KIB Tier 1 Sukuk Limited (Kuwait International Bank) USD300 Million 5.625% Perpetual - Propectus

Transcription

1. IMPORTANT NOTICE THE ATTACHED PROSPECTUS (THE DOCUMENT) MAY ONLY BE DISTRIBUTED TO PERSONS WHO ARE NOT U.S. PERSONS (AS DEFINED IN REGULATION S UNDER THE SECURITIES ACT (AS DEFINED BELOW)) AND ARE OUTSIDE THE UNITED STATES. IMPORTANT: You must read the following disclaimer before continuing. The following disclaimer applies to the Document, whether received by email, accessed from an internet page or otherwise received as a result of electronic communication, and you are therefore advised to read this carefully before reading, accessing or making any other use of the Document. In reading, accessing or making any other use of the Document, you agree to be bound by the following terms and conditions and each of the restrictions set out in the Document, including any modifications made to them from time to time, each time you receive any information from the Trustee, the Bank or the Managers (each as defined below) as a result of such access. You acknowledge that this electronic transmission and the delivery of the Document is confidential and intended only for you and you agree you will not reproduce or publish this electronic transmission or forward the Document to any other person. RESTRICTIONS: UNDER NO CIRCUMSTANCES SHALL THE DOCUMENT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THE SECURITIES DESCRIBED HEREIN (THE "SECURITIES") IN THE UNITED STATES OR ANY OTHER JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL. RECIPIENTS OF THE DOCUMENT WHO INTEND TO SUBSCRIBE FOR OR PURCHASE THE SECURITIES ARE REMINDED THAT ANY SUBSCRIPTION OR PURCHASE MAY ONLY BE MADE ON THE BASIS OF THE INFORMATION CONTAINED IN THE DOCUMENT. ANY SECURITIES TO BE ISSUED HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE SECURITIES ACT) OR WITH ANY SECURITIES REGULATORY AUTHORITY OF ANY STATE OR OTHER JURISDICTION OF THE UNITED STATES AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS (AS DEFINED IN REGULATION S UNDER THE SECURITIES ACT (REGULATION S)) EXCEPT PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND APPLICABLE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION OF THE UNITED STATES. THE DOCUMENT MAY NOT BE FORWARDED OR DISTRIBUTED TO ANY OTHER PERSON WITHOUT THE PRIOR WRITTEN CONSENT OF THE MANAGERS (AS DEFINED BELOW) AND MAY NOT BE REPRODUCED IN ANY MANNER WHATSOEVER. DISTRIBUTION OR REPRODUCTION OF THE DOCUMENT IN WHOLE OR IN PART IS UNAUTHORISED. FAILURE TO COMPLY WITH THIS DIRECTIVE MAY RESULT IN A VIOLATION OF THE SECURITIES ACT OR THE APPLICABLE SECURITIES LAWS OF OTHER JURISDICTIONS. THE DOCUMENT IS NOT BEING DISTRIBUTED TO, AND MUST NOT BE PASSED ON TO, THE GENERAL PUBLIC IN THE UNITED KINGDOM. RATHER, THE COMMUNICATION OF THE DOCUMENT AS A FINANCIAL PROMOTION IS ONLY BEING MADE TO THOSE PERSONS WHO ARE INVESTMENT PROFESSIONALS AS DEFINED IN ARTICLE 19(5) OF THE FINANCIAL SERVICES AND MARKETS ACT 2000 (FINANCIAL PROMOTION) ORDER 2005 (THE FINANCIAL PROMOTION ORDER), PERSONS FALLING WITHIN ANY OF THE CATEGORIES OF PERSONS DESCRIBED IN ARTICLE 49 OF THE FINANCIAL PROMOTION ORDER AND ANY OTHER PERSON TO WHOM THE DOCUMENT MAY OTHERWISE LAWFULLY BE MADE IN ACCORDANCE WITH THE FINANCIAL PROMOTION ORDER. THIS COMMUNICATION IS BEING DIRECTED ONLY AT PERSONS HAVING PROFESSIONAL EXPERIENCE IN MATTERS RELATING TO INVESTMENTS AND ANY INVESTMENT OR INVESTMENT ACTIVITY TO WHICH THIS COMMUNICATION RELATES WILL BE ENGAGED IN ONLY WITH SUCH PERSONS. NO OTHER PERSON SHOULD RELY ON IT. CONFIRMATION OF YOUR REPRESENTATION: By accepting this e-mail and accessing, reading or making any other use of the Document, you shall be deemed to have represented to Citigroup Global Markets Limited, Dubai Islamic Bank PJSC, First Abu Dhabi Bank PJSC, KAMCO Investment Company K.S.C.P., KFH Capital Investment Company K.S.C.C., and Standard Chartered Bank (together, the Joint Lead Managers) and Boubyan Bank K.S.C.P (the Co-Manager and together with the Joint Lead Managers, the Managers), KIB Tier 1 Sukuk Limited (the Trustee), Kuwait International Bank K.S.C.P. (the Bank) and Citibank N.A., London Branch (the Delegate) that: (1) you are located outside the United States and are not a U.S. person, or acting for the account or benefit of any U.S. person; (2) you consent to delivery by electronic transmission; (3) you will not transmit the Document (or any copy of it or part thereof) or disclose, whether orally or in writing, any of its contents to any other person except with the prior written consent of the Managers, the Trustee and the Bank; and (4) you acknowledge that you will make your own assessment regarding any credit, investment, legal, Shari'a, taxation or other economic considerations with respect to your decision to subscribe for or purchase any of the Securities. You are reminded that the Document has been delivered to you on the basis that you are a person into whose possession the Document may be lawfully delivered in accordance with the laws of the jurisdiction in which you are located and you may not, nor are you authorised to, deliver or disclose the contents of the Document, electronically or otherwise, to any other person. Failure to comply with this directive may result in a violation of the Securities Act or the applicable laws of other jurisdictions. You are reminded that the information contained in the Document is not complete and may be changed. Neither the Managers nor any of their respective affiliates accepts any responsibility whatsoever for the contents of the Document or for any statement made or purported to be made by any of them, or any on their behalf, in connection with the Trustee, the Bank or the offer. The Managers and their respective affiliates accordingly disclaim all and any liability whether arising in tort, contract, or otherwise which they might otherwise have in respect of the Document or any such statement. No representation or warranty, express or
2. implied , is made by any of the Managers or their respective affiliates as to the accuracy, completeness, verification or sufficiency of the information set out in the Document. The Managers are acting exclusively for the Trustee and the Bank and no one else in connection with the offer. They will not regard any other person (whether or not a recipient of the Document) as their client in relation to the offer and will not be responsible to anyone other than to the Trustee and the Bank for providing the protections afforded to its clients nor for giving advice in relation to the offer or any transaction or arrangement referred to herein. If you received the Document by e-mail, you should not reply by e-mail. Any reply e-mail communications, including those you generate by using the "Reply" function on your e-mail software, will be ignored or rejected. If you received the Document by email, your use of this e-mail is at your own risk and it is your responsibility to take precautions to ensure that it is free from viruses and other items of a destructive nature. The materials relating to the offering do not constitute, and may not be used in connection with, an offer or solicitation in any place where such offers or solicitations are not permitted by law. If a jurisdiction requires that the offering be made by a licensed broker or dealer and the Managers or any affiliate of the Managers is a licensed broker or dealer in that jurisdiction, the offering shall be deemed to be made by the Managers or such affiliate on behalf of the Trustee in such jurisdiction. The Document has been sent to you in an electronic form. You are reminded that documents transmitted via this medium may be altered or changed during the process of electronic transmission and consequently none of the Managers, the Trustee, the Bank nor any person who controls or is a director, officer, employee or agent of the Managers, the Trustee, the Bank nor any affiliate of any such person accepts any liability or responsibility whatsoever in respect of any difference between the Document distributed to you in electronic format and the hard copy version available to you on request from the Managers. By accessing the Document, you consent to receiving it in electronic form. Recipients of the Document who intend to subscribe for or purchase any Securities to be issued are reminded that any subscription or purchase may only be made on the basis of the information contained in the final version of the Document. The distribution of the Document and the offer or sale of the Securities in certain jurisdictions may be restricted by law. Persons into whose possession the Document comes are required by the Managers, the Trustee and the Bank to inform themselves about, and to observe, any such restrictions. Notification under Section 309B(1)(c) of the Securities and Futures Act (Chapter 289) of Singapore (the SFA) – In connection with Section 309B of the SFA and the Securities and Futures (Capital Markets Products) Regulations 2018 (the CMP Regulations 2018), the Trustee has determined the classification of the Certificates as prescribed capital markets products (as defined in the CMP Regulations 2018) and Excluded Investment Products (as defined in MAS Notice SFA 04-N12: Notice on the Sale of Investment Products and MAS Notice FAA-N16: Notice on Recommendations on Investment Products). MiFID II professionals / ECPs-only – Manufacturer target market (MiFID II product governance) is eligible counterparties and professional clients only (all distribution channels). Restrictions on marketing and sales to retail investors The Securities are complex financial instruments and are not a suitable or appropriate investment for all investors. In some jurisdictions, regulatory authorities have adopted or published laws, regulations or guidance with respect to the offer or sale of securities such as, or with features similar to those of, the Securities to retail investors. In particular, (i) on 1 January 2018, the provisions of Regulation (EU) No. 1286/2014 on key information documents for packaged and retail and insurance-based investment products (the PRIIPs Regulation) became directly applicable in all European Economic Area (EEA) member states and (ii) the Markets in Financial Instruments Directive 2014/65/EU (as amended) (MiFID II) was required to be implemented in EEA member states by 3 January 2018. Together, the PRIIPs Regulation and MiFID II are referred to as the Regulations. The Regulations set out various obligations in relation to (i) the manufacturing and distribution of financial instruments and (ii) the offering, sale and distribution of packaged retail and insurance-based investment products. Potential investors should inform themselves of, and comply with, any applicable laws, regulations or regulatory guidance with respect to any resale of the Securities (or any beneficial interests therein), including the Regulations. Each of the Managers is required to comply with some or all of the Regulations. By purchasing, or making or accepting an offer to purchase, any Securities from the Trustee, the Bank and/or the Managers, each prospective investor represents, warrants, agrees with and undertakes to the Trustee, the Bank and each of the Managers that: (a) it is not a retail investor, where retail investor means a person who is one (or more) of the following: (i) a retail client as defined in point (11) of Article 4(1) of MiFID II or (ii) a customer within the meaning of Directive 2002/92/EC (as amended or superseded) where that customer would not qualify as a professional client as defined in point (10) of Article 4(1) of MiFID II; (b) whether or not it is subject to the Regulations, it will not: (i) sell or offer the Securities (or any beneficial interest therein) to any retail investor; or (ii) communicate (including the distribution of the Document) or approve an invitation or inducement to participate in, acquire or underwrite the Securities (or any beneficial interests therein) where that
3. invitation or inducement is addressed to , or disseminated in such a way that it is likely to be received by, any retail investor; and (c) it will at all times comply with all applicable laws, regulations and regulatory guidance (whether inside or outside the EEA) relating to the promotion, offering, distribution and/or sale of the Securities, including (without limitation) MiFID II and any other applicable laws, regulations and regulatory guidance relating to determining the appropriateness and/or suitability of an investment in the Securities (or any beneficial interests therein) by investors in any relevant jurisdiction. Each prospective investor further acknowledges that: (a) the identified target market for the Securities (for the purposes of the product governance obligations in MiFID II) is eligible counterparties and professional clients; and (b) no key information document under the PRIIPs Regulation has been prepared and therefore offering or selling the Securities or otherwise making them available to any retail investor may be unlawful under the PRIIPs Regulation. Where acting as agent on behalf of a disclosed or undisclosed client when purchasing, or making or accepting an offer to purchase, any Securities from the Trustee, the Bank and/or the Managers, the foregoing representations, warranties, agreements and undertakings will be given by and be binding upon both the agent and its underlying client.
4. KIB Tier 1 Sukuk Limited (incorporated as a special purpose company with limited liability in the Cayman Islands) U.S.$300,000,000 Additional Tier 1 Capital Certificates The U.S.$300,000,000 Additional Tier 1 Capital Certificates (the Certificates) of KIB Tier 1 Sukuk Limited (in its capacity as issuer and in its capacity as trustee, as applicable, the Trustee) will be constituted by a declaration of trust (the Declaration of Trust) dated 10 June 2019 (the Issue Date) entered into between the Trustee, Kuwait International Bank K.S.C.P. (the Bank) and Citibank N.A., London Branch as the delegate of the Trustee (the Delegate). The Certificates confer on the holders of the Certificates from time to time (the Certificateholders) the conditional right to receive certain payments (as more particularly described herein) arising from an undivided ownership interest in the assets of a trust declared by the Trustee pursuant to the Declaration of Trust (the Trust) over the Trust Assets (as defined herein) and the Trustee will hold such Trust Assets upon trust absolutely for the Certificateholders pro rata according to the face amount of Certificates held by each Certificateholder in accordance with the Declaration of Trust and the terms and conditions of the Certificates (the Conditions). If a Non-Viability Event (as defined herein) occurs, a Write-down (as defined herein) shall occur on the relevant Non-Viability Event Write-down Date (as defined herein), as more particularly described in Condition 11 (Write-down at the Point of Non-Viability). In such circumstances, the Certificates shall be cancelled (in the case of a Write-down in whole) or written-down in part on a pro rata basis (in the case of a Write-down in part) by the Trustee in accordance with the prevailing Capital Regulations (as defined herein) and the Certificateholders' rights to the Trust Assets (including the Mudaraba Assets) shall automatically be deemed to be irrevocably and unconditionally cancelled or written-down, as applicable, in the same manner as the Certificates. See “Risk Factors—Certificateholders' right to receive payment of the face amount of the Certificates and the Certificateholders' right to any profit will be cancelled or permanently written down (in whole or in part) upon the occurrence of a Non-Viability Event”. Periodic Distribution Amounts (as defined herein) shall be payable subject to and in accordance with the Conditions on the outstanding face amount of the Certificates from (and including) the Issue Date to (but excluding) 10 June 2024 (the First Call Date) at a rate of 5.625 per cent. per annum from amounts of Rab-al-Maal Mudaraba Profit and Rab-al-Maal Final Mudaraba Profit (as further described below). If the Certificates are not written down in full, redeemed or purchased and cancelled in accordance with the Conditions on or prior to the First Call Date, Periodic Distribution Amounts shall be payable from (and including) the First Call Date subject to and in accordance with the Conditions at a fixed rate, to be reset on the First Call Date and every fifth anniversary thereafter, equal to the Relevant Five Year Reset Rate (as defined in the Conditions) plus a margin of 3.60 per cent. per annum. Each payment of a Periodic Distribution Amount will be made by the Trustee, provided that the Bank (in its capacity as Mudareb (as defined herein)) shall have paid Rab-al-Maal Mudaraba Profit and Rab-al-Maal Final Mudaraba Profit (as applicable) (each as defined in the Conditions) equal to such Periodic Distribution Amount pursuant to the terms of the Mudaraba Agreement (as defined in the Conditions). Payments of such profit amounts under the Mudaraba Agreement are subject to mandatory cancellation if a Non-Payment Event (as defined herein) occurs (which includes the case where sufficient Distributable Funds (as defined herein) are not available in order to permit the Bank to make the relevant payment or as a result of a breach of Applicable Regulatory Capital Requirements (as defined in the Conditions)), and are otherwise at the sole discretion of the Bank (as Mudareb). Any Periodic Distribution Amounts not paid as aforesaid will not accumulate and neither the Trustee nor the Certificateholders shall have any claim in respect thereof. Payments on the Certificates will be made free and clear of and without deduction for, or on account of, taxes, levies, imposts, duties, fees, assessments or other charges of whatever nature, imposed or levied by or on behalf of any Relevant Jurisdiction (as defined herein) (the Taxes) to the extent described under Condition 13 (Taxation). The payment obligations of the Bank under the Mudaraba Agreement (as defined herein) (including all payments which are the equivalent of principal and profit) (the Relevant Obligations) will rank subordinate to all Senior Obligations, rank pari passu with all other Pari Passu Obligations and rank in priority to all Junior Obligations (each as defined in the Conditions). The Certificates are perpetual securities and have no fixed or final redemption date. Unless the Certificates have previously been redeemed or purchased and cancelled as provided in the Conditions, the Bank may (acting in its sole discretion) instruct the Trustee to, whereupon the Trustee shall, redeem all but not some only of the Certificates on the First Call Date or on any Periodic Distribution Date falling after the First Call Date in accordance with Condition 10.1(b) (Trustee's Call Option). In addition, upon the occurrence of a Tax Event or a Capital Event (each as defined in the Conditions), the Certificates may be redeemed in whole (but not in part), or the terms thereof may be varied (by the Trustee but only upon the instructions of the Bank (acting in its sole discretion)), in each case at any time on or after the Issue Date in accordance with Conditions 10.1(c) (Redemption or Variation due to Taxation) and 10.1(d) (Redemption or Variation for Capital Event). Any redemption or variation is subject to the conditions described in Condition 10.1 (Redemption and variation). The Certificates will be limited recourse obligations of the Trustee. An investment in the Certificates involves certain risks. For a discussion of these risks, see "Risk Factors". The Bank has been assigned a long term rating of "A+" with a stable outlook by Fitch Ratings Ltd (Fitch). Fitch is established in the European Union and is registered under Regulation (EC) No. 1060/2009 (as amended) (the CRA Regulation). As such Fitch is included in the list of credit rating agencies published by the European Securities and Markets Authority (ESMA) on its website (at http://www.esma.europa.eu/page/List-registered-and-certified-CRAs) in accordance with the CRA Regulation. The Certificates will not be rated by any rating organisation upon their issue. A rating is not a recommendation to buy, sell or hold securities and may be subject to suspension, reduction or withdrawal at any time by the assigning rating agency. This Prospectus has been approved by the Central Bank of Ireland (the Central Bank) as competent authority under Directive 2003/71/EC, as amended or superseded (the Prospectus Directive). The Central Bank only approves this Prospectus as meeting the requirements imposed under Irish and European Union law pursuant to the Prospectus Directive. Such approval relates only to the Certificates which are to be admitted to trading on a regulated market for the purposes of the Markets in Financial Instruments Directive 2014/65/EU (as amended, MiFID II) or which are to be offered to the public in any Member State of the European Economic Area (the EEA). Application has been made to the Irish Stock Exchange plc trading as Euronext Dublin (Euronext Dublin) for the Certificates to be admitted to its official list (the Official List) and to trading on its regulated market. The regulated market of Euronext Dublin is a regulated market for the purposes of MiFID II. References in this Prospectus to the Certificated being listed (and all related references) shall mean that such Certificates have been admitted to the Official List and have been admitted to trading on the regulated market of Euronext Dublin. The Certificates may only be offered, sold or transferred in registered form in minimum nominal amounts of U.S.$200,000 and integral multiples of U.S.$1,000 in excess thereof. Delivery of the Certificates in book-entry form will be made on the Issue Date. The Certificates will be represented by interests in a global certificate in registered form (the Global Certificate) deposited on or about the Issue Date with, and registered in the name of a nominee for, a common depositary (the Common Depositary) for Euroclear Bank SA/NV (Euroclear) and Clearstream Banking S.A. (Clearstream, Luxembourg). Interests in the Global Certificate will be shown on, and transfers thereof will be effected only through, records maintained by Euroclear and Clearstream, Luxembourg. Certificates (as defined in the Conditions) evidencing holdings of interests in the Certificates will be issued in exchange for interests in the Global Certificate only in certain limited circumstances described herein. The Certificates should not be offered, sold or otherwise made available to retail investors in the EEA, which, for these purposes, includes a retail client as defined in MiFID II or a customer within the meaning of Directive 2002/92/EC (the Insurance Mediation Directive), each as amended or superseded from time to time. Prospective investors are referred to the section headed "Prohibition of Sale to EEA Retail Investors" on pages ix and 173 of this Prospectus for further information. Amounts payable on the Certificates following the Reset Date will be calculated by reference to one or more U.S. Treasury rates. As at the date of this Prospectus, the administrator(s) of the relevant U.S. Treasury rate(s) are not included in the register of administrators of the European Securities and Markets Authority (ESMA) under Article 36 of the Regulation (EU) No. 2016/1011 (the BMR). As far as the Trustee is aware, the transitional provisions in Article 51 of the BMR apply, such that the administrator(s) of the relevant U.S. Treasury rate(s) are not currently required to obtain authorisation/registration (or, if located outside the EU, recognition, endorsement or equivalence). The Certificates have not been and will not be, registered under the United States Securities Act of 1933, as amended (the Securities Act) or with any securities regulatory authority of any state or other jurisdiction of the United States and may not be offered, sold or delivered within the United States or to, or for the account or benefit of, U.S. Persons (as defined in Regulation S under the Securities Act (Regulation S)) except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state securities laws. Accordingly, the Certificates may be offered or sold solely to persons who are not U.S. Persons outside the United States in reliance on Regulation S. Each purchaser of the Certificates is hereby notified that the offer and sale of Certificates to it is being made in reliance on the exemption from the registration requirements of the Securities Act provided by Regulation S. The transaction structure relating to the Certificates (as described in this Prospectus) has been approved by the Shari'a Supervisory Board of Citi Islamic Investment Bank, the First Abu Dhabi Bank Shariah Supervisory Board, KFH Capital's Sharia Committee and the Sharia Supervisory Committee of Standard Chartered Bank. Prospective Certificateholders should not rely on such approvals in deciding whether to make an investment in the Certificates and should consult their own Shari'a advisers as to whether the proposed transaction described in such approvals is in compliance with their individual standards of compliance with Shari'a principles. Joint Global Co-ordinators Standard Chartered Bank Citi Joint Lead Managers Citi Dubai Islamic Bank First Abu Dhabi Bank KAMCO KFH Capital Standard Chartered Bank Co-Manager Boubyan Bank The date of this Prospectus is 7 June 2019
5. This Prospectus comprises a prospectus for the purposes of Article 5 .3 of the Prospectus Directive and for the purpose of giving information with regard to the Trustee, the Bank and its subsidiaries and affiliates taken as a whole and the Certificates which, according to the particular nature of the Trustee, the Bank and of the Certificates, is necessary to enable investors to make an informed assessment of the assets and liabilities, financial position, profit and losses and prospects of the Trustee and the Bank and of the Certificates. The Trustee and the Bank accept responsibility for the information contained in this Prospectus. To the best of the knowledge of each of the Trustee and the Bank (each having taken all reasonable care to ensure that such is the case) the information contained in this Prospectus is in accordance with the facts and does not omit anything likely to affect the import of such information. The opinions, assumptions, intentions, projections and forecasts expressed in this Prospectus with regard to the Trustee and the Bank are honestly held by the Trustee and the Bank, have been reached after considering all relevant circumstances and are based on reasonable assumptions and are not misleading in any material respect. None of Citigroup Global Markets Limited, Dubai Islamic Bank PJSC, First Abu Dhabi Bank PJSC, KAMCO Investment Company K.S.C.P., KFH Capital Investment Company K.S.C.C., and Standard Chartered Bank (together, the Joint Lead Managers) nor Boubyan Bank K.S.C.P (the Co-Manager and together with the Joint Lead Managers, the Managers), nor any of their directors, affiliates, advisers, agents, the Delegate nor the Agents (as defined in the Agency Agreement) has independently verified the information contained or incorporated by reference herein. Accordingly, no representation, warranty or undertaking, express or implied, is accepted by any of them: (i) as to the accuracy or completeness of the information contained or incorporated by reference in this Prospectus or any other information provided by the Trustee or the Bank in connection with the issuance of the Certificates; or (ii) for any acts or omissions of the Trustee, the Bank or any other person (other than the relevant Managers, directors, affiliates, advisers or agents, each in respect of itself) in connection with this Prospectus or the issue and offering of the Certificates. To the fullest extent permitted by law, the Managers, the Delegate and the Agents accept no responsibility whatsoever for the contents of this Prospectus or for any other statement, made or purported to be made by a Manager, the Delegate or any Agent or on its behalf in connection with the Trustee, the Bank or the issue and offering of the Certificates. Each Manager, the Delegate and each Agent accordingly disclaims all and any liability whether arising in tort or contract or otherwise (save as referred to above) which it might otherwise have in respect of this Prospectus or any such statement. No person is or has been authorised by the Trustee, the Bank, the Delegate or the Agents to give any information or to make any representation not contained in or not consistent with this Prospectus or any other document entered into in relation to the offering of the Certificates and, if given or made, such information or representation should not be relied upon as having been authorised by the Trustee, the Bank, the Delegate, the Agents or any of the Managers. None of the Managers, nor any of their directors, affiliates, advisers, agents, the Delegate nor the Agents or any of their respective affiliates make any representation or warranty or accept any liability as to the accuracy or completeness of the information contained in this Prospectus. Neither this Prospectus nor any other information supplied in connection with the issuance of the Certificates: (a) is intended to provide the basis of any credit or other evaluation; or (b) should be considered as a recommendation by the Trustee, the Bank or any of the Managers that any recipient of this Prospectus or any other information supplied in connection with the issuance of the Certificates should purchase any Certificates. Each investor contemplating purchasing any Certificates should make its own independent investigation of the financial condition and affairs, and its own appraisal of the creditworthiness, of the Trustee and the Bank. Neither this Prospectus nor any other information supplied in connection with the issuance of the Certificates constitutes an offer or invitation by or on behalf of the Trustee, the Bank or any of the Managers to any person to subscribe for or to purchase any Certificates. i
6. Neither the delivery of this Prospectus nor the offering , sale or delivery of the Certificates shall, in any circumstances, constitute a representation or create any implication that the information contained in this Prospectus is correct subsequent to the date hereof or the date upon which this Prospectus has been most recently amended or supplemented or that there has been no adverse change, or any event reasonably likely to involve any adverse change, in the prospects or the financial or trading position of the Trustee or the Bank since the date hereof or, if later, the date upon which this Prospectus has been most recently amended or supplemented or that any other information supplied in connection with the Certificates is correct at any time subsequent to the date on which it is supplied or, if different, the date indicated in the document containing the same. The Managers expressly do not undertake to review the financial condition or affairs of the Trustee or the Bank during the life of the issuance or to advise any investor in the Certificates of any information coming to their attention. No comment is made, or advice given, by the Trustee, the Delegate, the Agents, the Bank or the Managers or, any of their directors, affiliates, advisers or agents in respect of taxation matters relating to the Certificates or the legality of the purchase of the Certificates by an investor under applicable or similar laws. Any investor in the Certificates should be able to bear the economic risk of an investment in the Certificates for an indefinite period of time. This Prospectus does not constitute an offer to sell or the solicitation of an offer to buy any Certificates in any jurisdiction to any person to whom it is unlawful to make the offer or solicitation in such jurisdiction. The Certificates have not been and will not be registered under the Securities Act or with any securities regulatory authority of any state or other jurisdiction of the United States and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state securities laws. Accordingly, the Certificates may be offered or sold solely to persons who are not U.S. persons outside the United States in reliance on Regulation S. Each purchaser of the Certificates is hereby notified that the offer and sale of Certificates to it is being made in reliance on the exemption from the registration requirements of the Securities Act provided by Regulation S. The transaction structure relating to the Certificates (as described in this Prospectus) has been approved by the Shari'a Supervisory Board of Citi Islamic Investment Bank, the First Abu Dhabi Bank Shariah Supervisory Board, KFH Capital's Sharia Committee and the Sharia Supervisory Committee of Standard Chartered Bank. Prospective Certificateholders should not rely on such approvals in deciding whether to make an investment in the Certificates and should consult their own Shari'a advisers as to whether the proposed transaction described in such approvals is in compliance with their individual standards of compliance with Shari'a principles. Each prospective investor is advised to consult its own tax adviser, legal adviser and business adviser as to tax, legal, business and related matters concerning the purchase of any Certificates. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy Certificates in any jurisdiction to any person to whom it is unlawful to make the offer or solicitation in such jurisdiction. None of the Managers, the Trustee, the Delegate, the Agents or the Bank makes any representation to any investor in the Certificates regarding the legality of its investment under any applicable laws. Any investor in the Certificates should be able to bear the economic risk of an investment in the Certificates for an indefinite period of time. The distribution of this Prospectus and the offering, sale or delivery of Certificates may be restricted by law in certain jurisdictions. None of the Trustee, the Bank, the Managers, or any of their directors, affiliates, advisers, agents, the Delegate or the Agents represents that this Prospectus may be lawfully distributed, or that any Certificates may be lawfully offered, in compliance with any applicable registration or other requirements in any such jurisdiction, or pursuant to an exemption available thereunder, or assumes any responsibility for facilitating any such distribution or offering. In particular, no action has been taken by the Trustee, the Bank, the Managers or any of their directors, affiliates, advisers, agents, the Delegate or the Agents which is intended to permit a public ii
7. offering of any Certificates or distribution of this Prospectus in any jurisdiction where action for that purpose is required . Accordingly, no Certificates may be offered or sold, directly or indirectly, and neither this Prospectus nor any advertisement or other offering material may be distributed or published in any jurisdiction, except under circumstances that will result in compliance with any applicable laws and regulations. If a jurisdiction requires that the offering be made by a licensed broker or dealer and the Managers or any affiliate of the Managers is a licensed broker or dealer in that jurisdiction, the offering shall be deemed to be made by the Managers or such affiliate on behalf of the Trustee in such jurisdiction. Persons into whose possession this Prospectus or any Certificates may come must inform themselves about, and observe, any such restrictions on the distribution of this Prospectus and the offering and sale of any Certificates. In particular, there are restrictions on the distribution of this Prospectus and the offer or sale of any Certificates in the United States, the United Kingdom, the EEA, the United Arab Emirates (excluding the Dubai International Financial Centre), the Cayman Islands, the Dubai International Financial Centre, the Kingdom of Saudi Arabia, the State of Kuwait (Kuwait), the Kingdom of Bahrain (Bahrain), Hong Kong, Singapore, Malaysia, Switzerland and the State of Qatar (see "Subscription and Sale"). Neither this Prospectus nor any other information supplied in connection with the issuance of the Certificates constitutes an offer or an invitation to subscribe for or purchase Certificates, is intended to provide the basis of any credit or other evaluation nor should it be considered as a recommendation by the Trustee, the Bank, the Managers, the Delegate, the Agents or any of their directors, affiliates, advisers, agents or any of them that any recipient of this Prospectus or any other information supplied in connection with the issuance of the Certificates should subscribe for, or purchase, the Certificates. Each recipient of this Prospectus should make, and shall be taken to have made, its own independent investigation and appraisal of the condition (financial or otherwise) and affairs, and its own appraisal of the creditworthiness of the Trustee and the Bank. None of the Managers undertakes to review the financial condition or affairs of the Trustee or the Bank during the life of the arrangements contemplated by this Prospectus nor to advise any investor or potential investor in the Certificates of any information coming to the attention of any of the Managers. The Certificates may not be a suitable investment for all investors. Each potential investor in the Certificates must determine the suitability of its investment in light of its own circumstances. In particular, each potential investor should: (a) have sufficient knowledge and experience to make a meaningful evaluation of the Certificates, the merits and risks of investing in the Certificates and the information contained in this Prospectus; (b) have access to, and knowledge of, appropriate analytical tools to evaluate, in the context of its particular financial situation, an investment in the Certificates and the impact the Certificates will have on its overall investment portfolio; (c) have sufficient financial resources and liquidity to bear all of the risks of an investment in the Certificates, including where the currency of payment is different from the potential investor's currency; (d) understand thoroughly the terms of the Certificates and be familiar with the behaviour of any relevant indices and financial markets; and (e) be able to evaluate (either alone or with the help of a financial adviser) possible scenarios for economic and other factors that may affect its investment and its ability to bear the applicable risks. iii
8. Legal investment considerations may restrict certain investments . The investment activities of certain investors are subject to investment laws and regulations, or review or regulation by certain authorities. Each potential investor should consult its legal advisers to determine whether and to what extent: (a) the Certificates are legal investments for it; (b) the Certificates can be used as collateral for various types of financing; and (c) other restrictions apply to its purchase or pledge of any Certificates. Financial institutions should consult their legal advisers or the appropriate regulators to determine the appropriate treatment of Certificates under any applicable risk-based capital or similar rules. The Certificates are complex financial instruments. Sophisticated institutional investors generally do not purchase complex financial instruments as stand-alone investments. They purchase complex financial instruments as a way to reduce risk or enhance yield with an understood, measured, appropriate addition of risk to their overall portfolios. A potential investor should not invest in the Certificates unless it has the expertise (either alone or with the help of a financial adviser) to evaluate how the Certificates will perform under changing conditions, the resulting effects on the value of the Certificates and the impact this investment will have on the potential investor's overall investment portfolio. STABILISATION In connection with the issue of the Certificates, Standard Chartered Bank (the Stabilisation Manager) (or persons acting on behalf of the Stabilisation Manager) may effect transactions with a view to supporting the market price of the Certificates at a level higher than that which might otherwise prevail, but in so doing, the Stabilisation Manager shall act as principal and not as agent of the Trustee or the Bank. However, stabilisation may not necessarily occur. Any stabilisation action may begin on or after the Issue Date and, if begun, may cease at any time, but it must end no later than the earlier of 30 days after the Issue Date and 60 days after the date of the allotment of the Certificates. The Stabilisation Manager (or persons acting on behalf of the Stabilisation Manager) must conduct such stabilisation in accordance with all applicable laws and rules. CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS Some statements in this Prospectus may be deemed to be forward looking statements. The words "anticipate", "believe", "expect", "plan", "intend", "targets", "aims", "seeks", "estimate", "project", "will", "would", "may", "could", "continue", "should" and similar expressions are intended to identify forward looking statements. All statements other than statements of historical fact included in this Prospectus, including, without limitation, those regarding the financial position of the Bank, or the business strategy, management plans and objectives for future operations of the Bank, are forward looking statements. These forward looking statements involve known and unknown risks, uncertainties and other factors, which may cause the Bank's actual results, performance or achievements, or industry results, to be materially different from those expressed or implied by these forward looking statements. These forward-looking statements are contained in the sections entitled "Risk Factors" and "Description of the Bank" and other sections of this Prospectus. The Bank has based these forward-looking statements on the current view of its management with respect to future events and financial performance. These forward looking statements are based on numerous assumptions regarding the Bank's present, and future, business strategies and the environment in which the Bank expects to operate in the future. Important factors that could cause the Bank's actual results, performance or achievements to differ materially from those in the forward looking statements are discussed in this Prospectus (see "Risk Factors"). Forward looking statements speak only as at the date of this Prospectus and, without prejudice to any requirements under applicable laws and regulations, the Trustee and the Bank expressly disclaim any obligation or undertaking to publicly update or revise any forward looking statements in this Prospectus to reflect any change in the expectations of the Trustee or the Bank or any change in events, conditions or circumstances on which these forward looking statements are based. Given the uncertainties of forward looking statements, the Trustee and the Bank cannot assure potential investors that projected results or events will be achieved and the Trustee and the Bank caution potential investors not to place undue reliance on these statements. iv
