilities before and after implementation of IFRS 9 are as follows: Financial Assets Cash and balances with the Central Bank of Oman Due from banks Investment securities debt-type Investment securities Equity and debt-type Wakala bil Istithmar Murabaha receivables Ijarah assets-Ijarah muntahia bittamleek Diminishing Musharaka Other assets Financial Liabilities Due to banks Customer Deposits including customers’ Wakala bil Istithmar Equity Of Unrestricted Investment Accountholders Other liabilities Commitments and contingent liabilities ANNUAL REPORT 2018 | www.alizzislamic.com Original Classification IAS 39 New Classification IFRS 9 Original Carrying Amount Remeasurement Reclassification RO RO RO New Carrying Amount RO Financing & receivables Financing & receivables Amortised cost Amortised cost 26,693,236 22,522,495 (24,496) - 26,693,236 22,497,999 Available for sale Amortised cost - - 18,095,000 18,095,000 Available for sale Financing & receivables Financing & receivables FVOCI Amortised cost Amortised cost 41,313,573 100,305,502 83,183,614 142,521 (390,114) 965,260 (18,116,171) - 23,339,923 99,915,388 84,148,874 Financing & receivables Financing & receivables Financing & receivables Amortised cost Amortised cost Amortised cost 237,964,599 38,752,764 9,611,093 560,346,876 (674,803) 194,676 52,659 265,703 (21,171) 237,289,796 38,947,440 9,663,752 560,591,408 Amortised cost Amortised cost 5,775,000 - - 5,775,000 Amortised cost Amortised cost 361,166,029 - - 361,166,029 Amortised cost Amortised cost Amortised cost Amortised cost 113,304,461 10,423,588 490,669,078 - - 113,304,461 10,423,588 490,669,078 Amortised cost Amortised cost 65,920,397 (185,890) - 65,734,507 131
67. NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS As at 31 December 2018 As at 31 December 2018 3 . SIGNIFICANT ACCCOUNTING POLICIES (continued) 3. SIGNIFICANT ACCCOUNTING POLICIES (continued) 3.30Changes in Accounting Policies (continued) 3.30.1 International Financial Reporting Standard 9- Financial Instruments (IFRS 9) (continued) 3.30Changes in Accounting Policies (continued) 3.30.1 International Financial Reporting Standard 9- Financial Instruments (IFRS 9) (continued) The impact from the adoption of IFRS 9 as at 1 January 2018 has decreased accumulated losses by OMR 79,814 and decreased the fair value reserve by OMR 173,257. Closing balance under IAS 39 (31 December 2017) Impact of reclassification of debt-type instruments from available for sale to amortised cost (i) Impact of excess provision as per IFRS 9 over provision as per CBO Norms (ii) Net Transition Impact (i+ii) Reversal of fair value reserve due to reclassification of a debt type instruments from FVOCI to amortised cost Restated balance under IFRS 9 (1 January 2018) Accumulated losses RO (22,244,162) Fair value Reserve RO (24,254) 152,086 (72,272) 79,814 (152,086) (152,086) (22,164,348) (21,171) (197,511) The following table reconciles the closing impairment losses for financial assets in accordance with IAS 39 as at 31 December 2017 to the opening ECL loss determined in accordance with IFRS 9 as at 1 January 2018. Due from banks Financing Receivables Investments Other Assets Commitments and contingent liabilities 132 31 December 2017 RO 5,969,229 152,086 76,262 6,197,577 Remeasurement RO 24,496 (95,019) (152,086) (43,095) 185,890 (79,814) 01 January 2018 RO 24,496 5,874,210 33,167 185,890 6,117,763 ANNUAL REPORT 2018 | www.alizzislamic.com Exposure of Financial Assets The following table contains an analysis of stagewise risk exposure of financial assets for which ECL loss is recognised as at 31 December 2018. Stage 1 Stage 2 Stage 3 Total RO RO RO 9,446,999 - - RO 9,446,999 21,143,545 18,095,000 110,051,647 98,843,804 246,309,901 68,476,088 8,538,834 49,383,765 630,289,583 2,269,424 5,312,673 17,358,902 4,635,348 376,289 1,120,193 31,072,829 150,000 1,578,309 5,018,242 292,986 299,856 7,339,393 21,143,545 18,095,000 112,471,071 105,734,786 268,687,045 73,111,436 9,208,109 50,803,814 668,701,805 Stage 1 RO 24,496 Stage 2 RO - Stage 3 RO - Total RO 24,496 1,311,239 464,333 1,387,962 157,188 20,688 120,705 3,486,611 119,335 92,087 487,399 23,746 5,706 728,273 84,285 1,746,637 6,772 65,185 1,902,879 1,430,574 640,705 3,621,998 180,934 33,166 185,890 6,117,763 Exposure subject to ECL Due from banks Financial assets at fair value through other comprehensive income Financial assets at amortised cost Wakala bil Istithmar Murabaha receivables Ijarah assets-Ijarah muntahia bittamleek Diminishing Musharaka Other assets Commitments and contingent liabilities Movement in impairment loss by class of Financial Asset Opening balance as at 1 January 2018 Due from banks Financial assets at fair value through other comprehensive income Financial assets at amortised cost Wakala bil Istithmar Murabaha receivables Ijarah assets-Ijarah muntahia bittamleek Diminishing Musharaka Other assets Commitments and contingent liabilities ANNUAL REPORT 2018 | www.alizzislamic.com 133
68. NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS As at 31 December 2018 As at 31 December 2018 3 . SIGNIFICANT ACCCOUNTING POLICIES (continued) 3. SIGNIFICANT ACCCOUNTING POLICIES (continued) 3.30Changes in Accounting Policies (continued) 3.30.1 International Financial Reporting Standard 9- Financial Instruments (IFRS 9) (continued) Net transfer between stages and P&L impact Due from banks Financial assets at fair value through other comprehensive income Financial assets at amortised cost Wakala bil Istithmar Murabaha receivables Ijarah assets-Ijarah muntahia bittamleek Diminishing Musharaka Other assets Commitments and contingent liabilities Closing balance as at 31 December 2018 Due from banks Financial assets at fair value through other comprehensive income Financial assets at amortised cost Wakala bil Istithmar Murabaha receivables Ijarah assets-Ijarah muntahia bittamleek Diminishing Musharaka Other assets Commitments and contingent liabilities 3.31New and Amended Standards and Interpretations that are not yet Effective Stage 1 RO (23,588) Stage 2 RO - Stage 3 RO - Total RO (23,588) 9,444 - - 9,444 (485,812) 12,041 (563,714) 294,552 (7,146) (76,472) (840,696) (91,598) 212,164 17,989 107,626 53 13,986 260,219 75,202 625,954 612,914 16,028 69,750 1,399,848 (502,208) 850,158 67,189 402,178 8,935 7,264 819,371 907 - - 907 9,443 - - 9,443 825,426 476,374 824,247 451,739 13,541 44,239 2,645,915 27,737 304,251 505,388 131,372 5,759 13,986 988,492 75,202 710,239 2,359,551 22,800 134,935 3,302,727 928,365 1,490,863 3,689,185 583,111 42,100 193,160 6,937,134 3.30.2 IFRS 15- Revenue from contract with customers :- FAS 28 Murabaha and other deferred payments sales The objective of this standard is to prescribe the appropriate accounting and reporting principles for recognition, measurement and disclosures to apply in relation to Murabaha and other deferred payment sales transactions for the sellers and buyers, for such transactions. This standard applies to accounting for Murabaha and other deferred payment sales transaction carried out under Shari’a principles, excluding Tawarruq and commodity Murabaha transactions. This standard shall be effective for financial periods beginning on or after 01 January 2019 early adoption is permitted. FAS 30 Impairment and credit losses This standard aims at setting out the accounting rules and principles for impairment and credit losses, covering current and expected losses, in line with global best practices, taking into account the ever-changing requirements and the genuine requirements of Islamic finance industry across the globe. It aslo sets out classification of assets and exposures in view of the credit risk and other risks involved. The idea is to apply the forward looking approach in line with other standards setters for the assets and instruments that are financial instruments from shari’a perspective and to define globally acceptable impairment and write down and provisioning approaches for other assets and exposures, without compromising on shari’a. It further covers the situations where onerous commitments exist which mandate a provision for anticipated losses on the same. This standard shall be effective for financial periods beginning on or after 01 January 2020 early adoption is permitted. FAS 31 Investment agency This standard sets out that the primary consideration for an investment agency transaction is determination of a principal-agent relationship. Such a relationship does not entail transfer of the ownwership right and incidental risks and rewards to the agent. Hence such transaction shall be kept for the agent. On the contrary, the principal shall account for the assets or investment in assets in its books (i.e. On balancesheet). This standard intends to define the accounting principles and reporting requirements for investment agency (Al Wakala Bi Al-Istithmar) transaction and instruments to be in line with the ever-changing global best practices, in the hands of both the principal and the agent. This standard shall be effective for financial periods beginning on or after 01 January 2020 early adoption is permitted. FAS 35 Risk reserves This standard provides principle based guidance on maintaining reserves, including the approach for utilising reserves. It also requires IFIs to disclose in financial statements the basis for determining the transfers in and out of reserves, threshold for specific reserves and the use of specific reserve. It also provides guidance for assessment and accounting for various risks involved, and recognize the need for varying levels of reserves in line with the dynamism of risks across the financial calendar. It also creates a link between the allowances for impairment, credit losses and onerous commitments against the reserves to be maintained for the participating stakeholders. This standard shall be effective for financial periods beginning on or after 01 January 2021 early adoption is permitted. The Bank has adopted IFRS 15 as issued by IASB with effective date from 1 January 2018. This standard has superceded all revenue recognition requirements under IFRS and provides a principle based approach for revenue recognition with the introduction of concept for revenue recognition for performance obligation as they are satisfied. The Bank has assessed the impact of IFRS 15 and concluded that the application of this standard does not have any material impact on Bank’s financial statements. 134 ANNUAL REPORT 2018 | www.alizzislamic.com ANNUAL REPORT 2018 | www.alizzislamic.com 135
69. NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS As at 31 December 2018 As at 31 December 2018 4 . CASH AND BALANCES WITH CENTRAL BANK OF OMAN 6. FINANCIAL ASSETS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME Cash in hand Balances with CBO Current account Capital deposit with Central Bank of Oman (note 4.1) Other deposit with Central Bank of Oman 2018 RO 2017 RO 5,420,670 4,437,491 56,020,029 500,000 25,000 56,545,029 21,849,099 381,646 25,000 22,255,745 61,965,699 26,693,236 4.1 The Capital deposit with the CBO is a mandatory deposit and cannot be withdrawn without its approval and accordingly is not available for use in day to day operations of the Bank. 5. DUE FROM BANKS Current accounts- Foreign banks Inter bank wakala bil Istithmar Local banks Foreign banks Less: Impairment loss 2018 RO 9,446,999 2017 RO 2,517,495 (907) 9,446,092 15,000,000 5,005,000 20,005,000 22,522,495 Self financed RO 2018 Jointly financed RO Total RO Self financed RO 2017 Jointly financed RO Total RO Quoted investments classified as fair value through other comprehensive income Regional listed sukuks (Cost: RO 21,788,454, 31 December 2017: RO 40,026,905) - 19,740,344 19,740,344 40,065,000 - 40,065,000 Regional listed equities (Cost: RO 224,596, 31 December 2017: RO 1,615,094) - 140,338 140,338 1,400,659 - 1,400,659 - 1,262,863 1,262,863 - - - - (9,443) (9,443) (152,086) - (152,086) - 21,134,102 21,134,102 41,313,573 - 41,313,573 Self financed RO 2018 Jointly financed RO Total RO Self financed RO 2017 Jointly financed RO Total RO - 18,095,000 18,095,000 - - - - 18,095,000 18,095,000 - - - Regional Unlisted Fund (Cost: RO 1,289,750 31 December 2017: Nil ) Less: Impairment loss 7. FINANCIAL ASSETS AT AMORTISED COST Quoted investments classified as amortised cost Regional listed sukuks 7.1 The bank did not identify any material impairment loss against financial assets at amortised cost as at 31 December 2018. 136 ANNUAL REPORT 2018 | www.alizzislamic.com ANNUAL REPORT 2018 | www.alizzislamic.com 137
70. NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS As at 31 December 2018 As at 31 December 2018 8 . WAKALA BIL ISTITHMAR 10.IJARAH ASSETS-IJARAH MUNTAHIA BITTAMLEEK Wakala bil Istithmar Less: Impairment loss Self financed RO 2018 Jointly financed RO Total RO Self financed RO - 112,471,071 (928,365) 112,471,071 (928,365) - 111,542,706 111,542,706 2017 Jointly financed Total RO RO - 101,345,962 (1,040,460) 101,345,962 (1,040,460) - 100,305,502 100,305,502 9. MURABAHA RECEIVABLES Self financed RO 2018 Jointly financed RO Total RO Murabaha receivables Less: Deferred profit Less: Impairment loss - 120,924,166 (15,189,380) (1,490,863) Net Murabaha receivables - 104,243,923 Self financed RO 2017 Jointly financed RO Total RO 120,924,166 (15,189,380) (1,490,863) - 99,696,282 (14,906,704) (1,605,964) 99,696,282 (14,906,704) (1,605,964) 104,243,923 - 83,183,614 83,183,614 Self financed RO 2018 Jointly financed RO Total RO Self financed RO 2017 Jointly financed RO Total RO - 290,126,997 64,859,377 (10,840,000) 290,126,997 64,859,377 (10,840,000) - 207,803,456 92,666,228 (10,342,687) 207,803,456 92,666,228 (10,342,687) At the end of the year - 344,146,374 344,146,374 - 290,126,997 290,126,997 Depreciation: At beginning of the year Charge for the year Disposal - 53,853,327 32,447,043 (10,840,000) 53,853,327 32,447,043 (10,840,000) - 30,340,096 33,855,918 (10,342,687) 30,340,096 33,855,918 (10,342,687) At the end of the year - 75,460,370 75,460,370 - 53,853,327 53,853,327 Impairment loss: At the end of the year Net book value - 3,689,186 264,996,818 3,689,186 264,996,818 - 2,900,814 233,372,856 2,900,814 233,372,856 Plant and machinery Cost: At beginning of the year Additions Disposal - 12,263,333 (5,833,333) 12,263,333 (5,833,333) - 12,263,333 - 12,263,333 - At the end of the year - 6,430,000 6,430,000 - 12,263,333 12,263,333 Depreciation: At beginning of the year Charge for the year Disposal - 7,625,209 4,637,083 (5,833,333) 7,625,209 4,637,083 (5,833,333) - 3,115,833 4,509,376 - 3,115,833 4,509,376 - At the end of the year - 6,428,959 6,428,959 - 7,625,209 7,625,209 At the end of the year Net book value - 1,041 1,041 - 46,381 4,591,743 46,381 4,591,743 TOTAL Cost Less: Accumulated depreciation Less: Impairment loss - 350,576,374 (81,889,329) (3,689,186) - 302,390,330 (61,478,536) (2,947,195)   237,964,599 302,390,330 (61,478,536) (2,947,195)   237,964,599 Building Cost: At beginning of the year Additions Disposal Impairment loss: Net book value 138 ANNUAL REPORT 2018 | www.alizzislamic.com ANNUAL REPORT 2018 | www.alizzislamic.com   -   350,576,374 (81,889,329) (3,689,186)     264,997,859 264,997,859 - 139
71. NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS As at 31 December 2018 As at 31 December 2018 11 .DIMINISHING MUSHARAKA 12.FINANCING RECEIVABLES (continued) Self financed RO - Diminishing Musharaka Less: Impairment loss 2018 Jointly financed RO 73,111,436 (583,112) 72,528,324 Total RO Self financed RO 73,111,436 (583,112) 72,528,324 - 2017 Jointly financed RO 39,128,374 (375,610) 38,752,764 39,128,374 (375,610) 38,752,764 In accordance with CBO circular BM 1149 Banks should continue to maintain and update the risk classification (i.e. standard, special mention, substandard, etc.) of accounts as per the extant CBO norms, including those on restructuring of accounts for regulatory reporting purposes. Disclosure requirements containing the risk classification-wise gross and net amount outstanding, provision required as per CBO norms, allowance made as per IFRS 9, profit recognised as per IFRS 9 and reserve profit required as per CBO are given below based on CBO circular BM 1149. (1) Standard (2) Stage 1 Stage 2 Stage 3 Subtotal Special Mention Stage 1 Stage 2 Stage 3 Subtotal Substandard Subtotal 140 Stage 1 Stage 2 Stage 3 Gross Amount RO (3) 522,739,855 11,409,823 108,197 534,257,875 2,465,452 18,200,153 2,589,384 23,254,989 1,958,726 1,958,726 Provision required as per CBO Norms RO (4) 6,065,046 114,098 1,081 6,180,225 24,655 1,254,026 25,894 1,304,575 476,781 476,781 Provision held as per IFRS 9 RO (5) 2,545,581 347,390 48,919 2,941,890 45,745 627,117 1,195,672 1,868,534 926,337 926,337 Difference between CBO provision required and provision held RO (6) = (4)-(5) 3,519,465 (233,291) (47,838) 3,238,335 (21,090) 626,909 (1,169,778) (563,959) (449,557) (449,557) Net Amount as per CBO norms* RO (7)=(3)-(4)-(10) 516,674,809 11,295,725 107,116 528,077,650 2,440,797 16,946,127 2,563,490 21,950,414 1,464,652 1,464,652 Doubtful Asset Classification as per IFRS 9 (2) Stage 1 Stage 2 Stage 3 Subtotal 12.1 Comparison of provision held as per IFRS 9 and required as per CBO norms Asset Classification as per IFRS 9 Asset Classification as per CBO Norms (1) 12.FINANCING RECEIVABLES Asset Classification as per CBO Norms 12.1 Comparison of Provision held as per IFRS 9 and required as per CBO norms (continued) Total RO Net Amount as per IFRS 9 RO (8) = (3)-(5) 520,194,274 11,062,433 59,278 531,315,985 2,419,707 17,573,036 1,393,712 21,386,454 1,032,389 1,032,389 Profit recognised in P&L as per IFRS 9 RO (9) - Reserve profit as per CBO norms RO (10) 17,293 17,293 ANNUAL REPORT 2018 | www.alizzislamic.com Loss Subtotal Other items not covered under CBO circular BM 977 and related instructions Subtotal Total Stage 2 Stage 3 Stage 1 Stage 2 Stage 3 Stage 1 Stage 2 Stage 3 Stage 1 Stage 2 Stage 3 Total Gross Amount RO (3) 1,056,679 1,056,679 1,084,230 1,084,230 Provision required as per CBO Norms RO (4) 302,793 302,793 454,046 454,046 104,800,378 1,662,380 626,548 107,089,306 630,005,685 31,272,356 7,423,764 668,701,805 6,089,701 1,368,124 1,260,594 8,718,419 Provision held as per IFRS 9 RO (5) 484,931 484,931 511,933 511,933 Difference between CBO provision required and provision held RO (6) = (4)-(5) (182,139) (182,139) (57,887) (57,887) Net Amount as per CBO norms* RO (7)=(3)-(4)-(10) 723,744 723,744 567,050 567,050 54,588 13,986 134,936 203,510 2,645,914 988,492 3,302,728 6,937,134 (54,588) (13,986) (134,936) (203,510) 3,443,787 379,632 (2,042,134) 1,781,285 104,800,378 1,662,380 626,548 107,089,306 623,915,984 29,904,232 6,052,600 659,872,816 Net Amount as per IFRS 9 RO (8) = (3)-(5) 571,748 571,748 572,297 572,297 Profit recognised in P&L as per IFRS 9 RO (9) - Reserve profit as per CBO norms RO (10) 30,143 30,143 63,134 63,134 104,745,790 1,648,394 491,612 106,885,796 627,359,771 30,283,863 4,121,036 661,764,670 - 110,570 110,570 Other items disclosed above includes exposure outstanding and respective provisions held against due from banks, investments and other assets. ANNUAL REPORT 2018 | www.alizzislamic.com 141
72. NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS As at 31 December 2018 As at 31 December 2018 12 .FINANCING RECEIVABLES (continued) 13.PROPERTY AND EQUIPMENT 12.2 Restructured Financing Asset Classification as per CBO Norms (1) Asset Classification as per IFRS 9 (2) Stage 1 Stage 2 Stage 3 Classified as performing Subtotal Classified as nonperforming Stage 1 Stage 2 Stage 3 Sub total Stage 1 Stage 2 Stage 3 Total Total Gross Carrying Amount RO (3) 2,076,896 14,601,217 16,678,113 1,198,632 1,198,632 2,076,896 14,601,217 1,198,632 17,876,745 Provision required as per CBO Norms RO (4) 20,769 1,254,026 1,274,795 288,393 288,393 20,769 1,254,026 288,393 1,563,188 Provision held as per IFRS 9 RO (5) 40,203 374,057 414,260 571,307 571,307 40,203 374,057 571,307 985,567 Difference between CBO provision required and provision held RO (6) = (4)-(5) (19,434) 879,969 860,535 (282,914) (282,914) (19,434) 879,969 (282,914) 577,621 Net Carrying Amount as per CBO norms* RO (7)=(3)-(4)-(10) 2,056,127 13,347,191 15,403,318 910,239 910,239 2,056,127 13,347,191 910,239 16,313,557 Net Carrying Amount as per IFRS 9 RO (8) = (3)-(5) 2,036,693 14,227,160 16,263,853 627,325 627,325 2,036,693 14,227,160 627,325 16,891,178 Profit recognised in P&L as per IFRS 9 RO (9) - Reserve profit as per CBO norms RO (10) - *Net of provisions and reserve profit as per CBO norms 12.3 Impairment Charge and Provisions Held Impairment loss charged to profit and loss account Provisions required as per CBO norms including reserve profit/ held as per IFRS 9 Gross NPA ratio (percentage) Net NPA ratio (percentage) As per CBO Norms RO As per IFRS 9 RO Difference RO 8,828,990 0.73% 0.52% (819,371) 6,937,134 1.11% 0.62% 819,371 1,891,855 -0.38% -0.11% In accordance with CBO requirements, where the aggregate provision on portfolio & specific basis computed as per CBO norms is higher than the impairment allowance computed under IFRS 9, the difference, net of the impact of taxation, is transferred to an impairment reserve as an appropriation from the retained earnings as at reporting date amounted RO 1,964,128 (31 December, 2017- NIL). 142 ANNUAL REPORT 2018 | www.alizzislamic.com Leasehold improvements Computer hardware Furniture, fixtures and office equipment Capitalwork in progress Total RO RO RO RO RO 2,803,405 14,173 - 2,154,934 92,636 - 942,202 22,439 - 176,437 195,041 (45,030) 6,076,978 324,289 (45,030) 2,817,578 2,247,570 964,641 326,448 6,356,237 933,845 283,209 1,152,168 322,520 511,808 168,338 - 2,597,821 774,067 At 31 December 2018 1,217,054 1,474,688 680,146 - 3,371,888 Net book values: At 31 December 2018 1,600,524 772,882 284,495 326,448 2,984,349 Leasehold improvements Computer hardware Furniture, fixtures and office equipment Capitalwork in progress Total RO RO RO RO RO 2,611,277 192,128 - 1,883,802 271,132 - 757,418 184,784 - 84,820 133,125 (41,508) 5,337,317 781,169 (41,508) 2,803,405 2,154,934 942,202 176,437 6,076,978 658,241 275,604 803,773 348,395 337,794 174,014 - 1,799,808 798,013 At 31 December 2017 933,845 1,152,168 511,808 - 2,597,821 Net book values: At 31 December 2017 1,869,560 1,002,766 430,394 176,437 3,479,157 Cost: At 1 January 2018 Additions Transferred At 31 December 2018 Depreciation: At 1 January 2018 Charge for the year Cost: At 1 January 2017 Additions Transferred At 31 December 2017 Depreciation: At 1 January 2017 Charge for the year ANNUAL REPORT 2018 | www.alizzislamic.com 143
73. NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS As at 31 December 2018 As at 31 December 2018 14 . INTANGIBLES 16. DUE TO BANKS Cost Addition during the year Transfer (refer note 13) Less: Amortisation Movement of amortisation is as follows: At 1 January Charge for the year At 31 December 2018 RO 3,833,099 74,038 45,030 (2,417,612) 1,534,555 2017 RO 3,648,385 143,206 41,508 (1,947,096) 1,886,003 1 January 2018 to 31 December 2018 RO 1 January 2017 to 31 December 2017 RO 1,947,096 470,516 2,417,612 1,420,572 526,524 1,947,096 Total Less: Impairment losses Less: Reserve profit 144 2017 RO 5,775,000 2018 RO 8,395,539 705,716 438,090 900,431 922,379 982,789 12,344,944 2017 RO 6,186,743 1,414,010 338,498 1,078,708 681,052 724,577 10,423,588 2018 RO 134,114,218 134,114,218 2017 RO 113,304,461 113,304,461 2018 RO 132,258,043 1,856,175 134,114,218 2017 RO 110,953,135 2,351,326 113,304,461 17. OTHER LIABILITIES Profit payable on deposits and due to banks Managers cheque Accrued expenses Financing liabilities - payable to suppliers Provision for staff benefits Others 18. EQUITY OF UNRESTRICTED INVESTMENT ACCOUNTHOLDERS 15. SHARE CAPITAL OTHER ASSETS Profit receivable on financing and investing activities Prepaid expenses Security deposits Credit card receivables - gross Receivables from asset manager Financing assets available for sale Others Interbank Wakala bil istithmar 2018 RO 6,160,000 2018 RO 7,424,731 453,256 355,052 1,608,161 175,217 767,330 841,221   11,624,968 (42,100) (110,569) 2017 RO 4,099,296 441,679 502,007 1,055,561 2,071,552 1,129,309 387,950   9,687,354 (29,895) (46,366) 11,472,299 9,611,093 ANNUAL REPORT 2018 | www.alizzislamic.com Equity of unrestricted investment accountholders (note 18.1) 18.1 By Type Saving deposits Term deposits As investment accountholder’s funds are commingled with the Bank’s funds for investment, no priority is granted to any party for the purpose of investments and distribution of profits. No appropriation for investment risk reserve has been made to maintain healthy pay out for unrestricted investment accountholders. ANNUAL REPORT 2018 | www.alizzislamic.com 145
74. NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS As at 31 December 2018 As at 31 December 2018 19 . OWNERS’ EQUITY 20. NET ASSETS PER SHARE (i) Share capital Authorised 2,000,000,000 ordinary shares (2017: 2,000,000,000) of 100 Baizas per share Issued and fully paid 1,000,000,000 ordinary shares (2017: 1,000,000,000) of RO 100 Baizas per share 2018 RO 200,000,000 2017 RO 200,000,000 2018 RO 2017 RO 100,000,000 100,000,000 Net assets (RO) Number of shares at reporting date Net assets per share (RO) Name of the major shareholders Huriah Company LLC Aabar Investments PJS First Energy Bank BSC Tasameem Real Estate Company LLC 2017 Number of shares 100,000,000 200,000,000 150,000,000 150,000,000 % of total outstanding shares 10% 20% 15% 15% Number of shares 100,000,000 200,000,000 150,000,000 150,000,000 % of total outstanding shares 10% 20% 15% 15% 600,000,000 60% 600,000,000 60% (ii) Legal reserve In accordance with the Commercial Companies Law of Oman, the Bank is required to transfer 10% of its profit for the year to legal reserve until the accumulated balance of the reserve equals one third of the Bank’s paid up share capital. The reserve is not available for distribution. (iii)Fair value reserve This represents the net unrealised fair value gains and losses relating to instruments recorded at fair value through other comprehensive income. (iv)Restructured financing reserve The restructured financing reserve represents provisions in respect of restructured accounts and is not eligble for recognition as regulatory capital or distrbutiuon as dividends. Subsequent to the adoption of IFRS9, the Bank has transferred the reserve to impairment reserve. 21. CONTINGENT LIABILITIES AND COMMITMENTS Letters of guarantee Letters of credit Irrevocable financing commitments ANNUAL REPORT 2018 | www.alizzislamic.com 2018 RO 18,997,520 3,288,294 28,518,000 50,803,814 2017 RO 22,913,197 8,558,869 34,448,331 65,920,397 2018 RO 6,788,497 5,884,124 14,462,797 3,471,999 235,217 30,842,634 2017 RO 4,482,049 4,387,432 10,784,775 1,210,428 293,978 21,158,662 2018 RO 51,546,923 (37,084,126) 2017 RO 49,149,969 (38,365,194) 14,462,797 10,784,775 22. INCOME FROM FINANCING AND INVESTING ACTIVITIES Wakala bil istithmar placement with customers Murabaha receivables Ijarah muntahia bittamleek (note 22.1) - net Diminishing Musharaka Wakala bil istithmar placement with banks 22.1 Ijarah Muntahia Bittamleek Income from Ijarah muntahia bittamleek Depreciation on Ijarah muntahia bittamleek 146 2017 RO 78,288,437 1,000,000,000 0.078 Net assets per share is calculated by dividing the owners’ equity at the reporting date by the number of shares outstanding at the reporting date. Names of the major shareholders holding 10% or more of the Bank’s outstanding shares are set out below: 2018 2018 RO 77,936,266 1,000,000,000 0.078 ANNUAL REPORT 2018 | www.alizzislamic.com 147
75. NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS As at 31 December 2018 As at 31 December 2018 23 . BANK’S INCOME FROM OWN INVESTMENTS 26. MOVEMENT IN IMPAIRMENT ALLOWENCE FOR THE YEAR Dividends Loss on sale of investments Profit from debt type instrument at fair value through other comprehensive income 2018 RO 59,967 (7,497) 1,774,638 1,827,108 2017 RO 149,931 (311,280) 1,210,390 1,049,041 2018 RO 2,310,366 535,271 2,845,637 (63,827) 2,781,810 2017 RO 2,249,130 243,175 2,492,305 (50,107) 2,442,198 24. OTHER INCOME - NET Fee and commission Foreign exchange gain - net Less: Fee and commission expense 25. OTHER GENERAL AND ADMINSTRATIVE EXPENSES Information Technology maintenance cost Hiba paid to customers Occupancy costs Advertisement and marketing Card center expenses Licenses and statutory payments Board expenses Shari’a board expenses Other administrative expenses 148 2018 RO 1,093,475 1,371,500 462,115 436,485 220,648 156,687 71,256 50,820 1,903,289 5,766,275 2017 RO 1,030,367 901,700 454,411 381,631 309,750 306,167 72,721 52,987 1,417,273 4,927,007 ANNUAL REPORT 2018 | www.alizzislamic.com 2018 Impairment loss at beginning of the year - restated Wakala bil istithmar RO Murabaha receivables RO Ijarah muntahia bittamleek RO Diminishing musharaka RO Others RO Total RO 1,430,574 640,704 3,621,998 180,934 243,553 6,117,763 Charge for the year - Stage 1 Charge for the year - Stage 2 Charge for the year - Stage 3 (485,813) (91,598) 75,202 12,041 223,596 625,954 (563,715) 17,988 601,482 294,550 107,627 - (97,759) 14,040 85,776 (840,696) 271,653 1,388,414 Charge for the year (502,209) 861,591 55,755 402,177 2,057 819,371 928,365 1,502,295 3,677,753 583,111 245,610 6,937,134 Wakala bil istithmar RO Murabaha receivables RO Ijarah muntahia bittamleek RO Diminishing musharaka RO Others RO Total RO Impairment loss at beginning of the year Charge for the year - portfolio Charge for the year - specific Release for the year - specific 558,474 451,986 30,000 - 1,092,726 392,999 113,380 - 2,200,218 453,417 306,946 (13,386) 126,301 249,309 - 82,273 6,884 128,883 (36,059) 4,059,992 1,554,595 579,209 (49,445) Reserve profit at beginning of the year Transferred during the year Reserve profit as of reporting date 481,986 - 506,379 383 6,476 6,859 746,977 - 249,309 - 99,708 15,463 30,904 46,367 2,084,359 15,846 37,380 53,226 1,040,460 1,605,964 2,947,195 375,610 228,348 6,197,577 Impairment loss at 31 December 2018 2017 Impairment loss at end of the year ANNUAL REPORT 2018 | www.alizzislamic.com 149
76. NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS As at 31 December 2018 As at 31 December 2018 27 . TAXATION 27. TAXATION (continued) Current tax Deferred tax Deferred tax As at 1 January Movement for the year As at 31 December 2018 RO (378,540) (378,540) 2017 RO 712,785 712,785 3,245,479 (378,540) 2,866,939 2,532,694 712,785 3,245,479 The tax rate applicable to the Bank is 15% (2017 - 15%). For the purpose of determining the taxable result of the year, the accounting loss has been adjusted for tax purposes. Adjustment for tax purposes include items relating to both income and expense. The adjustments are based on the current understanding of the existing tax laws, regulations and practices. The Bank has reported a taxable gains. The Bank has assessed that following taxable losses available for offset against future taxable profits will be utilised prior to their expiry: Available Available Available Available Available until until until until until 31 31 31 31 31 December 2018 December 2019 December 2020 December 2021 December 2022 (declared) (declared) (declared) (declared) (declared) 2018 RO 3,568,508 7,543,788 6,678,921 5,558,375 3,626,372 2017 RO 3,568,508 7,543,788 6,678,921 5,558,375 3,930,918 None of the assessments have been agreed by the tax authorities. The islamic finance regulations relating to tax treatment of various products are awaited. Thus based on the current regulations governing taxation in Oman, deferred tax asset on taxable losses net of timing differences arising on property and equipment and intangibles has been recorded in these interim condensed financial statements to the extent that sufficient taxable profits will be available to utilize deferred tax asset in future. Reconciliation The following is a reconciliation of income taxes calculated at the applicable tax rate with the income tax expense: Profit /(loss) before tax as per financial statements Tax at the applicable rate Non- deductible expenses and permeant differences Deferred tax not recognized Deferred tax recognised for change in tax rate in respect of prior years’ losses 150 2018 RO 2,385,663 (357,847) (20,693) (378,540) Net deferred tax asset routed through statement of income are attributable to the following items: Deferred tax asset are attributable to the following items: Taxable temporary differences Losses carried forward Net deferred tax asset As at 1 January 2018 (269,257) 3,514,736 3,245,479 Recognised in income (378,540) (378,540) Un- Recognised (162,291) 349,010 186,719 As at 31 December 2018 (431,548) 3,485,206 3,053,658 Deferred tax asset and liabilities recognized as at the reporting date are in the amount of RO 2,866,939. Taxable temporary differences Losses carried forward Net deferred tax asset As at 1 January 2017 (269,257) 2,801,951 2,532,694 Recognised in income 712,785 712,785 Un- Recognised (13,427) 583,164 569,737 As at 31 December 2017 (282,684) 4,097,896 3,815,212 Deferred tax asset and liabilities recognized as at the reporting date are in the amount of RO 3,245,479 28. PROFIT/(LOSS) PER SHARE Profit/(loss) attributable to owners (RO) Weighted average number of shares outstanding Earning/(loss) per share 2018 RO 2,007,123 1,000,000,000 0.002 2017 RO (2,995,947) 1,000,000,000 (0.003) Basic and diluted earning/(loss) per share are same as the Bank has not issued any instruments which would have a diluting impact on earning/ (loss) per share when exercised. 29. CASH AND CASH EQUIVALENTS For the purpose of statement of cash flows, cash and cash equivalents represent: 2017 RO (3,708,732) (556,310) (13,427) 569,737 (712,785) (712,785) Cash in hand Current account with the CBO Current accounts with foreign banks Due from banks Due to banks ANNUAL REPORT 2018 | www.alizzislamic.com ANNUAL REPORT 2018 | www.alizzislamic.com 2018 RO 5,420,670 56,020,029 9,446,092 (6,160,000) 64,726,791 2017 RO 4,437,491 21,849,099 2,517,495 20,005,000 (5,775,000) 43,034,085 151
77. NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS As at 31 December 2018 As at 31 December 2018 30 . RELATED PARTY TRANSACTIONS 30. RELATED PARTY TRANSACTIONS (continued) Related parties comprise major shareholders, directors and key management personnel of the Bank, entities owned or controlled, jointly controlled or significantly influenced by them, companies affiliated by virtue of shareholding in common with that of the Bank and Shari’a supervisory board. The significant balances with related parties at 31 December were as follows: Directors 2018 RO Assets Wakala bil istithmar Murabaha receivables Ijarah assets-Ijarah muntahia bittamleek Other assets 2017 RO Other related parties 2018 2017 RO RO Total 2018 RO 2017 RO 2,300   2,300 6,095   6,095 6,050,000 89,889 605,121 22,457   6,767,467 3,092,668 61,703 651,625 64,363   3,870,359 6,050,000 89,889 605,121 24,757   6,769,767 3,092,668 61,703 651,625 70,458   3,876,454 43,857   43,857 183,443   183,443 1,072,799   1,072,799 1,635,105 125,000   1,760,105 1,116,656   1,116,656 1,818,548 125,000   1,943,548 Equity of unrestricted investment accountholders - - - 130,874 - 130,874 Contingent liabilities and commitments - - 651,486 647,829 651,486 647,829 2018 RO 2017 RO 426,293 6,620 432,913 257,716 83,956 341,672 Liabilities Current account Customer Wakala bil Istithmar Other liabilities The transactions with the related parties included in the statement of income are as follows: Income Income from financing and investing activities Other income 152 ANNUAL REPORT 2018 | www.alizzislamic.com Expenses Return on equity of IAH before Bank’s share as a Mudarib Profit on Wakala bil Istithmar payable Board expenses Shari’a board expense Other expenses Compensation of key management personnel is as follows: Salaries and allowances End of service benefits 2018 RO 2017 RO 253 1,096 71,256 50,820 1,093,763 1,217,188 537 4,071 72,721 52,987 1,032,085 1,162,401 903,425 25,427 928,852 829,351 25,290 854,641 31. RISK MANAGEMENT The Enterprise Risk management (ERM) is an integral part of the Bank’s decision-making process. The Management Risk Committee and other executive committees including Board Risk & Compliance Committee, guide and assist with overall management of the Bank’s statement of financial position risks. The Bank manages exposures by setting Risk Appetite Limits which are approved by the Board of Directors. i) Introduction and overview The Bank’s business involves taking risks in a bankable manner through established target market and Risk Acceptance Criteria and managing them proactively. The core functions of the Bank’s risk management division is establishing a sustainable, reputable and dependable Enterprise Risk Management Framework and Architecture so that the risks of the Bank’s business model are monitored and mitigated, and accordingly allows to determine capital allocations. The Bank regularly reviews its risk management policies and systems to reflect changes in markets, products and best market practices. The Bank’s aim is to achieve an appropriate balance between risk and reward while minimizing potential adverse effects on the Bank’s financial performance. The key features of the Bank’s Enterprise Risk Management (ERM) Framework are: - The Board of Directors (“the Board”) has the overall responsibility of managing risks and provides the overall risk management direction and oversight through various Board approved artifacts such as Credit Underwriting policy Framework along with all associated risk management policies covering Target Market & Risk Acceptance Criteria (TM&RAC), Early Warning Indicator (EWI) Framework, Risk Appetite Framework (RAF) & Policy, Stress esting Policy, Provisioning Policy Framework (IFRS 9 Compliant) and ERM Framework & Policy. - The Bank’s overall risk management process is managed by experienced risk management professionals, lead by the Chief Risk Officer (“CRO”). This function is independent of the business divisions and reports to the Chairman of Board Risk & Compliance Committee (BRCC). ANNUAL REPORT 2018 | www.alizzislamic.com 153
78. NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS As at 31 December 2018 As at 31 December 2018 31 . RISK MANAGEMENT (continued) 31. RISK MANAGEMENT (continued) i) Introduction and overview (continued) - Credit, market, operational and liquidity risks are managed in a coordinated manner within the organization through Risk Architecture and Enterprise Risk Management Framework. - Board committees meet regularly and are responsible for monitoring compliance with the risk management policies and procedures, and reviewing the adequacy of the control and governance framework through enterprise risk management function. - All risk management policies are reviewed by Management Risk Committee (MRC), BRCC and duly approved by the Board of Directors Each department of the Bank is responsible for: - Identify, measure and mitigate the risks that the Bank is exposed to in that specific area and assessing whether those risks are significant; - Working in close coordination with Risk Management Division (RMD), develop and recommend for review and approval of appropriate risk management policies and procedures spanning those activities of business units which are susceptible to significant risk, including business continuity management and disaster recovery plans; - Working in close coordination with Chief Risk Officer contribute to the development of overall direction regarding the Bank’s risk management framework and risk appetite, including exploring whether certain new business proposals are acceptable from a risk management perspective; - Adherence and Monitoring on a continual basis for the compliance of risk management policies and procedures and; - Reporting any policy or major practice changes, unusual situations, significant exceptions and new strategies through Chief Risk Officer to the Board of Directors for review, approval and/or ratification. Distribution of profit to shareholders and unrestricted customers’ accounts is subject to a comprehensive risk management system that is reviewed at the management, the Shari’a Board and the ALCO level to maintain the appropriate distribution levels taking into account the Bank’s performance vis-a-vis the competitors’ profit distributions and market conditions. ii) Liquidity risk Liquidity risk is the risk that the Bank may not be able to meet its payment obligations when they fall due under normal and stressed business conditions. To manage this risk, the Bank focuses on diversified funding sources, manage assets and liabilities with liquidity in mind, and monitors liquidity on a regular basis through the ALCO. The treasury department is mandated to manage the liquidity on a day to day basis. ii) Liquidity risk (continued) The table below summarises the maturity profile of the Bank’s assets and liabilities as of 31 December 2018 based on expected periods to cash conversion from the reporting date: 2018 ASSETS Cash and balances with Central bank of Oman Due from banks Financial assets at fair value through OCI Financial assets at amortised cost Wakala bil istithmar Murabaha receivables Ijarah assets-Ijarah muntahia bittamleek Diminishing Musharaka Property and equipment Intangibles Deferred tax asset Other assets Total assets ANNUAL REPORT 2018 | www.alizzislamic.com 1 to 6 months RO 6 months to 1 year RO 1 to 5 years RO Over 5 years RO Total RO 61,465,699 9,446,092 16,363,102 13,625,125 7,704,445 1,355,527 435,686 - 3,367,000 34,348,913 22,843,820 7,804,223 2,337,573 - 1,404,000 2,543,705 10,751,980 11,286,343 2,694,565 11,472,299 50,953,328 41,730,660 102,233,430 23,562,669 2,866,939 - 500,000 18,095,000 10,071,635 21,213,018 142,318,336 43,497,831 2,984,349 1,534,555 - 61,965,699 9,446,092 21,134,102 18,095,000 111,542,706 104,243,923 264,997,859 72,528,324 2,984,349 1,534,555 2,866,939 11,472,299 110,395,676 70,701,529 40,152,892 221,347,026 240,214,724 682,811,847 AND OWNERS’ EQUITY 7,396,377 150,034,325 102,468,088 12,344,944     169,775,646 102,468,088 9,245,472 21,262,104   30,507,576 6,160,000 36,982,020 415,274,399 12,344,944   470,761,363 LIABILITIES, EQUITY OF UNRESTRICTED INVESTMENT ACCOUNTHOLDERS Due to banks 6,160,000 Customers’ current accounts 7,396,511 12,943,660 Customers’ Wakala bil Istithmar 26,178,199 115,331,683 Other liabilities     Total liabilities 39,734,710 128,275,343 Equity of unrestricted investment accountholders 7,645,304 13,382,149 Total owners’ equity Total liabilities, equity of investment 47,380,014 141,657,492 accountholders and owners’ equity Net gap Cumulative net gap 154 Up to 1 month RO ANNUAL REPORT 2018 | www.alizzislamic.com 63,015,662 63,015,662 13,704,397 - 66,004,873 - 33,377,495 77,936,266 134,114,218 77,936,266 183,480,043 168,472,961 141,821,337 682,811,847 (70,955,963) (143,327,151) (7,940,301) (151,267,452) 52,874,065 (98,393,387) 98,393,387 - - 155
79. NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS As at 31 December 2018 As at 31 December 2018 31 . RISK MANAGEMENT (continued) 31. RISK MANAGEMENT (continued) ii) Liquidity risk (continued) The table below summarises the maturity profile of the Bank’s assets and liabilities as of 31 December 2017 based on expected periods to cash conversion from the reporting date: 2017 Up to 1 month RO 1 to 6 months RO 6 months to 1 year RO 1 to 5 years RO Total RO ASSETS Cash and balances with Central bank of Oman Due from banks Financial assets at fair value through OCI Financial assets at amortised cost Wakala bil istithmar Murabaha receivables Ijarah assets-Ijarah muntahia bittamleek Diminishing Musharaka Property and equipment Intangibles Deferred tax asset Other assets 26,311,236 22,522,495 33,699,238 3,248,139 7,409,141 183,720 - 40,071,287 31,974,486 14,963,840 32,549,445 2,596,651 - 1,242,286 669,632 10,329,095 30,271,432 3,115,981 9,611,093 16,962,146 44,282,890 90,692,393 20,588,846 3,245,479 - 382,000 17,000,000 10,359,650 77,042,188 12,267,566 3,479,157 1,886,003 - 26,693,236 22,522,495 41,313,573 100,305,502 83,183,614 237,964,599 38,752,764 3,479,157 1,886,003 3,245,479 9,611,093 Total assets 93,373,969 122,155,709 55,239,519 175,771,754 122,416,564 568,957,515 6,826,202 55,402,117   62,228,319 5,775,000 27,304,809 333,861,220 10,423,588 377,364,617 28,326,115 78,288,437 113,304,461 78,288,437 168,842,871 (46,426,307) - 568,957,515 - LIABILITIES, EQUITY OF UNRESTRICTED INVESTMENT ACCOUNTHOLDERS AND OWNERS’ EQUITY Due to banks 5,775,000 Customers’ current accounts 5,460,962 9,556,683 5,460,962 Customers’ Wakala bil istithmar 17,274,775 87,337,604 133,205,225 40,641,499 10,423,588 Other liabilities         Total liabilities 28,510,737 96,894,287 149,089,775 40,641,499 Equity of unrestricted investment accountholders 5,665,223 11,330,446 11,330,446 56,652,231 Total owners’ equity Total liabilities, equity of investment 34,175,960 108,224,733 160,420,221 97,293,730 accountholders and owners’ equity 59,198,009 13,930,976 (105,180,702) 78,478,024 Net gap 59,198,009 73,128,985 (32,051,717) 46,426,307 Cumulative net gap 156 Over 5 years RO ANNUAL REPORT 2018 | www.alizzislamic.com iii) Market risk Market risk is the risk of loss arising from unexpected changes in financial prices, as a result of fluctuations in profit rates, foreign exchange rates, equity and commodity prices. Consistent with the Bank’s approach to ensure strict compliance with Shari’a, the Bank does not enter into speculative foreign exchange transactions. Market risk activities are governed by the market risk policy of the Bank. The implementation of the policy, procedures and regulatory limits in the Bank is the responsibility of the relevant business units with oversight by ALCO and the Risk and Compliance Committee. (i) Profit rate risk Profit rate risk is the risk that the Bank will incur a financial loss as a result of mismatch in the profit rate on the Bank’s assets and investment accountholders (IAH). The profit distribution to IAH is based on profit sharing agreements. Therefore, the Bank is not subject to any significant profit rate risk. Effective profit rate on profit bearing assets, liabilities and equity of unrestricted investment accountholders is set below: 2018 % 1.99 5.77 5.91 5.64 6.01 4.51 2017 % 1.40 5.78 5.61 5.16 5.40 3.40 Due to banks’ Customers’ Wakala bil istithmar 1.86 3.81 0.99 3.86 Equity of unrestricted investment accountholders 2.40 1.45 Due from banks Wakala bil istithmar Murabaha receivables Ijarah muntahia bittamleek Diminishing Musharaka Financial assets at fair value through other comprehensive income & amortised cost (ii) Foreign exchange risk Foreign exchange risk arises from the movement of the rate of exchange over a period of time. Positions are monitored on a regular basis to ensure positions are maintained within established approved limits. ANNUAL REPORT 2018 | www.alizzislamic.com 157
80. NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS As at 31 December 2018 As at 31 December 2018 31 . RISK MANAGEMENT (continued) 31. RISK MANAGEMENT (continued) iii) Market risk (continued) The Bank has the following exposures in a foreign currency at the reporting date: US Dollar Euro GCC currencies Great Britain Pound Others Long RO 2018 Short RO Net RO 8,860,032 9,986 196,714 3,169 37,155 9,107,056 - 8,860,032 9,986 196,714 3,169 37,155 9,107,056 Long RO Short RO Net RO 24,191,290 1,261,517 4,131 61,620 25,518,558 652,489 652,489 24,191,290 (652,489) 1,261,517 4,131 61,620 24,866,069 2017 US Dollar Euro GCC currencies Great Britain Pound Others (iii) Price risk Price risk is the risk that fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices (other than those arising from profit rate risk or currency risk), whether those changes are caused by factors specific to the individual financial instrument or its issuer, or factors affecting all similar financial instruments traded in the market. The effect on equity as a result of a change in the fair value of instruments held as fair value through equity due to reasonably possible change in prices, with all other variables held constant, is as follows: Investment type Regional listed sukuks Regional listed equities Regional unlisted funds 158 Change in price 2018 % Effect on equity 2018 RO Change in price 2017 % Effect on equity 2017 RO 10% 10% 10% 1,974,034 14,034 126,286 10% 10% - 4,006,500 140,066 - ANNUAL REPORT 2018 | www.alizzislamic.com iv) Credit risk Credit risk is the risk of potential loss arising from failure of counterparty to meet its contractual obligations. The Bank manages its credit risk arising from its banking book by implementing robust policies and procedures with respect to identification, measurement, mitigation, monitoring and controlling the risks. Corporate financing risk Corporate financing risk is managed by Risk Management Department through a system of independent review. Credit facilities to corporate are approved based on a detailed credit risk assessment which includes review of the end use of funds, primary and secondary sources of payment, prevailing and potential macro economic factors and industry trends. Corporate financing proposals are assigned risk rating based on the results of an internal risk rating model. Altman’s Z score is calculated for each individual Corporate customers. The ratings and the Z score assigned to a Corporate customer aids in the decision making process. Corporate financing is approved by the Senior Credit Committee of the Management, Executive Committee of the Board and the Board of Directors based on authorities approved by the Board. Retail financing risk All Retail Financing is extended to Retail customers on the basis of approved Retail Product Programs. The Retail Product Programs are approved by the Board and Shari’a Supervisory Board. However, any significant modifications arising out of product review is to be recommended to the Chief Executive Officer (CEO) by the business. The CEO, Shari’a Supervisory Board and the relevant business stakeholders shall approve changes/revisions to the product program. Retail Financing proposals meeting the parameters prescribed in the Retail Product Programs are approved by the Risk Management department. Exceptions to the Retail Financing are approved by the Senior Credit Committee of the Management. The financing activity of the Bank is governed by limits prescribed by the CBO and the ones prescribed by the policies of the Bank. Portfolio diversification is the basis of the Bank’s financing strategy. Diversification is achieved by setting customer, industry and geographical limits. The Bank uses a robust Management Information System to monitor its Corporate and Retail financing portfolio by various dimensions. Credit risk grading The Bank uses internal credit risk rating model that reflect its assessment of the probability of default of individual counterparties. The bank’s internal Risk Rating (IRR) system is developed on a 22-point rating scale - enumerated from RR 1 to RR 10 with sub classes under each notch to risk rate a customer and to associate a probability of default to each rating grade. The ratings will also assist studying the distribution of customers, grade wise exposures, transition of credit risk ratings over time, grade wise defaults, Non-Performing Financing (NPF) etc. Risk appetite will also be set in terms of how much of exposure bank expects in various risk rating grades. The credit risk ratings are calibrated such that the risk of default increases exponentially at each higher risk grade. Credit Quality Rating Standard Special Mention Sub Standard Doubtful Loss ANNUAL REPORT 2018 | www.alizzislamic.com Risk Rating(RR) 1 to 67+ or Worse 8 9 10 IFRS 9 Staging Identified based on SICR criteria since initial recognition but is not deemed to be credit impaired - classified under ‘stage 1 or 2 ‘ as applicable Credit Impaired - classified as stage 3 159
81. NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS As at 31 December 2018 As at 31 December 2018 31 . RISK MANAGEMENT (continued) 31. RISK MANAGEMENT (continued) iv) Credit risk (continued) iv) Credit risk (continued) Credit risk mitigation strategy The Bank uses a variety of tools to mitigate its credit risk, the primary one being that of securing the exposure by suitable collaterals. In practice a large part of existing exposures are fully or partially collateralized. The legal validity and enforceability of the documents used for collateral have been established by qualified personnel, including lawyers and Shari’a’ scholars. The Bank’s credit portfolio is supported by various types of collateral such as deposits marked lien, mortgage over land and property, moveable assets including inventory, securities and guarantees. Collaterals are valued as a general rule as per the policy. However, adhoc valuations will also be carried out depending on the nature of collateral and general economic condition. This will enable the Bank to assess the fair market value of the collateral and ensure that risks are appropriately covered. Risk gross maximum exposure: The table below shows the maximum exposure to credit risk for the components of the statement of financial position. The maximum exposure is shown gross, before the effect of use of master netting and collateral agreements. Type of financing contract Wakala bil istithmar Murabaha receivables Ijarah muntahia bittamleek Diminishing Musharaka Neither past due nor non performing RO 112,082,110 100,657,516 253,417,647 70,493,752 536,651,025 Gross maximum exposure to credit risk Cash and balances with Central Bank of Oman Due from banks Financial assets at fair value through other comprehensive income Financial assets at amortised cost Wakala bil istithmar Murabaha receivables Ijarah assets-Ijarah muntahia bittamleek Diminishing Musharaka Other assets Contingent liabilities and commitments 2018 RO 61,965,699 9,446,092 21,143,545 18,095,000 112,471,071 105,734,786 268,687,045 73,111,436 9,208,109 2017 RO 26,693,236 22,522,495 41,313,573 101,345,962 84,789,578 240,911,794 39,128,374 7,226,409 50,803,814 65,920,397 Neither past due nor non performing RO Type of financing contract Wakala bil istithmar Murabaha receivables Ijarah muntahia bittamleek Diminishing Musharaka 99,644,790 79,532,974 211,823,615 36,621,118 427,622,497 Gross exposure 31 December 2018 Past due but performing Non performing RO RO 238,961 150,000 3,498,960 1,578,310 10,251,156 5,018,242 2,617,684 - Total RO 112,471,071 105,734,786 268,687,045 73,111,436 16,606,761 6,746,552 560,004,338 Gross exposure 31 December 2017 Past due but performing Non performing RO RO Total RO 1,701,172 5,076,163 28,164,327 2,507,256 37,448,918 180,441 923,852 1,104,293 101,345,962 84,789,578 240,911,794 39,128,374 466,175,708 Credit quality by type of financing contracts The table below shows the credit quality by type of Islamic financing contracts, based on the Bank’s Credit Rating System (CRS). The balances presented are gross of impairment provision. 160 ANNUAL REPORT 2018 | www.alizzislamic.com ANNUAL REPORT 2018 | www.alizzislamic.com 161
82. NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS As at 31 December 2018 As at 31 December 2018 31 . RISK MANAGEMENT (continued) 31. RISK MANAGEMENT (continued) iv) Credit risk (continued) Aged analysis of past due but performing by type of financing contracts Wakala bil istithmar Murabaha receivables Ijarah muntahia bittamleek Diminishing Musharaka Wakala bil istithmar Murabaha receivables Ijarah muntahia bittamleek Diminishing Musharaka iv) Credit risk (continued) The gross credit exposure to credit risk of the Bank on financial assets and off-balance sheet items subject to ECL is as follows:- Less than 30 days RO 238,961 2,021,932 4,668,558 1,387,964 8,317,415 31 December 2018 31 to 60 days 61 to 90 days RO RO 1,187,924 289,105 2,842,307 2,740,290 847,830 381,890 4,878,061 3,411,285 Total RO 238,961 3,498,961 10,251,155 2,617,684 16,606,761 Less than 30 days RO 1,701,172 3,437,774 13,588,942 2,292,396 21,020,284 31 December 2017 31 to 60 days 61 to 90 days RO RO 287,361 1,351,028 6,353,202 5,372,183 214,859 6,855,422 6,723,211 Total RO 1,701,172 5,076,163 25,314,327 2,507,255 34,598,917 Corporate Retail Corporate Retail 162 Less than 30 days RO 3,882,982 4,434,434 8,317,416 31 December 2018 31 to 60 days 61 to 90 days RO RO 2,118,813 2,759,247 3,411,285 4,878,060 3,411,285 Total RO 6,001,795 10,604,966 16,606,761 Less than 30 days RO 16,113,400 4,906,884 21,020,284 31 December 2017 31 to 60 days 61 to 90 days RO RO 6,393,502 6,324,834 461,920 398,377 6,855,422 6,723,211 Total RO 28,831,736 5,767,181 34,598,917 ANNUAL REPORT 2018 | www.alizzislamic.com Total RO 31 December 2017 Total RO Due from banks Financial assets at FVOCI Financial assets at AC Wakala bil Istithmar Murabaha receivables Ijarah assets-Ijarah muntahia bittamleek Diminishing Musharaka Other assets Commitments and contingent liabilities 9,446,999 21,143,545 18,095,000 110,051,647 98,843,804 246,309,901 68,476,088 8,538,834 49,383,765 2,269,424 5,312,673 17,358,902 4,635,348 376,289 1,120,193 150,000 1,578,309 5,018,242 292,986 299,856 9,446,999 21,143,545 18,095,000 112,471,071 105,734,786 268,687,045 73,111,436 9,208,109 50,803,814 22,497,999 18,095,000 23,339,923 99,915,388 84,148,874 237,289,796 38,947,440 9,663,752 65,734,507 Gross carrying amount 630,289,583 31,072,829 7,339,393 668,701,805 599,632,679 2,645,915 988,492 3,302,727 6,937,134 6,197,577 627,643,668 30,084,337 4,036,666 661,764,671 593,435,102 Expected credit loss allowance/ impairment loss Net carrying amount Aged analysis of past due but performing by customer concentration 31 December 2018 Stage 2 Stage 3 RO RO Stage 1 RO Geographical distribution of financial assets Table below indicates the geographical distribution of financial assets held by the Bank as at 31 December 2018 in Rial Omani. Class of financial asset and off-balance sheet net exposure Balances with Central Bank of Oman Due from banks Financial assets at fair value through other comprehensive income Financial assets at amortised cost Wakala bil istithmar Murabaha receivables Ijarah muntahia bitamleek Diminishing Musharaka Contingent liabilities and commitments Total ANNUAL REPORT 2018 | www.alizzislamic.com Oman 56,545,029 16,503,794 18,095,000 111,542,706 104,243,923 264,997,859 72,528,324 50,803,814 695,260,449 31 December 2018 GCC Rest of the world 688,649 8,758,350 3,367,445 1,262,863 4,056,094 10,021,213 Total 56,545,029 9,446,999 21,134,102 18,095,000 111,542,706 104,243,923 264,997,859 72,528,324 50,803,814 709,337,756 163
83. NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS As at 31 December 2018 As at 31 December 2018 31 . RISK MANAGEMENT (continued) 31. RISK MANAGEMENT (continued) iv) Credit risk (continued) Geographical distribution of financial assets (continued) Class of financial asset and off-balance sheet exposure Balances with Central Bank of Oman Due from banks Financial assets at fair value through other comprehensive income Wakala bil istithmar Murabaha receivables Ijarah muntahia bitamleek Diminishing Musharaka Contingent liabilities and commitments Total Oman 22,255,745 15,000,000 34,500,368 100,305,502 83,183,614 237,964,599 38,752,764 65,920,397 597,882,989 31 December 2017 GCC Rest of the world 5,826,049 1,696,446 6,207,735 605,470 12,033,784 2,301,916 iv) Credit risk (continued) Geographical distribution of financial assets (continued) The table below indicates the sector concentration (continued) Total 22,255,745 22,522,495 41,313,573 100,305,502 83,183,614 237,964,599 38,752,764 65,920,397 612,218,689 The table below indicates the sector concentration 164 Due from banks Financing Gross exposure 31 December 2018 Financial assets at fair value through other comprehensive income and at amortised cost Construction and real estate Banks and financial institutions Sovereigns Trading and manufacturing Personal Other Services 9,446,999 - 84,941,619 106,701,668 256,463,114 111,897,937 3,507,783 34,467,899 1,262,863 84,941,619 12,954,782 34,467,899 106,701,668 256,463,114 113,160,800 17,649,364 15,763,305 13,365,240 4,025,905 Total 9,446,999 560,004,338 39,238,545 608,689,882 50,803,814 Gross exposure 31 December 2017 Construction and real estate Banks and financial institutions Sovereigns Trading and manufacturing Personal Other Services Total Due from banks 22,522,495 22,522,495 Financing 89,512,357 53,315,190 219,746,487 103,601,674 466,175,708 Investments 3,832,658 36,232,342 1,400,659 41,465,659 Total 89,512,357 3,832,658 36,232,342 53,315,190 219,746,487 105,002,333 507,641,367 Contingent Liabilities and Commitments 25,957,320 7,962,040 11,676,419 20,324,618 65,920,397 v) Customer concentrations Total Contingent Liabilities and Commitments ANNUAL REPORT 2018 | www.alizzislamic.com Class of financial asset and off-balance sheet exposure Balances with Central Bank of Oman Due from banks Financial assets at fair value through other comprehensive income Financial assets at amortised cost Wakala bil istithmar Murabaha receivables Ijarah muntahia bitamleek Diminishing Musharaka Contingent liabilities and commitments ANNUAL REPORT 2018 | www.alizzislamic.com Gross exposure 31 December 2018 Personal Corporate 61,965,699 9,446,999 21,143,545 18,095,000 91,471,071 75,789,706 29,945,080 166,076,145 102,610,900 46,551,652 26,559,784 13,365,240 37,438,574 301,782,743 398,676,652 Government - 21,000,000 21,000,000 165
84. NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS As at 31 December 2018 As at 31 December 2018 31 . RISK MANAGEMENT (continued) 31. RISK MANAGEMENT (continued) v) Customer concentrations (continued) Class of financial asset and off-balance sheet exposure Balances with Central Bank of Oman Due from banks Financial assets at fair value through other comprehensive income Financial assets at amortised cost Investments Wakala bil istithmar Murabaha receivables Ijarah muntahia bitamleek Diminishing Musharaka Contingent liabilities and commitments vii) Capital management (continued) Gross exposure 31 December 2017 Personal Corporate 22,255,745 22,522,495 63,475,926 136,481,762 18,859,321 11,676,419 230,493,428 41,313,573 80,345,962 21,313,652 104,430,032 20,269,053 54,243,978 366,694,490 Government - 21,000,000 21,000,000 vi) Operational risk Operational risk is the risk of loss arising from failure of systems, people, processes, fraud and/or any external events. When controls fail to perform, operational risks can cause damage to reputation, have legal or regulatory implications, or lead to financial loss. The Bank cannot eliminate all the operational risks, but it endeavors to manage these risks through a Risk Control Self-Assessment (RCSA) and Key Risk Indicator (KRI) Frameworks there by monitoring and mitigating those potential risks. Controls include effective segregation of duties & responsibilities, access control management, authorization and reconciliation procedures, Maker-Checker, staff education and assessment processes, along with the use of internal audit observations. Common equity tier 1 (CET1) Additional Tier 1 Tier 1 Tier 2 Total regulatory capital Risk-weighted assets Credit risk Market risk Operational risk Total risk-weighted assets Capital adequacy ratio CET1 capital (Tier I) expressed as a percentage of total risk-weighted assets Tier II capital expressed as a percentage of total risk weighted assets Total Regulatory Capital expressed as a percentage of total risk-weighted assets 2018 RO 71,569,384 71,569,384 3,437,276 75,006,660 2017 RO 72,796,179 72,796,179 5,229,401 78,025,580 457,198,178 9,112,500 25,221,714 491,532,392 414,971,901 25,512,500 27,634,088 468,118,489 14.56% 0.70% 15.26% 15.55% 1.12% 16.67% Minimum share capital requirement The Bank has commenced commercial operations on 30 September 2013 and as expected has reported loss during the initial years. As a result the Bank’s owner’s equity is below RO 100 million, which is a CBO requirement. The Bank is developing an appropriate strategy to comply with the minimum prescribed capital requirement. vii) Capital management CBO sets and monitors capital requirements of the Banks operating in Oman. In implementing Basel III’s capital requirement, the CBO requires the Bank to maintain a minimum of 12.875% ratio of total capital to total risk-weighted assets. The Bank’s regulatory capital is analyzed into two tiers:- Tier I capital, which includes ordinary share capital, legal reserve and retained earning. - Tier II capital which includes fair value reserves - Asset liability committee devises capital utilization strategy and monitors compliance with CBO’s regulations in this regard. - The risk asset ratio, calculated in accordance with the capital adequacy guidelines of the Basel Committee on Banking Supervision and CBO Circulars BM 1009 ‘Guidelines on Basel II’ and BM 1114 ‘Regulatory Capital and Composition of Capital Disclosure requirements under Basel III’ effective from 31 December 2013, minimum capital adequacy ratio requirement for the year is 12.875% inclusive of capital conservation buffer of 1.250% (2017: 13.25% inclusive of capital conservation buffer of 0.625%). The capital adequacy ratio working is as follows: 166 ANNUAL REPORT 2018 | www.alizzislamic.com ANNUAL REPORT 2018 | www.alizzislamic.com 167
85. NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS As at 31 December 2018 As at 31 December 2018 32 . FINANCIAL INSTRUMENTS 32. FINANCIAL INSTRUMENTS (continued) Set out below is an overview of financial instruments held by the Bank as at 31 December 2018 :31 December 2018 Fair value through other Amortised cost comprehensive Income RO RO Financial assets: 61,965,699 Cash and balances with Central Bank of Oman 9,446,092 Due from banks 21,134,102 Financial assets at fair value through other comprehensive income 18,095,000 Financial assets at amortised cost 111,542,706 Wakala bil istithmar 104,243,923 Murabaha receivables 264,997,859 Ijarah assets-Ijarah muntahia bittamleek 72,528,324 Diminishing Musharaka 9,387,944 Other assets Fair value through Profit and Loss RO - Total 652,207,547 21,134,102 - Financial liabilities: Due to banks Customers’ current accounts Customers’ Wakala bil istithmar Other liabilities 6,160,000 36,982,020 415,274,399 1,606,147 - - Total 460,022,566 - - Amortised cost RO 31 December 2017 Fair value through other comprehensive Income RO Fair value through Profit and Loss RO Financial assets: Cash and balances with Central Bank of Oman Due from banks Financial assets at fair value through other comprehensive income Financial assets at amortised cost Wakala bil istithmar Murabaha receivables Ijarah assets-Ijarah muntahia bittamleek Diminishing Musharaka Other assets 26,693,236 22,522,495 100,305,502 83,183,614 237,964,599 38,752,764 8,667,407 41,313,573 - - Total 518,089,617 41,313,573 - Financial liabilities: Due to banks Customers’ current accounts Customers’ Wakala bil istithmar Other liabilities 5,775,000 27,304,809 333,861,220 8,679,461 - - Total 375,620,490 - - Fair value of financial instruments The fair value of the financial assets and financial liabilities, other than those disclosed in the table below and in note 10, approximate their carrying values. The bank’s primary medium and long-term financial liabilities are the invested customer deposits and other banks funds. The fair values of these financial liabilities are not materially different from their carrying values, since these liabilities are repriced at intervals of three or six months, depending on the terms and conditions of the instrument and the resultant applicable margins approximate the current spreads that would apply for liabilities with similar maturities. Fair value is the amount for which an asset could be exchanged or a liability settled between knowledgeable and willing parties in an arm’s length transaction. Fair values of quoted securities/sukuks are derived from quoted market prices in active markets, if available. For unquoted securities/sukuks, fair value is estimated using appropriate valuation techniques. Such techniques may include using recent arm’s length market transactions; reference to the current fair value of another instrument that is substantially the same; discounted cash flow analysis or other valuation models. 168 ANNUAL REPORT 2018 | www.alizzislamic.com ANNUAL REPORT 2018 | www.alizzislamic.com 169
86. NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS As at 31 December 2018 As at 31 December 2018 32 . FINANCIAL INSTRUMENTS (continued) 33. SEGMENTAL INFORMATION (continued) Fair value of financial instruments (continued) The Bank uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique: Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities; Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly; and Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data. The following table shows an analysis of financial instruments recorded at fair value by level of the fair value hierarchy at 31 December: 2018 Fair value through other comprehensive income 2017 Fair value through other comprehensive income Level 1 RO 1,403,201 1,403,201 Level 2 RO 19,730,901 19,730,901 Level 3 RO - Total RO 21,134,102 21,134,102 Level 1 RO 1,248,573 1,248,573 Level 2 RO 40,065,000 40,065,000 Level 3 RO - Total RO 41,313,573 41,313,573 Transfers between Level 1, Level 2 and Level 3 There were no transfers between Level 1 and Level 2 fair value measurements, and no transfers into or out of Level 3 fair value measurement. The segment information is as follows: 2018 Net operating income Impairment Loss Allowance Net profit / (loss) Total assets Total liabilities and equity of unrestricted accountholders 2017 Net operating income Provision for impairment Net profit / (loss) Total assets Total liabilities and equity of unrestricted accountholders Retail RO 9,429,274 (1,815,938) (2,743,322) 292,138,456 Corporate RO 8,163,511 1,000,380 4,409,611 266,682,187 Treasury RO 1,406,563 (3,813) 695,037 50,572,043 Others RO (354,203) 73,419,161 Total RO 18,999,348 (819,371) 2,007,123 682,811,847 199,713,497 386,657,141 6,160,000 12,344,943 604,875,581 Retail RO Corporate RO Treasury RO Others RO Total RO 5,486,892 (923,172) (4,712,237) 241,534,093 6,408,328 (1,076,531) 1,423,037 225,165,452 489,112 (84,656) (419,532) 61,331,373 712,785 40,926,597 12,384,332 (2,084,359) (2,995,947) 568,957,515 149,000,838 325,469,652 5,775,000 10,423,588 490,669,078 The costs incurred by the central functions are managed on an overall basis and are currently being allocated to business units. 34. ZAKAH 33. SEGMENTAL INFORMATION The Bank does not collect or pay Zakah on behalf of its customers. Segment information is presented in respect of the Bank’s operating segments. For performance management purposes, the Bank is organised into three operating segments based on products and services as follows: Retail banking includes individual customers deposits, unrestricted investment account consumer financing, credit card and general banking services. Corporate banking includes deposits and financing for corporate and institutional customers along with provision of trade finance services. Treasury includes placements with financial institutions and managing proprietary investment portfolio of the Bank. Performance of the bank is evaluated based on the profit after tax. 35. SHARI’A SUPERVISORY BOARD The Shari’a Supervisory Board (SSB) is an independent body of Shari’a scholars specialised in Fiqh al Mu’amalat (Islamic commercial jurisprudence) and shall oversee the Bank operations from a Shari’a compliance perspective. The SSB is entrusted with the responsibility to directing, reviewing, and supervising the activities of the Bank to ensure they are in compliance with Shari’a principles and regulatory requirements. 36. SOCIAL RESPONSIBILITY The Bank discharges its social responsibilities through donations to charitable causes and organisations. 37. COMPARATIVE INFORMATION Certain of the corresponding figures have been reclassified in order to conform with the presentation for the current year. Such reclassification do not affect previously reported loss or owners’ equity. 170 ANNUAL REPORT 2018 | www.alizzislamic.com ANNUAL REPORT 2018 | www.alizzislamic.com 171
87. 2018 WAS AN EVENTFUL YEAR 2018 WAS AN EVENTFUL YEAR Alizz Islamic Bank 5th Annual General Meeting Alizz Islamic Bank 5th Anniversary 172 Awarded with the ‘Excellence in Islamic Banking’ award at the Oman Banking and Finance Awards 2018 ANNUAL REPORT 2018 | www.alizzislamic.com Shari’a Awareness at Madayn Estates Alizz Islamic Bank Refurbishes Reading & Entertainment Room for Children at Khoula Hospital Alizz organizes Annual Ramadan Iftar for Employees MoU signing ceremony with Takaful Oman ANNUAL REPORT 2018 | www.alizzislamic.com 173
88. 2018 WAS AN EVENTFUL YEAR Alizz Islamic Bank signing ceremony with Al Iskan Al Tullabi Project Alizz Islamic Bank inaugurates its 10th branch in Ma ’abela 174 2018 WAS AN EVENTFUL YEAR Alizz Islamic Bank signing ceremony with Al Raffd Fund Alizz Islamic Bank wins Best Premium Wealth Management Services Award ANNUAL REPORT 2018 | www.alizzislamic.com Alizz Islamic Bank Ramadan Iftar Sa’yim Campaign Gives back to the community Alizz Islamic Bank sponsors Quran Competition in the Wilayat of Izki ANNUAL REPORT 2018 | www.alizzislamic.com 175
89. 2018 WAS AN EVENTFUL YEAR Alizz Islamic Bank conducts the Second Bushra Prize Savings Account Grand Prize Draw at Oman Avenues Mall Alizz Islamic Bank Pioneers Marketing Via Virtual Reality in the Sultanate 176 2018 WAS AN EVENTFUL YEAR Alizz Islamic Bank signs MoU with Prime Business Solutions Alizz Islamic Bank wins Best Arabian Executive Management Team Award ANNUAL REPORT 2018 | www.alizzislamic.com Alizz Islamic Bank sponsors Banking & Finance Conference Alizz Islamic Bank wins Best Islamic Banking Brand Award ANNUAL REPORT 2018 | www.alizzislamic.com 177
90. BRANCH NETWORK Head Office Alizz Tower P .O. Box 753 CBD Area, PC 112 Sultanate of Oman 178 ANNUAL REPORT 2018 | www.alizzislamic.com 178 REPORT 2018 | www.alizzislamic.com ANNUAL REPORT 2018 | ANNUAL www.alizzislamic.com Main Branch 24 775 515 Sohar Branch 26 948 401 Al Khoudh Branch 24 283 801 Nizwa Branch 25 413 401 Wattaya Branch 22 314 850 Salalah Branch 23 382 601 Athaibah Branch 22 060 969 Barka Branch 22 351 600 Ma’abela Branch 22 352 050 Ibra Branch 22 351 750 179
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