9. PRESENTATION OF CERTAIN FINANCIAL AND OTHER INFORMATION PRESENTATION OF FINANCIAL INFORMATION Historical financial statements The financial statements relating to the Bank and its subsidiary (together, the Group) included in this Prospectus are: • the interim condensed consolidated financial information (unaudited) as at and for the three-month period ended 31 March 2019 (the Interim Financial Statements); • the audited consolidated financial statements as at and for the year ended 31 December 2018 (the 2018 Financial Statements); and • the audited consolidated financial statements as at and for the year ended 31 December 2017 (the 2017 Financial Statements and, together with the 2018 Financial Statements, the Annual Financial Statements). The Interim Financial Statements and the Annual Financial Statements are together referred to as the Financial Statements. All financial information in this Prospectus as at and for the three-month periods ended 31 March 2019 and 31 March 2018 has been derived from the Interim Financial Statements. All financial information in this Prospectus as at and for the years ended 31 December 2018 and 31 December 2017 has been derived from the 2018 Financial Statements and all financial information in this Prospectus as at and for the year ended 31 December 2016 has been derived from the 2017 Financial Statements. The Annual Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) as adopted for use by the State of Kuwait (Kuwait). This reflects the fact that from 1 January 2018 the regulations for financial services institutions published by the Central Bank of Kuwait (the CBK) require expected credit loss (ECL) to be measured at the higher of the ECL on credit facilities computed under IFRS 9, “Financial Instruments” (IFRS 9) according to the CBK guidelines or the provisions as required by CBK instructions. Prior to 1 January 2018, CBK regulations required the adoption of all IFRS requirements except for the International Accounting Standard 39, “Financial Instruments: Recognition and Measurement”, requirement for a collective provision, which had been replaced by the CBK's requirement for a minimum general provision to be made on all applicable credit facilities (net of certain categories of collateral) that were not provided for specifically. The Interim Financial Statements have been prepared in accordance with International Accounting Standard 34, “Interim Financial Reporting”. The Annual Financial Statements have been jointly audited by independent auditors Ernst & Young (Al-Aiban, AlOsaimi & Partners) (EY) and Deloitte & Touche Al Wazzan & Co (Deloitte, and together with EY, the Auditors), in accordance with International Standards on Auditing as stated in their reports included herein, who have issued unqualified reports on the Annual Financial Statements. The Interim Financial Statements have been jointly reviewed by the Auditors in accordance with International Standard on Review Engagements 2410, “Review of Interim Financial Information Performed by the Independent Auditor of the Entity”, as stated in their review report included herein, who have issued an unqualified review report on the Interim Financial Statements. The Group's financial year ends on 31 December and references in this Prospectus to 2016, 2017 and 2018 are to the 12 month period ending on 31 December in each such year. v
10. The Issuer is a special purpose company established in the Cayman Islands . The Issuer is not required by Cayman Islands law, and does not intend, to publish audited financial statements or appoint an auditor. Impact of the implementation of IFRS 9 from 1 January 2018 The Group applied, for the first time, IFRS 9 with effect from 1 January 2018 with the exception of requirement of ECL on financing receivables. IFRS 9 was effective for annual periods beginning on or after 1 January 2018 with early application permitted by the IASB. The Group has not restated comparative information for 2017 as permitted by the transitional provisions of IFRS 9. Therefore, the financial information relating to the Group presented in this Prospectus for 2017 does not reflect the requirements of IFRS 9 and is not comparable to the financial information relating to the Group presented for 2018. Differences in the carrying amount of financial assets resulting from the adoption of IFRS 9 are recognised in retained earnings and reserves as at 1 January 2018 and are disclosed in Note 2.2 to the 2018 Financial Statements, which also summarises the key changes to the Group's accounting policies resulting from the adoption of IFRS 9. The Group's ECL allowances for various assets are disclosed in Notes 2.2, 9, 10, 11 and 12 to the 2018 Financial Statements. Certain non-IFRS and unaudited financial information This Prospectus includes references to capital, leverage and certain other ratios. Although these ratios are not IFRS measures, the Group believes that the capital and leverage ratios in particular are important to understanding its capital and leverage position, particularly in light of regulatory requirements to maintain these ratios above prescribed minimum levels. The Group's interpretation of certain ratios and the basis of its calculation of those ratios may be different from those of other financial institutions. Certain of the non-IFRS financial information included in this Prospectus are not subject to any audit or review by independent auditors and also constitute Alternative Performance Measures (APMs), as defined in the European Securities and Markets Authority Guidelines on Alternative Performance Measures. See “Selected financial information—Selected consolidated ratios and APMs”. All information in this Prospectus as at, and relating to the three-month periods ended, 31 March 2019 and 31 March 2018 is unaudited. Results for any interim period within a year will not necessarily be indicative of the results for the full year. PRESENTATION OF OTHER INFORMATION Currencies Unless otherwise indicated, in this Prospectus, all references to: • dinar and KD are to the lawful currency of Kuwait; and • U.S. dollars and U.S.$ are to the lawful currency of the United States. Unless otherwise indicated, the financial information contained in this Prospectus has been expressed in dinar. The Group's presentation currency is the dinar and the Group prepares its financial statements in dinar. Third party and market share data There is no independently determined comprehensive financial services industry data available in Kuwait. As a result, any Group market share data included in this Prospectus represents the Group's own estimates of its market shares based on the financial statements published by Kuwaiti banking groups and, where available, reported bank data published by the CBK. All such market share information is referred herein to as having been estimated and potential investors should note that the data so derived includes significant assets and liabilities outside Kuwait and vi
11. excludes any Kuwaiti assets and liabilities of non-Kuwaiti banking groups . As a result, it simply represents an approximation of the Group's actual market shares. Nevertheless, the Group believes that its estimates of market share are helpful as they give prospective investors a better understanding of the industry in which the Group operates, as well as its position within that industry. Although all such estimations have been made in good faith based on the information available and the Group's knowledge of the market within which it operates, the Bank cannot guarantee that a third party expert using different methods would reach the same conclusions. Statistical information relating to Kuwait included in this Prospectus has been derived from official public sources, including the Organization of Petroleum Exporting Countries (OPEC), the International Monetary Fund (the IMF), the Sovereign Wealth Fund Institute, the United States Central Intelligence Agency (the CIA), the Kuwait Public Authority for Civil Information, the CBK and the Kuwait Central Statistical Bureau (the CSB). All such statistical information may differ from that stated in other sources for a variety of reasons, including the fact that the underlying assumptions and methodology (including definitions and cut-off times) may vary from source to source. This data may subsequently be revised as new data becomes available and any such revised data will not be circulated by the Group to investors who have purchased the Certificates. The statistical information in this Prospectus, including in relation to Gross Domestic Product (GDP), balance of payments, revenues and expenditures, and indebtedness of the Kuwaiti government, have been obtained from public sources identified in this Prospectus. All statistical information provided in this Prospectus, and the component data on which it is based, may not have been compiled in the same manner as data provided by, and may be different from statistics published by, other sources. Accordingly, the statistical data contained in this Prospectus should be treated with caution by prospective investors. Where information has not been independently sourced, it is the Group's own information. No incorporation of website information The Bank's website is www.kib.com.kw. The information on this website or any other website mentioned in this Prospectus or any website directly or indirectly linked to these websites has not been verified and is not incorporated by reference into this Prospectus, and investors should not rely on it. Definitions In this Prospectus: • a billion means a thousand million; • GCC means the Gulf Cooperation Council (comprising Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates); • Government means the government of Kuwait; • GREs means government-related entities; and • MENA region means the region comprising the Middle East and North Africa. Rounding In this Prospectus, financial information relating to the Group which has been extracted from the Financial Statements has been rounded to the nearest thousand dinar, with KD 500 and above being rounded up and KD 499 and below being rounded down. In tables in this Prospectus, the number "0" denotes that the amount is less than KD 500 whilst the symbol "—" indicates that there is no number for the particular item. In addition, in this vii
12. Prospectus percentages have been rounded to one or , in certain cases, two decimal places with 0.05 and above and 0.005 and above being rounded up. As a result of such rounding, the totals of financial data presented in tables in this Prospectus and in any related analysis may vary slightly from the arithmetic totals of such data. Percentage changes and other percentage data relating to the Group's financial information have been calculated on the basis of financial statement data contained in the Financial Statements. viii
13. MIFID II PRODUCT GOVERNANCE / PROFESSIONAL INVESTORS AND ECPS ONLY TARGET MARKET Solely for the purposes of each manufacturer's product approval process, the target market assessment in respect of the Certificates has led to the conclusion that: (i) the target market for the Certificates is eligible counterparties and professional clients only, each as defined in MiFID II; and (ii) all channels for distribution of the Certificates to eligible counterparties and professional clients are appropriate. Any person subsequently offering, selling or recommending the Certificates (a distributor) should take into consideration the manufacturers' target market assessment; however, a distributor subject to MiFID II is responsible for undertaking its own target market assessment in respect of the Certificates (by either adopting or refining the manufacturers' target market assessment) and determining appropriate distribution channels. PRIIPS REGULATION / PROHIBITION OF SALES TO EEA RETAIL INVESTORS The Certificates are not intended to be offered, sold or otherwise made available to and should not be offered, sold or otherwise made available to any retail investor in the EEA. For these purposes, a retail investor means a person who is one (or more) of: (i) a retail client as defined in point (11) of Article 4(1) of MiFID II; or (ii) a customer within the meaning of the Insurance Mediation Directive, where that customer would not qualify as a professional client as defined in point (10) of Article 4(1) of MiFID II. Consequently, no key information document required by Regulation (EU) No 1286/2014 (as amended, the PRIIPs Regulation) for offering or selling the Certificates or otherwise making them available to retail investors in the EEA has been prepared and therefore offering or selling the Certificates or otherwise making them available to any retail investor in the EEA may be unlawful under the PRIIPs Regulation. NOTIFICATION UNDER SECTION 309B(1)(C) OF THE SECURITIES AND FUTURES ACT (CHAPTER 289) OF SINGAPORE, AS MODIFIED OR AMENDED FROM TIME TO TIME (THE SFA) In connection with Section 309B of the SFA and the Securities and Futures (Capital Markets Products) Regulations 2018 (the CMP Regulations 2018), the Trustee has determined, and hereby notifies all relevant persons (as defined in Section 309A(1) of the SFA), that the Certificates are prescribed capital markets products (as defined in the CMP Regulations 2018) and Excluded Investment Products (as defined in MAS Notice SFA 04-N12: Notice on the Sale of Investment Products and MAS Notice FAA-N16: Notice on Recommendations on Investment Products). VOLCKER RULE The Volcker Rule, which became effective on 1 April 2014, but was subject to a conformance period for certain entities that concluded on 21 July 2015, generally prohibits "banking entities" (which is broadly defined to include U.S. banks and bank holding companies and many non-U.S. banking entities, together with their respective subsidiaries and other affiliates) from (i) engaging in proprietary trading, (ii) acquiring or retaining an ownership interest in or sponsoring a "covered fund", and (iii) entering into certain relationships with "covered funds". The general effects of the Volcker Rule remain uncertain; any prospective investor in the Certificates and any entity that is a "banking entity" as defined under the Volcker Rule which is considering an investment in the Certificates should consult its own legal advisers and consider the potential impact of the Volcker Rule in respect of such investment. If investment by "banking entities" in the Certificates is prohibited or restricted by the Volcker Rule, this could impair the marketability and liquidity of such Certificates. No assurance can be made as to the effect of the Volcker Rule on the ability of certain investors subject thereto to acquire or retain an interest in the Certificates, and accordingly none of the Trustee, the Bank, the Managers, the Delegate or the Agents, or any of their respective affiliates makes any representation regarding (a) the status of the Trustee under the Volcker Rule (including whether it is a "covered fund" for their purposes) or (b) the ability of any purchaser to acquire or hold the Certificates, now or at any time in the future. ix
14. NOTICE TO U .K. RESIDENTS The Certificates represent interests in a collective investment scheme (as defined in the Financial Services and Markets Act 2000, as amended (the FSMA)) which has not been authorised, recognised or otherwise approved by the United Kingdom Financial Conduct Authority. Accordingly, this Prospectus is not being distributed to and must not be passed on to the general public in the United Kingdom. The distribution in the United Kingdom of this Prospectus and any other marketing materials relating to the Certificates: (A) if effected by a person who is not an authorised person under the FSMA, is being addressed to, or directed at, only the following persons: (i) persons who are Investment Professionals as defined in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the Financial Promotion Order); (ii) persons falling within any of the categories of persons described in Article 49(2) (High net worth companies, unincorporated associations, etc.) of the Financial Promotion Order; and (iii) any other person to whom it may otherwise lawfully be made in accordance with the Financial Promotion Order; and (B) if effected by a person who is an authorised person under the FSMA, is being addressed to, or directed at, only the following persons: (i) persons falling within one of the categories of Investment Professional as defined in Article 14(5) of the Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemptions) Order 2001 (the Promotion of CIS Order); (ii) persons falling within any of the categories of person described in Article 22(2)(a)-(d) (High net worth companies, unincorporated associations, etc.) of the Promotion of CIS Order; and (iii) any other person to whom it may otherwise lawfully be made. Persons of any other description in the United Kingdom may not receive and should not act or rely on this Prospectus. Prospective investors in the United Kingdom in the Certificates are advised that all, or most, of the protections afforded by the United Kingdom regulatory system will not apply to an investment in the Certificates and that compensation will not be available under the United Kingdom Financial Services Compensation Scheme. Any prospective investor intending to invest in the Certificates should consult his professional adviser and ensure that he fully understands all the risks associated with making such an investment and that he has sufficient financial resources to sustain any loss that may arise from such investment. NOTICE TO RESIDENTS OF THE CAYMAN ISLANDS No invitation whether directly or indirectly may be made to the public in the Cayman Islands to subscribe for the Certificates and this Prospectus shall not be construed as an invitation to any member of the public in the Cayman Islands to subscribe for the Certificates. NOTICE TO RESIDENTS OF THE KINGDOM OF SAUDI ARABIA This Prospectus may not be distributed in the Kingdom of Saudi Arabia except to such persons as are permitted under the Rules on the Offer of Securities and Continuing Obligations issued by the Saudi Arabian Capital Market Authority (the Capital Market Authority). The Capital Market Authority does not make any representation as to the accuracy or completeness of this Prospectus, and expressly disclaims any liability whatsoever for any loss arising from, or incurred in reliance upon, any part of this Prospectus. Prospective purchasers of the Certificates should conduct their own due diligence on the accuracy of the information relating to the securities. If you do not understand the contents of this Prospectus you should consult an authorised financial adviser. NOTICE TO RESIDENTS OF KUWAIT Unless all necessary approvals from the Kuwait Capital Markets Authority (the CMA) pursuant to Law No. 7 of 2010 Concerning the Establishment of the Capital Markets Authority and the Regulating of Securities Activities x
15. and its executive bylaws (each as amended) (the CMA Rules), and the various resolutions, regulations, directives and instructions and announcements issued from time to time pursuant thereto, or in connection therewith (regardless of nomenclature), have been given in relation to the marketing of, and sale of, the Certificates, the Certificates may not be offered for sale, nor sold, in Kuwait. Neither this Prospectus nor any of the information contained herein is intended to lead to the conclusion of any contract of whatsoever nature within Kuwait. This Prospectus is not for general circulation to the public in Kuwait nor will the Certificates be sold by way of a public offering in Kuwait. In the event that the Certificates are intended to be purchased onshore in Kuwait, the same may only be so purchased through a licensed person duly authorised to undertake such activity pursuant to the CMA Rules. Investors from Kuwait acknowledge that the CMA and all other regulatory bodies in Kuwait assume no responsibility whatsoever for the contents of this Prospectus or verify the validity and accuracy thereof. Prior to purchasing any Certificates, it is recommended that a prospective holder of any Certificates seeks professional advice from its advisors in respect to the contents of this Prospectus so as to determine the suitability of purchasing the Certificates. NOTICE TO RESIDENTS OF THE KINGDOM OF BAHRAIN In relation to investors in the Kingdom of Bahrain, Certificates issued in connection with this Prospectus and related offering documents may only be offered in registered form to existing account holders and accredited investors as defined by the Central Bank of Bahrain (the CBB) in the Kingdom of Bahrain where such investors make a minimum investment of at least U.S.$100,000 or any equivalent amount in any other currency or such other amount as the CBB may determine. This Prospectus does not constitute an offer of securities in the Kingdom of Bahrain in terms of Article (81) of the Central Bank and Financial Institutions Law 2006 (Decree Law No. 64 of 2006). This Prospectus and related offering documents have not been and will not be registered as a prospectus with the CBB. Accordingly, no securities may be offered, sold or made the subject of an invitation for subscription or purchase nor will this Prospectus or any other related document or material be used in connection with any offer, sale or invitation to subscribe or purchase securities, whether directly or indirectly, to persons in the Kingdom of Bahrain, other than to accredited investors for an offer outside the Kingdom of Bahrain. The CBB has not reviewed, approved or registered this Prospectus or related offering documents and it has not in any way considered the merits of the securities to be offered for investment, whether in or outside the Kingdom of Bahrain. Therefore, the CBB assumes no responsibility for the accuracy and completeness of the statements and information contained in this document and expressly disclaims any liability whatsoever for any loss howsoever arising from reliance upon the whole or any part of the content of this document. No offer of Certificates will be made to the public in the Kingdom of Bahrain and this Prospectus must be read by the addressee only and must not be issued, passed to, or made available to the public generally. NOTICE TO RESIDENTS OF MALAYSIA The Certificates may not be offered for subscription or purchase and no invitation to subscribe for or purchase the Certificates in Malaysia may be made, directly or indirectly, and this Prospectus or any document or other materials in connection therewith may not be distributed in Malaysia other than to persons falling within the categories set out in Schedule 6 or Section 229(1)(b), Schedule 7 or Section 230(1)(b) and Schedule 8 or Section 257(3) of the Capital Market and Services Act 2007 of Malaysia as may be amended and/or varied from time to time and subject to any amendments to the applicable laws from time to time. The Securities Commission of Malaysia shall not be liable for any non-disclosure on the part of the Trustee or the Bank and assumes no responsibility for the correctness of any statements made or opinions or reports expressed in this Prospectus. xi
16. TABLE OF CONTENTS RISK FACTORS .................................................................................................................................................. 1 STRUCTURE DIAGRAM AND CASH FLOWS ............................................................................................ 31 OVERVIEW OF THE OFFERING ................................................................................................................... 34 TERMS AND CONDITIONS OF THE ADDITIONAL TIER 1 CAPITAL CERTIFICATES......................... 41 GLOBAL CERTIFICATE.................................................................................................................................. 79 USE OF PROCEEDS ........................................................................................................................................ 83 DESCRIPTION OF THE TRUSTEE ................................................................................................................ 84 SELECTED FINANCIAL INFORMATION .................................................................................................... 86 FINANCIAL REVIEW ..................................................................................................................................... 93 DESCRIPTION OF THE GROUP .................................................................................................................. 112 RISK MANAGEMENT .................................................................................................................................. 124 MANAGEMENT AND EMPLOYEES ........................................................................................................... 139 OVERVIEW OF KUWAIT.............................................................................................................................. 154 OVERVIEW OF BANKING AND FINANCE REGULATIONS IN KUWAIT ............................................. 157 SUMMARY OF THE PRINCIPAL TRANSACTION DOCUMENTS .......................................................... 163 TAXATION...................................................................................................................................................... 169 SUBSCRIPTION AND SALE......................................................................................................................... 172 GENERAL INFORMATION .......................................................................................................................... 177 INDEX TO FINANCIAL STATEMENTS ...................................................................................................... 180 xii
17. RISK FACTORS The purchase of the Certificates may involve substantial risks and is suitable only for sophisticated investors who have the knowledge and experience in financial and business matters necessary to enable them to evaluate the risks and merits of an investment in the Certificates . Before making an investment decision, prospective purchasers of the Certificates should consider carefully, in light of their own financial circumstances and investment objectives, all of the information in this Prospectus. Each of the Trustee and the Bank believes that the following factors may affect their ability to fulfil their respective obligations under the Certificates and the Transaction Documents. All of these factors are contingencies which may or may not occur and neither the Trustee nor the Bank is in a position to express a view on the likelihood of any such contingency occurring. Factors which the Trustee and the Bank believe may be material for the purpose of assessing the market risks associated with the Certificates are also described below. Each of the Trustee and the Bank believes that the factors described below represent the principal risks inherent in investing in the Certificates but the inability of the Trustee and the Bank to pay any amounts on or in connection with the Certificates and the Transaction Documents may occur for other reasons and neither the Trustee nor the Bank represents that the statements below regarding the risks of holding any Certificate are exhaustive. Prospective investors should also read the detailed information set out elsewhere in this Prospectus and reach their own views prior to making any investment decision. Words and expressions defined in the Conditions and "Global Certificate" shall have the same meanings in this section. FACTORS THAT MAY AFFECT THE TRUSTEE'S ABILITY TO OBLIGATIONS UNDER OR IN CONNECTION WITH THE CERTIFICATES FULFIL ITS The Trustee has no operating history and no material assets The Trustee is a special purpose company with limited liability incorporated under the laws of the Cayman Islands on 18 March 2019 and has no operating history. The Trustee has not as at the date of this Prospectus, and will not, engage in any business activity other than the issuance of the Certificates, the acquisition of the Trust Assets as described herein, acting in the capacity as Trustee and other activities incidental or related to the foregoing as required under the Transaction Documents. The Certificates represent limited recourse obligations of the Trustee and the recourse of the Certificateholders against the Trustee in relation to the Certificates is limited to the Trust Assets and the proceeds from the Trust Assets. The Trustee's only material assets, which will be held on trust for Certificateholders, are the Trust Assets, including the right to receive amounts paid by the Mudareb under the Mudaraba Agreement. Therefore, the Trustee is subject to all the risks to which the Bank is subject to the extent that such risks could limit the Bank's ability to satisfy in full and on a timely basis its obligations under the Transaction Documents. The ability of the Trustee to pay amounts due on the Certificates will be dependent upon receipt by the Trustee from the Bank of amounts to be paid under the Mudaraba Agreement (which in aggregate may not be sufficient to meet all claims under the Certificates and the Transaction Documents). 1
18. RISKS RELATING TO THE BANK 'S ABILITY TO FULFIL ITS OBLIGATIONS UNDER THE TRANSACTION DOCUMENTS The Group could be materially adversely affected by any deterioration in economic conditions in Kuwait The Group's operations are focused in Kuwait, with 93.2 per cent. of its financial assets exposed to credit risk as at 31 December 2018 being concentrated in Kuwait. Kuwait's economy, as is the case with the economies of a number of other countries in the MENA region, is dependent on oil and gas and related industries, as well as the prices and production quantities of these commodities. Oil prices have, however, been volatile in recent years, which has impacted economic growth in Kuwait. For example, based on data on the OPEC website, oil prices decreased significantly from July 2014 (when the monthly average price of the OPEC reference basket was U.S.$105.61) to January 2016 (when the monthly average price of the OPEC reference basket was U.S.$26.50). Since January 2016, international oil prices have generally increased, with the yearly average OPEC reference basket price being U.S.$40.76 in 2016, U.S.$52.43 in 2017 and U.S.$69.78 in 2018. The monthly average price of the OPEC reference basket was U.S.$58.74 in January 2019, U.S.$63.83 in February 2019 and U.S.$66.37 in March 2019. Reflecting these trends and according to CSB data, nominal GDP in Kuwait decreased by 4.1 per cent. in 2016 and grew by 9.7 per cent. in 2017, with the oil sector growing by 19.8 per cent. and the non-oil sector growing by 3.2 per cent. in 2017. Real GDP in Kuwait grew by 2.9 per cent. in 2016 and decreased by 3.5 per cent. in 2017, with the oil sector growing by 3.2 per cent. in 2016 and decreasing by 7.2 per cent. in 2017 and the non-oil sector growing by 1.6 per cent. in 2016 and by 2.2 per cent. in 2017. Oil sector real GDP is principally affected by changes in production. The non-oil sector in Kuwait has been supported by Government spending on development plans and projects. According to the CSB, Kuwait's real GDP was estimated at KD 9,809.5 million in the third quarter of 2018, representing growth of 1.8 per cent. in real terms compared to estimated real GDP of KD 9,632.8 million in the third quarter of 2017. Potential investors should note the significance of changes in international oil prices on Kuwait's economy. For instance, financial institutions, such as the Bank, may experience lower liquidity or higher financing receivables losses or impairments if government expenditure in Kuwait is reduced as a result of budgetary pressures caused by low oil prices. Should international oil prices decline significantly in the future for an extended period, this will be likely to adversely affect Kuwait's economy. Additionally, although the CBK has the ability to offset the components of the undisclosed weighted basket of international currencies of Kuwait's major trade and financial partner countries against which the dinar is pegged (the KD Basket), there can be no assurance that the CBK will maintain the KD Basket at its current level, which could lead to higher inflation and negatively affect confidence in Kuwait's economy. Further, the impact of oil prices on Kuwait's economy could materially adversely affect many of the Group's borrowers and contractual counterparties. This, in turn, would adversely affect the Group's business, in particular through increases in the Group's non-performing financing (NPF) portfolio (which comprises facilities where the profit or a principal instalment is past-due for more than 90 days and the carrying amount of the facility is greater than its estimated recoverable value), increased impairment provisions which would negatively impact the Group's profitability and reduced demand for financing and other banking services. See “—The Group's financial assets and depositors' accounts are concentrated in Kuwait” below. The Group could also be affected by any future material adverse changes in regional and global financial markets and economic conditions There was significant volatility and disruption in the global capital and credit markets during the global financial crisis, which commenced in late 2007. At times since then, there has also been a material reduction in the availability of financing, both for financial institutions and their customers. As a result, many financial institutions 2
19. have been compelled to rely on central banks and governments to provide liquidity and , in some cases, additional capital. Governments around the world, including in Kuwait and other countries in the MENA region, have taken actions intended to stabilise financial markets and prevent the failure of financial institutions. See “Overview of banking and finance regulations in Kuwait”. Despite such measures, international capital and credit markets have continued to experience periods of significant volatility, with the current material factors contributing to uncertainty being the trade dispute between the Unites States and China, the outcome of Brexit negotiations between the United Kingdom and the European Union, volatility in certain primary commodities markets such as oil and political turmoil in certain countries and regions. The Group's business growth and results of operations were adversely affected by the global financial crisis and the impact it had in Kuwait. In particular, many countries in the MENA region experienced significant declines in real estate prices and in stock exchange indices and these factors adversely affected companies engaged in the real estate sector (including developers, construction companies and others) and investment companies. Reflecting a lack of diversification in Kuwait's economy, Kuwaiti banks had significant concentrations of these companies as borrowers and, as a result of the difficulties these companies experienced, Kuwaiti banks, including the Group, significantly increased their provisions in 2009 compared to prior years, which in turn adversely affected their results of operations. If comparable market disruptions and levels of volatility recur, the Group may experience reductions in business activity, increased funding costs and funding pressures, decreased asset values, increased credit losses and impairment charges, and lower profitability and cash flows. The Group's business and financial performance may also be adversely affected by future recovery rates on assets (including real estate and equity securities which it has accepted as security), particularly as the historical assumptions underlying asset recovery rates may prove to be inaccurate. In addition, although economic conditions are different in each country in the MENA region, investors' reactions to developments in one country may affect the price of securities of issuers in other countries in the MENA region, including Kuwait. Accordingly, the market price of the Certificates may be subject to significant fluctuations, which may not necessarily be related to the financial performance of the Group. The Group is exposed to the credit risk of borrowers and other counterparties and anticipated future growth in, or deterioration in the quality of, the Group's financing receivables or sukuk investment securities could result in an increase in its credit risk profile and a deterioration in its financial condition Risks arising from adverse changes in the credit quality and recoverability of financing receivables, securities and amounts due from counterparties are inherent in a wide range of the Group's businesses, principally in its financing and investment activities. In particular, the Group is exposed to the risk that customers may not make payments in respect of their financing according to their contractual terms and that the collateral (if any) securing the payment of this financing may be insufficient. The Group regularly reviews and analyses its financing receivables and credit risks, and the Group's provision for impairment losses on its financing receivables is based on, among other things, its analysis of current and historical delinquency rates and financing management and the valuation of the underlying assets, as well as numerous other management assumptions. However, these internal analyses and assumptions may give rise to inaccurate predictions of credit performance, particularly in a volatile economic climate. See “—The Group's risk management policies and procedures may not be effective in all circumstances and may leave it exposed to unidentified or unanticipated risks” below. As at 31 March 2019, the Group's gross financing receivables along with bank exposures amounted to KD 1,814.1 million. As at 31 December 2018, the Group's gross financing receivables along with bank exposures amounted to KD 1,792.1 million compared to KD 1,457.6 million as at 31 December 2017 and KD 1,429.3 million at 31 December 2016. The Group's NPF portfolio was KD 18.9 million as at 31 March 2019, KD 17.3 million as at 31 December 2018, KD 40.0 million as at 31 December 2017 and KD 21.5 million as at 31 December 2016 and its provision for impairment losses in respect of its financing receivables along with bank exposures amounted to 2.89 3
20. per cent ., 2.86 per cent., 3.11 per cent. and 3.49 per cent. of its gross financing receivables as at 31 March 2019, 31 December 2018, 31 December 2017 and 31 December 2016, respectively. To the extent that the Group's financing receivables increase in the future, reflecting one of its strategic aims to become the fastest growing Islamic bank in Kuwait, and its credit exposure consequently increases, management of the Group will need to continually monitor the credit quality of the financing receivables. This will be particularly important should economic conditions in Kuwait deteriorate in the future. See “Risk management—Credit risk” and “—The Group's risk management policies and procedures may not be effective in all circumstances and may leave it exposed to unidentified or unanticipated risks” below. Any failure by the Group to maintain the quality of its assets through effective risk management policies could lead to higher impairment provisioning and result in higher levels of defaults and write-offs, all of which would be likely to reduce the Group's profitability. Security interests or guarantees in respect of financing receivables provided in favour of the Group may not be sufficient to cover any losses and may not be legally enforceable As at 31 December 2018, 53 per cent. of the Group's financing receivables was fully secured by collateral, including share pledges governed by Kuwaiti law and pledged real estate collateral. As at the same date, 15.3 per cent. of the Group's financing receivables comprised financing provided to retail customers against salary and/or other eligible collateral in accordance with CBK rules, meaning that approximately one-third of the Group's financing receivables are not secured with any collateral. Although certain Islamic financing structures used by the Group, such as the ijara structure, permit the registration of the relevant underlying assets, such as real estate, in the Bank's name, other structures require a customer to pledge assets. The practice of pledging assets (such as share portfolios and real estate assets) to obtain financing is subject to certain limitations and administrative restrictions under Kuwaiti law. In particular, such security may not be enforced without a court order. As a result, security over certain pledged assets may not be enforceable in Kuwaiti courts. Accordingly, the Group may have difficulty foreclosing on collateral (including any real estate collateral) or enforcing guarantees or other third party credit support arrangements when customers default on their financing. In addition, even if such security interests are enforceable in Kuwaiti courts, the time and costs associated with enforcing security interests in Kuwait may make it uneconomical for the Group to pursue such proceedings, adversely affecting the Group's ability to recover its financing losses. The Group typically requires additional collateral in the form of cash and/or other assets in situations where the Group may not be able to exercise rights over pledged shares or where it enters into guarantees or other third party credit support arrangements for financing made to individuals and corporations. Any decline in the value or liquidity of such collateral may prevent the Group from foreclosing on such collateral for its full value or at all in the event that a customer becomes insolvent and enters bankruptcy, and could thereby adversely affect the Group's ability to recover the full amounts advanced to the customer. The Group's financial assets and depositors' accounts are concentrated in Kuwait As at 31 December 2018, 93.2 per cent. of the Group's financial assets were geographically concentrated in Kuwait. The Group's financial assets principally comprise its financing receivables, due from banks and investment securities. Together, the Group's financial assets constituted 93.6 per cent. of its total assets, or KD 2,030.7 million, as at 31 December 2018, 92.8 per cent. of its total assets, or KD 1,778.0 million, as at 31 December 2017 and 93.6 per cent. of its total assets, or KD 1,727.4 million, as at 31 December 2016. 4
21. The Group 's sukuk investments, which aggregated KD 65.8 million as at 31 December 2018, principally comprise securities issued by the Government and GREs and financial institutions in Kuwait. The Group's depositors' accounts constituted 69.7 per cent. of its total liabilities, or KD 1,318.5 million, as at 31 December 2018, 72.8 per cent. of its total liabilities, or KD 1,203.2 million, as at 31 December 2017 and 70.7 per cent. of its total liabilities, or KD 1,124.8 million, as at 31 December 2016. In particular, the Group has a significant concentration of deposits from the Government and its related agencies which amounted to 48.5 per cent. of the Group's total deposits as at 31 December 2018. As a result, any deterioration in general economic conditions in Kuwait or any failure by the Group to manage effectively its geographic risk concentrations could have a more significant adverse effect on the Group's business than on that of a more diversified bank. See “—The Group is affected by regional and global financial markets and economic conditions and could be materially adversely affected by any deterioration in economic conditions in Kuwait” above. The Group has significant customer and sector concentrations The Group's 20 largest customers, based on gross financing receivables, accounted for 24.7 per cent., 24.6 per cent. and 25.2 per cent. of its total credit risk exposures as at 31 December 2018, 31 December 2017 and 31 December 2016, respectively. Although diversified by industry sector, the Group's credit risk exposure with respect to its financial assets is concentrated on the construction and real estate industry sectors which, as at 31 December 2018, accounted for 35.3 per cent. of the Group's credit risk exposure (excluding contingent liabilities) compared to 35.7 per cent. as at 31 December 2017. In addition, the banking and financial institutions sector accounted for 24.4 per cent. of the Group's credit risk exposure (excluding contingent liabilities) as at 31 December 2018 compared to 28.4 per cent. as at 31 December 2017. Further, financing to retail customers accounted for 12.1 per cent. of the Group's credit risk exposure (excluding contingent liabilities) as at 31 December 2018 compared to 12.7 per cent. as at 31 December 2017 and 15.9 per cent. as at 31 December 2016. As a result, a material weakening in the credit quality of, or a default by, any one or more of the Group's large counterparties, or any factors which negatively impacted any of the sectors to which the Group has significant exposure, could result in the Group having to make significant additional impairment provisions and experiencing reduced financing income. Sector specific factors might include: • a significant decline in real estate values which would weaken the credit quality of the Group's construction and real estate customers and could also reduce the value of the real estate collateral which the Group holds; and • continued low levels of economic growth or a recession in Kuwait which, particularly if coupled with increased levels of unemployment and falling house prices, could materially adversely impact the ability of the Group's retail customers to repay their financing. Each of the above factors would also be likely to impact the other banks and financial institutions in Kuwait which are customers of the Group in a similar manner to that in which they impact the Group. In terms of liabilities, the Group's 20 largest deposits as at 31 December 2018 constituted 62.8 per cent. of its total deposits at that date. The withdrawal or non-renewal of its deposits by any one or more of the Group's large depositors could require the Group to obtain replacement funding from other sources which may not be readily available or may be significantly more expensive, which would reduce the Group's net financing margin and adversely impact its operating income and profitability. See further “—The Group is subject to the risk that 5
22. liquidity may not always be readily available or may only be available at costs which may adversely affect its business ” below. The Group could be adversely affected if it is unable to effectively monitor and control the level of or, where required, successfully restructure its impaired financing with customers in financial distress, or if its impairment allowances are insufficient to cover its financing losses As at 31 March 2019, the Group's NPF ratio (calculated as NPF portfolio divided by total gross financing receivables and expressed as a percentage) was 1.04 per cent. As at 31 March 2019, the Group had KD 18.9 million of NPFs and carried impairment provisions (along with provision for bank exposures) of KD 52.4 million to cover potential financing losses. As at 31 December 2018, the Group's NPF ratio was 0.97 per cent. compared to 2.74 per cent. as at 31 December 2017 and 1.51 per cent. as at 31 December 2016. As at 31 December 2018, the Group had KD 17.3 million of NPFs and carried impairment provisions (along with provision for bank exposures) of KD 51.3 million to cover potential financing losses compared to KD 40.0 million of NPFs and impairment provisions (along with provision for bank exposures) of KD 45.3 million as at 31 December 2017 and KD 21.5 million of NPFs and impairment provisions (along with provision for bank exposures) of KD 49.8 million as at 31 December 2016. In accordance with IFRS 9 as adopted by Kuwait for financial services institutions regulated by the CBK, effective as of 1 January 2018, the Group is required to reflect the impairment calculated as a charge to the consolidated statement of profit or loss. As at 31 March 2019, the Group's impairment provision coverage ratio (including collateral) amounted to 331.7 per cent. of the Group's NPFs. As at 31 December 2018, the Group's impairment provision coverage ratio (including collateral) amounted to 343.2 per cent. of the Group's NPFs compared to 192.9 per cent. as at 31 December 2017 and 368.3 per cent. as at 31 December 2016. However, there is no guarantee that the impairment allowances recognised by the Group will be sufficient to cover its actual financing losses. Impairment provision coverage ratio (including collateral) is calculated as a sum of general and specific provisions and collaterals against NPF divided by NPF. If the Group fails to, where required, appropriately restructure or monitor and control the levels of, and adequately provide for, its NPFs, the Group may need to make further impairment charges and its business, results of operations and financial condition could be materially adversely affected. The Group has significant credit-related contingent liabilities and commitments that may lead to potential losses As part of its normal banking business, the Group issues guarantees, letters of credit and acceptances which are accounted for off the Group's balance sheet until such time as they are actually funded or cancelled. In addition, the Group makes revocable commitments to advance financing to its customers. Although these commitments are contingent, they nonetheless subject the Group to both credit and liquidity risks. As at 31 December 2018, the Group had KD 455.7 million in such contingent liabilities and commitments outstanding, equal to 22.1 per cent. of its combined financing receivables and contingent liabilities (including commitments) compared to KD 497.4 million equal to 27.6 per cent. of its combined financing receivables and contingent liabilities (including commitments) as at 31 December 2017 and KD 481.7 million equal to 27.5 per cent. of its combined financing receivables and contingent liabilities (including commitments) as at 31 December 2016. Although the Group anticipates that only a portion of its obligations in respect of these commitments will be triggered and funds itself accordingly, the Group may need to make payments in respect of a greater portion of such commitments, particularly in cases where there has been a general deterioration in market conditions. This would result in the Group needing to obtain additional funding, potentially at relatively short notice, which may not be readily available or may be significantly more expensive, which would reduce the Group's net financing margin and adversely impact its operating income and profitability. See further “—The Group could be adversely affected by market risks” below. 6
23. The Group is exposed to reputational risks related to its operations and industry All financial institutions depend on the trust and confidence of their customers to succeed in their business . The Group is exposed to the risk that litigation, misconduct, operational failures, negative publicity and press speculation, whether or not valid, will harm its reputation. The Group's reputation may also be adversely affected by the conduct of third parties over whom it has no control, including entities to which it has advanced financing or in which it has invested. For example, if one of the Group's customers becomes associated with financial scandals or widely publicised improper behaviour, the Group's own reputation may be affected. In common with other banks, the Group is also exposed to adverse publicity relating to the financial services industry as a whole. Financial scandals unrelated to the Group or questionable ethical conduct by a competitor may taint the reputation of the industry and affect the perception of investors, public opinion and the attitude of regulators. Any damage to the Group's reputation could cause existing customers to withdraw their business and lead potential customers to be reluctant to do business with the Group. The Group could be adversely affected by the soundness or the perceived soundness of other financial institutions and counterparties Against the backdrop of constraints on liquidity and the high cost of funds in the interbank lending market, and given the high level of interdependence between financial institutions that became most evident following the bankruptcy of Lehman Brothers in 2008, the Group is subject to the risk of deterioration in the commercial and financial soundness, or perceived soundness, of other financial institutions. Within the financial services industry, the default of any one institution could lead to significant losses, and potentially defaults, by other institutions. As was experienced in 2008 and 2009, concerns about, or a default by, one institution could also lead to significant liquidity problems, losses or defaults by other institutions, because the commercial and financial soundness of many financial institutions is closely related as a result of their credit, trading, clearing or other relationships. Even the perceived lack of creditworthiness of, or questions about, a counterparty may lead to market-wide liquidity problems and losses or defaults by the Group or other institutions. This risk, often referred to as “systemic risk”, may also adversely affect other financial intermediaries, such as clearing agencies, clearing houses, securities firms and exchanges, with whom the Group interacts on a regular basis. Systemic risk, should it materialise, could have a material adverse effect on the Group's ability to raise new funding and on its business generally. The Group is subject to the risk that liquidity may not always be readily available or may only be available at costs which may adversely affect its business Liquidity risk is the risk that the Group will be unable to meet its obligations, including funding commitments, as they become due. This risk is inherent in banking operations and can be heightened by a number of enterprisespecific factors, including over-reliance on a particular source of funding (including, for example, short-term and overnight funding), changes in credit ratings or market-wide phenomena such as market dislocation and major disasters. Credit markets worldwide experienced a severe reduction in liquidity in the final quarter of 2008 and the first half of 2009. Since then, market conditions have been volatile with financial institutions continuing to experience periods of reduced liquidity. The perception of counterparty risk between banks has also increased significantly since the final quarter of 2008, which led to reductions in certain traditional sources of liquidity, such as the debt markets, asset sales and redemption of investments. The Group's access to these traditional sources of liquidity may be restricted or available only at a higher cost and there can be no assurance that the Government will continue to provide the levels of support that it has provided to date to the Kuwaiti banking sector. See “—The Government is under no obligation to support the Group and there is no assurance that the Group will receive future support that is commensurate with the support provided by the Government to the Kuwaiti banking sector in the past” below. In addition, uncertainty or volatility in the capital and credit markets may limit the Group's ability to refinance maturing liabilities with long-term funding or may increase the cost to the Group of such funding. The Group's 7
24. access to any additional financing it may need will depend on a variety of factors , including market conditions, the availability of financing generally and to entities in the financial services industry specifically, and the Group's financial condition, credit ratings and credit capacity. The Group has historically relied on both customer and interbank deposits, which are mainly short-term and generally low cost in nature, to meet most of its funding needs. The availability of deposits is subject to fluctuation due to factors outside the Group's control, including possible loss of confidence and competitive pressures, and this could result in a significant outflow of deposits within a short period of time or may cause the Group to increase the profit distributions on its deposits to ensure that it retains sufficient deposits. As at 31 December 2018, 36.4 per cent. of the Group's non-equity funding (which comprises amounts due to banks and financial institutions and depositors' accounts) had remaining contractual maturities of up to one month or was payable on demand and 87.6 per cent. had remaining maturities of one year or less or was payable on demand. The Group may experience outflows of deposits at times when liquidity is constrained generally in Kuwait or when its major depositors experience short- or longer-term liquidity requirements. Particularly if international oil and gas prices fall significantly, the Group's large Kuwaiti governmental depositors may start to withdraw part or even all of their deposits with it. In addition, the Group's deposits are geographically concentrated and the Group is reliant on certain large deposits from a limited group of government-related and private sector corporate customers. See “—The Group's financial assets and depositors' accounts are concentrated in Kuwait” above and “—The Group has significant customer and sector concentrations” above. If a substantial portion of the Group's depositors, or any of its largest depositors, withdraw their demand deposits or do not roll over their time deposits at maturity, the Group may need to seek other sources of funding or may have to sell, or enter into sale and repurchase or securitisation transactions over, certain of its assets to meet its funding requirements. There can be no assurance that the Group will be able to obtain additional funding as and when required or at prices that will not affect its ability to compete effectively and, if the Group is forced to sell assets to meet its funding requirements, it may suffer material losses as a result. In extreme cases, if the Group is unable to refinance or replace such deposits with alternative sources of funding to meet its liquidity needs, through deposits, the interbank markets, the international capital markets or through asset sales, this would have a material adverse effect on its business generally and could, potentially, result in its insolvency. The Group is subject to extensive regulation and changes in this regulation, or the interpretation and enforcement of this regulation, or any failure by the Group to comply with this regulation could have a material adverse effect on the Group The Group is subject to a number of prudential and regulatory controls designed to maintain the safety and soundness of banks, ensure their compliance with economic and other objectives and limit their exposure to risk. These controls include laws and regulations promulgated by the CBK, the Kuwait Capital Markets Authority (the CMA) and the Boursa Kuwait (formerly the Kuwait Stock Exchange) and are further described under “Overview of banking and finance regulations in Kuwait”. The regulations to which the Group is subject may limit its ability to carry on certain parts of its business, to increase its financing receivables portfolio or to raise capital and may also increase its cost of doing business. In addition, increased regulation or changes in applicable laws and regulations and the manner in which they are interpreted or enforced in Kuwait may impose significant additional compliance costs on the Group. Furthermore, non-compliance by the Group with any applicable regulations could expose it to potential liabilities and fines, which may be significant. 8
25. In order to carry out and expand its businesses , it is necessary for the Group to maintain or obtain a variety of licences, permits, approvals and consents from various regulatory, legal, administrative, tax and other governmental authorities and agencies. The processes for obtaining these licences, permits, approvals and consents are often lengthy, complex, unpredictable and costly. If the Group is unable to maintain or obtain the relevant licences, permits, approvals and consents, its ability to achieve its strategic objectives could be impaired. The Group is also required to comply with applicable know-your-customer, anti-money laundering and counterterrorism financing laws and regulations in Kuwait and other jurisdictions where it operates, including those related to countries subject to sanctions by the United States Office of Foreign Assets Control (OFAC), similar regulations of other jurisdictions, and applicable anti-corruption laws in the jurisdictions in which it conducts business. To the extent that the Group fails or is perceived to fail to comply with these and other applicable laws and regulations, its reputation could be materially damaged and it could be subject to fines or other monetary penalties, which could materially adversely impact its cash flow and profitability. A negative change in the Bank's credit rating could limit its ability to raise funding and may increase its funding costs The Bank has a long-term foreign currency issuer default rating of A+ with stable outlook from Fitch. This rating, which is intended to measure the Bank's ability to meet its debt obligations as they mature, is an important factor in determining the Group's cost of borrowing funds. There is no assurance that the Bank's rating will remain in effect for any given period of time or that the rating will not be lowered or withdrawn entirely if circumstances in the future so warrant. A downgrade of the Bank's credit rating, or a negative change in its outlook, may: • limit the Bank's or any other member of the Group's ability to raise funding; • increase the Bank's or any other member of the Group's cost of borrowing; and • limit the Bank's or any other member of the Group's ability to raise capital. In addition, actual or anticipated changes in the Bank's credit rating may negatively affect the market value of the Certificates. According to Fitch, a significant factor underpinning the Bank's rating is Fitch's assessment that there is an extremely high probability of support for the Bank from the Kuwaiti authorities, if needed. Any event that causes Fitch or any other applicable rating agency in the future to adjust this view would be likely to result in a negative change in the Bank's rating. See “—The Government is under no obligation to support the Group and there is no assurance that the Group will receive future support that is commensurate with the support provided by the Government to the Kuwaiti banking sector in the past” below. In addition, the credit rating assigned to the Bank may not reflect the potential impact of all risks related to an investment in the Certificates, the market, additional factors discussed in this Prospectus and other factors that may affect the value of the Certificates. A security rating is not a recommendation to buy, sell or hold securities. Ratings may be subject to revision or withdrawal at any time by the assigning rating organisation and each rating should be evaluated independently of any other rating. The Bank may not be able to raise capital as and when needed on commercially attractive terms As at 31 December 2018, the Bank's tier 1 capital adequacy ratio (calculated according to Basel III standards as implemented in Kuwait) was 15.45 per cent. and its total capital adequacy ratio was 16.63 per cent., in each case above the levels required by the CBK at that date of 11.0 per cent. (tier 1 capital) and 13.0 per cent. (total capital). 9
26. The Bank 's tier 1 capital adequacy ratio was 17.89 per cent. and its total capital adequacy ratio was 19.05 per cent. as at 31 December 2017 and 19.39 per cent. and 20.54 per cent., respectively, as at 31 December 2016. The reductions in the Bank's capital adequacy ratios in 2017 and 2018 principally reflected the strong growth of the Bank's risk-weighted assets, which exceeded the more moderate growth in its equity. A variety of factors may affect the Bank's capital adequacy levels. For example, an increase in financing during 2019 and beyond is likely to reduce the Bank's capital adequacy ratios further and any losses experienced by it in future periods would have a similar effect. In addition, regulatory requirements in relation to the calculation of capital adequacy and required levels of capital adequacy may change from time to time including as a result of new guidelines issued by the Basel Committee on Banking Supervision (the Basel Committee) or the implementation or interpretation of them by the CBK. The Bank may also need to increase its capital as a result of market perceptions of adequate capitalisation levels and the perceptions of rating agencies. As a result and notwithstanding the issue of the Certificates, the Bank may need to obtain additional capital in the future. Such capital, whether in the form of financing or additional equity, may not be available on commercially favourable terms, or at all. Moreover, should the Bank's capital ratios fall close to regulatory minimum levels or the Bank's own internal minimum levels, the Bank may need to adjust its business practices, including reducing the risk and leverage of certain activities or undertaking asset disposals. If the Bank is unable to maintain satisfactory capital adequacy ratios, its credit ratings may be lowered and its cost of funding may therefore increase and it may suffer regulatory sanctions. In addition, the Bank's inability to grow capital may limit the Bank's ability to attract large corporate customers, due to regulatory limits on exposures to a single borrower. Neither the Trustee's obligations under the Certificates nor the Bank's obligations under the Transaction Documents are guaranteed by the Government Although the Government has in the past supported the domestic banking industry, including in the period following the global financial crisis, there can be no assurance that it will continue to provide support to the domestic banking industry in the future. An investment in the Certificates will not be covered by any Kuwaiti compensation or insurance scheme. The Certificates are the Trustee's obligation only and holders of the Certificates must solely look to the Trustee for the performance of the Trustee's obligations under the Certificates. In the event of the Trustee's insolvency, a Certificateholder may lose all or some of its investment in the Certificates. See “Factors that may affect the Trustee's ability to fulfil its obligations under or in connection with the Certificates— The Trustee has no operating history and no material assets”. Potential investors in the Certificates should note that the Certificates are not guaranteed by the Government, any of the Bank's shareholders or any other party. The banking industry is competitive and the Group is exposed to significant competition in Kuwait The Group faces high levels of competition for all of its products and services in Kuwait. In particular, the Group competes with other domestic Islamic banks and such competition may increase. See “Description of the Group— Competition”. As at the date of this Prospectus, the Kuwaiti banking sector comprises five Kuwait-incorporated conventional commercial banks and five Kuwait-incorporated banks operating in accordance with Sharia principles. In addition, branches of 11 other non-Kuwaiti conventional banks, a non-Kuwaiti bank operating in accordance with Sharia principles and a specialised bank are also licensed to operate in Kuwait. The Group's relatively small size compared to some of the other banks in Kuwait could constrain its efforts to attract very large corporate customers. The Group believes that, in order to compete effectively, it will need to continue to successfully implement its new strategy which it launched in 2015 and which, among other things, envisages it becoming the fastest growing 10
27. Islamic bank in Kuwait and being recognised as the most innovative bank in Kuwait . See “Description of the Group—Strategy”. Any failure by the Group to successfully develop and implement its strategy in the coming years could negatively affect its competitive position in the markets in which it operates which could result in reduced income or a failure to achieve anticipated levels of income. The Group could be adversely affected by market risks The Group could be adversely affected by market risks that are outside its control, including, without limitation, volatility in profit rates, prices of securities and currency exchange rates. The Group maintains small portfolios of equity securities held at fair value through profit and loss (FVTPL) and at fair value through other comprehensive income (FVOCI). Any changes in the fair value of these securities, for example as a result of changing equity prices where the securities are quoted on an active market, has an impact on the Group's profit or equity, as the case may be. In addition, the Group's income from securities operations depends on numerous factors beyond its control, such as overall market trading activity, profit rate levels, fluctuations in currency exchange rates and general market volatility. See note 25(iii)(b) to each of the Annual Financial Statements for a sensitivity analysis showing the impact on the Group's equity of an assumed 5 per cent. increase in stock prices. The Group is also exposed to foreign exchange rate risk. This risk includes the possibility that the value of a foreign currency asset or liability will change due to changes in currency exchange rates as well as the possibility that the Group may have to close out any open position in a foreign currency at a loss due to an adverse movement in exchange rates. The Group attempts to match the currencies of its assets and liabilities and any open currency position is maintained within the limits set by the CBK. However, where the Group is not so matched, it is exposed to fluctuations in foreign exchange rates. See note 25(iii)(a) to each of the Annual Financial Statements. The Group is also exposed to profit rate risk and changes in market profit rates could impact it both through an impact on its earnings and through an impact on the value of certain of its underlying assets and liabilities. Although the Group monitors and seeks to manage this risk through the Assets Liabilities Management Committee (ALCO), there can be no assurance that it will not, at times, be adversely affected by movements in profit rates. Adverse movements in international interest rates and foreign exchange rates may also adversely impact the revenue and financial condition of the Group's depositors, financing customers and other counterparties which, in turn, may impact the Group's deposit base and the quality of its credit exposures to certain customers and other counterparties. Ultimately, there can be no assurance that the Group will be able to protect itself from any adverse effects of a currency revaluation or future volatility in international interest rate or currency exchange rates or from a significant change in the prices of its securities. Rising inflation, or deflation, may adversely affect the Group's profitability Kuwait has, at times since 1990, experienced both high levels of inflation and short periods of deflation. High inflation could slow the rate of economic growth and consumer spending in Kuwait. A deflationary environment in Kuwait could also adversely affect property values, which could have an adverse effect on the Group's real estate financing portfolio and its profitability. There can be no assurance that the Government and the CBK will be able to achieve or maintain price stability, in the real estate market or otherwise and thus control inflation. 11
28. The Group is exposed to a range of operational risks . In particular, the Group is exposed to the risk of loss as a result of employee misrepresentation, misconduct and improper practice and through any failure of the Group's IT systems Operational risk and losses can result from fraud, errors by employees, failure to document transactions properly or to obtain proper internal authorisation, failure to comply with regulatory requirements and conduct of business rules, systems and equipment failures (including, in particular, IT failures), natural disasters or the failure of external systems (for example, those of the Group's counterparties or vendors). The Group has implemented risk controls and loss mitigation strategies, and substantial resources are devoted to developing efficient procedures and to staff training, but it is not possible to eliminate entirely each of the potential operational risks that the Group faces. Losses from the failure of the Group's system of internal controls could have a material adverse effect on its business generally and its reputation. The Group's employees could engage in misrepresentation, misconduct or improper practice that could expose the Group to direct and indirect financial loss and damage to its reputation. Such practices may include embezzling clients' funds, engaging in corrupt or illegal practices to originate further business, intentionally or inadvertently releasing confidential information about clients or failing to follow internal procedures. It is not always possible to detect or deter these types of misconduct, and the precautions which the Group takes to detect and prevent such misconduct may not be effective in all cases. There can be no assurance that measures undertaken to combat these types of misconduct will be successful. Any such actions by employees could expose the Group to financial losses resulting from the need to reimburse clients, co-investors or other business partners who suffered loss or as a result of fines or other regulatory sanctions, and could damage the Group's reputation. The Group is dependent on its IT systems which are subject to potential cyber-attack and any failure of these systems could materially disrupt the Group's business In common with other financial institutions based in the GCC and elsewhere in the world, the threat to the security of the Group's information and customer data from cyber-attacks is real and continues to increase. Activists, rogue states and cyber criminals are among those targeting computer systems around the world. Risks to technology and cyber-security change rapidly and require continued focus and investment. Given the increasing sophistication and scope of potential cyber-attack, it is possible that future attacks may lead to significant breaches of security. The Group depends on its IT systems to process a large number of transactions on an accurate and timely basis, and to store and process substantially all of the Group's business and operating data. The proper functioning of the Group's financial control, risk management, credit analysis and reporting, accounting, customer service and other IT systems, as well as the communication networks between its branches and main data processing centres, are critical to the Group's business and ability to compete effectively. The Group's business activities would be materially disrupted if there is a partial or complete failure of any of these IT systems or communications networks. In addition to cyber-attacks, such failures can be caused by a variety of factors, many of which are wholly or partially outside the Group's control, including natural disasters and extended power outages. The proper functioning of the Group's IT systems also depends on accurate and reliable data and other system input, which are subject to human errors. Failure to adequately manage cyber-security risk and continually review and update current processes in response to new threats as well as any failure in the Group's systems as a result of other causes could disrupt the Group's business, result in the disclosure of confidential information, create significant financial and/or legal exposure and damage the Group's reputation, any or all of which could have a material adverse effect on the Group's business, results of operations and financial condition. Further, any failure or delay in recording or processing the Group's transaction data could subject it to claims for losses and regulatory fines and penalties. The Group has implemented and tested business continuity plans and processes as well as disaster recovery procedures, but there can be no assurance that these safeguards will be fully effective at all times or that they will protect the Group from all losses that could occur. 12
29. The Group 's risk management policies and procedures may not be effective in all circumstances and may leave it exposed to unidentified or unanticipated risks There can be no assurance that the Group's risk management and internal control policies and procedures will adequately control, or protect it against, all credit, liquidity, market, operational and other risks. In addition, certain risks may not be accurately quantified by the Group's risk management systems. Some of the Group's methods of managing risk are based upon the use of historical market data which, as evidenced by events caused by the global financial crisis, may not always accurately predict future risk exposures which could be significantly greater than historical measures indicate. In addition, certain risks could be greater than the Group's empirical data would otherwise indicate. Other risk management methods depend upon evaluation of information regarding the markets in which the Group operates, its clients or other matters that are publicly available or information otherwise accessible to it. This information may not be accurate, complete, up-to-date or properly evaluated in all cases. Any material deficiency in the Group's risk management or other internal control policies or procedures may expose it to significant losses as a result of unidentified credit, liquidity, market or operational risks, should they occur. The Group's internal compliance systems might not be fully effective in all circumstances The Group's ability to comply with all applicable regulations is largely dependent on its maintenance of compliance, audit and reporting systems and procedures, and its ability to attract and retain personnel qualified to manage and monitor such systems and procedures. Although the Group is subject to oversight by regulatory authorities, including regular examination activity, and performs regular internal audits and employs an external auditing firm to review its internal control systems, the Group cannot be certain that these systems and procedures will be fully effective in all circumstances, particularly in the case of deliberate employee misconduct or other frauds perpetrated against it. In the case of actual or alleged non-compliance with applicable regulations, the Group could be subject to investigations and judicial or administrative proceedings that may result in substantial penalties or civil lawsuits for damages. The Group may not be able to recruit and retain qualified and experienced personnel, which could have an adverse effect on its business and its ability to implement its strategy The Group's success and ability to maintain current business levels and sustain growth will depend, in part, on its ability to continue to recruit and retain qualified and experienced banking and management personnel. The market for such personnel in the Middle East is intensely competitive and, as has been the case in the past, the Group could face challenges in recruiting and retaining such personnel to manage its businesses. The Group depends on the efforts, skill, reputation and experience of its senior management, as well as synergies among their diverse fields of expertise and knowledge. The loss of key personnel could delay or prevent the Group from implementing its strategies. The Group is also not insured against losses that may be incurred in the event of the loss of any member of its key personnel. The Group's accounting policies and methods are critical to how it reports its financial condition and results of operations and require management to make estimates about matters that are uncertain Accounting policies and methods are fundamental to how the Group records and reports its financial condition and results of operations. Management must exercise judgement in selecting and applying many of these accounting policies and methods so they comply with IFRS, as adopted for use by Kuwait. See “Financial review—Critical accounting judgments and estimates”. Management has identified the most significant judgements and estimates made by it in Note 2.6 to the 2018 Financial Statements. These judgements and estimates include, for example, the classification of financial assets 13
30. and real estate , the impairment of financial instruments and the valuation of financial instruments with significant unobservable inputs. A variety of factors could affect the ultimate value that is obtained either when earning income, recognising an expense, recovering an asset or reducing a liability. The Group has established policies and control procedures that are intended to ensure that its significant accounting estimates and judgements are well controlled and applied consistently. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. However, due to the uncertainty surrounding the Group's judgements and the estimates pertaining to these matters, the Group cannot guarantee that it will not be required to make changes in accounting estimates or restate prior period financial statements in the future. RISKS RELATING TO KUWAIT Investing in securities involving emerging markets generally involves a higher degree of risk Investors in emerging markets, such as Kuwait, should be aware that these markets are subject to greater risks than more developed markets, including, but not limited to, higher volatility, limited liquidity and changes in the political and economic environment. In addition, there can be no assurance that the market for securities bearing emerging market risk, such as the Certificates, will not be affected negatively by events elsewhere, especially in the emerging markets. Specific risks in Kuwait and the wider MENA region that could have a material adverse effect on the Group's business include, without limitation, the following: • political, economic or social instability; • external acts of warfare, civil clashes or other hostilities or conflict; • domestic unrest or violence; • increases in inflation and the cost of living; • changing tax regimes and tax laws, including the introduction of value added tax among some or all of the GCC countries and the imposition of other taxes in tax-free jurisdictions or the increase of taxes in low-tax jurisdictions; • government interventions and protectionism; • potential adverse changes in laws and regulatory practices, including legal structures and tax laws; • difficulties in staffing and managing operations; • legal systems which could make it difficult for the Group to enforce its intellectual property and contractual rights; • restrictions on the right to convert or repatriate currency or export assets; • greater risk of uncollectible accounts and longer collection cycles; and • logistical and communications challenges. Accordingly, prospective investors should exercise particular care in evaluating the risks involved and must determine for themselves whether, in light of those risks, an investment in the Certificates is appropriate. 14
31. Generally , investment in emerging markets is only suitable for sophisticated investors who fully appreciate the significance of the risk involved. Kuwait is located in a region that is characterised by ongoing unrest Since 2010, there has been political unrest in a range of countries in or proximate to the MENA region, including Syria, Iraq, Egypt, Turkey, Bahrain, Algeria, Libya, Iran, Lebanon, Jordan, Palestine, Tunisia, Somalia, Sudan and Yemen. This unrest, which has ranged from public demonstrations to, in extreme cases, armed conflict and civil war, has led to the collapse of political regimes in Tunisia, Egypt and Libya, civil war in Syria and armed insurrection in Iraq and Yemen. It has also given rise to significantly increased political uncertainty across the region. This situation has caused significant disruption to the economies of affected countries and has had a destabilising effect on international oil and gas prices. In June 2017, the UAE, Saudi Arabia, Egypt, Bahrain and Yemen cut diplomatic, economic and transport ties with Qatar on the basis of alleged Qatari links with terrorism. Each of the four countries subsequently announced sanctions on groups and people accused of having Islamist military ties, many of them Qataris or with links to Qatar. Saudi Arabia has also closed its land border with Qatar whilst the UAE has ceased to trans-ship goods from Dubai to Qatar. There can be no assurance as to when diplomatic, economic or transport ties will be restored with Qatar. It is also not currently possible to predict the outcome of this dispute or its impact on the Bank. Wars, acts of terrorism and uncertain political or economic prospects or instability in Kuwait or the wider MENA region may adversely impact regional financial markets and the Group's business. Renewed protests in the MENA region could lead to significant political uncertainties in a number of countries. Financial market and political uncertainty in the MENA region could decrease the Group's customer deposits or its customers' demand for loans or other products offered by the Group. These factors could result in decreased asset values and increased provisions for the Group. Such instability could also negatively affect the value of the Group's investments in affected countries. The planned introduction of VAT in Kuwait, and the imposition of any other taxes, including corporation tax, could negatively impact the Group Although Kuwait does not currently impose VAT on the sale of goods and services, there is a risk that this may change. In May 2018, the Government announced that the planned introduction of VAT on the sale of goods and services in Kuwait would be postponed until at least 2021. It is impossible to state with any accuracy if, and when, VAT will be introduced in Kuwait, and the terms and conditions of such VAT. Any introduction of VAT may increase the pricing of the services provided by the Group. Furthermore, the introduction of VAT could have a more widespread economic impact, for example, reducing the levels of disposable income of the Group's customers which could negatively impact demand for the Group's services. The Bank is not currently subject to corporation tax on its earnings within Kuwait, although there is no guarantee that this will continue to be the case. If the Kuwaiti authorities impose new tax regimes on the Bank (whether related to corporation tax or otherwise), or introduce any other changes in tax laws which make doing business in Kuwait less attractive, this may have a material adverse effect on the Bank's business and prospects. Kuwait and other GCC legal systems continue to develop and this may create an uncertain environment for investment and business activity Kuwait and the other GCC countries are in various stages of developing legal and regulatory institutions that are characteristic of more developed markets. As a result, procedural safeguards as well as formal regulations and laws may not be applied consistently. In some circumstances it may not be possible to obtain the legal remedies provided under the relevant laws and regulations in a timely manner. 15
32. As the legal environment remains subject to continuous development , investors in Kuwait and the other GCC countries may face uncertainty as to the security of their investments. Any unexpected changes in the legal systems in Kuwait and the other GCC countries may have a material adverse effect on the rights of holders of the Certificates or the investments that the Group has made or may make in the future, which may, in turn, have a material adverse effect on the Group's business generally. Kuwait's economy and growth could be affected by Kuwaiti political considerations Relations between the Kuwaiti government and Kuwait's parliament (the National Assembly) have been strained in the past. Because all legislation must be approved by National Assembly vote, measures requiring legislation that are proposed by the Council of Ministers (the Council of Ministers) can be stalled indefinitely before being sent to the Emir for assent and ratification. Recent years have seen a series of National Assembly sessions that have not lasted through a full term with the Emir dissolving sessions multiple times, citing a number of different reasons. On 26 November 2016, following dissolution of the National Assembly, the Kuwaiti government held its seventh National Assembly elections since 2006. Opposition candidates won 24 out of 50 seats. Many of these candidates have expressed displeasure with existing Kuwaiti government policies and the opposition is likely to pose resistance to many aspects of government policy, including in relation to reductions in subsidies and the imposition of taxes. However, the opposition is fragmented between Islamists, secularists and independents whose priorities and interests frequently diverge. Nevertheless, there is a possibility that political gridlock could stall the Kuwaiti government's proposed fiscal and economic measures as well as other reform initiatives that are currently in place. An ineffective or gridlocked government may have a material adverse effect on Kuwait's economy and its growth, which could negatively impact Kuwaiti financial institutions, such as the Bank, see “Factors that may affect the Bank's ability to fulfil its obligations under or in connection with the Certificates—The Group is affected by regional and global financial markets and economic conditions and could be materially adversely affected by any deterioration in economic conditions in Kuwait” above. The statistical data contained in this document should be treated with caution by prospective investors Statistics contained in this document, including in relation to GDP, money supply, inflation and indebtedness of the Government, have been obtained from, among other sources, the CBK and the IMF. Such statistics, and the component data on which they are based, may not have been compiled in the same manner as data provided by other sources and may be different from statistics published by third parties, reflecting the fact that the underlying assumptions and methodology may vary from source to source. There may also be material variances between preliminary, estimated or projected statistics shown in this document and actual results, and between statistics shown in this document and corresponding data previously published by or on behalf of Kuwait. Consequently, the statistical data contained in this document should be treated with caution by prospective investors. RISKS RELATING TO THE CERTIFICATES Certificateholders' right to receive payment of the face amount of the Certificates and the Certificateholders' right to any profit will be cancelled or permanently written-down (in whole or in part) upon the occurrence of a Non-Viability Event If a Non-Viability Event (as defined in the Conditions) occurs, the Certificates will be cancelled (in the case of a Write-down in whole) or written-down in part on a pro rata basis (in the case of a Write-down in part) by the Trustee in accordance with the Conditions and the prevailing Capital Regulations and all rights of any Certificateholder for payment of any amounts under or in respect of the Certificates (including, without limitation, any amounts arising as a result of, or due and payable upon the occurrence of, a Bank Event (as defined in the 16
33. Conditions )) shall, as the case may be, be cancelled or written-down pro rata among the Certificateholders and, in each case, not restored under any circumstances, irrespective of whether such amounts have become due and payable prior to the date of the Non-Viability Event or notice in relation thereto and even if the Non-Viability Event has ceased. Further, whilst it is intended that the ordinary shares of the Bank should absorb losses prior to the Certificates, a Write-down in full or in part of the Certificates could occur prior to the ordinary shares of the Bank absorbing losses in full. A Write-down shall not constitute a Dissolution Event. As a result, Certificateholders will lose the entire amount or, as the case may be, a material amount, of their investment in the Certificates. Investors should also be aware that the application of a non-viability loss absorption feature similar to Condition 11 (Write-down at the Point of Non-Viability) has not been tested in Kuwait and therefore some degree of uncertainty may exist in its application. The circumstances triggering a Write-down are unpredictable The occurrence of a Non-Viability Event is inherently unpredictable and depends on a number of factors, many of which are outside of the Bank's control. The occurrence of a Non-Viability Event is subject to, inter alia, a subjective determination by the Financial Regulator (as defined in the Conditions). As a result, the Financial Regulator may require a Write-down in circumstances that are beyond the control of the Bank and with which the Bank may not agree. See "Certificateholders' right to receive payment of the face amount of the Certificates and the Certificateholders' right to any profit will be cancelled or permanently written-down (in whole or in part) upon the occurrence of a Non-Viability Event". The exercise (or perceived likelihood of exercise) of any such power by the Financial Regulator or any suggestion of such exercise could materially adversely affect the value of the Certificates and could lead to the Certificateholders losing some or all of their investment in the Certificates. The financial viability of the Bank would also depend in part on decisions made by the Bank in relation to its business and operations, including the management of its capital position. In making such decisions, the Bank will not necessarily have regard to the interests of Certificateholders and, in particular, the consequences for Certificateholders of any such decisions and there can be no assurance in any such circumstances that the interests of the Bank, its shareholders and the Financial Regulator will be aligned with those of the Certificateholders. The payment obligations of the Bank under the Mudaraba Agreement are subordinated and unsecured obligations Payments of Periodic Distribution Amounts will be made by the Trustee, provided that the Bank (as Mudareb) shall have paid to the Trustee profit amounts equal to such Periodic Distribution Amount pursuant to the terms of the Mudaraba Agreement. In this regard, prospective investors should note that the payment obligations of the Bank under the Mudaraba Agreement rank subordinate to all Senior Obligations (as defined in the Conditions), rank pari passu with the Pari Passu Obligations (as defined in the Conditions) and rank in priority to all Junior Obligations, as more particularly described in Condition 4.2 (Subordination). Further, the payment obligations of the Bank under the Mudaraba Agreement are unsecured and no collateral is or will be given by the Bank in relation thereto. The Trustee may exercise its enforcement rights in relation to the Mudaraba Agreement only in the manner provided in Condition 12.3 (Winding-up, dissolution or liquidation). If the Bank were wound up, liquidated or dissolved, the Bank's liquidator would apply the assets of the Bank to satisfy all claims of creditors in respect of Senior Obligations in priority to the claims of the holders of the Certificates and pari passu with creditors whose claims are in respect of the Pari Passu Obligations. In such case, there may not be sufficient assets to satisfy the claims of the holders of the Certificates in full. 17
34. No limitation on issuing senior securities ; subordination Other than the limitations in relation to the issue of further Additional Tier 1 Capital by the Bank as set out in Condition 4.3 (Other Issues) which limits the circumstances in which Additional Tier 1 Capital of the Bank can be issued that ranks senior to the Certificates, there is no restriction in the Conditions or in the terms of the Transaction Documents on the Bank (in its capacity as Mudareb or otherwise) incurring additional financing or issuing securities or creating any guarantee or contractual support arrangement which would rank senior to the Certificates and the obligations of the Bank under the Mudaraba Agreement (Bank Senior Obligations). The issue of or the creation of any such Bank Senior Obligations may reduce the amount recoverable by Certificateholders on a winding-up of the Bank. Accordingly, in the winding-up of the Bank and after payment of the claims of Senior Creditors, there may not be a sufficient amount to satisfy the amounts owing to the Certificateholders. See also "— The payment obligations of the Bank under the Mudaraba Agreement are subordinated and unsecured obligations". Payments of Periodic Distribution Amounts are conditional upon certain events and may be cancelled and are non-cumulative The Bank may elect (any such election being a Non-Payment Election), in its sole discretion and by instructing the Trustee to such effect, not to make payment of a Periodic Distribution Amount (in whole or in part) to Certificateholders on the corresponding Periodic Distribution Date as more particularly provided in Condition 8.2 (Non-Payment Election). No such Non-Payment Election may be made in respect of the Periodic Distribution Amount payable on the date on which the Certificates are to be redeemed in whole at the Bank's discretion in accordance with Condition 10 (Redemption and Variation). In addition, if a Non-Payment Event (as defined in the Conditions) occurs (which includes the case where sufficient Distributable Funds are not available in order to permit the Bank to make the relevant payment or as a result of a breach of Applicable Regulatory Capital Requirements), the Bank (in its capacity as Mudareb) shall be prohibited from paying Rab-al-Maal Mudaraba Profit or Rab-al-Maal Final Mudaraba Profit as applicable on any Mudaraba Profit Distribution Date or Mudaraba End Date (as the case may be) pursuant to the Mudaraba Agreement, and as a result thereof the Trustee shall be prohibited from paying Periodic Distribution Amounts to the Certificateholders on the corresponding Periodic Distribution Date, as more particularly provided in Condition 8.1 (Non-Payment Event). If any amount of Rab-al-Maal Mudaraba Profit, Rab-al-Maal Final Mudaraba Profit or Periodic Distribution Amount is not paid as a consequence of a Non-Payment Election or a Non-Payment Event then, from the date of such Non-Payment Election or Non-Payment Event, the Bank will be prohibited from declaring or paying certain distributions or dividends and from redeeming, purchasing, cancelling, reducing or otherwise acquiring certain securities, in each case for a limited period of time, as more particularly described in Condition 8.4 (Dividend and Redemption Restrictions). However, the Certificateholders shall have no claim in respect of any Periodic Distribution Amount not paid as a result of either a Non-Payment Election or a Non-Payment Event and the consequential non-payment of any Periodic Distribution Amount in such a circumstance shall not constitute a Dissolution Event. Any Periodic Distribution Amounts not paid following either a Non-Payment Election or a Non-Payment Event will not accumulate or compound. Accordingly, the Bank shall not have any obligation to make any subsequent payment in respect of any such unpaid profit (whether from its own cash resources, from the Mudaraba Reserve or otherwise) and the Trustee will not have any obligation to make any subsequent payment in respect of any such Periodic Distribution Amounts. If such a situation occurs, the Certificateholders shall not receive Periodic Distribution Amounts on their investment in the Certificates and neither the Trustee nor the Certificateholders shall have any claim in respect thereof. Any non-payment of Periodic Distribution Amounts or perceived risk of such non-payment may have a material adverse effect on the market value of the Certificates. 18
35. The Certificates are Perpetual Securities The Certificates are perpetual securities which have no scheduled payment date . The Trustee is under no obligation to redeem the Certificates at any time and the Certificateholders have no right to call for their redemption unless a Bank Event occurs. The Bank Events and Certificateholders' rights following a Bank Event are set out in Condition 12 (Dissolution Events and Winding-up). The Dissolution Events in the Conditions are limited to: (a) (b) Bank Events (being: (i) a default by the Mudareb for a period of five days or more in the payment of any principal or 14 days or more in the payment of any profit amount due and payable by it under the Mudaraba Agreement; (ii) an order is made or an effective resolution is passed for the winding-up or dissolution or administration of the Bank or the Bank applies or petitions for a winding-up or administration order in respect of itself except, in each case for the purpose of and followed by a reconstruction, amalgamation, reorganisation, merger or consolidation on terms approved by the Delegate (acting in accordance with the Declaration of Trust and the Conditions) or by an Extraordinary Resolution of the Certificateholders); and Trustee Events (being similar in nature to Bank Events in respect of the Trustee), all as more fully described in the Conditions. In certain circumstances the Bank may (acting in its sole discretion) instruct the Trustee to, whereupon the Trustee shall, redeem the Certificates, including on the First Call Date or any Periodic Distribution Date thereafter and if a Tax Event or a Capital Event occurs, as more particularly described in Condition 10 (Redemption and Variation), although there is no assurance that the Bank will require it to do so. Any such redemption will also be subject to a number of conditions, as set out in Condition 10.1(a) (No Fixed Redemption Date and Conditions for Redemption and Variation). Therefore, prospective investors should be aware that they may be required to bear the financial risks of an investment in the Certificates indefinitely, unless: (a) the Trustee exercises its rights to redeem the Certificates in accordance with Condition 10 (Redemption and Variation); (b) the Trustee is directed by an Extraordinary Resolution of the Certificateholders, or by the Delegate (acting in accordance with the Declaration of Trust and the Conditions), following a Bank Event to redeem the Certificates; or (c) they sell their Certificates. The exercise of (or perceived likelihood of exercise of) any such redemption feature of the Certificates may limit their market value, which is unlikely to rise substantially above the price at which the Certificates can be redeemed. If the Certificates are redeemed, there can be no assurance that Certificateholders will be able to reinvest the amount received upon redemption in a comparable security at a rate that will provide the same rate of return as their investment in the Certificates. Potential investors should consider reinvestment risk in light of other investments available at that time. See also "Absence of secondary market/limited liquidity" for a description of the risks relating to the ability of holders of Certificates to sell the Certificates in the secondary market. 19
36. The Certificates will cease to accrue profit from the due date for redemption (if any) Investors are advised that each Certificate will cease to accrue profit from the due date for redemption (following liquidation of the Mudaraba). Consequently, should payments owing to Certificateholders on the due date for redemption (if any) be received by them after the due date for any reason, no additional profit payment, late payment amount or other equivalent amount will be payable in respect of such delay. See Condition 7.3 (Cessation of Accrual). Due to the deeply subordinated nature of the obligations arising under the Certificates, the Conditions contain limited Dissolution Events and remedies The Certificates are perpetual instruments with no fixed redemption date and there is no obligation on the Trustee to pay the face amount of the Certificates other than in accordance with the exercise of a call option in accordance with Condition 10.1(b) (Trustee's Call Option), a redemption in accordance with Condition 10.1(c) (Redemption or Variation due to Taxation), a redemption in accordance with Condition 10.1(d) (Redemption or Variation for Capital Event) or following the occurrence of a Bank Event in accordance with Condition 12.1 (Bank Events). In addition, the Trustee may be prohibited from making, or instructed by the Bank not to make, payments of Periodic Distribution Amounts on the Certificates in accordance with Condition 8 (Periodic Distribution Restrictions) and Periodic Distribution Amounts will not therefore be due other than in the limited circumstances described in the Conditions. Moreover, pursuant to Condition 12 (Dissolution Events and Winding-up), upon the occurrence of any Bank Event, the Mudaraba will be liquidated in accordance with the provisions of the Mudaraba Agreement and the remedies available to the Trustee, the Delegate and/or the Certificateholders (as applicable) are limited to giving notice to the Trustee and the Bank that the Certificates are, and shall immediately become, due and payable without presentation, demand, protest or other notice of any kind at the applicable Dissolution Distribution Amount together with any Outstanding Payments (as defined in the Conditions) and thereafter: (i) instituting any steps, actions or proceedings for the winding-up or bankruptcy of the Bank and/or (ii) proving in the winding-up of the Bank and/or (iii) claiming in the liquidation of the Bank and/or (iv) taking such other steps, actions or proceedings which, under the laws of Kuwait, have an analogous effect to the actions referred to paragraphs (i) to (iv) above, in each case, for the payment of amounts due under the Mudaraba Agreement. Therefore, it will only be possible to enforce claims for payment of the applicable Dissolution Distribution Amount and/or Periodic Distribution Amounts in respect of the Certificates when the same have become due pursuant to the Mudaraba Agreement and the Conditions. Furthermore, the claims of Senior Creditors of the Bank will first have to be satisfied in any winding-up, bankruptcy, dissolution, liquidation or analogous proceedings before the Certificateholders may expect to obtain any amounts in respect of their Certificates and prior thereto Certificateholders will have only limited (if any) ability to influence the conduct of such winding-up, liquidation or analogous proceedings. Resettable fixed rate instruments have a market risk A holder of an instrument with a fixed profit (or equivalent) rate that will be reset during the term of the instrument (as will be the case for the Certificates with effect from each Reset Date (as defined in the Conditions) if not previously redeemed and/or purchased and cancelled) is exposed to the risk of fluctuating profit rate levels and uncertain profit rate income. While the expected profit rate on the Certificates is fixed until the First Call Date (with a reset of the initial profit rate on the First Call Date as set out in the Conditions and every five years thereafter), the current investment return rate in the capital markets (the market return rate) typically changes on a daily basis. As the market return rate changes, the market value of the Certificates may also change, but in the opposite direction. If the market return rate increases, the market value of the Certificates would typically decrease. If the market return rate falls, the market value of the Certificates would typically increase. Certificateholders 20
37. should be aware that movements in these market return rates can adversely affect the market value of the Certificates and can lead to losses for the Certificateholders if they sell the Certificates . Variation upon the occurrence of a Capital Event or a Tax Event Upon the occurrence and continuation of a Capital Event or a Tax Event, the Bank may (acting in its sole discretion), instruct the Trustee to, whereupon the Trustee shall, subject as provided in Condition 10.1(c) (Redemption or Variation due to Taxation) or Condition 10.1(d) (Redemption or Variation for Capital Event) (as the case may be) and without any requirement for consent or approval of the Certificateholders, vary the terms of the Mudaraba Agreement and the Certificates such that the Certificates become or remain (as appropriate) Qualifying Additional Tier 1 Instruments (as defined in the Conditions). A Capital Event is deemed to have occurred if the Bank is notified in writing by the Financial Regulator to the effect that the outstanding face amount of the Certificates is excluded (in full or in part) from the Additional Tier 1 Capital of the Bank (save where such non-qualification is only as a result of any applicable limitation on the amount of such capital). A Tax Event will arise if the Bank or the Trustee (as the case may be) would, as a result of a Tax Law Change (as defined in the Conditions), in making any payments under the Mudaraba Agreement or on the Certificates (as the case may be) on the next due date for such payment, be required to pay Additional Amounts (and such requirement cannot be avoided by the Bank or the Trustee (as the case may be) taking reasonable measures available to it). Each of Tax Event and Capital Event are more particularly described in Condition 10.1 (Redemption and variation). The tax and stamp duty consequences of holding the Certificates following variation as contemplated in Condition 10.1 (Redemption and variation) could be different for certain Certificateholders from the tax and stamp duty consequences for them of holding the Certificates prior to such variation and none of the Trustee, the Delegate, the Agents or the Bank shall be responsible to any Certificateholder for any such consequences in connection therewith. Further, while the Conditions stipulate that the variation (as contemplated by the Conditions) must not be materially less favourable to the Certificateholders, no assurance can be given as to whether any of these changes will negatively affect any particular Certificateholder. The Certificates are limited recourse obligations The Certificates are not debt obligations of the Trustee. Instead, the Certificates represent an undivided ownership interest solely in the Trust Assets. Recourse to the Trustee in respect the Certificates is limited to the Trust Assets and the proceeds of the Trust Assets are the sole source of payments on the Certificates. Upon receipt by the Trustee of a Dissolution Notice in accordance with the terms of Condition 12.1 (Bank Events), the sole rights of each of the Trustee and/or the Delegate (acting on behalf of the Certificateholders) will be (subject to Condition 12.3 (Winding-up, dissolution or liquidation)) against the Bank to perform its obligations under the Transaction Documents. Certificateholders will have no recourse to any assets of the Trustee (other than the Trust Assets in the manner contemplated in the Transaction Documents) or of the Delegate or the Agents (to the extent that each of the Delegate and the Agents (as applicable) fulfils all of its obligations under the Transaction Documents to which it is party) or any of their respective affiliates in respect of any shortfall in the expected amounts from the Trust Assets. The Bank is obliged to make certain payments under the Transaction Documents directly to the Trustee, and the Trustee and/or the Delegate will have direct recourse against the Bank to recover such payments due to the Trustee pursuant to the Transaction Documents. After enforcing or realising the rights in respect of the Trust Assets and distributing the net proceeds of such Trust Assets in accordance with Condition 5.3 (The Trust), the obligations of the Trustee and/or the Delegate in respect of the Certificates shall be satisfied and neither the Trustee nor the Delegate nor any Certificateholder may take any further steps against the Trustee to recover any further sums in respect of the Certificates and the right to receive any such sums unpaid shall be extinguished. Furthermore, under no circumstances shall the Trustee, the Delegate or any Certificateholder have any right to cause the sale or other disposition of any of the Trust Assets (other than 21
38. as expressly contemplated in the Transaction Documents ) and the sole right of the Delegate and the Certificateholders against the Trustee and the Bank shall be (in accordance with Condition 12.3 (Winding-up, dissolution or liquidation)) to enforce their respective obligations under the Transaction Documents. Absence of secondary market/limited liquidity There is no assurance that a secondary market for the Certificates will develop or, if it does develop, that it will provide the Certificateholders with liquidity of investment or that it will continue for the life of the Certificates. Accordingly, a Certificateholder may not be able to find a buyer to buy its Certificates readily or at prices that will enable the Certificateholder to realise a desired yield. The market value of the Certificates may fluctuate and a lack of liquidity, in particular, can have a material adverse effect on the market value of the Certificates. The Certificates generally may have a more limited secondary market liquidity and may be subject to greater price volatility than conventional debt securities as they are perpetual securities (see "—The Certificates are Perpetual Securities"), are subordinated (see "—The payment obligations of the Bank under the Mudaraba Agreement are subordinated and unsecured obligations"), will be fully and permanently written-down upon the occurrence of a Non-Viability Event (see "—Certificateholders' right to receive payment of the face amount of the Certificates and the Certificateholders' right to any profit may be cancelled or written-down (in whole or in part) upon the occurrence of a Non-Viability Event") and payments of Periodic Distribution Amounts may be restricted in certain circumstances (see "—Payments of Periodic Distribution Amounts are conditional upon certain events and may be cancelled and are non-cumulative"). Furthermore, certain shareholders and related parties of the Bank may participate in the offering of the Certificates. The secondary market liquidity of the Certificates may be adversely affected if, and to the extent that, such person(s) intend(s) to adopt a buy and hold strategy in respect of the Certificates. Application has been made for the Certificates to be admitted to the Official List and for such Certificates to be admitted to trading on the Euronext Dublin. However, there can be no assurance that any such listing or admission to trading will occur on or prior to the Issue Date or at all or, if it does occur, that it will enhance the liquidity of the Certificates. Accordingly, the purchase of the Certificates is suitable only for investors who can bear the risks associated with a lack of liquidity in the Certificates and the financial and other risks associated with an investment in the Certificates. The Certificates may be subject to early redemption; redemption is conditional Upon the occurrence of a Tax Event or a Capital Event, the Bank may (acting in its sole discretion), instruct the Trustee to, whereupon the Trustee shall, at any time, having given not less than 30 nor more than 60 days' prior notice to the Certificateholders in accordance with Condition 17 (Notices) (which notice shall be irrevocable and shall specify the date fixed for redemption), redeem in accordance with the Conditions all, but not some only, of the Certificates together with any accrued but unpaid Periodic Distribution Amounts (as more particularly described in Condition 10.1(c) (Redemption or Variation due to Taxation) in relation to a Tax Event, and Condition 10.1(d) (Redemption or Variation for Capital Event) in relation to a Capital Event). Any redemption of the Certificates is subject to the requirements in Condition 10.1(a) (No Fixed Redemption Date and Conditions for Redemption and Variation), including obtaining the prior approval of the Financial Regulator. There can be no guarantee that the approval of the Financial Regulator will be received on time or at all. There is no assurance that the Certificateholders will be able to reinvest the amount received upon redemption at a rate that will provide the same rate of return as their investment in the Certificates. During any period when the Bank may instruct the Trustee to redeem the Certificates, the market value of the Certificates generally will not rise substantially above the relevant redemption amount payable in respect of the Certificates. Potential investors should consider re-investment risk in light of other investments available at that time. 22
39. The exercise of (or perceived likelihood of exercise of) the redemption features of the Certificates may limit their market value, which is unlikely to rise substantially above the price at which the Certificates can be redeemed. Investment in the Mudaraba Assets Pursuant to the Mudaraba Agreement, the proceeds of the issuance of the Certificates will be contributed by the Trustee (as Rab-al-Maal) to the Mudareb which proceeds shall form the initial capital of the Mudaraba (the Mudaraba Capital). The Mudaraba Capital will be co-mingled with shareholders equity and invested by the Bank (as Mudareb), on an unrestricted co-mingling Mudaraba basis, in its general business activities carried out through the General Mudaraba Pool (as defined in the Conditions) and, following investment of the Mudaraba Capital, the Mudaraba Capital shall constitute pro rata undivided assets in the General Mudaraba Pool (the Mudaraba Assets) with a view to earning profit therefrom, which will in turn be applied towards payments due to Certificateholders in respect of the Certificates. No investigation or enquiry will be made and no due diligence will be conducted in respect of any Mudaraba Assets. The investment activities of the Mudaraba will be carried out by the Bank, and the Certificateholders shall have no ability to influence such activities. The Bank shall be granted the express entitlement to co-mingle its own assets in the General Mudaraba Pool assets and, as a result, it may not be possible to identify the Mudaraba Assets separately from the assets of the Bank. If any of the risks relating to the business of the Bank mentioned above (see "—Risks relating to the Bank and its ability to fulfil its obligations under the Transaction Documents") materialise or otherwise impact the Bank's business, the value of and profit earned from the investment in such Mudaraba Assets may decrease, which may, in turn, have a material adverse effect on the Bank's ability to fulfil its payment obligations under the Mudaraba Agreement and, consequently, the Trustee's ability to make payments in respect of the Certificates. Furthermore, whilst the Mudareb has agreed in the Mudaraba Agreement to ensure that the Mudaraba Capital is invested in accordance with the Investment Plan (and with the degree of skill and care that it would exercise in respect of its own assets), the Mudaraba Agreement also provides that there is no guarantee of any return from the Mudaraba Assets. In addition, the Trustee and the Mudareb have agreed in the Mudaraba Agreement that the Mudareb shall not be responsible for any losses to the Mudaraba Capital suffered by the Trustee except to the extent such losses are caused by: (i) the Mudareb's breach of the Mudaraba Agreement; or (ii) the Mudareb's gross negligence, wilful misconduct or fraud. Accordingly, potential investors are advised that any claim by or on behalf of the Trustee for the Mudaraba Capital following any Dissolution Event may be reduced if and to the extent that the Mudareb is able to prove that any losses to the Mudaraba Capital were not caused by: (i) the Mudareb's breach of the Mudaraba Agreement; or (ii) the Mudareb's gross negligence, wilful misconduct or fraud. If the Mudareb is able to provide such proof, Certificateholders may lose all or some of their investment. It is not possible to state with certainty what approach any court with jurisdiction will take in such circumstances. Credit ratings assigned to the Bank may not reflect all the risks associated with an investment in the Certificates. One or more independent credit rating agencies may assign credit ratings to the Bank. The ratings may not reflect the potential impact of all risks related to structure, market, additional factors discussed above, and other factors that may affect the value of the Certificates. A credit rating is not a recommendation to buy, sell or hold securities and may be revised, suspended or withdrawn by the rating agency at any time. In general, European regulated investors are restricted under the CRA Regulation from using credit ratings for regulatory purposes, unless such ratings are issued by a credit rating agency established in the EU and registered under the CRA Regulation (and such registration has not been withdrawn or suspended, subject to transitional 23
40. provisions that apply in certain circumstances ). Such general restriction will also apply in the case of credit ratings issued by non-EU credit rating agencies, unless the relevant credit ratings are endorsed by an EU-registered credit rating agency or the relevant non-EU rating agency is certified in accordance with the CRA Regulation (and such endorsement action or certification, as the case may be, has not been withdrawn or suspended, subject to transitional provisions that apply in certain circumstances). The list of registered and certified rating agencies published by the European Securities and Markets Authority (ESMA) on its website in accordance with the CRA Regulation is not conclusive evidence of the status of the relevant rating agency included in such list, as there may be delays between certain supervisory measures being taken against a relevant rating agency and the publication of the updated ESMA list. Certain information with respect to the credit rating agencies and ratings is set out on the cover of this Prospectus. ADDITIONAL RISK FACTORS Certificateholders must rely on Euroclear and Clearstream, Luxembourg procedures The Certificates will be represented on issue by a Global Certificate that will be deposited with a common depositary for Euroclear and Clearstream, Luxembourg. Except in the circumstances described in the Global Certificate, investors will not be entitled to receive Certificates in definitive form. Euroclear and Clearstream, Luxembourg and their respective direct and indirect participants will maintain records of the ownership interests in the Global Certificate. While the Certificates are represented by the Global Certificate, investors will be able to trade their ownership interests only through Euroclear and Clearstream, Luxembourg and their respective participants. While the Certificates are represented by the Global Certificate, the Trustee will discharge its payment obligation under the Certificates by making payments through the relevant clearing systems. A holder of an ownership interest in the Global Certificate must rely on the procedures of the relevant clearing system and its participants to receive payments under the Certificates. The Trustee has no responsibility or liability for the records relating to, or payments made in respect of, ownership interests in the Global Certificate. Holders of ownership interests in the Global Certificate will not have a direct right to vote in respect of the Certificates so represented. Instead, such holders will be permitted to act only to the extent that they are enabled by the relevant clearing system and its participants to appoint appropriate proxies. No assurance can be given as to Shari'a rules The Shari'a Supervisory Board of Citi Islamic Investment Bank, the First Abu Dhabi Bank Shariah Supervisory Board, KFH Capital's Sharia Committee and the Sharia Supervisory Committee of Standard Chartered Bank have each confirmed that the transaction structure relating to the Certificates (as described in this Prospectus) and the Transaction Documents are, in their view, in compliance with Shari'a principles. However, there can be no assurance that the Transaction Documents or the issue and trading of the Certificates will be deemed to be Shari'acompliant by any other Shari'a board or Shari'a scholars. None of the Trustee, the Bank, the Delegate, the Agents, or the Managers makes any representation as to the Shari'a-compliance of the Certificates and/or any trading thereof and potential investors are reminded that, as with any Shari'a views, differences in opinion are possible. Prospective investors should obtain their own independent Shari'a advice as to whether the Transaction Documents and the Certificates will meet their individual standards of compliance and should also make their own determination as to the future tradability of the Certificates on any secondary market. Questions as to the Shari'a permissibility of the Transaction Documents or the issue and the trading of the Certificates may limit the liquidity and adversely affect the market value of the Certificates. In addition, prospective investors are reminded that the enforcement of any obligations of any of the parties under the Conditions or the Transaction Documents would be, if in dispute, the subject of arbitration in London under the 24
41. LCIA Rules . In such circumstances, the arbitrator will first apply the relevant law of the relevant Transaction Document in determining the obligation of the parties. Shari'a requirements in relation to interest awarded by a court In accordance with applicable Shari'a principles, each of the Trustee and the Delegate will waive all and any entitlement it may have to interest awarded in its favour by any court in connection with any dispute under the Mudaraba Agreement. Should there be any delay in the enforcement of a judgment given against the Bank, judgment interest may accrue in respect of that delay and, as a result of the waiver referred to above, Certificateholders will not be entitled to receive all, or any part of, such interest. Certificates with a denomination that is not an integral multiple of the minimum Specified Denomination may be illiquid and difficult to trade As the Certificates have a minimum denomination consisting of U.S.$200,000 and integral multiples of U.S.$1,000 in excess thereof, it is possible that the Certificates may be traded in amounts in excess of U.S.$200,000 that are not integral multiples of U.S.$200,000. In such case a Certificateholder who, as a result of trading such amounts, holds a face amount of less than U.S.$200,000 would need to purchase an additional amount of Certificates with a face value of U.S.$200,000 or more such that it holds an amount equal to at least U.S.$200,000 to be able to trade such Certificates. Certificateholders should be aware that Certificates which have a denomination that is not an integral multiple of U.S.$200,000 may be illiquid and difficult to trade. If a Certificateholder holds an amount which is less than U.S.$200,000 in his account with the relevant clearing system at the relevant time, such Certificateholder may not receive a Definitive Certificate in respect of such holding (should Definitive Certificates be printed) and would need to purchase a face amount of Certificates such that its holding amounts to at least an Authorised Denomination in order to be eligible to receive a Definitive Certificate. If Definitive Certificates are issued, holders should be aware that Definitive Certificates which have a denomination that is not an integral multiple of U.S.$200,000 may be illiquid and difficult to trade. Consents are required in relation to the variation of Transaction Documents and other matters The Conditions contain provisions for calling meetings of Certificateholders to consider matters affecting their interests generally and for obtaining written resolutions on matters relating to the Certificates from Certificateholders without calling a meeting. A written resolution signed by or on behalf of the holders of not less than 75 per cent. in face amount of the Certificates who for the time being are entitled to receive notice of a meeting in accordance with the provisions of the Declaration of Trust and whose Certificates are outstanding shall, for all purposes, take effect as an Extraordinary Resolution. In certain circumstances, where the Certificates are held in global form in the clearing systems, the Trustee, the Bank and the Delegate will be entitled to rely upon: (a) where the terms of the proposed resolution have been notified through the relevant clearing system(s), approval of a resolution proposed by the Trustee, the Bank or the Delegate given by way of electronic consents communicated through the electronic communications systems of the relevant clearing systems in accordance with their operating rules and procedures by or on behalf of the holders of not less than 75 per cent. in face amount of the Certificates for the time being outstanding; and (b) where electronic consent is not being sought, consent or instructions given in writing directly to the Trustee, the Bank and/or the Delegate by accountholders in the clearing systems with entitlements to the Global Certificate or, where the accountholders hold such entitlement on behalf of another person, on 25
42. written consent from or written instruction by the person for whom such entitlement is ultimately beneficially held (directly or via one or more intermediaries), provided that the Trustee has obtained commercially reasonable evidence to ascertain the validity of such holding and taken reasonable steps to ensure such holding does not alter following the giving of such consent/instruction and prior to effecting such resolution. A written resolution or an electronic consent as described above may be effected in connection with any matter affecting the interests of Certificateholders, including the modification of the Conditions, that would otherwise be required to be passed at a meeting of Certificateholders satisfying the special quorum in accordance with the provisions of the Declaration of Trust, and shall for all purposes take effect as an Extraordinary Resolution passed at a meeting of Certificateholders duly convened and held. These provisions permit defined majorities to bind all Certificateholders including Certificateholders who did not attend and vote at the relevant meeting and Certificateholders who voted in a manner contrary to the majority. The Conditions also provide that the Delegate may, without the consent or approval of the Certificateholders, agree to the substitution of another company as obligor under the Certificates in place of the Trustee, in the circumstances described in Condition 12.2 (Trustee Events). The Conditions also provide that the Delegate may, without the consent or approval of the Certificateholders, agree to the variation of the terms of the Certificates so that they become or, as appropriate, remain Qualifying Additional Tier 1 Instruments, as provided in Condition 10.1(c) (Redemption or Variation due to Taxation) and Condition 10.1(d) (Redemption or Variation for Capital Event). The Declaration of Trust also contains provisions permitting the Delegate from time to time and at any time without the consent or approval of the Certificateholders to make any modification to the Declaration of Trust if, in the sole opinion of the Delegate, such modification: (a) is of a formal, minor or technical nature; or (b) is made to correct a manifest error; or (c) is not materially prejudicial to the interests of the Certificateholders then outstanding and is other than in respect of a Reserved Matter (as defined in the Declaration of Trust) or any provision of the Declaration of Trust referred to in the definition of Reserved Matter. Unless the Delegate otherwise agrees, any such modification shall as soon as practicable thereafter be notified to the Certificateholders and shall in any event be binding upon the Certificateholders. Exchange rate risks and exchange controls The Trustee will make all payments on the Certificates in U.S. dollars. If the Certificateholders measure their investment returns by reference to a currency other than U.S. dollars (the Investor's Currency), an investment in the Certificates will entail foreign exchange-related risks due to, among other factors, possible significant changes in the value of the U.S. dollar, as applicable, relative to the Investor's Currency because of economic, political and other factors over which the Trustee has no control and the risk that authorities with jurisdiction over the Investor's Currency may impose or modify exchange controls. Depreciation of the U.S. dollar, as applicable, against the Investor's Currency could cause a decrease in the effective yield of the Certificates below their stated Periodic Distribution Amount and could result in a loss to the Certificateholders when the return on the Certificates is translated into the Investor's Currency. Investment in the Certificates may also have important tax consequences as a result of any foreign exchange currency gains or losses. Government and monetary authorities may impose (as some have done in the past) exchange controls that could adversely affect an applicable exchange rate. As a result, investors may receive lesser amounts under the Certificates than expected, or no such amounts. 26
43. RISKS RELATING TO ENFORCEMENT The insolvency regime in Kuwait is relatively untested with limited guidance as to how the legislative framework will be applied in practice by the courts in Kuwait In the event of the Bank 's insolvency, Kuwaiti bankruptcy law will apply and such law may adversely affect the Bank's ability to perform its obligations under the Mudaraba Agreement, and obtaining a final bankruptcy judgment in Kuwait may take several years. There is little precedent to predict how any claims by holders of the Certificates against the Bank would be resolved in the event of the Bank's insolvency and therefore there can be no assurance that holders of the Certificates will receive payment of their claims in full or at all in these circumstances. There is a risk that the Kuwaiti Courts will assume jurisdiction The Declaration of Trust, the Agency Agreement, the Mudaraba Agreement and the Certificates (the Documents) each contain a provision to the effect that disputes arising under the Documents will be referred to arbitration under the LCIA Rules. Nevertheless, if a claim is brought before the courts of Kuwait (the Kuwaiti Courts), the Kuwaiti Courts may still accept jurisdiction in any suit, action or proceedings in the situations identified in Articles 23, 24 and 26 of Kuwait Law No. 38 of 1980, as amended (the Code of Civil and Commercial Procedures). These situations include (a) where the defendant in the proceedings expressly or impliedly accepted the jurisdiction of the Kuwaiti Courts, (b) where the defendant is a Kuwaiti national or is resident, domiciled or has a place of business or a chosen domicile in Kuwait or (c) if such legal proceedings relate to property (movable or immovable) located in Kuwait, an obligation is created, executed or required to be performed in Kuwait or a bankruptcy is declared in Kuwait. There can therefore be no assurance that the Kuwaiti Courts will decline jurisdiction to adjudicate any dispute under the Documents, notwithstanding that the Documents provide that the parties have agreed that any disputes arising thereunder shall be referred to arbitration. The risk that the Kuwaiti Courts would assume jurisdiction on the proceedings is reduced, but not eliminated, in the event that (a) the respondent to a claim raises procedural defences as regards the jurisdiction and (b) the existence of previous or simultaneous proceedings in, or res judicata judgments from, a competent jurisdiction outside Kuwait, on the subject matter and involving the same disputing parties. In addition to the foregoing, Article 173 of the Code of Civil and Commercial Procedures provides that the Kuwaiti Courts have no jurisdiction to hear disputes which have been validly agreed to be referred to arbitration, provided that the party raising the existence of an arbitration provision does so before taking any substantive steps in the proceedings, or any other act or omission which would be considered a waiver of the right to seek arbitration. Enforcing arbitral awards in Kuwait Kuwait is a party to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention). A foreign arbitral award will be recognised and enforced in Kuwait (without re-trial or examination of the merits of the case) in accordance with the Code of Civil and Commercial Procedures. Article 200 of the Code of Civil and Commercial Procedure provides that foreign arbitral awards are to be recognised and enforced under the same conditions (applied mutatis mutandis to foreign arbitral awards) as are applied in respect of the enforcement of foreign judgments under Article 199 of the Code of Civil and Commercial Procedures, which requires that: (a) the courts of the jurisdiction by which the judgment was rendered must afford reciprocal treatment to judgments rendered in Kuwait; (b) the judgment must be rendered by a competent authority according to the law of the jurisdiction in which it was rendered; (c) the parties must have been duly summoned to appear and were duly represented at the proceedings; (d) the judgment must be final and non-appealable (res judicata) according to the law of the jurisdiction in which it was rendered; (e) the judgment must not contradict any prior judgment rendered by a Kuwaiti Court; and (f) the judgment must not contain anything in conflict with the 27
44. general morals or public order of Kuwait . In addition, the subject matter of the award must be considered arbitrable under Kuwaiti law and the arbitral award must be enforceable in the jurisdiction in which it was rendered. The requirement to establish reciprocal enforcement under Articles 199 and 200 of the Code of Civil and Commercial Procedures with respect to the recognition and enforcement of arbitral awards issued in England is satisfied as England and Kuwait are both signatories to the New York Convention. As noted above, enforcement of a foreign arbitral award or foreign judgment in Kuwait requires the filing of an enforcement action in the Kuwaiti Courts. Proceedings before the Kuwaiti Courts, including enforcement actions, can take a relatively long time before a final and non-appealable judgment is issued. There have not been many occasions in which the Kuwaiti Courts have been asked to consider the enforcement of foreign arbitral awards or foreign judgments and so (notwithstanding that on those occasions when they have been asked to do so they have shown that they will follow the provisions of the Code of Civil and Commercial Procedures and enforce an arbitral award) there is not a large body of decided cases in which the practical implications of complying with Articles 199 and 200 of the Code of Civil and Commercial Procedures have been analysed. Change in law The Documents (except for Condition 4.2 (Subordination)) are governed by English law in effect as at the date of this Prospectus. No assurance can be given as to the impact of any possible change to English law after the date of this Prospectus, nor can any assurance be given as to whether any such change could adversely affect the ability of the Trustee or the Bank to make payments under the Documents, as applicable. RISK FACTORS RELATING TO TAXATION Taxation risks on payments Payments made by the Bank to the Trustee under the Transaction Documents or by the Trustee in respect of the Certificates could become subject to taxation. The Mudaraba Agreement requires the Bank to pay additional amounts in the event that any withholding or deduction is required by Kuwaiti law to be made in respect of payments made by it to the Trustee under that document. Furthermore, Condition 13 (Taxation) provides that the Trustee is required to pay additional amounts in respect of any such withholdings or deductions imposed by the Cayman Islands therein in certain circumstances. If the Trustee fails to gross-up for any such withholding or deduction on payments due in respect of the Certificates to Certificateholders, the Bank has, pursuant to the Declaration of Trust, unconditionally and irrevocably undertaken (irrespective of the payment of any fee), as a continuing obligation, to pay to the Delegate (for the benefit of the Certificateholders) such additional amounts as shall be necessary in order that the aggregate net amounts received by the Certificateholders and the Delegate for the benefit of the Certificateholders after all withholdings or deductions shall equal the amounts that would have been receivable in the absence of any such deduction or withholding. The circumstances described above may entitle the Bank to be able to instruct the Trustee to redeem or vary the Certificates pursuant to Condition 10.1(c) (Redemption or Variation due to Taxation). See "—The Certificates may be subject to early redemption; redemption is conditional" and "—Variation upon the occurrence of a Capital Event or a Tax Event" for a description of the consequences thereof. The application and enforcement of the Kuwaiti income tax regime is uncertain and holders of the Certificates which are "non-GCC corporate entities" may become subject to the Kuwaiti income tax regime in certain limited circumstances Article 150 (bis) of Law No. 7 of 2010 Concerning the Establishment of the Capital Markets Authority and the Regulating of Securities Activities (which was introduced pursuant to Law No. 22 of 2015) (Article 150 (bis)) 28
45. provides that , without prejudice to the exemptions prescribed on capital gains tax arising from the disposal of securities issued by companies listed on the Kuwait Stock Exchange, the returns from bonds, finance sukuk and other similar securities, regardless of the nature of the issuer, are exempt from Kuwaiti tax. However, the Kuwait Ministry of Finance's Department of Income Tax (DIT) has to date not always adopted consistent rulings on Kuwaiti tax matters more generally. Accordingly, to the extent that the exemption afforded by Article 150 (bis) is held not to apply to the Certificates, or to a particular Certificateholder, such Certificateholder or the Certificateholders which are non-GCC corporate entities (and which are not ultimately held by GCC national shareholders) may become subject to income tax in Kuwait (see "Taxation—Kuwait" for further details). In addition, neither Article 150 (bis) nor Ministry of Finance Administrative Order No. 2028 of 2015 endorsing the provisions thereof, addresses the issue of whether or not there remains an obligation (as described under "Taxation⎯Kuwait⎯Retention") to make a deduction of 5 per cent. of the amount of any payments made by the Bank to the Trustee. In the event of any such deduction, the Mudaraba Agreement provides that the Bank will pay such additional amounts in order that the net amounts received by the Trustee shall equal the amount which would have been receivable in the absence of such deduction. To date there has been no official statement made publicly by the DIT regarding its interpretation of Article 150 (bis) and/or its application. Similarly, the Kuwaiti Courts (who will be the final arbiters on the matter) have not been required to interpret such provision to date. Therefore, it is not possible to state definitively how the DIT and/or the Kuwaiti Courts may implement or enforce the Taxation Laws (as defined in "Taxation—Kuwait") including Article 150 (bis) in practice. Prospective purchasers of the Certificates are advised to consult their tax advisers as to the consequences under Kuwaiti and other applicable tax laws of acquiring, holding and disposing of the Certificates and receiving payments under the Certificates. See "Taxation⎯Kuwait" for further details. Value Added Tax Although Kuwait does not currently impose value-added tax (VAT) on the sale of goods and services, there is a risk that this may change. In the period preceding the global financial crisis, the Kuwaiti government announced that it was investigating the possibility of introducing a VAT system across Kuwait and that draft VAT laws were in preparation. Investors should be aware that the GCC states, including Kuwait, have agreed to the implementation of a GCC-wide VAT framework, to be introduced at a rate of 5 per cent. (the Framework). The national legislation in Kuwait implementing the Framework has yet to be promulgated and no Kuwait-specific details of the regime have been released as at the date of this Prospectus. Therefore, although the Kuwait parliament has indicated that it will postpone the introduction of VAT until 2021, it is impossible to state with any accuracy if, and when, VAT will be introduced in Kuwait and on which terms and conditions. Furthermore, the introduction of VAT could have a more widespread economic impact, for example, reducing the levels of disposable income of the Bank's customers which could negatively impact demand for the Bank's services. The Bank is not currently subject to corporation tax on its earnings within Kuwait, although there is no guarantee that this will continue to be the case. If the Kuwaiti authorities impose new tax regimes on the Bank (whether related to corporation tax or otherwise), or introduce any other changes in tax laws which make doing business in Kuwait less attractive, this may have a material adverse effect on the Bank's business and prospects. 29
46. Kuwait may introduce corporate income tax The Bank is not currently subject to corporation tax on its earnings within Kuwait . However, on 14 March 2016 the Kuwait Cabinet of Ministers approved plans to implement a corporate tax of 10 per cent. on the annual profits of Kuwaiti incorporated entities (the Proposed Corporate Income Tax), which may be applicable to the Bank for future financial years. As at the date of this Prospectus, the Proposed Corporate Income Tax does not have the force of law until such time as it has been ratified by the Kuwaiti Parliament, signed by the Amir and published in the Official Gazette. It is currently uncertain as to whether the Proposed Corporate Income Tax will be promulgated into law in the form in which it has been proposed by the Cabinet of Ministers, or at all. If the Kuwaiti authorities impose new tax regimes on the Bank (whether in the form of the Proposed Corporate Income Tax or otherwise), or introduce any other changes in tax laws which make doing business in Kuwait less attractive, this may have a material adverse effect on the Bank's business, results of operations, cash flows and financial condition. 30
47. STRUCTURE DIAGRAM AND CASH FLOWS Set out below is a simplified structure diagram and description of the principal cash flows relating to the Certificates . This does not purport to be complete and is qualified in its entirety by reference to, and must be read in conjunction with, the more detailed information appearing elsewhere in this Prospectus. Potential investors are referred to the Conditions and the detailed descriptions of the relevant Transaction Documents set out elsewhere in this Prospectus for a fuller description of certain cash flows and for an explanation of the meaning of certain capitalised terms used below. Potential investors should read this entire Prospectus carefully, especially the risks of investing in the Certificates discussed under "Risk Factors". STRUCTURE DIAGRAM PRINCIPAL CASH FLOWS Payments by the Certificateholders and the Trustee On the Issue Date, the Certificateholders will pay the issue price in respect of the Certificates to the Trustee. Pursuant to the Declaration of Trust, the Trustee will declare a trust, in favour of the Certificateholders, over: (a) the cash proceeds of the issuance of the Certificates, pending application thereof in accordance with the terms of the Transaction Documents; (b) all of the Trustee's rights, title, interest and benefit, present and future, in, to and under the assets from time to time constituting the Mudaraba Assets (as defined below); 31
48. (c) all of the Trustee's rights, title, interest and benefit, present and future, in, to and under the Transaction Documents (other than in relation to any representations given by the Bank (acting in any capacity) pursuant to any of the Transaction Documents and the covenant given to the Trustee by the Bank pursuant to clauses 11.1 and 11.10 of the Declaration of Trust); and (d) all amounts standing to the credit of the Transaction Account from time to time, and all proceeds of the foregoing (together, the Trust Assets). The proceeds of the issuance of the Certificates will be contributed by the Trustee (as Rab-al-Maal) to the Mudareb and shall form the initial capital of the Mudaraba (the Mudaraba Capital) pursuant to the Mudaraba Agreement. The Mudaraba Capital will be co-mingled with shareholders equity and invested, on an unrestricted co-mingling Mudaraba basis, by the Bank in its general business activities carried out through the General Mudaraba Pool and, following investment of the Mudaraba Capital, the Mudaraba Capital shall constitute pro rata undivided assets in the General Mudaraba Pool (the Mudaraba Assets). Periodic payments by the Trustee Unless a Non-Payment Event or a Non-Payment Election has occurred, prior to each Periodic Distribution Date, the Mudareb shall distribute the profit generated by the Mudaraba to both the Trustee and the Mudareb in accordance with an agreed profit sharing ratio (99 per cent. to the Trustee (as Rab-al-Maal) and 1 per cent. to the Mudareb). The Trustee shall apply its share of the profit (if any) generated by the Mudaraba on each Periodic Distribution Date to pay the Periodic Distribution Amount due to the Certificateholders on such date. Payments of Rab-al Maal Mudaraba Profit (as defined in the Mudaraba Agreement) by the Bank (as Mudareb) are at the sole discretion of the Bank (as Mudareb) and may only be made in circumstances where a Non-Payment Event has not occurred. The Mudareb shall not have any obligation to make any subsequent payment in respect of such unpaid profit (whether from its own cash resources, from a reserve account (the Mudaraba Reserve) or otherwise). If the Rab-al-Maal Mudaraba Profit payable to the Trustee (as Rab-al-Maal) on any Mudaraba Profit Distribution Date is greater than the then applicable Periodic Distribution Amount due to any Certificateholder on such date, the amount of any excess shall be credited to the Mudaraba Reserve. Under the terms of the Mudaraba Agreement, the Mudareb shall be expressly entitled to co-mingle its assets with the General Mudaraba Pool assets. Dissolution payments, redemption and variation by the Trustee and the Mudareb The Mudaraba is a perpetual arrangement with no fixed end date. Accordingly, the Certificates are perpetual securities in respect of which there is no fixed redemption date. Subject to certain conditions set out in clause 7 of the Mudaraba Agreement, the Bank (as Mudareb) may at its option liquidate the Mudaraba in whole, but not in part, on the basis of a final constructive liquidation of the Mudaraba in the following circumstances: (a) on the First Call Date or any Periodic Distribution Date after the First Call Date, by giving not less than 35 nor more than 65 days' prior notice to the Trustee; or (b) on any date on or after the Issue Date (whether or not a Periodic Distribution Date), by giving not less than 35 nor more than 65 days' prior notice to the Trustee: (i) upon the occurrence of a Tax Event; or 32
49. (ii) upon the occurrence of a Capital Event. The Bank may (acting in its sole discretion) instruct the Trustee to, whereupon the Trustee shall, upon receipt of notice in accordance with paragraph (i) above redeem all of, but not only some of, the Certificates, and upon receipt of notice in accordance with paragraph (ii) above redeem all of, but not only some of, the Certificates or vary the terms thereof, in each case by giving not less than 30 nor more than 60 days' prior notice to the Certificateholders, all as more particularly described in the Conditions, and in each case following final constructive liquidation of the Mudaraba, as described above. The Bank (as Mudareb) and the Trustee undertake in the Mudaraba Agreement, in circumstances where the Certificates are required by the Bank to be varied upon the occurrence of a Tax Event or a Capital Event, to make such variations as are necessary to ensure that the Certificates become or, as appropriate, remain Qualifying Additional Tier 1 Instruments. 33
50. OVERVIEW OF THE OFFERING The following description does not purport to be complete and is taken from , and is qualified in its entirety by, the remainder of this Prospectus. Any decision to invest in the Certificates should be based on a consideration of this Prospectus as a whole. Words and expressions defined in the Conditions shall have the same meanings in this overview. Certificates U.S.$300,000,000 Additional Tier 1 Capital Certificates. Trustee/Issuer KIB Tier 1 Sukuk Limited, a special purpose company incorporated with limited liability on 18 March 2019 under the laws of the Cayman Islands with incorporation number MC-349126 with its registered office at PO Box 1093, Queensgate House, South Church Street, George Town, Grand Cayman, KY1-1102, Cayman Islands. Trustee/Issuer Legal Entity Identifier (LEI) 549300NQ3IPXJSWDXF51. Ownership of the Trustee The authorised share capital of the Trustee is U.S.$50,000 consisting of 50,000 ordinary shares of U.S.$1.00 each, 250 of which are fullypaid and issued. The Trustee's entire issued share capital is held on trust for charitable purposes by MaplesFS Limited as share trustee under the terms of a declaration of trust. Administration of the Trustee The affairs of the Trustee are managed by MaplesFS Limited (the Trustee Administrator), who has agreed to perform certain management functions and provide certain clerical, administrative and other services pursuant to a corporate services agreement dated 28 May 2019 between the Trustee Administrator and the Trustee (the Corporate Services Agreement). The Trustee Administrator's registered office is PO Box 1093, Queensgate House, South Church Street, George Town, Grand Cayman, KY1-1102, Cayman Islands. Mudareb/Bank Kuwait International Bank K.S.C.P. Rab-al-Maal KIB Tier 1 Sukuk Limited. Risk Factors Certain factors may affect the Trustee's ability to fulfil its obligations under the Certificates and the Bank's ability to fulfil its obligations under the Transaction Documents. In addition, certain factors are material for the purpose of assessing the market risks associated with the Certificates. These are set out under "Risk Factors". Joint Global Co-ordinators Citigroup Global Markets Limited and Standard Chartered Bank. Joint Lead Managers Citigroup Global Markets Limited, Dubai Islamic Bank PJSC, First Abu Dhabi Bank PJSC, KAMCO Investment Company K.S.C.P., KFH Capital Investment Company K.S.C.C. and Standard Chartered Bank. Co-Manager Boubyan Bank K.S.C.P. 34
51. Delegate Citibank N .A., London Branch. Pursuant to the Declaration of Trust, the Trustee shall delegate to the Delegate certain of the present and future powers, trusts, authorities and discretions vested in the Trustee by certain provisions of the Declaration of Trust. In particular, the Delegate shall be entitled to (and, in certain circumstances, shall, subject to being requested and indemnified and/or secured and/or pre-funded to its satisfaction, be obliged to) take enforcement action in the name of the Trustee against the Mudareb and/or the Bank following a Bank Event. Principal Paying Agent, Transfer Agent and Calculation Agent Citibank N.A., London Branch. Registrar Citigroup Global Markets Europe AG. Summary of the transaction structure and Transaction Documents An overview of the structure of the transaction and the principal cash flows is set out under "Structure Diagram and Cash Flows" and a description of the principal terms of certain of the Transaction Documents is set out under "Summary of the Principal Transaction Documents". Issue Date 10 June 2019. Issue Price 100 per cent. of the aggregate principal amount of the Certificates. Periodic Distribution Dates 10 June and 10 December every year, commencing on 10 December 2019. Periodic Distributions Subject to Condition 8 (Periodic Distribution Restrictions), Periodic Distribution Amounts shall be payable on each Periodic Distribution Date up to and including the First Call Date at a rate of 5.625 per cent. per annum. If the Certificates are not redeemed or purchased and cancelled in accordance with the Conditions on or prior to the First Call Date, Periodic Distribution Amounts shall be payable on each Periodic Distribution Date after the First Call Date (subject as aforesaid) at a fixed rate, to be reset on the First Call Date and every five years thereafter, equal to the Relevant Five Year Reset Rate plus a margin of 3.60 per cent. per annum. If the Bank makes a Non-Payment Election or a Non-Payment Event occurs, the Trustee shall not pay the corresponding Periodic Distribution Amounts (or any part thereof, as applicable) and neither the Bank nor the Trustee shall have any obligation to make any subsequent payment in respect of any unpaid Periodic Distribution Amount as more particularly described in Condition 8 (Periodic Distribution Restrictions). In such circumstances, distributions will not be cumulative and any distributions which are not paid will not accumulate or compound and the Certificateholders will have no right to receive such distributions at any time, even if other distributions are paid in the future. 35
52. Form of Certificates The Certificates will be issued in registered form as described in "Global Certificate". The Certificates will be represented on issue by ownership interests in a Global Certificate, which will be deposited with, and registered in the name of a nominee of, a common depositary for Euroclear and Clearstream, Luxembourg. Ownership interests in the Global Certificate will be shown on, and transfers thereof will only be effected through, records maintained by each relevant clearing system and its participants. Definitive Certificates evidencing a holding of Certificates will be issued in exchange for interests in the Global Certificate only in limited circumstances. Clearance and Settlement Certificateholders must hold their interest in the Global Certificate in book-entry form through Euroclear or Clearstream, Luxembourg. Transfers within and between Euroclear and Clearstream, Luxembourg will be in accordance with the usual rules and operating procedures of the relevant clearing systems. Denomination of the Certificates The Certificates will be issued in registered form in nominal amounts of U.S.$200,000 and integral multiples of U.S.$1,000 in excess thereof. Status of the Certificates Each Certificate will represent an undivided ownership interest in the Trust Assets, will be a limited recourse obligation of the Trustee and will rank pari passu without any preference or priority with all other Certificates; see Condition 4.1 (Status). The Relevant Obligations will (a) constitute Additional Tier 1 Capital of the Bank, (b) constitute direct, unsecured, conditional and subordinated obligations of the Bank, (c) rank subordinate to all Senior Obligations (as defined in the Conditions), (d) rank pari passu with all other Pari Passu Obligations (as defined in the Conditions) and (e) rank in priority to all Junior Obligations (as defined in the Conditions); see Condition 4.2 (Subordination). Trust Assets The Trust Assets consist of: (a) the cash proceeds of the issue of the Certificates, pending application thereof in accordance with the terms of the Transaction Documents; (b) all of the Trustee's rights, title, interest and benefit, present and future, in, to and under the assets from time to time constituting the Mudaraba Assets; (c) all of the Trustee's rights, title, interest and benefit, present and future, in, to and under the Transaction Documents (other than in relation to any representations given by the Bank (acting in any capacity) pursuant to any of the Transaction Documents and the covenants given to the Trustee pursuant to clauses 11.1 and 11.10 of the Declaration of Trust); and 36
53. (d) all amounts standing to the credit of the Transaction Account from time to time, and all proceeds of the foregoing, which will be held by the Trustee upon trust absolutely for and on behalf of the Certificateholders pro rata according to the face amount of Certificates held by each such Certificateholder in accordance with the Declaration of Trust and the Conditions. Redemption of Certificates variation of their terms and The Certificates are perpetual securities and accordingly do not have a fixed or final redemption date. The Certificates may be redeemed in whole but not in part, or the terms thereof may be varied by the Trustee (but only upon the instructions of the Bank (acting in its sole discretion)) only in accordance with the provisions of Condition 10 (Redemption and Variation). Pursuant to Condition 10.1(b) (Trustee's Call Option), the Trustee may (but only upon the instructions of the Bank (acting in its sole discretion)), on the First Call Date or on any Periodic Distribution Date thereafter, redeem all, but not some only, of the Certificates at the Trustee Call Amount. In addition (on any date on or after the Issue Date, whether or not a Periodic Distribution Date), upon the occurrence of a Tax Event or a Capital Event, all but not some only, of the Certificates may be redeemed or the terms of the Certificates may be varied, in each case in accordance with Conditions 10.1(c) (Redemption or Variation due to Taxation) and 10.1(d) (Redemption or Variation for Capital Event). Any redemption of the Certificates is subject to the conditions described in Condition 10.1 (Redemption and variation). Cancellation or Write-down at the Point of Non-Viability If a Non-Viability Event (as defined in the Conditions) occurs, a Write-down (as defined herein) shall occur on the relevant NonViability Event Write-down Date (as defined herein), as more particularly described in Condition 11 (Write-down at the Point of Non-Viability). In such circumstances, the Certificateholders' rights to the Trust Assets shall automatically be deemed to be irrevocably and unconditionally written-down in the same manner as the Certificates and the Certificates shall be cancelled (in the case of a Write-down in whole) or written-down in part on a pro rata basis (in the case of a Write-down in part) by the Trustee in accordance with the prevailing Capital Regulations. See Condition 11 (Write-down at the Point of Non-Viability). Dissolution Events Subject to Condition 12 (Dissolution Events and Winding-up), if a Bank Event occurs and, if so requested in writing by the Certificateholders of at least one-fifth of the then aggregate face amount of the Certificates outstanding or if so directed by an Extraordinary Resolution of the Certificateholders in accordance with 37
54. Condition 12 .1 (Bank Events), the Trustee and/or the Delegate shall, subject to Condition 12.3 (Winding-up, dissolution or liquidation), take the actions referred to therein. Withholding Tax Subject to Condition 9.2 (Payments subject to Applicable Laws) and Condition 13 (Taxation), all payments in respect of the Certificates by or on behalf of the Trustee shall be made free and clear of and without withholding or deduction for, or on account of, any Taxes (as defined in Condition 13 (Taxation)), unless the withholding or deduction of the Taxes is required by law. In such event, the Trustee will pay (subject to certain specified exclusions) Additional Amounts (as defined in the Conditions) so that the full amount which otherwise would have been due and payable under the Certificates in the absence of such deduction or withholding is received by the parties entitled thereto. In addition, the Transaction Documents provide that payments thereunder by the Bank (in its capacity as the Mudareb) shall be made free and clear of and without withholding or deduction, for and on account of, any Taxes, unless such withholding or deduction is required by law and, in such case, provide for the payment by the Bank of additional amounts so that the full amount which would otherwise have been due and payable is received by the Trustee. Notwithstanding any other provision of the Conditions, the Trustee and the Paying Agents shall be permitted to withhold or deduct any amounts imposed pursuant to an agreement described in Section 1471(b) of the U.S. Internal Revenue Code of 1986, as amended (the Code), or otherwise imposed pursuant to Sections 1471 through 1474 of the Code, any regulations or agreements thereunder, any official interpretations thereof, or (without prejudice to the provisions of Condition 13 (Taxation)) any law implementing an intergovernmental approach thereto (FATCA withholding). None of the Trustee, the Delegate or any Agent will have any obligation to pay Additional Amounts or otherwise indemnify a Certificateholder for any FATCA withholding deducted or withheld by the Trustee, a Paying Agent or any other party as a result of any person not being entitled to receive payments free of FATCA withholding. Trustee Covenants The Trustee has agreed to certain restrictive covenants as set out in Condition 6 (Covenants). Ratings The Bank has been assigned long-term ratings of "A+" by Fitch with a stable outlook. A rating is not a recommendation to buy, sell or hold securities and may be subject to suspension, reduction or withdrawal at any time by the assigning rating agency. In general, European regulated investors are restricted from using a rating for regulatory purposes if such rating is not issued or endorsed by a credit rating agency established in the European Union and registered under the CRA Regulation (or is endorsed and published or distributed by subscription by such a 38
55. credit rating agency in accordance with the CRA Regulation ). The Certificates will not be rated by any rating organisation upon their issue. Certificateholder Meetings A summary of the provisions for convening meetings of the Certificateholders to consider matters relating to their interests as such is set out in Condition 18 (Meetings of Certificateholders, Modification, Waiver, Authorisation and Determination). Tax Considerations See "Taxation" for a description of certain tax considerations applicable to the Certificates. Listing and Admission to Trading Application has been made to Euronext Dublin for the Certificates to be admitted to listing on the Official List and for the Certificates to be admitted to trading on the regulated market of Euronext Dublin. Transaction Documents The Declaration of Trust, the Agency Agreement and the Mudaraba Agreement (and any other agreements, deeds, undertakings or other documents designated as such by the parties thereto) are referred to herein as the Transaction Documents. Governing Law The Declaration of Trust, the Certificates, the Conditions, the Agency Agreement, the Mudaraba Agreement and any noncontractual obligations arising out of or in connection with them will be governed by, and construed in accordance with, English law. The Corporate Services Agreement and the Share Declaration of Trust and any non-contractual obligations arising out of or in connection with them will be governed by, and construed in accordance with, the laws of the Cayman Islands. Waiver of Immunity To the extent that the Bank may claim for itself or its assets or revenues immunity from jurisdiction, enforcement, prejudgment proceedings, injunctions and all other legal proceedings and relief and to the extent that such immunity (whether or not claimed) may be attributed to it or its assets or revenues, the Bank will agree in the Transaction Documents not to claim and will irrevocably and unconditionally waive such immunity in relation to any legal proceedings. Further, the Bank will irrevocably and unconditionally consent to the giving of any relief or the issue of any legal proceedings, including, without limitation, jurisdiction, enforcement, prejudgment proceedings and injunctions in connection with any legal proceedings. See Condition 21.4 (Waiver of Immunity). Limited Recourse Proceeds of the Trust Assets are the sole source of payments on the Certificates. Save as otherwise provided in Condition 4.4 (Limited Recourse and Agreement of Certificateholders), the Certificates do not represent an interest in any of the Trustee, the Delegate, the Bank, any of the Agents or any of their respective affiliates. If the net proceeds of the realisation of, or enforcement with respect 39
56. to , the Trust Assets are not sufficient to make all payments due in respect of the Certificates, Certificateholders will have no recourse to any assets of the Trustee (other than the Trust Assets in the manner contemplated in the Transaction Documents) or of the Delegate or the Agents (to the extent that each of the Delegate and the Agents (as applicable) fulfils all of its respective obligations under the Transaction Documents to which it is a party) or any of their respective affiliates in respect of any shortfall in the expected amounts from the Trust Assets. The Bank is obliged to make certain payments under the Transaction Documents directly to or to the order of the Trustee. Such payment obligations form part of the Trust Assets and the Trustee and/or the Delegate will, subject to Condition 4.2 (Subordination) and Condition 12.3 (Winding-up, dissolution or liquidation), have direct recourse against the Bank to recover payments due to the Trustee from the Bank pursuant to such Transaction Documents notwithstanding any other provision of Condition 4.4 (Limited Recourse and Agreement of Certificateholders). Such right of the Trustee and the Delegate shall constitute an unsecured claim against the Bank. None of the Certificateholders, the Trustee or the Delegate shall be entitled to claim any priority right in respect of any specific assets of the Bank in connection with the enforcement of any such claim. See Condition 4.4 (Limited Recourse Certificateholders) for further details. and Agreement of Selling Restrictions There are restrictions on the distribution of this Prospectus and the offer or sale of Certificates in the United States, the United Kingdom, the Cayman Islands, the UAE (excluding the Dubai International Financial Centre), the Dubai International Financial Centre, Kuwait, the Kingdom of Bahrain, the Kingdom of Saudi Arabia, the State of Qatar, Japan, Hong Kong, Malaysia, Singapore and Switzerland. See "Subscription and Sale". Use of Proceeds The proceeds of the issue of the Certificates will be contributed by the Trustee (as Rab-al-Maal) to the Bank (as Mudareb) as Mudaraba Capital pursuant to the terms of the Mudaraba Agreement as described in "Use of Proceeds". 40
57. TERMS AND CONDITIONS OF THE ADDITIONAL TIER 1 CAPITAL CERTIFICATES The following (except for the text in italics) is the text of the Terms and Conditions of the Certificates which (subject to modification and except for the text in italics) will be endorsed on each Certificate in definitive form (if issued) and will, save as provided in "Global Certificate", apply to the Global Certificate: KIB Tier 1 Sukuk Limited (in its capacity as issuer and in its capacity as trustee, as applicable, the Trustee, which expression shall where the context allows include the Delegate (as defined below) acting pursuant to the powers delegated to it by the Trustee pursuant to the Declaration of Trust (as defined below)) has issued Additional Tier 1 Capital Certificates (the Certificates) in an aggregate face amount of U.S.$300,000,000. The Certificates are constituted by a declaration of trust (the Declaration of Trust) dated 10 June 2019 (the Issue Date) made between the Trustee, Kuwait International Bank K.S.C.P. (the Bank) and Citibank N.A., London Branch as the delegate of the Trustee (the Delegate, which expression shall include all persons for the time being appointed as the delegate or delegates under the Declaration of Trust). Payments relating to the Certificates will be made pursuant to an agency agreement dated the Issue Date (the Agency Agreement) made between the Trustee, the Bank, the Delegate, Citibank N.A., London Branch as principal paying agent (in such capacity, the Principal Paying Agent and together with any further or other paying agents appointed from time to time in respect of the Certificates, the Paying Agents), Citigroup Global Markets Europe AG as registrar (in such capacity, the Registrar) and Citibank N.A., London Branch as transfer agent (in such capacity, the Transfer Agent and, together with any further or other transfer agents appointed from time to time in respect of the Certificates, the Transfer Agents) and as calculation agent (the Calculation Agent, which expression includes the Calculation Agent for the time being). The Paying Agents, the Transfer Agents and the Calculation Agent are together referred to in these terms and conditions (the Conditions) as the Agents. References to the Agents or any of them shall include their successors. These Conditions include summaries of, and are subject to, the detailed provisions of the Transaction Documents (as defined in Condition 1 (Interpretation)). Copies of the Transaction Documents are available for inspection and/or collection during normal business hours at the specified offices of the Principal Paying Agent. The Certificateholders are entitled to the benefit of, are bound by, and are deemed to have notice of, all the provisions of the Transaction Documents applicable to them. The owners shown in the records of Euroclear Bank SA/NV (Euroclear) and Clearstream Banking S.A. (Clearstream, Luxembourg) of book-entry interests in Certificates are entitled to the benefit of, are bound by, and are deemed to have notice of, all the provisions of the Agency Agreement applicable to them. Each initial Certificateholder, by its acquisition and holding of its interest in a Certificate, shall be deemed to authorise and direct the Trustee, on behalf of the Certificateholders: (i) to contribute the sums paid by it in respect of its Certificate(s) to the Mudareb (as defined in Condition 5 (The Trust)) in accordance with the Mudaraba Agreement (as defined in Condition 5 (The Trust)); (ii) to act as Rab-al-Maal (as defined in Condition 5 (The Trust)) pursuant to the Mudaraba Agreement on its behalf (which authorisation and direction shall also apply to its successors in title and any Substituted Trustee (as defined below)); and (iii) to enter into each Transaction Document, subject to the provisions of the Declaration of Trust and these Conditions. 1 Interpretation Words and expressions defined in the Declaration of Trust and the Agency Agreement shall have the same meanings where used in these Conditions unless the context otherwise requires or unless otherwise stated and provided that, in the event of any inconsistency between any such document and these Conditions, these Conditions will prevail. In addition, in these Conditions the following expressions have the following meanings: 41
58. Additional Amounts has the meaning given to it in Condition 13 (Taxation); Additional Tier 1 Capital means capital qualifying as (or which would qualify as, but for any applicable limitation on the amount of such capital), and approved by the Financial Regulator as, additional tier 1 capital in accordance with the Capital Regulations; Applicable Regulatory Capital Requirements means any requirements contained in the Capital Regulations for the maintenance of capital from time to time applicable to the Bank, including transitional rules and waivers granted in respect of the foregoing; Authorised Denomination has the meaning given to that term in Condition 2.1 (Form and Denomination); Bank Event means any of the following events: (i) Non-payment: the Bank (acting in its capacity as Mudareb) fails to pay an amount which is equivalent to principal or profit (including Additional Amounts) due and payable by it pursuant to the Mudaraba Agreement and the failure continues for a period of (in the case of principal) five days or (in the case of profit) 14 days (save in each case where such failure occurs solely as a result of the occurrence of a Non-Payment Election or a Non-Payment Event); or (ii) Winding-up: an order is made or an effective resolution is passed for the winding-up or dissolution or administration of the Bank or the Bank applies or petitions for a winding-up or administration order in respect of itself except, in each case, for the purpose of and followed by an amalgamation, reorganisation or reconstruction whilst solvent on terms approved by the Delegate (acting in accordance with the Declaration of Trust and these Conditions) or by an Extraordinary Resolution of the Certificateholders; or (iii) Analogous Event: any event occurs which under the laws of Kuwait has an analogous effect to any of the events referred to in paragraph (ii) above; Basel III means the reforms to the international regulatory capital framework issued by the Basel Committee (including, but not limited to, the Basel III Documents) as part of a package of new capital and liquidity requirements intended to reinforce capital standards and to establish minimum liquidity standards for international credit institutions (including guidance on the eligibility criteria for tier 1 capital instruments and tier 2 capital instruments); Basel III Documents means the Basel Committee document "A global regulatory framework for more resilient banks and banking systems" released by the Basel Committee on 16 December 2010 and revised in June 2011 and the Annex contained in its document "Basel Committee issues final elements of the reforms to raise the quality of regulatory capital" on 13 January 2011; Basel Committee means the Basel Committee on Banking Supervision; Business Day means a day (other than a Saturday or a Sunday) on which commercial banks are open for business in London and, if on that date a payment is to be made, in New York City; Capital Event is deemed to have occurred if the Bank is notified in writing by the Financial Regulator to the effect that the outstanding face amount of the Certificates is excluded (in full or in part) from the Additional Tier 1 Capital of the Bank (save where such non-qualification is only as a result of any applicable limitation on the amount of such capital); 42
59. Capital Event Redemption Amount in relation to a Certificate means 100 per cent . of its outstanding face amount together with any Outstanding Payments; Capital Regulations means, at any time, the regulations, requirements, guidelines and policies relating to capital adequacy then in effect in Kuwait, including those of the Financial Regulator, including, without limitation, the Instructions and, in each case, as amended or superseded from time to time; Certificateholder means a person in whose name a Certificate is registered in the Register (or, in the case of joint Certificateholders, the first named thereof) and the expressions holder and holder of Certificates and related expressions shall (where appropriate) be construed accordingly; Code means the U.S. Internal Revenue Code of 1986, as amended; Common Equity Tier 1 Capital means capital of the Bank qualifying as, and approved by the Financial Regulator as, or capital which would, but for any applicable limitation on the amount of such capital, qualify as common equity tier 1 capital in accordance with the Capital Regulations; Day-count Fraction means the actual number of days in the relevant period divided by 360 (the number of days to be calculated on the basis of a year of 360 days with 12 30-day months and, in the case of an incomplete month, the number of days elapsed of the Periodic Distribution Period in which the relevant period falls (including the first such day but excluding the last)); Determination Date means, in respect of a Reset Period, the third Business Day prior to the commencement of such Reset Period; Dispute has the meaning given to it in Condition 21.2 (Arbitration); Dissolution Distribution Amount means the Trustee Call Amount, the Capital Event Redemption Amount or the Tax Event Redemption Amount, as the case may be, or such other amount in the nature of a redemption amount as may be determined in accordance with these Conditions; Dissolution Event means a Bank Event and/or a Trustee Event; Dissolution Notice has the meaning given to it in Condition 12.1 (Bank Events); Dissolution Request has the meaning given to it in Condition 12.1 (Bank Events); Distributable Funds means the aggregate of the Bank's (a) consolidated retained earnings and reserves after the transfer of any amounts to non-distributable reserves; and (b) profits (after the transfer of any profits to non-distributable reserves, if applicable), in each case: (i) as set out in the most recent annual audited consolidated financial statements or (as the case may be) auditor reviewed consolidated financial statements of the Bank less any prior distribution of Rab-al-Maal Mudaraba Profit calculated and paid by reference to such annual audited or (as the case may be) auditor reviewed consolidated financial statements; and (ii) to the extent not restricted from distribution by applicable law, subject as otherwise defined in the Capital Regulations from time to time; 43
60. Euronext Dublin means the Irish Stock Exchange plc trading as Euronext Dublin ; Extraordinary Resolution has the meaning given to it in the Declaration of Trust; Final Mudaraba Profit has the meaning given to it in the Mudaraba Agreement; Financial Regulator means the Central Bank of Kuwait and/or any successor entity having primary bank supervisory authority with respect to the Bank in Kuwait; First Call Date means 10 June 2024; First Mudaraba Profit Distribution Date means 10 December 2019; General Mudaraba Pool has the meaning given to it in the Mudaraba Agreement; H.15 (519) means the weekly statistical release designated as such, or any successor publication, published by the Board of Governors of the United States Federal Reserve System and most recent H.15 (519) means the H.15 (519) published closest in time but prior to the applicable U.S. Government Securities Determination Date. H.15 (519) may be currently obtained at the following website: https://www.federalreserve.gov/releases/h15/; Initial Period means the period from (and including) the Issue Date to (but excluding) the First Call Date; Initial Periodic Distribution Rate has the meaning given to it in Condition 7.4(a) (Periodic Distribution Rate); Instructions means the final instructions entitled "Implementing Capital Adequacy Standards⎯Basel III⎯for Islamic banks" issued by the Financial Regulator on 24 June 2014, as may be amended or superseded from time to time; Junior Obligations means all claims of the holders of Ordinary Shares and all payment obligations of the Bank in respect of its Common Equity Tier 1 Capital and any other subordinated payment obligations of the Bank which rank, or are expressed to rank, junior to the Relevant Obligations; Kuwait means the State of Kuwait; LCIA means the London Court of International Arbitration; Margin means 3.60 per cent. per annum; Mudaraba has the meaning given to it in Condition 5 (The Trust); Mudaraba Agreement has the meaning given to it in Condition 5 (The Trust); Mudaraba Assets has the meaning given to it in Condition 5 (The Trust); Mudaraba Capital has the meaning given to it in Condition 5 (The Trust); Mudaraba End Date means the date on which the Mudaraba ends, being the date on which the Certificates are redeemed in whole but not in part in accordance with these Conditions; Mudaraba Profit has the meaning given to that term in the Mudaraba Agreement; 44
61. Mudaraba Profit Distribution Date means 10 June and 10 December in each year , starting on (and including) the First Mudaraba Profit Distribution Date; Mudaraba Reserve has the meaning given to it in the Mudaraba Agreement; Mudareb has the meaning given to it in Condition 5 (The Trust); Non-Payment Election has the meaning given to it in Condition 8.2 (Non-Payment Election); Non-Payment Event has the meaning given to it in Condition 8.1 (Non-Payment Event); Non-Viability Event means that the Financial Regulator has informed the Bank in writing that it has determined that a Trigger Event has occurred; Non-Viability Event Write-down Date shall be the date on which the Write-down will take place as specified in the Non-Viability Notice, which date shall be no later than 10 Business Days after the date of the Non-Viability Notice; Non-Viability Notice has the meaning given to it in Condition 11.2 (Non-Viability Notice); Ordinary Shares means the ordinary shares of the Bank; Outstanding Payments means, in relation to any amounts payable on redemption of the Certificates, an amount representing accrued and unpaid Periodic Distribution Amounts for the Periodic Distribution Period during which redemption occurs to the date of redemption plus Additional Amounts thereon, if any, and, if the Certificates are redeemed following a Capital Event, shall include the Premium; Pari Passu Obligations means all subordinated payment obligations of the Bank which rank, or are expressed to rank, pari passu with the Relevant Obligations; Payment Business Day has the meaning given to it in Condition 9.4 (Payment only on a Payment Business Day); Periodic Distribution Amount has the meaning given to it in Condition 7.2 (Periodic Distribution Amounts); Periodic Distribution Date means 10 June and 10 December in each year, starting on (and including) 10 December 2019; Periodic Distribution Period means the period beginning on (and including) the Issue Date and ending on (but excluding) the first Periodic Distribution Date and each successive period beginning on (and including) a Periodic Distribution Date and ending on (but excluding) the next succeeding Periodic Distribution Date; Person means any individual, company, corporation, firm, partnership, joint venture, association, organisation, state or agency of a state or other entity, whether or not having separate legal personality; Potential Dissolution Event means an event which, with the giving of notice, lapse of time, determination of materiality or fulfilment of any other applicable condition (or any combination of the foregoing), would constitute a Dissolution Event; Premium means, on the date of final constructive liquidation of the Mudaraba pursuant to subclause 7.3(c) of the Mudaraba Agreement, an amount equal to one per cent. of the Mudaraba Capital on such date; 45
62. Profit Rate means , in respect of the Initial Period, the Initial Periodic Distribution Rate, and, in respect of each Reset Period thereafter, the rate calculated in accordance with the provisions of Condition 7.4(a) (Periodic Distribution Rate); Qualifying Additional Tier 1 Instruments means instruments (whether securities, trust certificates, interests in limited partnerships or otherwise) issued directly or indirectly by the Bank that: (i) will be eligible to constitute (or would, but for any applicable limitation on the amount of such capital, constitute) Additional Tier 1 Capital of the Bank; (ii) have terms and conditions not materially less favourable to a Certificateholder than the Certificates, as reasonably determined by the Bank (provided that in making this determination the Bank is not required to take into account the tax treatment of the new instrument in the hands of all or any Certificateholder, or any transfer or similar taxes that may apply on the acquisition of the new instrument), provided that a certification to such effect of two Authorised Signatories of the Bank shall have been delivered to the Trustee and the Delegate prior to the variation of the terms of the instruments and upon which the Trustee and Delegate may rely without further enquiry and without liability to any person, in accordance with Condition 10.1(c) (Redemption or Variation due to Taxation); (iii) will constitute direct or indirect (whether by a guarantee or equivalent support undertaking) obligations of the Bank; (iv) rank, on a winding-up of the Bank, at least pari passu with the Relevant Obligations; (v) have at least the same outstanding principal amount and profit distribution dates as the Certificates and at least equal profit or distribution rate or rate of return as the Certificates; (vi) are listed on the same stock exchange as the Certificates; (vii) have, to the extent such payment is not cancelled, the same claim to accrued but unpaid distributions; (viii) have the same optional redemption dates as the Certificates, save that any right to redeem the Certificates prior to the fifth anniversary of the Issue Date may be disapplied if such right to redeem would cause a Capital Event; and (ix) preserve the Relevant Obligations upon any redemption of the Certificates and the ranking of any claims in a winding-up or dissolution of the Bank, and which may include such technical changes as necessary to reflect the requirements of Additional Tier 1 Capital under the Capital Regulations then applicable to the Bank (including, without limitation, such technical changes as may be required in the adoption and implementation of Basel III); Rab-al-Maal has the meaning given to it in Condition 5 (The Trust); Rab-al-Maal Mudaraba Profit has the meaning given to it in the Mudaraba Agreement; Rab-al-Maal Final Mudaraba Profit has the meaning given to it in the Mudaraba Agreement; Record Date means, in the case of the payment of a Periodic Distribution Amount, the date falling on the fifteenth day before the relevant Periodic Distribution Date and, in the case of the payment of a Dissolution Distribution Amount, the date falling two Payment Business Days before the date for payment of the relevant Dissolution Distribution Amount, as the case may be; 46
63. Register has the meaning given to it in Condition 2 .1 (Form and Denomination); Registered Account has the meaning given to it in Condition 9.1 (Payments in respect of the Certificates); Relevant Date in respect of a Certificate means (a) the date on which payment in respect of such Certificate first becomes due or (b) if the full amount of the money payable has not been received by the Principal Paying Agent or the Delegate on or before the due date, the date on which, the full amount of the money having been so received, notice to that effect has been duly given to Certificateholders in accordance with Condition 17 (Notices); Relevant Jurisdiction means the Cayman Islands (in the case of any payment made by the Trustee) and Kuwait (in the case of any payment made by the Bank) or, in each case, any political sub-division or authority thereof or therein having the power to tax; Relevant Obligations has the meaning given to it in Condition 4.2 (Subordination); Relevant Five Year Reset Rate means, in respect of each Reset Period: (i) a rate (expressed as a decimal and, in the case of U.S. Treasury bills, converted to a bond equivalent yield) determined on the relevant U.S. Securities Determination Date to be the per annum rate equal to the weekly average yield to maturity for U.S. Treasury securities with a maturity of five years and trading in the public securities markets; or (ii) if there is no such published U.S. Treasury security with a maturity of five years and trading in the public securities markets, then the rate will be determined on the relevant U.S. Securities Determination Date by interpolation between the most recent weekly average yield to maturity for two series of U.S. Treasury securities trading in the public securities market: (A) one maturing as close as possible to, but earlier than, the immediately following Reset Date; and (B) the other maturity as close as possible to, but later than, the immediately following Reset Date, in each case as published in the most recent H.15 (519). If the Bank cannot procure the determination of the Relevant Five Year Reset Rate on the relevant Determination Date pursuant to the methods described in (i) and (ii) above, then the Relevant Five Year Reset Rate will be: (i) equal to the rate applicable to the immediately preceding Reset Period; or (ii) in the case of the Reset Period commencing on the First Call Date, 2.025 per cent; Reserved Matter has the meaning given to it in the Declaration of Trust; Reset Date means the First Call Date and every fifth anniversary thereafter; Reset Period means the period from (and including) the first Reset Date to (but excluding) the earlier of (a) the Mudaraba End Date and (b) the following Reset Date, and (if applicable) each successive period thereafter from (and including) such Reset Date to (but excluding) the earlier of (x) the Mudaraba End Date and (y) the next succeeding Reset Date; Rules has the meaning given to it in Condition 21.2 (Arbitration); Senior Creditors means creditors of the Bank (including depositors (in respect of their due claims) and, for this purpose, holders of any instrument issued by, or other obligation of, the Bank which ranks senior to the claims of the Trustee in respect of the Relevant Obligations) other than creditors in respect of obligations the claims in relation to which rank or are expressed to rank pari passu with, or junior to, the claims of the Trustee in respect of the Relevant Obligations; Senior Obligations means all unsubordinated payment obligations of the Bank including depositors and all subordinated payment obligations (if any) of the Bank except Pari Passu Obligations and Junior Obligations; 47
64. Subsidiary means , in relation to any Person (the first person) at any particular time, any other Person (the second person) whose affairs and policies the first Person controls or has the power to control, whether by ownership or share capital, contract, the power to appoint or remove members of the governing body of the second Person or otherwise; Substituted Territory has the meaning given to it in Condition 12.2 (Trustee Events); Substituted Trustee has the meaning given to it in Condition 12.2 (Trustee Events); Taxes has the meaning given to it in Condition 13 (Taxation); Tax Event means the Bank or the Trustee (as the case may be) would, as a result of a Tax Law Change, in making any payments under the Mudaraba Agreement (in the case of the Bank (in its capacity as Mudareb)) on the next due date for a payment of Mudaraba Profit or the Certificates (in the case of the Trustee) on the next due date for payment of a Periodic Distribution Amount (as the case may be) (whether or not a NonPayment Event has occurred or a Non-Payment Election has been made), be required to pay Additional Amounts or additional amounts under clause 5.11 of the Mudaraba Agreement (and such requirement cannot be avoided by the Bank or the Trustee (as the case may be) taking reasonable measures available to it); Tax Law Change means any change in, or amendment to, the laws, published practice or regulations of any Relevant Jurisdiction, or any change in the application or official interpretation of such laws, published practice or regulations (including a holding by a court of competent jurisdiction), which change or amendment becomes effective (or, in the case of application or official interpretation, is announced) on or after 7 June 2019); Tax Event Redemption Amount in relation to a Certificate, means 100 per cent. of its outstanding face amount together with any Outstanding Payments; Tier 2 Capital means capital qualifying as (or which would qualify as, but for any applicable limitation on the amount of such capital), and approved by the Financial Regulator as, tier 2 capital in accordance with the Capital Regulations; Transaction Account has the meaning given to it in Condition 5 (The Trust); Transaction Documents means each of the Declaration of Trust, the Agency Agreement, the Mudaraba Agreement and any other agreements, deeds, undertakings or other documents designated as such by the parties thereto; Trigger Event has the meaning given to it in the Instructions; For the definition of "Trigger Event" as set out in the Instructions, see "Overview of Banking and Finance Regulations in Kuwait—Certain Banking Regulations—Capital Adequacy Regulations"; Trust Assets has the meaning given to it in Condition 5 (The Trust); Trustee Call Amount in relation to a Certificate, means 100 per cent. of its outstanding face amount together with any Outstanding Payments; Trustee Event means any of the following events: (i) Non-Payment: default is made in the payment of the Dissolution Distribution Amount, or default is made in the payment of any Periodic Distribution Amount, in each case, on the due date for payment 48
65. thereof and , in the case of any Periodic Distribution Amount only, such default continues for a period of five days; or (ii) Winding-up: an order is made or an effective resolution is passed for the winding-up or dissolution or administration of the Trustee or the Trustee applies or petitions for a winding-up or administration order in respect of itself except, in each case, for the purpose of and followed by an amalgamation, reorganisation or reconstruction whilst solvent on terms approved by the Delegate (acting in accordance with the Declaration of Trust and these Conditions) or by an Extraordinary Resolution of the Certificateholders; or (iii) Analogous Event: any event occurs that under the laws of the Cayman Islands has an analogous effect to any of the events referred to in paragraph (ii) above. For the purpose of subparagraph (i) above, all amounts payable in respect of the Certificates shall be considered due and payable (including any amounts calculated as being payable under Condition 7.4 (Periodic Distributions)) notwithstanding that the Trustee has at the relevant time insufficient funds or relevant Trust Assets to pay such amounts including, without limitation, as a result of any failure by the Mudareb to comply with the matters described in Condition 4.4(c) (Limited Recourse and Agreement of Certificateholders) (save in each case where such insufficient funds arise solely as a result of the occurrence of a Non-Payment Event or a Non-Payment Election); Trustee's Territory has the meaning given to it in Condition 12.2 (Trustee Events); U.S. means the United States of America; U.S. Government Securities Business Day means any day except for a Saturday, Sunday or a day on which the U.S. Securities Industry and Financial Markets Association recommends that the fixed income departments of its members be closed for the entire day for purposes of trading in U.S. government securities; U.S. Securities Determination Date means the second U.S. Government Securities Business Day before the commencement of the Reset Period for which the rate will apply; and Write-down means: (i) the Certificateholders' rights to the Trust Assets (including the Mudaraba Assets) shall automatically be deemed to be irrevocably and unconditionally cancelled (in the case of a Write-down in whole) or written-down in part (in the case of a Write-down in part) in the same manner as the Certificates; (ii) the Certificates shall be cancelled (in the case of a Write-down in whole) or written-down in part on a pro rata basis (in the case of a Write-down in part) by the Trustee in accordance with the prevailing Capital Regulations; and (iii) all rights of any Certificateholder for payment of any amounts under or in respect of the Certificates (including, without limitation, any amounts arising as a result of, or due and payable upon the occurrence of, a Dissolution Event) shall, as the case may be, be cancelled or written-down pro rata among the Certificateholders and, in each case, will not be restored under any circumstances, irrespective of whether such amounts have become due and payable prior to the date of the NonViability Notice or the Non-Viability Event Write-down Date and even if the Non-Viability Event has ceased. and references herein to "written-down" will be construed accordingly 49
66. All references in these Conditions to U .S. dollars, U.S.$ and $ are to the lawful currency of the United States of America. 2 Form, Denomination and Title 2.1 Form and Denomination The Certificates are issued in registered form in denominations of U.S.$200,000 and integral multiples of U.S.$1,000 in excess thereof (each an Authorised Denomination). A Certificate will be issued to each Certificateholder in respect of its registered holding of Certificates. Each Certificate will be numbered serially with an identifying number, which will be recorded on the relevant Certificate and in the register of Certificateholders (the Register). Upon issue, the Certificates will be represented by a Global Certificate, which will be deposited with, and registered in the name of a nominee for, a common depositary for Euroclear Bank SA/NV (Euroclear) and Clearstream Banking S.A. (Clearstream, Luxembourg). Ownership interests in the Global Certificate will be shown on, and transfers thereof will only be effected through, records maintained by Euroclear and Clearstream, Luxembourg (as applicable), and their respective participants. These Conditions are modified by certain provisions contained in the Global Certificate. The Certificates are not issuable in bearer form. 2.2 Title The Trustee will cause the Registrar to maintain the Register outside the United Kingdom in accordance with the provisions of the Agency Agreement. Title to the Certificates passes only by registration in the Register. The registered Certificateholder will (except as otherwise required by law) be treated as the absolute owner of the Certificates represented by the Certificate for all purposes (whether or not any payment thereon is overdue and regardless of any notice of ownership, trust or any interest or any writing on, or the theft or loss of, the Certificate) and no person will be liable for so treating any Certificateholder. The registered Certificateholder will be recognised by the Trustee as entitled to his Certificate free from any equity, set-off or counterclaim on the part of the Trustee against the original or any intermediate holder of such Certificate. 3 Transfers of Certificates 3.1 Transfers Subject to Conditions 3.4 (Closed Periods) and 3.5 (Regulations) and the provisions of the Agency Agreement, a Certificate may be transferred in an Authorised Denomination only by depositing the Certificate by which it is represented, with the form of transfer on the back duly completed and signed, at the specified office of any of the Transfer Agents together with such evidence as the Registrar or (as the case may be) such Transfer Agent may reasonably require to prove the title of the transferor and the individuals who have executed the forms of transfer. Transfers of interests in the Global Certificate will be effected in accordance with the rules of the relevant clearing system through which the interest is held. 3.2 Delivery of New Certificates Each new Certificate to be issued upon any transfer of Certificates will, within five business days of receipt by the relevant Transfer Agent of the duly completed form of transfer endorsed on the relevant 50
67. Certificate (or such longer period as may be required to comply with any applicable fiscal or other laws or regulations), be delivered at the specified office of the relevant Transfer Agent or mailed by uninsured mail at the risk of the holder entitled to the Certificate to the address specified in the form of transfer. For the purposes of this Condition, business day shall mean a day on which banks are open for business in the city in which the specified office of the Transfer Agent with whom a Certificate is deposited in connection with a transfer is located. Where some but not all of the Certificates in respect of which a Certificate is issued are to be transferred, a new Certificate in respect of the Certificates not so transferred will, within five business days of receipt by the relevant Transfer Agent of the original Certificate, be mailed by uninsured mail at the risk of the Certificateholder not so transferred to the address of such Certificateholder appearing on the Register or as specified in the form of transfer. 3.3 Formalities Free of Charge Registration of any transfer of Certificates will be effected without charge by or on behalf of the Trustee or any Transfer Agent except that the Trustee may require payment of a sum to it (or the giving of such indemnity as the Trustee or any Transfer Agent may reasonably require) to cover any stamp duty, tax or other governmental charges which may be imposed in relation to such transfer. 3.4 Closed Periods No Certificateholder may require the transfer of a Certificate to be registered during the period of 15 days ending on a Periodic Distribution Date or any other date on which any payment of the face amount or payment of any premium or profit in respect of a Certificate falls due. 3.5 Regulations All transfers of Certificates and entries on the Register will be made subject to the detailed regulations concerning the transfer of Certificates scheduled to the Declaration of Trust. The Regulations may be changed by the Trustee from time to time with the prior written approval of the Delegate (acting in accordance with the Declaration of Trust and these Conditions) and the Registrar. A copy of the current regulations will be mailed (free of charge) by the Registrar to any Certificateholder who requests a copy of such regulations. The Certificateholders shall be entitled to receive, in accordance with Condition 3.2 (Delivery of New Certificates), only one Certificate in respect of his entire holding of Certificates. In the case of a transfer of a portion of the face amount of a Certificate, a new Certificate in respect of the balance of the Certificates not transferred will be issued to the transferor in accordance with Condition 3.2 (Delivery of New Certificates). 4 Status, Subordination and Limited Recourse 4.1 Status The Certificates represent an undivided ownership interest in the Trust Assets and are limited recourse obligations of the Trustee. Each Certificate will constitute unsecured obligations of the Trustee and shall at all times rank, pari passu without any preference or priority, with all other Certificates. The rights and claims of the Trustee and the Certificateholders against the Bank in respect of the Relevant Obligations are subordinated as described in Condition 4.2 (Subordination). 51
68. Each Certificateholder unconditionally and irrevocably waives any right of set-off , counterclaim, abatement or other similar remedy which it might otherwise have, under the laws of any jurisdiction, in respect of such Certificate. No collateral is or will be given for the Relevant Obligations and any collateral that may have been or may in the future be given in connection with other indebtedness of the Bank shall not secure the Relevant Obligations. 4.2 Subordination (a) The payment obligations of the Bank under the Mudaraba Agreement (including all payments which are the equivalent of principal and profit) (the Relevant Obligations) will (a) constitute Additional Tier 1 Capital of the Bank, (b) constitute direct, unsecured, conditional and subordinated obligations of the Bank, (c) rank subordinate to all Senior Obligations, (d) rank pari passu with all other Pari Passu Obligations and (e) rank in priority to all Junior Obligations. (b) The Trustee or the Delegate may only exercise its enforcement rights in relation to any Relevant Obligation or in relation to any of its other rights under the Mudaraba Agreement or any other Transaction Document in the manner provided in Condition 12.3 (Winding-up, dissolution or liquidation). 4.3 (c) The Trustee will, in each relevant Transaction Document, unconditionally and irrevocably waive any right of set-off, counterclaim, abatement or other similar remedy which it might otherwise have, under the laws of any jurisdiction, in respect of the Relevant Obligations. No collateral is or will be given by the Bank for the Relevant Obligations and any collateral that may have been or may in the future be given in connection with other obligations of the Bank shall not secure the Relevant Obligations. (d) Nothing in these Conditions shall affect or prejudice the payment of the costs, charges, expenses, liabilities or remuneration of the Delegate or the rights and remedies of the Delegate in respect thereof, all of which shall accordingly remain unsubordinated. Other Issues So long as any of the Certificates remain outstanding, the Bank (in its capacity as Mudareb or otherwise) will not issue any securities (regardless of name or designation) or create any guarantee of, or provide any contractual support arrangement in respect of, the obligations of any other entity which in each case constitutes (whether on a solo, or a solo consolidated or on a consolidated basis) issued Additional Tier 1 Capital of the Bank if claims in respect of such securities, guarantee or contractual support arrangement would rank (as regards distributions on a return of assets on a winding-up or in respect of distribution or payment of dividends and/or any other amounts thereunder) senior to the Relevant Obligations. This prohibition will not apply if at the same time or prior thereto: (a) these Conditions and (to the extent applicable) the Transaction Documents are amended to ensure that the Trustee (on behalf of the Certificateholders) obtains and/or (b) the Relevant Obligations have, in each case, the benefit of, such of those rights and entitlements as are contained in or attached to such securities or under such guarantee or contractual support arrangement as are required so as to ensure that claims in respect of the Relevant Obligations rank pari passu with, and contain substantially equivalent rights of priority as to distributions or payments on, such securities or under such guarantee or contractual support arrangement. 52
69. 4 .4 Limited Recourse and Agreement of Certificateholders Save as provided in this Condition 4.4 (Limited Recourse and Agreement of Certificateholders), the Certificates do not represent an interest in any of the Trustee, the Delegate, the Bank, any of the Agents or any of their respective affiliates. Each Certificateholder, by subscribing for or acquiring the Certificates, acknowledges and agrees that notwithstanding anything to the contrary contained in these Conditions or any Transaction Document: (a) no payment of any amount whatsoever shall be made by the Trustee or any of its directors, officers, employees or agents on its behalf except to the extent funds are available therefor from the Trust Assets; (b) the Trustee may not deal with the Mudaraba Assets or realise or deal with its interest, rights, title, benefit and entitlements, present and future, in, to and under the Transaction Documents and the Trust Assets except in the manner expressly permitted by the Transaction Documents; (c) the proceeds of the Trust Assets are the sole source of payments on the Certificates. Payment by the Trustee of any Periodic Distribution Amount or any amount required to redeem the Certificates is subject to receipt by the Trustee of the amounts expected to be received by it from the Mudareb in accordance with the provisions of the Mudaraba Agreement; (d) if the net proceeds of the realisation of, or enforcement with respect to, the Trust Assets is not sufficient to make all payments due in respect of the Certificates, Certificateholders will have no recourse to any assets of the Trustee (other than the Trust Assets in the manner contemplated in the Transaction Documents) or of the Delegate or the Agents, or any of their respective affiliates in respect of any such shortfall, and no recourse shall be had, and no Certificateholder will have any claim, for the payment of any amount due and owing hereunder or under any Transaction Document, whether for the payment of any fee, indemnity or other amount hereunder or any other obligation or claim arising out of or based upon the Transaction Documents, against the Trustee to the extent the Trust Assets have been exhausted (following which all obligations of the Trustee shall be extinguished) or the Delegate or the Agents; (e) it will not petition for, institute, or join with any other person in instituting proceedings for, the reorganisation, arrangement, liquidation, bankruptcy winding-up or receivership or other proceedings under any bankruptcy or similar law against the Trustee or any of its directors, officers, agents, shareholders or affiliates as a consequence of such shortfall or otherwise; (f) no recourse (whether by institution or enforcement of any legal proceedings or assessment or otherwise) in respect of any breaches of any duty, obligation or undertaking of the Trustee arising under or in connection with these Conditions or the Transaction Documents by virtue of any customary law, statute or otherwise shall be had against any shareholder, officer, director or corporate services provider of the Trustee in their capacity as such. The obligations of the Trustee under these Conditions and the Transaction Documents are corporate or limited liability obligations of the Trustee and no personal liability shall attach to or be incurred by the shareholders, members, officers, agents, directors or corporate services provider of the Trustee (in each of their respective capacities as such), save in the case of their wilful default or actual fraud. References in these Conditions to wilful default or actual fraud mean a finding to such effect by a court of competent jurisdiction (in relation to the conduct of the relevant party); (g) it shall not be entitled to claim or exercise any right of set-off, counterclaim, abatement or other similar remedy which it might otherwise have, under the laws of any jurisdiction, in respect of 53
70. any sums due under such Certificate . No collateral is or will be given for the payment obligations under the Certificates; and (h) the Trustee and the Mudareb have agreed in the Mudaraba Agreement that the Mudareb shall not be responsible for any losses to the Mudaraba Capital suffered by the Trustee unless such losses are caused by (i) the Mudareb's breach of the Mudaraba Agreement or (ii) the Mudareb's gross negligence, wilful misconduct or fraud. The Bank is obliged to make certain payments under the Transaction Documents directly to or to the order of the Trustee. Such payment obligations form part of the Trust Assets and the Trustee and/or the Delegate will, subject to Condition 4.2 (Subordination) and Condition 12.3 (Winding-up, dissolution or liquidation), have direct recourse against the Bank to recover payments due to the Trustee from the Bank pursuant to such Transaction Documents notwithstanding any other provision of this Condition 4.4 (Limited Recourse and Agreement of Certificateholders). Such right of the Trustee and the Delegate shall constitute an unsecured claim against the Bank. None of the Certificateholders, the Trustee and the Delegate shall be entitled to claim any priority right in respect of any specific assets of the Bank in connection with the enforcement of any such claim. 5 The Trust 5.1 KIB Tier 1 Sukuk Limited (in its capacity as Trustee and as the Rab-al-Maal) will enter into a mudaraba agreement (the Mudaraba Agreement) to be dated the Issue Date with the Bank (in such capacity, the Mudareb). Pursuant to the Mudaraba Agreement, the Rab-al-Maal will contribute the proceeds of the issue of the Certificates to the Mudareb, which proceeds will form the initial capital of the Mudaraba (as defined below) and which may be subject to change after the Issue Date in accordance with Condition 10.2 (Purchase) (the Mudaraba Capital). The Mudareb will invest the Mudaraba Capital in its general business activities carried out through the General Mudaraba Pool and, following investment of the Mudaraba Capital in the General Mudaraba Pool, the Mudaraba Capital shall constitute pro rata undivided assets in the General Mudaraba Pool (the Mudaraba Assets) in accordance with the Mudaraba Agreement, which shall include an investment plan prepared by the Mudareb and shall constitute a mudaraba (the Mudaraba). The Trustee has opened a transaction account (the Transaction Account) in London in its own name with the Principal Paying Agent (details of which are set out in the Declaration of Trust) into which the Mudareb will pay all amounts due to the Trustee under the Mudaraba Agreement. If the Trustee is substituted in accordance with Condition 12.2 (Trustee Events), the Substituted Trustee will be required to open a new transaction account in London in its name with the Principal Paying Agent into which the Mudareb will pay all amounts due to the Trustee under the Mudaraba Agreement from the date of substitution onwards, and references in these Conditions to the Transaction Account will be construed accordingly. 5.2 Pursuant to the Declaration of Trust, the Trustee holds: (a) the cash proceeds of the issue of the Certificates, pending application thereof in accordance with the terms of the Transaction Documents; (b) all of the Trustee's rights, title, interest and benefit, present and future, in, to and under the assets from time to time constituting the Mudaraba Assets; (c) all of the Trustee's rights, title, interest and benefit, present and future, in, to and under the Transaction Documents (other than in relation to any representations given by the Bank (acting 54
71. in any capacity ) pursuant to any of the Transaction Documents and the covenant given to the Trustee pursuant to clauses 11.1 and 11.10 of the Declaration of Trust); and (d) all amounts standing to the credit of the Transaction Account from time to time, and all proceeds of the foregoing (together, the Trust Assets) upon trust absolutely for and on behalf of the Certificateholders pro rata according to the face amount of Certificates held by each such Certificateholder in accordance with the Declaration of Trust and these Conditions. 5.3 On each Periodic Distribution Date and on any date fixed for payment of the Dissolution Distribution Amount, the Principal Paying Agent shall apply the monies standing to the credit of the Transaction Account in the following order of priority (in each case, only if and to the extent that payments of a higher priority have been made in full): (a) first (to the extent not previously paid), to the Delegate, Agents and/or any Appointee (as defined in the Declaration of Trust) in respect of all amounts owing to it under the Transaction Documents in its capacity as Delegate (in accordance with the Declaration of Trust) or Agent (in accordance with the Agency Agreement); (b) second, in or towards reimbursement pari passu and rateably of any amounts paid by any Indemnifying Parties as contemplated by clause 11.8 of the Declaration of Trust together with any profit payable thereon; (c) third, only if such payment is due on or before a Periodic Distribution Date (to the extent not previously paid) to pay, pro rata and pari passu, (i) the Trustee in respect of all amounts owing to it under the Transaction Documents in its capacity as trustee; and (ii) the Trustee Administrator in respect of all amounts owing to it under the Transaction Documents and the Corporate Services Agreement in its capacity as trustee administrator and registered office provider; (d) fourth, only if such payment is due on a Periodic Distribution Date, and subject to Condition 8 (Periodic Distribution Restrictions), in or towards payment pari passu and rateably of all Periodic Distribution Amounts (including Additional Amounts) due but unpaid; (e) fifth, only if such payment is due on a date fixed for payment of the Dissolution Distribution Amount, in or towards payment pari passu and rateably of the Dissolution Distribution Amount; and (f) sixth, only after all amounts required to be paid in respect of the Certificates have been discharged in full, in payment of any residual amount to the Bank. Any such residual amount shall be credited to the Mudaraba Reserve and the balance of amounts standing to the credit of the Mudaraba Reserve, after paying all amounts due to the Trustee pursuant to the Mudaraba Agreement, shall be paid to the Bank as an incentive fee. 6 Covenants The Trustee has covenanted in the Declaration of Trust that, inter alia, for so long as any Certificate is outstanding, it shall not (without the prior written consent of the Delegate (given in accordance with the Declaration of Trust and these Conditions)): 55
72. 6 .1 incur any indebtedness in respect of financed, obtained or raised money whatsoever (whether structured (or intended to be structured) in accordance with the principles of Shari'a or otherwise), or give any guarantee or indemnity in respect of any obligation of any person or issue any shares (or rights, warrants or options in respect of shares or securities convertible into or exchangeable for shares) except, in all cases, as contemplated in the Transaction Documents; 6.2 secure any of its present or future indebtedness or present or future obligations (whether structured in accordance with the principles of Shari'a or otherwise) by granting or permitting to be outstanding any lien, pledge, charge, mortgage or other security interest upon any of its present or future undertakings, assets, properties or revenues (other than those arising by operation of law (if any) or under or pursuant to any of the Transaction Documents); 6.3 sell, transfer, assign, participate, exchange or pledge, mortgage, hypothecate or otherwise encumber (by security interest, lien (statutory or otherwise), preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever or otherwise, or permit such to occur or suffer such to exist) any part of its interest in any of the Trust Assets except pursuant to any of the Transaction Documents (other than those arising by operation of law); 6.4 use the proceeds of the issue of the Certificates for any purpose other than as stated in the Transaction Documents; 6.5 amend or agree to any amendment to any Certificate or Transaction Document (other than in accordance with the terms thereof) in each case in a manner which is materially prejudicial to the rights of Certificateholders, without the prior approval of the Certificateholders by way of Extraordinary Resolution, save that it shall be permitted to make such variations to the Transaction Documents and these Conditions as are required pursuant to Condition 10.1 (Redemption and variation); 6.6 act as trustee in respect of any trust other than the Trust or in respect of any parties other than the Certificateholders; 6.7 have any subsidiaries or employees; 6.8 redeem or purchase any of its shares or pay any dividend or make any other distribution to its shareholders; 6.9 prior to the date which is one year and one day after the date on which all amounts owing by the Trustee under the Transaction Documents have been paid in full, put to its directors or shareholders any resolution for, or appoint any liquidator for, its winding-up (except for the purpose of and followed by an amalgamation, reorganisation or reconstruction whilst solvent on terms approved by the Delegate or by an Extraordinary Resolution of the Certificateholders) or any resolution for the commencement of any other bankruptcy or insolvency proceedings with respect to it; and 6.10 enter into any contract, transaction, amendment, obligation or liability other than the Transaction Documents or any permitted amendment or supplement thereto or as expressly permitted or required thereunder or engage in any business or activity other than: (a) as provided for or permitted in the Transaction Documents; (b) the ownership, management and disposal of the Trust Assets as provided in the Transaction Documents; and 56
73. (c) 7 such other matters which are incidental thereto. Periodic Distributions 7.1 Distribution of Mudaraba Profit The Trustee has agreed in the Mudaraba Agreement that the Bank shall be entitled (in its capacity as Mudareb or otherwise) to utilise the Mudaraba Assets (and the proceeds thereof) to make payments in respect of the claims of Senior Creditors or to cover losses of the Mudaraba and that such entitlement shall apply at any time before an order has been made, or an effective resolution has been passed, for the winding-up, dissolution or liquidation (or other analogous event) of the Bank (in its capacity as Mudareb or otherwise). 7.2 Periodic Distribution Amounts Subject to Conditions 4.2 (Subordination), 4.4 (Limited Recourse and Agreement of Certificateholders), 7.3 (Cessation of Accrual), 8 (Periodic Distribution Restrictions), 9 (Payments) and 11 (Write-down at the Point of Non-Viability), the Trustee shall distribute to Certificateholders, pro rata to their respective holdings, out of amounts transferred into the Transaction Account, a distribution in relation to the Certificates on each Periodic Distribution Date equal to the Periodic Distribution Amount (assuming, for this purpose, that a Non-Payment Event has not occurred and a Non-Payment Election has not be made with respect to such Periodic Distribution Amount). The Periodic Distribution Amount payable on each Periodic Distribution Date (i) falling prior to and including the first Reset Date shall be U.S.$28.125 per U.S.$1,000 in face amount of the Certificates and (ii) falling after the first Reset Date shall be the relevant amount calculated pursuant to Condition 7.4 (Periodic Distributions). 7.3 Cessation of Accrual Subject to Conditions 4.2 (Subordination), 8 (Periodic Distribution Restrictions) and 11 (Write-down at the Point of Non-Viability), each Certificate will cease to be eligible to earn Periodic Distribution Amounts from the due date for redemption, following liquidation of the Mudaraba in accordance with these Conditions and the Mudaraba Agreement. 7.4 Periodic Distributions Subject to Condition 8 (Periodic Distribution Restrictions), the Certificates bear profit at the applicable Profit Rate from (and including) the Issue Date in accordance with the provisions of this Condition 7 (Periodic Distributions). Periodic Distribution Amounts will not be cumulative and any Periodic Distribution Amount which is not paid will not accumulate or compound and Certificateholders will have no right to receive such Periodic Distribution Amount at any time, even if Periodic Distribution Amounts are paid in the future. Subject to Condition 8 (Periodic Distribution Restrictions), Periodic Distribution Amounts shall be payable on the Certificates semi-annually in arrear on each Periodic Distribution Date, in each case as provided in this Condition 7 (Periodic Distributions). If a Periodic Distribution Amount is required to be calculated in respect of a period of less than a full Periodic Distribution Period (the Relevant Period), it shall be calculated as an amount equal to the product of: (a) the applicable Profit Rate; (b) the face amount of the relevant Certificates; and (c) the applicable Day-count Fraction for the Relevant Period, rounding the resultant figure to the nearest cent (half a cent being rounded upwards). 57
74. (a) Periodic Distribution Rate For the Initial Period, the Certificates bear profit at the Profit Rate of 5.625 per cent. per annum (the Initial Periodic Distribution Rate). The Profit Rate will be reset on each Reset Date on the basis of the aggregate of the Margin and the Relevant Five Year Reset Rate on the relevant Determination Date, as determined by the Calculation Agent. The Calculation Agent will, as soon as practicable upon determination of the Profit Rate which shall apply to the Reset Period commencing on the relevant Reset Date, but in no event later than the second Business Day thereafter, cause the applicable Profit Rate and the corresponding Periodic Distribution Amount to be notified to each of the Paying Agents, Euronext Dublin or any other stock exchange on which the Certificates are for the time being listed and to be notified to Certificateholders in accordance with Condition 17 (Notices). To the extent that the Calculation Agent is unable to notify Euronext Dublin or any other stock exchange on which the Certificates are for the time being listed, the Calculation Agent shall promptly notify the Bank, which shall procure the performance of such obligation. For the avoidance of doubt, the Calculation Agent shall not be responsible to the Trustee, the Bank, the Certificateholders or any third party as a result of the Calculation Agent having relied upon any quotation, ratio or other information provided to it by any person for the purposes of making any determination hereunder, which subsequently may be found to be incorrect or inaccurate in any way. (b) Calculation Agent With effect from the First Call Date, and so long as any Certificates remain outstanding thereafter, the Trustee will maintain a Calculation Agent. The name of the initial Calculation Agent and its initial specified office is set out at the end of these Conditions. The Trustee may, with the prior written approval of the Delegate (given in accordance with the Declaration of Trust and these Conditions), from time to time replace the Calculation Agent with another leading investment, merchant or commercial bank or financial institution in London. If the Calculation Agent is unable or unwilling to continue to act as the Calculation Agent or (without prejudice to Condition 7.4(c) (Determinations of Calculation Agent or Trustee Binding)) fails duly to determine the Profit Rate in respect of any Reset Period as provided in Condition 7.4(a) (Periodic Distribution Rate), the Trustee shall forthwith appoint another leading investment, merchant or commercial bank or financial institution in London approved in writing by the Delegate (in accordance with the Declaration of Trust and these Conditions) to act as such in its place. The Calculation Agent may not resign its duties or be removed without a successor having been appointed as aforesaid. (c) Determinations of Calculation Agent or Trustee Binding All notifications, opinions, determinations, certificates, calculations, quotations and decisions given, expressed, made or obtained for the purposes of this Condition 7 (Periodic Distributions), whether by the Calculation Agent or the Trustee (or its agent), shall (in the absence of manifest error) be binding on the Trustee, the Bank, the Calculation Agent, the Paying Agents, the Delegate and all Certificateholders and (in the absence of manifest error) no liability to the Trustee, the Bank, any Agent, the Delegate and the Certificateholders shall attach 58
75. to the Calculation Agent or the Trustee (or its agent) in connection with the exercise or nonexercise by them of any of their powers, duties and discretions. 8 Periodic Distribution Restrictions 8.1 Non-Payment Event Notwithstanding Condition 7.4 (Periodic Distributions), if any of the following events occur (each, a Non-Payment Event), the Bank (as Mudareb) shall not pay Mudaraba Profit (and, as a result, Rab-alMaal Mudaraba Profit) or Final Mudaraba Profit (and, as a result, Rab-al-Maal Final Mudaraba Profit) on any Mudaraba Profit Distribution Date or Mudaraba End Date (as the case may be), and as a result thereof the Trustee shall not pay Periodic Distribution Amounts on the corresponding Periodic Distribution Date: 8.2 (a) the amount equal to the then applicable Periodic Distribution Amount to be paid by the Bank out of the Rab-al-Maal Mudaraba Profit or Rab-al-Maal Final Mudaraba Profit, as applicable (the Relevant Rab-al-Maal Mudaraba Profit Amount), when aggregated with any distributions or amounts payable by the Bank (in its capacity as Mudareb or otherwise) on the same date (or otherwise due and payable on such date) on any other obligations in respect of Pari Passu Obligations, exceeds, on the relevant date for payment of the Relevant Rab-al-Maal Mudaraba Profit Amount, the Mudareb's Distributable Funds; or (b) the Bank (in its capacity as Mudareb or otherwise) is, on that Mudaraba Profit Distribution Date or Mudaraba End Date (as the case may be), in breach of (or such payment would cause a breach of) the Applicable Regulatory Capital Requirements (including any applicable capital buffers imposed on the Bank by the Financial Regulator); or (c) the Financial Regulator requires (a) the Bank not to pay the Relevant Rab-al-Maal Mudaraba Profit Amount to the Trustee (in its capacity as Rab-al-Maal) on that Mudaraba Profit Distribution Date or Mudaraba End Date (as the case may be) or (b) the Trustee (in its capacity as Rab-al-Maal) not to pay the relevant Periodic Distribution Amount on that Periodic Distribution Date. Non-Payment Election Notwithstanding Condition 7.4 (Periodic Distributions), the Bank may in its sole discretion elect that Rab-al-Maal Mudaraba Profit (in whole or in part) will not be paid to the Trustee (in its capacity as Rab-al-Maal) on any Mudaraba Profit Distribution Date, and the Bank shall, in each case, instruct the Trustee not to make payment of a Periodic Distribution Amount (in whole or in part) to Certificateholders on such Periodic Distribution Date, provided that the foregoing in this Condition 8.2 (Non-Payment Election) shall not apply in respect of Rab-al-Maal Final Mudaraba Profit payable on any Mudaraba End Date (any such election being a Non-Payment Election). The Bank may not, however, make a Non-Payment Election once the Trustee has given notice to Certificateholders that the Certificates will be redeemed in whole in accordance with Condition 10 (Redemption and Variation). 8.3 Effect of Non-Payment Event or Non-Payment Election If the Bank makes a Non-Payment Election or a Non-Payment Event occurs, then the Bank shall (i) in the case of a Non-Payment Election, no later than 14 calendar days prior to such event, and (ii) in the case of a Non-Payment Event, as soon as practicable thereafter but in any case no later than one Business Day prior to the relevant Mudaraba Profit Distribution Date or Mudaraba End Date, as the 59
76. case may be , give notice to the Trustee and the Principal Paying Agent in accordance with the Mudaraba Agreement, the Delegate in accordance with the Declaration of Trust and Certificateholders in accordance with Condition 17 (Notices) in each case providing details of the Non-Payment Election (including, if relevant, details of any partial payment to be made) or Non-Payment Event, as the case may be. Certificateholders shall have no claim in respect of any Periodic Distribution Amount (or any part thereof, as applicable) not paid as a result of either a Non-Payment Election or a Non-Payment Event and any such non-payment in whole or in part, as applicable, of Rab-al-Maal Mudaraba Profit, Rab-al-Maal Final Mudaraba Profit (in the case of a Non-Payment Event only) or a Periodic Distribution Amount in such circumstance shall not constitute a Dissolution Event. The Bank shall not have any obligation to make any subsequent payment in respect of any such unpaid profit (or any part thereof, as applicable) (whether from its own cash resources, from the Mudaraba Reserve or otherwise) and the Trustee shall not have any obligation to make any subsequent payment in respect of any such Periodic Distribution Amounts (or any part thereof, as applicable). 8.4 Dividend and Redemption Restrictions If any amount of Rab-al-Maal Mudaraba Profit, Rab-al-Maal Final Mudaraba Profit or Periodic Distribution Amount is not paid as a consequence of a Non-Payment Election or a Non-Payment Event pursuant to Condition 8.1 (Non-Payment Event) or 8.2 (Non-Payment Election) (as the case may be), then, from the date of such Non-Payment Election or Non-Payment Event (the Dividend Stopper Date), the Bank will not, so long as any of the Certificates are outstanding: (a) declare or pay any distribution or dividend or make any other payment on, and will procure that no distribution or dividend or other payment is made on, Ordinary Shares issued by the Bank (other than to the extent that any such distribution, dividend or other payment is declared before such Dividend Stopper Date); or (b) declare or pay profit or any other distribution on any of its shares or securities ranking, as to the right of payment of dividend, distributions or similar payments, junior to or pari passu with the Relevant Obligations (excluding securities the terms of which do not at the relevant time enable the Bank to defer or otherwise not to make such payment), only to the extent such restriction on payment or distribution is permitted under the relevant regulatory criteria for Additional Tier 1 Capital applicable from time to time; or (c) directly or indirectly redeem, purchase, cancel, reduce or otherwise acquire any Ordinary Shares issued by the Bank; or (d) directly or indirectly redeem, purchase, cancel, reduce or otherwise acquire any securities issued by the Bank ranking, as to the right of repayment of capital, junior to or pari passu with the Relevant Obligations (excluding securities the terms of which stipulate (i) any mandatory redemption in accordance with its terms or (ii) any conversion into, or exchange for, Ordinary Shares), only to the extent such restriction on redemption, purchase, cancellation, reduction or acquisition is permitted under the relevant regulatory criteria for Additional Tier 1 Capital applicable from time to time, in each case unless or until (a) two consecutive payments of Rab-al-Maal Mudaraba Profit or (b) (as the case may be) payment of the Rab-al-Maal Final Mudaraba Profit, in each case following the Dividend Stopper Date have been made in full (or an amount equal to the same has been duly set aside or provided for in full for the benefit of the Trustee in accordance with the Mudaraba Agreement). 60
77. 9 Payments 9 .1 Payments in respect of the Certificates Subject to Condition 9.2 (Payments subject to Applicable Laws), payment of the Dissolution Distribution Amount and any Periodic Distribution Amount will be made by or on behalf of the Trustee in U.S. dollars by wire transfer in same day funds to the Registered Account (as defined below) of the Certificateholder. Payments of the Dissolution Distribution Amount will only be made against presentation and surrender of the relevant Certificate at the specified office of any of the Paying Agents. The Dissolution Distribution Amount and each Periodic Distribution Amount will be paid to the Certificateholder shown on the Register at the close of business on the relevant Record Date. For the purposes of this Condition 9 (Payments), a Certificateholder's Registered Account means the U.S. dollar account maintained by or on behalf of such Certificateholder with a bank that processes payments in U.S. dollars, details of which appear on the Register at the close of business on the relevant Record Date. 9.2 Payments subject to Applicable Laws Payments in respect of the Certificates are subject in all cases to (a) any fiscal or other laws and regulations applicable thereto in the place of payment, but without prejudice to the provisions of Condition 13 (Taxation) and (b) any withholding or deduction required pursuant to an agreement described in Section 1471(b) of the U.S. Internal Revenue Code of 1986, as amended (the Code), or otherwise imposed pursuant to Sections 1471 through 1474 of the Code, any regulations or agreements thereunder, any official interpretations thereof, or (without prejudice to the provisions of Condition 13 (Taxation)) any law implementing an intergovernmental approach thereto. 9.3 No Commissions No commissions or expenses shall be charged to the Certificateholders in respect of any payments made in accordance with this Condition 9 (Payments). 9.4 Payment only on a Payment Business Day Where payment is to be made by transfer to a Registered Account, payment instructions (for value the due date or, if that is not a Payment Business Day (as defined below), for value the first following day which is a Payment Business Day) will be initiated by the Principal Paying Agent on the due date for payment or, in the case of a payment of the Dissolution Distribution Amount, if later, on the Payment Business Day on which the relevant Certificate is surrendered at the specified office of a Paying Agent for value as soon as practicable thereafter. Certificateholders will not be entitled to any additional payment for any delay after the due date in receiving the amount due if the due date is not a Payment Business Day or if the relevant Certificateholder is late in surrendering its Certificate (if required to do so). If the amount of the Dissolution Distribution Amount or, subject to Conditions 8.1 (Non-Payment Event) and 8.2 (Non-Payment Election), any Periodic Distribution Amount is not paid in full when due, the Registrar will annotate the Register with a record of the amount in fact paid. In these Conditions, Payment Business Day means a day (other than a Saturday or Sunday) on which commercial banks and foreign exchange markets in New York City and London settle payments and 61
78. are open for general business and , in the case of presentation of a Certificate, in the place in which the Certificate is presented. 9.5 Agents The names of the initial Agents and their initial specified offices are set out at the end of these Conditions. The Trustee reserves the right at any time to vary or terminate the appointment of any Agent and to appoint additional or other Agents, provided that: (a) it will at all times maintain a Principal Paying Agent and a Registrar (which may be the same entity); and (b) so long as any Certificates are admitted to listing, trading and/or quotation on any listing authority, stock exchange and/or quotation system, it will at all times maintain a Paying Agent, a Registrar and a Transfer Agent having its specified office in such place (if any) as may be required by the rules of such listing authority, stock exchange and/or quotation system. Notice of any termination or appointment and of any changes in specified offices will be given to Certificateholders promptly by the Trustee in accordance with Condition 17 (Notices). 10 Redemption and Variation 10.1 Redemption and variation (a) No Fixed Redemption Date and Conditions for Redemption and Variation The Certificates are perpetual securities in respect of which there is no fixed redemption date and the Trustee shall (subject to the provisions of Condition 4.2 (Subordination), Condition 11 (Write-down at the Point of Non-Viability) and Condition 12.3 (Winding-up, dissolution or liquidation) and without prejudice to the provisions of Condition 14 (Prescription)) only have the right to redeem the Certificates or vary the terms thereof in accordance with the following provisions of this Condition 10 (Redemption and Variation). The redemption of the Certificates or variation of these Conditions, in each case pursuant to this Condition 10 (Redemption and Variation), is subject to the following conditions (in addition to those set out elsewhere in this Condition 10.1 (Redemption and variation)): (i) (except to the extent that the Financial Regulator no longer so requires) the Bank having obtained the prior approval of the Financial Regulator; (ii) (except to the extent that the Financial Regulator no longer so requires) the requirement that at the time when the relevant notice of redemption or variation is given and immediately following any redemption or variation (as applicable), the Bank is or will be (as the case may be) in compliance with the Applicable Regulatory Capital Requirements (including any applicable capital buffers imposed on the Bank by the Financial Regulator); and (iii) (in the case of a redemption or variation pursuant to Condition 10.1(c) (Redemption or Variation due to Taxation) or Condition 10.1(d) (Redemption or Variation for Capital Event) only) the requirement that the circumstance that entitles the Bank to instruct the Trustee to exercise its right of redemption or variation is a change of law, published practice or regulation (including, in the case of Condition 10.1(d) (Redemption or 62
79. Variation for Capital Event ), Applicable Regulatory Capital Requirements) in Kuwait or, in the case of Condition 10.1(c) (Redemption or Variation due to Taxation), of a Relevant Jurisdiction or a change in the interpretation or application of such law, published practice or regulation by any court or authority entitled to do so which change becomes, or would become, effective on or after 7 June 2019. (b) Trustee's Call Option Subject to Condition 10.1(a) (No Fixed Redemption Date and Conditions for Redemption and Variation), the Bank may (acting in its sole discretion) instruct the Trustee to, whereupon the Trustee shall, by giving not less than 30 nor more than 60 days' prior notice to the Certificateholders in accordance with Condition 17 (Notices) and to the Delegate in accordance with the Declaration of Trust, which notice shall be irrevocable and shall specify the date fixed for redemption, redeem all, but not some only, of the Certificates at the Trustee Call Amount. Redemption of the Certificates pursuant to this Condition 10.1(b) (Trustee's Call Option) may only occur on the First Call Date or any Periodic Distribution Date thereafter. Prior to the publication of any notice of redemption pursuant to this Condition 10.1(b) (Trustee's Call Option), the Bank shall give to the Trustee and the Delegate a certificate signed by two Authorised Signatories stating that all conditions precedent to the redemption of the Certificates pursuant to this Condition 10.1(b) (Trustee's Call Option) (other than the notice to Certificateholders described in this Condition 10.1(b) (Trustee's Call Option)) have been satisfied (upon which the Delegate may rely without further enquiry and without liability to any person), and the Delegate shall accept the certificate without any further enquiry as sufficient evidence of the satisfaction of the conditions precedent set out above, in which event it shall be conclusive and binding on the Certificateholders. (c) Redemption or Variation due to Taxation (i) Subject to Condition 10.1(a) (No Fixed Redemption Date and Conditions for Redemption and Variation) and the provisions of this Condition 10.1(c) (Redemption or Variation due to Taxation), if a Tax Event occurs, the Bank may (acting in its sole discretion) instruct the Trustee to, whereupon the Trustee shall, by giving not less than 30 nor more than 60 days' prior notice to the Certificateholders in accordance with Condition 17 (Notices) and to the Delegate in accordance with the Declaration of Trust, which notice shall be irrevocable and shall specify the date fixed for redemption or variation (as applicable) and applicable Record Date, (a) redeem all, but not some only, of the Certificates at the Tax Event Redemption Amount; or (b) vary the terms of the Mudaraba Agreement, subject to the approval of the Mudareb's Shari'a board, and the Certificates such that the Certificates remain or become, as the case may be, Qualifying Additional Tier 1 Instruments, in each case without any requirement for consent or approval of the Certificateholders, and, in the case of (b) only, provided that such modifications or any document giving effect to such modifications do not impose, in the Delegate's sole opinion, more onerous obligations or duties upon it or expose it to liabilities or reduce its protections, and that such modifications or any document giving effect to such modifications are approved by the Trustee and the Delegate (who shall be obliged to approve the same if the requirements of Clause 10.1(c)(iii) are satisfied). No such notice shall be given earlier than 90 days prior to the earliest date on which the Trustee or the Bank would be obliged to pay Additional Amounts or additional amounts under clause 5.11 of the Mudaraba Agreement. If the Bank does not instruct the Trustee to so redeem or vary in accordance with this Condition 10.1(c)(i) (Redemption or 63
80. Variation due to Taxation ) in respect of such Tax Event then the Certificates shall continue to be perpetual securities in respect of which there is no fixed redemption date unless the Trustee shall otherwise (subject to the provisions of Condition 4.2 (Subordination), Condition 11 (Write-down at the Point of Non-Viability) and Condition 12.3 (Winding-up, dissolution or liquidation) and without prejudice to the provisions of Condition 14 (Prescription)) redeem the Certificates or vary the terms thereof in accordance with the provisions of this Condition 10 (Redemption and Variation). (ii) Redemption of the Certificates, or variation of these Conditions, pursuant to this Condition 10.1(c) (Redemption or Variation due to Taxation) may occur on any date on or after the Issue Date (whether or not a Periodic Distribution Date). (iii) Prior to the delivery of any notice of redemption or variation, as the case may be, pursuant to this Condition 10.1(c) (Redemption or Variation due to Taxation), the Bank shall give to the Trustee and the Delegate (i) a copy of the opinion of a recognised independent tax adviser to the effect that a Tax Event has occurred and a certificate signed by two Authorised Signatories (upon which the Delegate may rely without liability to any person) stating that (A) the conditions set out in Condition 10.1(a) (No Fixed Redemption Date and Conditions for Redemption and Variation) have been satisfied; (B) a Tax Event has occurred; and (C) in the case of a variation only, the Certificates, as so varied, are Qualifying Additional Tier 1 Instruments and that the Financial Regulator has confirmed that they satisfy limb (i) of the definition of Qualifying Additional Tier 1 Instruments, and (ii) an opinion of independent legal advisers of recognised standing (upon which the Delegate may rely without liability to any person) to the effect that a Tax Event has occurred. Such certificate and opinions shall be conclusive and binding evidence of the satisfaction of the conditions precedent set out above in this Condition 10.1(c)(iii) (Redemption or Variation due to Taxation) and the Delegate shall be entitled to accept and rely on such certificate and opinions without any further inquiry as sufficient evidence of the satisfaction of such conditions precedent without liability to any person. Upon expiry of such notice, the Trustee shall redeem or vary the terms of the Certificates, as the case may be. The Capital Regulations, as in force from time to time, may oblige the Bank to demonstrate to the satisfaction of the Financial Regulator that (among other things) the Tax Law Change was not reasonably foreseeable as at the Issue Date. (d) Redemption or Variation for Capital Event (i) Subject to Condition 10.1(a) (No Fixed Redemption Date and Conditions for Redemption and Variation) and the provisions of this Condition 10.1(d) (Redemption or Variation for Capital Event), if a Capital Event occurs and is continuing, the Bank may (acting in its sole discretion) instruct the Trustee to, whereupon the Trustee shall, by giving not less than 30 nor more than 60 days' prior notice to the Certificateholders in accordance with Condition 17 (Notices) and to the Delegate in accordance with the Declaration of Trust, which notice shall be irrevocable and shall specify the date fixed for redemption or variation (as applicable) and the applicable Record Date, (a) redeem all, but not some only, of the Certificates at the Capital Event Redemption Amount; or (b) solely for the purpose of ensuring compliance with the Applicable Regulatory Capital Requirements, vary the terms of the Mudaraba Agreement, subject to the approval of the Mudareb's Shari'a board, and the Certificates such that the Certificates remain or become, as the case may be, Qualifying Additional Tier 1 Instruments without any requirement for consent or approval of the Certificateholders, and, in the case of (b) 64
81. only , provided that such modifications or any document giving effect to such modifications do not impose, in the Delegate's sole opinion, more onerous obligations or duties upon it or expose it to liabilities or reduce its protections, and that such modifications or any document giving effect to such modifications are approved by the Trustee and the Delegate (who shall be obliged to approve the same if the requirements of Clause 10.1(d)(iii) are satisfied). If the Bank does not instruct the Trustee to so redeem or vary in accordance with this Condition 10.1(d)(i) (Redemption or Variation for Capital Event) in respect of such Capital Event then the Certificates shall continue to be perpetual securities in respect of which there is no fixed redemption date unless the Trustee shall otherwise (subject to the provisions of Condition 4.2 (Subordination), Condition 11 (Write-down at the Point of Non-Viability) and Condition 12.3 (Windingup, dissolution or liquidation) and without prejudice to the provisions of Condition 14 (Prescription)) redeem the Certificates or vary the terms thereof in accordance with the provisions of this Condition 10 (Redemption and Variation). (ii) Redemption of the Certificates, or variation of these Conditions, pursuant to this Condition 10.1(d) (Redemption or Variation for Capital Event) may occur on any date on or after the Issue Date (whether or not a Periodic Distribution Date). (iii) Prior to the delivery of any notice of redemption or variation, as the case may be, pursuant to this Condition 10.1(d)(iii) (Redemption or Variation for Capital Event), the Bank shall give to the Trustee and the Delegate a certificate signed by two Authorised Signatories (upon which the Delegate shall rely without liability to any person) stating that (A) the conditions set out in Condition 10.1(a) (No Fixed Redemption Date and Conditions for Redemption and Variation) have been satisfied; (B) a Capital Event has occurred and is continuing as at the date of the certificate; and (C), in the case of a variation only, the Certificates, as so varied, are Qualifying Additional Tier 1 Instruments and the Financial Regulator has confirmed that they satisfy limb (i) of the definition of Qualifying Additional Tier 1 Instruments and such certificate and legal opinion shall be conclusive and binding evidence of the satisfaction of the conditions precedent set out above in this Condition 10.1(d)(iii) (Redemption or Variation for Capital Event) and the Delegate shall be entitled to accept and rely on such certificate without any further enquiry as sufficient evidence of the satisfaction of such conditions precedent without liability to any person. Upon expiry of such notice the Trustee shall redeem or vary the terms of the Certificates, as the case may be. The Capital Regulations, as in force from time to time, may oblige the Bank to demonstrate to the satisfaction of the Financial Regulator that (among other things) the Capital Event was not reasonably foreseeable as at the Issue Date. (e) Taxes upon Variation In the event of a variation in accordance with Condition 10.1(c) (Redemption or Variation due to Taxation) or 10.1(d) (Redemption or Variation for Capital Event), none of the Trustee, the Delegate and the Bank will be obliged to pay and will not pay any liability of any Certificateholder to corporation tax, corporate income tax or tax on profits or gains or any similar tax arising in respect of the variation of the terms of the Certificates, provided that (in the case of a Tax Event) or so that (in the case of a Capital Event) the Certificates remain or become, as the case may be, Qualifying Additional Tier 1 Instruments, and further will not be liable for any stamp duty or similar other taxes arising on any subsequent transfer, disposal or deemed disposal of the Qualifying Additional Tier 1 Instruments by such Certificateholder. 65
82. (f) No redemption following delivery of a Non-Viability Notice If the Bank has instructed the Trustee to redeem the Certificates and prior to the redemption of the Certificates a Non-Viability Event occurs, the relevant redemption notice shall be automatically rescinded and shall be of no force and effect and the Trustee shall give notice thereof to the Certificateholders (in accordance with Condition 17 (Notices), the Delegate, the Principal Paying Agent and the Registrar as soon as practicable. Further, no notice of redemption shall be given in the period following the giving of a Non-Viability Notice and prior to the relevant Non-Viability Event Write-down Date. 10.2 Purchase Subject to the Bank (a) obtaining the prior approval of the Financial Regulator (except to the extent that the Financial Regulator no longer so requires) and (b) being in compliance with the Applicable Regulatory Capital Requirements, the Bank or any of its Subsidiaries may, in those circumstances permitted by the Applicable Regulatory Capital Requirements, purchase the Certificates in any manner and at any price. Upon any such purchase, the Bank shall deliver such Certificates to any Paying Agent for cancellation, and upon such cancellation, the Mudaraba Capital shall be reduced by the face amount of the Certificates so cancelled. 10.3 Cancellation All Certificates that are redeemed, and all Certificates that are purchased pursuant to Condition 10.2 (Purchase) and which the Bank delivers for cancellation in accordance with Condition 10.2 (Purchase), will be cancelled as soon as possible and accordingly may not be held, reissued or resold. 11 Write-down at the Point of Non-Viability 11.1 Non-Viability Event If a Non-Viability Event occurs, a Write-down (in whole or in part, as applicable) will take place in accordance with Condition 11.2 (Non-Viability Notice). Any such Write-down shall not constitute a Dissolution Event. Certificateholders acknowledge that there shall be no recourse to the Financial Regulator in respect of any determination made by it with respect to the occurrence of a Non-Viability Event. It is the Mudareb's current intention to procure that a Write-down will take place: (1) after the Ordinary Shares in the Mudareb absorb losses (if and to the extent such loss absorption is permitted at the relevant time under all relevant rules and regulations applicable to the Mudareb at such time) and the Financial Regulator has not notified the Mudareb in writing that the relevant Non-Viability Event has been cured as a result of such loss absorption; and (2) simultaneously and pro rata with the writedown of any of the Mudareb's other obligations in respect of Additional Tier 1 Capital and any other trust certificates and other instruments related to the Mudareb's other obligations constituting Additional Tier 1 Capital; and (3) prior to the write-down or write-off of any of the Mudareb's obligations in respect of Tier 2 Capital and any other trust certificates and other instruments related to the Mudareb's other obligations constituting Tier 2 Capital. However, the Mudareb may at any time depart from this policy at its sole discretion or if so required by the Applicable Regulatory Capital Requirements. 66
83. 11 .2 Non-Viability Notice On the third Business Day following the date on which such Non-Viability Event occurs, (a) the Mudareb will notify the Trustee thereof in accordance with the Mudaraba Agreement; and (b) the Trustee will then notify the Delegate and the Certificateholders thereof and the Principal Paying Agent in accordance with Condition 17 (Notices) (a Non-Viability Notice). A Write-down will occur on the Non-Viability Event Write-down Date and, with effect from such date: (i) in the case of a Write-down in whole only, the Mudaraba Agreement will be automatically terminated; and (ii) in the case of a Write-down in part only, the Mudaraba Capital shall be reduced in proportion to the face amount of the Certificates that are to be written-down and Periodic Distribution Amounts shall only be in respect of the face amount of the Certificates that have not been written-down. In the case of (i) above, the Trustee shall not be entitled to any claim for any amounts in connection with the Mudaraba Assets. In the case of (ii) above, the Trustee shall not be entitled to any claim for any amounts in connection with the Mudaraba Assets that relate to the proportion of the Mudaraba Capital that has been reduced. 11.3 Liability of Delegate and Agents Neither the Delegate nor the Agents shall have any responsibility for, or liability or obligation in respect of, any loss, claim or demand incurred as a result of or in connection with a Non-Viability Event (or its disapplication, if applicable) or any consequent Write-down and/or cancellation of any Certificates or termination of the Mudaraba Agreement or any claims in respect thereof, and the Delegate and the Agents shall not be responsible for any calculation, determination or the verification of any calculation or determination in connection with the foregoing. 12 Dissolution Events and Winding-up The Declaration of Trust contains provisions entitling the Delegate to claim from the Trustee and the Bank, inter alia, the fees, expenses and liabilities incurred by it in carrying out its duties under the Declaration of Trust. The restrictions on commencing proceedings described below will not apply to any such claim. 12.1 Bank Events If a Bank Event occurs, the Delegate (provided it shall have been given notice in writing thereof by the Trustee or the Bank and subject to it being indemnified and/or secured and/ or prefunded to its satisfaction) shall promptly give notice of the occurrence of such Bank Event to the Certificateholders in accordance with Condition 17 (Notices) with a request to such Certificateholders to indicate to the Trustee and the Delegate in writing if they wish the Certificates to be redeemed in whole and the Trust to be dissolved (a Dissolution Request). The Delegate may and, if so requested in writing by the Certificateholders of at least one-fifth of the then aggregate face amount of the Certificates outstanding or if so directed by an Extraordinary Resolution of Certificateholders, shall (but in each case subject to Condition 12.3(e)(i) (Realisation of Trust Assets) and subject to it being indemnified and/or secured and/ or prefunded to its satisfaction), give notice (a Dissolution Notice) to the Trustee that the 67
84. Certificates are immediately due and payable at the aggregate face amount of the outstanding Certificates together with any Outstanding Payments , whereupon the aggregate face amount of the outstanding Certificates together with any Outstanding Payments shall become immediately due and payable without presentation, demand, protest or other notice of any kind. A Dissolution Notice may be given whether or not a Dissolution Request has been given to Certificateholders. 12.2 Trustee Events (a) (b) The Bank has undertaken in the Declaration of Trust that, as soon as practicable following the occurrence of a Trustee Event, it will procure, subject to such amendment of the Declaration of Trust and such other conditions as the Delegate may require and subject to the consent of the Financial Regulator, the substitution of any newly formed special purpose company in form substantially the same as that of the Trustee, in place of the Trustee (the Substituted Trustee), or of any previous substituted company, as trustee and issuer under the Declaration of Trust and the Certificates, provided that: (i) a deed is executed or undertaking given by the Substituted Trustee to the Delegate, in form and manner satisfactory to the Delegate (acting in accordance with the Declaration of Trust and these Conditions), agreeing to be bound by the Declaration of Trust, the Certificates and the Transaction Documents (with consequential amendments as the Delegate may deem appropriate) as if the Substituted Trustee had been named in the Declaration of Trust, the Certificates and the other Transaction Documents as trustee and issuer in place of the Trustee; (ii) if the Substituted Trustee is subject generally to the taxing jurisdiction of a territory or any political sub-division or authority of or in that territory with power to tax (the Substituted Territory) other than the territory of the taxing jurisdiction to which (or to any such authority of or in which) the Trustee is subject generally (the Trustee's Territory), the Substituted Trustee shall give an undertaking satisfactory to the Delegate in terms corresponding to Condition 13 (Taxation) with the substitution for or the addition to the references in that Condition to the Trustee's Territory of references to the Substituted Territory whereupon the Declaration of Trust and the Certificates shall be read accordingly (and the Bank shall also be required to give to the Delegate an undertaking satisfactory to the Delegate in terms corresponding to the last paragraph of Condition 13 (Taxation), extending its obligations thereunder to the Substituted Territory); (iii) if any two directors of the Substituted Trustee certify that it will be solvent immediately after such substitution, the Delegate need not have regard to the Substituted Trustee's financial condition, profits or prospects or compare them with those of the Trustee; (iv) the Trustee, the Substituted Trustee and the Bank comply with such other requirements as the Delegate may direct in the interests of the Certificateholders; and (v) such substitution would not, in the sole opinion of the Delegate, be materially prejudicial to the interests of the Certificateholders. Subject to this Condition 12.2 (Trustee Events), the Delegate may agree to the substitution of the Substituted Trustee without obtaining the consent or approval of the Certificateholders (it being acknowledged that each Certificateholder has by virtue of the last paragraph of the preamble to these Conditions authorised each Substituted Trustee to act as Rab-al-Maal pursuant to the Mudaraba Agreement on its behalf). 68
85. (c) If the Bank fails to comply with the foregoing provisions of this Condition 12.2 (Trustee Events) within 60 days of the occurrence of the relevant Trustee Event, Conditions 12.1 (Bank Events) and 12.3 (Winding-up, dissolution or liquidation) shall apply to the relevant Trustee Event as if it was a Bank Event. 12.3 Winding-up, dissolution or liquidation (a) Proceedings for Winding-up If a Bank Event occurs and a Dissolution Notice is delivered pursuant to Condition 12.1 (Bank Events), the Mudaraba will be liquidated in accordance with the provisions of the Mudaraba Agreement, and either the Trustee or the Delegate may at its discretion, and the Delegate shall, in each case subject to Condition 12.3(e)(i) (Realisation of Trust Assets), if it shall have been so requested by an Extraordinary Resolution of the Certificateholders or so requested in writing by the Certificateholders holding at least one-fifth of the then aggregate face amount of the Certificates outstanding (i) institute any steps, actions or proceedings for the winding-up of the Bank and/or (ii) prove in the winding-up of the Bank and/or (iii) institute any steps, actions or proceedings for the bankruptcy of the Bank and/or (iv) claim in the liquidation of the Bank and/or (v) take such other steps, actions or proceedings which, under the laws of Kuwait, have an analogous effect to the actions referred to in (i) to (iv) above, in each case, for (subject as set out below) all amounts of Mudaraba Capital, Rab-al-Maal Mudaraba Profit, Rab-al-Maal Final Mudaraba Profit and/or other amounts due to the Trustee on termination of the Mudaraba Agreement in accordance with its terms and the terms of the other Transaction Documents, provided, however, that the Trustee or the Delegate may only take any such steps, actions or proceedings as described in this Condition 12.3(a) (Proceedings for Winding-up), but may take no further or other steps, actions or proceedings to enforce, prove or claim for any payment and provided further that neither the Trustee nor the Delegate may take any steps, actions or proceedings against the Bank with respect to any sum that the Bank has paid into the Transaction Account in accordance with the Transaction Documents in circumstances where the Trustee has failed to pay that amount to Certificateholders in accordance with these Conditions. No payment in respect of the Transaction Documents may be made by the Bank as a result of any steps, actions or proceedings taken pursuant to Condition 12.1 (Bank Events), nor will the Trustee or the Delegate accept the same, otherwise than during or after a winding-up (or analogous event) of the Bank, unless the Bank has given prior written notice (with a copy to the Trustee and the Delegate) to, and received no objection from, the Financial Regulator (which the Bank shall confirm in writing to the Trustee and the Delegate). (b) Enforcement Without prejudice to Condition 12.1 (Bank Events) and the remaining provisions of this Condition 12.3 (Winding-up, dissolution or liquidation), the Trustee (or the Delegate) may at its discretion and the Delegate shall, in each case subject to Condition 12.3(e)(i) (Realisation of Trust Assets), if it shall have been so requested by an Extraordinary Resolution of the Certificateholders or so requested in writing by the Certificateholders holding at least one-fifth of the then aggregate face amount of the Certificates outstanding and without further notice institute such steps, actions or proceedings against the Bank or against the Trustee, as it may think fit to enforce any term or condition binding on the Bank or the Trustee (as the case may be) under the Certificates and the Transaction Documents (other than any payment obligation of the Bank under or arising from the Transaction Documents, including, without limitation, payment of any principal or premium or satisfaction of any payments in respect of the Transaction Documents, including any damages awarded for breach of any obligations), 69
86. including , without limitation, any failure by the Bank to procure the substitution of the Trustee in the circumstances described in Condition 12.2 (Trustee Events). However, in no event shall the Bank, by virtue of the institution of any such steps, actions or proceedings, be obliged to pay any sum or sums, in cash or otherwise, sooner than the same would otherwise have been payable by it in accordance with the Transaction Documents. Nothing in this Condition 12.3 (Winding-up, dissolution or liquidation) shall, however, prevent the Trustee (or the Delegate) from taking such steps, actions or proceedings as described in Condition 12.3(a) (Proceedings for Winding-up) in respect of any payment obligations of the Bank arising from the Mudaraba Agreement or any other Transaction Document (including any damages awarded for breach of any obligations). (c) Non-Viability All claims by the Delegate and/or the Certificateholders against the Trustee under the Certificates and all claims by the Trustee (or the Delegate) against the Bank under the Transaction Documents (including, without limitation, any claim in relation to any unsatisfied payment obligation of the Trustee and/or the Bank under the Certificates or the Transaction Documents, as the case may be) shall be subject to, and shall be superseded by the provisions of Condition 11 (Write-down at the Point of Non-Viability), irrespective of whether the relevant Non-Viability Event occurs prior to or after the event which is the subject matter of the claim, provided that nothing in these Conditions shall affect or prejudice the payment of the costs, charges, expenses, liabilities or remuneration of the Delegate or the rights and remedies of the Delegate in respect thereof, all of which shall accordingly remain unsubordinated. (d) Extent of Certificateholder remedy No remedy against the Bank, other than as referred to in this Condition 12 (Dissolution Events and Winding-up), shall be available to the Delegate, the Trustee or the Certificateholders, whether for the recovery of amounts owing in respect of the Transaction Documents or in respect of any breach by the Bank of any of its other obligations under or in respect of the Transaction Documents. (e) Realisation of Trust Assets (i) Neither the Trustee nor the Delegate shall be bound to take any steps, actions or proceedings to enforce or to realise the Trust Assets or any of the actions, steps or proceedings referred to in these Conditions in respect of the Bank or, in the case of the Delegate only, the Trustee to enforce the terms of the Certificates or Transaction Documents or give a Dissolution Notice (including, without limitation, pursuant to this Condition 12 (Dissolution Events and Winding-up)), unless (1) it shall have been so requested by an Extraordinary Resolution of the Certificateholders or in writing by Certificateholders holding at least one-fifth of the then aggregate face amount of the Certificates outstanding and (2) it shall have been indemnified and/or secured and/or pre-funded to its satisfaction. (ii) No Certificateholder shall be entitled to proceed directly against the Trustee or the Bank or to take the actions, steps or proceedings referred to in Conditions 12.3(a) (Proceedings for Winding-up) and 12.3(b) (Enforcement), unless (1) the Trustee or the Delegate, having become bound so to proceed, fails to do so within a reasonable period and such failure is continuing and (2) the relevant Certificateholder (or such Certificateholder together with the other Certificateholders who propose to proceed directly against any of the Trustee or the Bank, as the case may be) holds at least one- 70
87. fifth of the then outstanding aggregate face amount of the Certificates , in which case the Certificateholders shall have only such rights against the Bank as those which the Trustee or the Delegate is entitled to exercise as set out in Condition 12.1 (Bank Events) and this Condition 12.3 (Winding-up, dissolution or liquidation). 13 (iii) Under no circumstances shall the Delegate or any Certificateholder have any right to cause the sale or other disposition of any of the Trust Assets (other than as expressly contemplated in the Transaction Documents) and the sole right of the Delegate and the Certificateholders against the Trustee and the Bank shall be to enforce their respective obligations under the Certificates and Transaction Documents. (iv) The foregoing paragraphs in this Condition 12.3(e) (Realisation of Trust Assets) are subject to this paragraph. After enforcing or realising the Trust Assets and distributing the net proceeds thereof in accordance with the Declaration of Trust, the obligations of the Trustee in respect of the Certificates shall be satisfied and no Certificateholder may take any further steps against the Trustee (or any steps against the Delegate) to recover any further sums in respect of the Certificates and the right to receive any such sums remaining unpaid shall be extinguished. In particular, no Certificateholder shall be entitled in respect thereof to petition or to take any other steps for the winding-up of the Trustee. Taxation All payments in respect of the Certificates by or on behalf of the Trustee shall be made free and clear of and without withholding or deduction for, or on account of, any present or future taxes, levies, imposts, duties, fees, assessments or other charges of whatever nature, imposed, levied, collected, withheld or assessed by or on behalf of any Relevant Jurisdiction (Taxes), unless the withholding or deduction of the Taxes is required by law. In such event, the Trustee will pay additional amounts (Additional Amounts) so that the full amount which otherwise would have been due and payable under the Certificates in the absence of any such deduction or withholding is received by the parties entitled thereto, except that no such Additional Amount shall be payable in relation to any payment in respect of any Certificate: (a) the holder of which is liable for such Taxes in respect of such Certificate by reason of having some connection with a Relevant Jurisdiction other than the mere holding of such Certificate; or (b) presented for payment (where presentation is required) more than 30 days after the Relevant Date except to the extent that a holder would have been entitled to additional amounts on presenting the same for payment on such thirtieth day assuming that day to have been a Payment Business Day. In these Conditions, references to the Dissolution Distribution Amount or any Periodic Distribution Amounts (and related expressions including, without limitation, the face amount of the Certificates and Outstanding Payments) shall be deemed to include any Additional Amounts payable under this Condition 13 (Taxation) or any undertaking given in addition to or in substitution for it under the Declaration of Trust. Notwithstanding any other provision in these Conditions, the Trustee and the Paying Agents shall be permitted to withhold or deduct any amounts imposed pursuant to an agreement described in Section 1471(b) of the Code or otherwise imposed pursuant to Sections 1471 through 1474 of the Code (or any regulations thereunder or official interpretations thereof), or an intergovernmental agreement between the United States and another jurisdiction facilitating the implementation thereof (or any fiscal or regulatory legislation, rules or practices implementing such an intergovernmental agreement) (any such withholding or deduction, a FATCA withholding). None of the Trustee, the Delegate or any Agent will have any obligation to pay Additional 71
88. Amounts or otherwise indemnify a Certificateholder for any FATCA withholding deducted or withheld by the Trustee , a Paying Agent or any other party as a result of any person not being entitled to receive payments free of FATCA withholding. Neither the Delegate nor any Agent shall be responsible for paying any tax, duty, charges, withholding or other payment referred to in this Condition 13 (Taxation) or for determining whether such amounts are payable or the amount thereof, and none of them shall be responsible or liable for any failure by the Trustee, the Bank, any Certificateholder or any third party to pay such tax, duty, charges, withholding or other payment in any jurisdiction or to provide any notice or information to the Delegate or any Agent that would permit, enable or facilitate the payment of any principal, premium (if any), any additional amount or other amount under or in respect of the Certificates without deduction or withholding for or on account of any tax, duty, charge, withholding or other payment imposed by or in any jurisdiction. The Mudaraba Agreement provides that payments made thereunder by the Bank (in its capacity as the Mudareb) to the Trustee shall be made free and clear of, and without withholding or deduction for, or on account of, any present or future Taxes, unless such withholding or deduction is required by law. In such event, and/or if Additional Amounts are payable by the Trustee in respect of the Certificates in accordance with this Condition 13 (Taxation), the Mudaraba Agreement provides for the payment by the Bank of such additional amounts by payment to the Transaction Account in U.S. dollars by wire transfer for same day value so that the net amounts received by the Certificateholders shall equal the respective amounts that would have been received in the absence of such withholding or deduction and in the absence of the withholding or deduction to which this Condition 13 (Taxation) applies. 14 Prescription Subject to applicable law, the right to receive any amount in respect of the Certificates shall be prescribed and become void unless made within 10 years from the Relevant Date thereof. 15 Delegate 15.1 Delegation of Powers The Trustee will in the Declaration of Trust irrevocably and unconditionally appoint the Delegate to be its attorney and in its name, on its behalf and as its act and deed, to execute, deliver and perfect all documents, and to exercise all of the present and future duties, powers (including the power to subdelegate), trusts, rights, authorities (including, but not limited to, the authority to request directions from any Certificateholders and the power to make any determinations to be made under the Transaction Documents) and discretions vested in the Trustee by the Declaration of Trust, that the Delegate may consider to be necessary or desirable in order to, upon the occurrence of a Dissolution Event or Potential Dissolution Event, and subject to its being indemnified and/or secured and/or prefunded to its satisfaction, (i) exercise all of the rights of the Trustee and have all the protections of the Trustee under the Mudaraba Agreement and any of the other Transaction Documents and (ii) make such distributions from the Trust Assets as the Trustee is bound to make in accordance with the Declaration of Trust (together the Delegation of the Relevant Powers), provided that: (i) no obligations, duties, liabilities or covenants of the Trustee pursuant to the Declaration of Trust or any other Transaction Document shall be imposed on the Delegate by virtue of the Delegation; (ii) in no circumstances will such Delegation of the Relevant Powers result in the Delegate holding on trust the Trust Assets; and (iii) such Delegation of the Relevant Powers shall not include any duty, power, trust, right, authority or discretion to dissolve the trusts constituted by the Declaration of Trust following the occurrence of a Dissolution Event or Potential Dissolution Event or to determine the remuneration of the Delegate. The Trustee shall ratify and confirm all things done and all documents executed by the Delegate in the exercise of all or any of the Relevant Powers. 72
89. In addition to the Delegation of the Relevant Powers under the Declaration of Trust , the Delegate also has certain powers which are vested solely in it from the date of the Declaration of Trust. The appointment of a delegate by the Trustee is intended to be in the interests of the Certificateholders and does not affect the Trustee's continuing role and obligations as sole trustee. 15.2 Indemnification The Declaration of Trust contains provisions for the indemnification of the Delegate in certain circumstances and for its relief from responsibility, including provisions relieving it from taking any action, step or proceeding unless indemnified and/or secured and/or pre-funded to its satisfaction. In particular, but without limitation, in connection with the exercise of any of its rights in respect of the Trust Assets or any other right it may have pursuant to the Declaration of Trust or the other Transaction Documents, the Delegate shall in no circumstances be bound to take any action, step or proceeding unless directed to do so in accordance with Condition 12 (Dissolution Events and Winding-up), and then only if it shall also have been indemnified and/or secured and/or pre-funded to its satisfaction. The Declaration of Trust provides that, when determining whether an indemnity or any security or prefunding is satisfactory to it, the Delegate shall be entitled (i) to evaluate its risk in any given circumstance by considering the worst-case scenario and (ii) to require that any indemnity or security given to it by the Certificateholders or any of them be given on a joint and several basis and be supported by evidence satisfactory to it as to the financial standing and creditworthiness of each counterparty and/or as to the value of the security and an opinion as to the capacity, power and authority of each counterparty and/or the validity and effectiveness of the security. 15.3 15.4 No Liability (a) The Delegate makes no representation and assumes no responsibility for the validity, sufficiency or enforceability of the obligations of the Bank or the Trustee under the Transaction Documents and shall not under any circumstances have any liability or be obliged to account to the Certificateholders in respect of any payments which should have been paid by the Bank or the Trustee but are not so paid and shall not in any circumstances have any liability arising from the Trust Assets other than as expressly provided in these Conditions or in the Declaration of Trust. (b) Each of the Trustee and the Delegate is exempted from: (i) any liability in respect of any loss or theft of the Trust Assets or any cash; (ii) any obligation to monitor or insure the Trust Assets or any cash; and (iii) any claim arising from the fact that the Trust Assets or any cash are held by or on behalf of the Trustee or on deposit or in an account with any depositary or clearing system or are registered in the name of the Trustee or its nominee. Reliance on Opinions, Certificates, Reports and/or Information The Delegate may rely on any opinion, certificate, report or information of the auditors or insolvency officials (as applicable) of the Trustee or the Bank or any other expert or other person called for by or provided to the Delegate (whether or not addressed to the Delegate) in accordance with or for the purposes of the Declaration of Trust or the other Transaction Documents and such opinion, certificate, report or information may be relied upon by the Delegate (without liability to any person) as sufficient evidence of the facts stated therein notwithstanding that such opinion, certificate, report, information and/or any engagement letter or other document contains a monetary or other limit on the liability of the auditors or insolvency officials of the Trustee or the Bank or such other expert or other person in respect thereof and notwithstanding that the scope and/or basis of such opinion, certificate, report or information may be limited by an engagement or similar letter or by the terms of the opinion, 73
90. certificate , report or information itself and the Delegate shall not be bound in any such case to call for further evidence or be responsible for any liability, delay or inconvenience that may be occasioned by its failure to do so. 15.5 Proper performance of duties Nothing shall, in the case of the Trustee (having regard to the provisions of the Declaration of Trust conferring on it any trusts, powers, authorities or discretions) or in the case of the Delegate as donee and delegate (having regard to the powers, authorities and discretions conferred on it by the Declaration of Trust and to the Relevant Powers delegated to it), respectively exempt the Trustee or the Delegate from or indemnify either of them against any liability for gross negligence, wilful default or fraud of which either of them may be guilty in relation to their duties under the Declaration of Trust. 15.6 Illegality The Delegate may refrain from taking any action in any jurisdiction if the taking of such action in that jurisdiction would, in its opinion based upon legal advice in the relevant jurisdiction, be contrary to any law of that jurisdiction. Furthermore, the Delegate may also refrain from taking such action if it would otherwise render it liable to any person in that jurisdiction or if, in its opinion based upon such legal advice, it would not have the power to do the relevant thing in that jurisdiction by virtue of any applicable law in that jurisdiction or if it is determined by any court or other competent authority in that jurisdiction that it does not have such power. 15.7 Delegate not Precluded from Conducting Business with the Trustee and the Bank The Delegate is entitled, inter alia, (i) to enter into business transactions with the Trustee, the Bank and/or any entity related to the Trustee and/or the Bank and to act as trustee for the holders of any other securities issued or guaranteed by, or relating to, the Trustee and/or any entity related to the Trustee and/or the Bank, (ii) to exercise and enforce its rights, comply with its obligations and perform its duties under or in relation to any such transactions or, as the case may be, any such trusteeship without regard to the interests of, or consequences for, the Certificateholders, and (iii) to retain and not be liable to account for any profit made or any other amount or benefit received thereby or in connection therewith. 15.8 Notice of Events The Delegate shall not be responsible for monitoring or ascertaining whether or not a Non-Payment Event, Capital Event, Tax Event, Non-Viability Event, Dissolution Event or Potential Dissolution Event has occurred or exists or is continuing or will or may occur or exist and, unless and until it shall have received express written notice to the contrary, it will be entitled to assume that no such event or circumstance exists or has occurred or is continuing (without any liability to the Certificateholders or any other person for so doing). 16 Replacement of Certificates If a definitive Certificate is lost, stolen, mutilated, defaced or destroyed, it may be replaced at the specified office of the Registrar (and, if the Certificates are then admitted to listing, trading and/or quotation by any competent authority, stock exchange and/or quotation system which requires the appointment of a Paying Agent or Transfer Agent in any particular place, the Paying Agent or Transfer Agent having its specified office in the place required by such competent authority, stock exchange and/or quotation system), subject to all applicable laws and competent authority, stock exchange and/or quotation system requirements, upon payment by the claimant of the expenses incurred in connection with the replacement and on such terms as to 74
91. evidence and indemnity as the Trustee , the Bank, the Registrar, the Paying Agent or the Transfer Agent may require. Mutilated or defaced Certificates must be surrendered before replacements will be issued. 17 Notices Notices to Certificateholders will be deemed to be validly given if mailed to Certificateholders by pre-paid registered mail (or its equivalent) or (if posted to an overseas address) by airmail at their respective addresses in the Register. The Trustee shall also ensure that notices are duly given or published in a manner which complies with the rules and regulations of any listing authority, stock exchange and/or quotation system (if any) on which the Certificates are for the time being admitted to listing, trading and/or quotation. Any notices shall be deemed to have been given on the day (being a day other than a Saturday or a Sunday) after being so mailed (or on the date of publication, or, if so published more than once or on different dates, on the date of the first publication). Notices to be given by any Certificateholder shall be in writing and given by lodging the same, together with evidence of entitlement to the relevant Certificates, with the Principal Paying Agent. So long as the Certificates are represented by a Global Certificate and such Global Certificate is held on behalf of Euroclear or Clearstream, Luxembourg, or any other clearing system, notices to the Certificateholders may be given by delivery of the relevant notice to that clearing system for communication by it to entitled accountholders in substitution for mailing. Any such notice shall be deemed to have been given to the Certificateholders on the day on which such notice was given to Euroclear and/or Clearstream, Luxembourg and/or such other clearing system. 18 Meetings of Certificateholders, Modification, Waiver, Authorisation and Determination 18.1 The Declaration of Trust contains provisions for convening meetings of Certificateholders to consider any matter affecting their interests, including the sanctioning by Extraordinary Resolution of a modification of any of these Conditions or any provisions of the Declaration of Trust. Such a meeting may be convened by Certificateholders holding not less than 10 per cent. in face amount of the Certificates for the time being outstanding. The quorum for any meeting convened to consider an Extraordinary Resolution will be one or more Eligible Persons (as defined in the Declaration of Trust) present holding or representing in aggregate more than 50 per cent. in face amount of the Certificates for the time being outstanding, or at any adjourned such meeting one or more Eligible Persons whatever the face amount of the Certificates held or represented, except that any meeting the business of which includes consideration of proposals, inter alia, (i) to modify any date for payment (including any optional repayment date) in respect of the Certificates, (ii) to reduce or cancel or vary the method or basis for calculating the amount of any payment due in respect of the Certificates, (iii) to change any of the Trustee's and the Bank's covenants set out in the Transaction Documents, (iv) to alter the currency of payment or denomination of the Certificates, (v) to modify the provisions concerning the quorum required at any meeting of Certificateholders or the majority required to pass an Extraordinar y Resolution, (vi) to sanction any such scheme or proposal or substitution as is described in paragraphs 5.9(i) and 5.9(j) of Schedule 4 to the Declaration of Trust, or (vii) to amend the above list or the proviso to paragraphs 4.4 or 4.6 of Schedule 4 to the Declaration of Trust, in which case the quorum shall be one or more Eligible Persons holding or representing in aggregate not less than 75 per cent., or at any adjourned such meeting not less than 25 per cent., in face amount of the Certificates for the time being outstanding. To be passed, an Extraordinary Resolution requires (i) a majority in favour consisting of not less than 75 per cent. of the votes cast, (ii) a resolution in writing signed by or on behalf of the holders of not less than 75 per cent. in aggregate face amount of the Certificates then outstanding (a Written Resolution) or (iii) where the Certificates are held by or on behalf of a clearing system or clearing systems, approval given by way of electronic consents communicated through the 75
92. electronic communications systems of the relevant clearing system (s) in accordance with their operating rules and procedures (in a form satisfactory to the Delegate) by or on behalf of the holders of not less than 75 per cent. in aggregate face amount of the Certificates then outstanding (an Electronic Consent). Any Extraordinary Resolution, if duly passed, will be binding on all Certificateholders, whether or not they were present at the meeting at which such resolution was passed and whether or not they voted. 18.2 The Declaration of Trust provides that a Written Resolution or an Electronic Consent shall for all purposes be as valid and effective as an Extraordinary Resolution passed at a meeting of Certificateholders duly convened and held. Such a Written Resolution may be contained in one document or several documents in the same form, each signed by or on behalf of one or more Certificateholders. Such a Written Resolution and/or Electronic Consent will be binding on all Certificateholders whether or not they participated in such Written Resolution or Electronic Consent. 18.3 The Delegate may, (but shall not be obliged to), without the consent or approval of the Certificateholders (i) agree to any modification to these Conditions, any provisions of the Transaction Documents or to the Trustee's memorandum and articles of association which, in the sole opinion of the Delegate, is of a formal, minor or technical nature or is made to correct a manifest error; (ii) agree to any modification (other than in respect of a Reserved Matter) of these Conditions, any provisions of the Transaction Documents or the Trustee's memorandum and articles of association, or to the waiver or authorisation of any breach or proposed breach of any of these Conditions or any of the provisions of the Declaration of Trust or the other Transaction Documents; or (iii) determine that any Dissolution Event or Potential Dissolution Event shall not be treated as such, provided in the case of paragraphs (ii) and (iii) that such modification, waiver, authorisation or determination is not, in the sole opinion of the Delegate, materially prejudicial to the interests of Certificateholders and that such waiver, authorisation or determination is not in contravention of any express direction by Extraordinary Resolution or request in writing by the holders of at least one-fifth of the outstanding aggregate face amount of the Certificates. 18.4 In connection with the exercise by it of any of its powers, authorities and discretions (including, without limitation, those referred to in this Condition 18 (Meetings of Certificateholders, Modification, Waiver, Authorisation and Determination), the Delegate shall have regard to the interests of the Certificateholders as a class (but shall not have regard to any interests arising from circumstances particular to individual Certificateholders (whatever their number) and, in particular but without limitation, shall not have regard to the consequences of any such exercise for individual Certificateholders (whatever their number) resulting from their being for any purpose domiciled or resident in, or otherwise connected with, or subject to the jurisdiction of, any particular territory or any political sub-division thereof) and the Delegate shall not be entitled to require, nor shall any Certificateholder be entitled to claim from the Delegate or any other person, any indemnification or payment in respect of any tax consequence of any such exercise upon individual Certificateholders except to the extent provided in Condition 13 (Taxation). 18.5 Any modification, waiver, authorisation or determination shall be binding on all of the Certificateholders and shall be notified by the Trustee to the Certificateholders as soon as practicable thereafter in accordance with Condition 17 (Notices). This Condition 18 (Meetings of Certificateholders, Modification, Waiver, Authorisation and Determination) is without prejudice to Condition 10.1(c) (Redemption or Variation due to Taxation) and Condition 10.1(d) (Redemption or Variation for Capital Event). 76
93. 19 Currency Indemnity If any sum due from the Trustee in respect of the Certificates or any order or judgment given or made in relation thereto has to be converted from the currency (the first currency) in which the same is payable under these Conditions or such order or judgment into another currency (the second currency) for the purpose of: (a) making or filing a claim or proof against the Trustee; (b) obtaining an order or judgment in any court or other tribunal; or (c) enforcing any order or judgment given or made in relation to the Certificates, the Trustee shall indemnify each Certificateholder, on the written demand of such Certificateholder addressed to the Trustee and delivered to the Trustee or to the specified office of the Principal Paying Agent, against any loss suffered as a result of any discrepancy between: (i) the rate of exchange used for such purpose to convert the sum in question from the first currency into the second currency; and (ii) the rate or rates of exchange at which such Certificateholder may in the ordinary course of business purchase the first currency with the second currency upon receipt of a sum paid to it in satisfaction, in whole or in part, of any such order, judgment, claim or proof. This indemnity constitutes a separate and independent obligation of the Trustee and shall give rise to a separate and independent cause of action. In no circumstances will the Delegate incur any liability by virtue of this Condition 19 (Currency Indemnity). 20 Contracts (Rights of Third Parties) Act 1999 No rights are conferred on any person under the Contracts (Rights of Third Parties) Act 1999 to enforce any term of these Conditions, but this does not affect any right or remedy of any person which exists or is available apart from that Act. 21 Governing Law and Dispute Resolution 21.1 Governing Law The Declaration of Trust (including these Conditions), the Agency Agreement, the Mudaraba Agreement and the Certificates, and any non-contractual obligations arising out of or in connection with them are governed by, and shall be construed in accordance with, English law. 21.2 Arbitration Any dispute, claim, difference or controversy arising out of, relating to or having any connection with the Declaration of Trust (including these Conditions) and the Certificates (including any dispute as to their existence, validity, interpretation, performance, breach or termination or the consequences of the nullity of any of them or a dispute relating to any non-contractual obligations arising out of or in connection with them) (a Dispute) shall be referred to and finally resolved by arbitration in accordance with the Arbitration Rules of the LCIA (the Rules), which Rules (as amended from time to time) are deemed to be incorporated by reference into this Condition 21.2 (Arbitration). For these purposes: (a) the seat of arbitration shall be London, England; (b) there shall be three arbitrators, each of whom shall be disinterested in the arbitration and shall be an attorney experienced in international securities transactions. The parties to the Dispute shall each nominate one arbitrator and both arbitrators in turn shall appoint a further arbitrator, who shall be the chairman of the tribunal. In cases where there are multiple claimants and/or multiple respondents, the class of claimants jointly, and the class of respondents jointly, shall each nominate one arbitrator. If one party or both parties fail to nominate an arbitrator within the time limits specified by the Rules, such arbitrator(s) shall be appointed by the LCIA. If the 77
94. party nominated arbitrators fail to nominate the third arbitrator within 15 days of the appointment of the second arbitrator , such arbitrator shall be appointed by the LCIA; and (c) 21.3 the language of the arbitration shall be English. Appointment of Process Agent Each of the Trustee and the Bank has, in the Declaration of Trust, appointed Maples and Calder at its registered office at 11th Floor, 200 Aldersgate Street, London EC1A 4HD, United Kingdom as its agent for service of process and has undertaken that, in the event of Maples and Calder ceasing so to act or ceasing to be registered in England, it will appoint another person as its agent for service of process in England in respect of any Disputes and notify the Delegate and the Certificateholders of such appointment in accordance with this Condition 21.3 (Appointment of Process Agent). Nothing herein shall affect the right to serve proceedings in any other manner permitted by law. 21.4 Waiver of Immunity Under the Transaction Documents to which it is a party, the Bank has agreed that, to the extent that it may claim for itself or its assets or revenues immunity from jurisdiction, enforcement, prejudgment proceedings, injunctions and all other legal proceedings and relief and to the extent that such immunity (whether or not claimed) may be attributed to it or its assets or revenues, it will not claim and has irrevocably and unconditionally waived such immunity in relation to any Disputes. Further, the Bank has irrevocably and unconditionally consented to the giving of any relief or the issue of any legal proceedings, including, without limitation, jurisdiction, enforcement, prejudgment proceedings and injunctions in connection with any Disputes. 21.5 Waiver of Interest (a) Each of the Trustee, the Delegate and the Bank has irrevocably agreed in the Declaration of Trust that no interest will be payable or receivable under or in connection therewith and, if it is determined that any interest is payable or receivable in connection therewith by a party, whether as a result of any arbitral award or by operation of any applicable law or otherwise, such party has agreed to waive any rights it may have to claim or receive such interest and has agreed that, if any such interest is actually received by it, it shall hold such amount in a suspense account and promptly donate the same to a registered or otherwise officially recognised charitable organisation. (b) For the avoidance of doubt, nothing in this Condition 21.5 (Waiver of Interest) shall be construed as a waiver of rights in respect of Mudaraba Profit, Final Mudaraba Profit, Rab-alMaal Mudaraba Profit, Rab-al-Maal Final Mudaraba Profit, Periodic Distribution Amounts, Outstanding Payments or profit of any kind howsoever described payable by the Bank (in any capacity) or the Trustee (in any capacity) pursuant to the Transaction Documents and/or these Conditions, howsoever such amounts may be described or re-characterised by any arbitral tribunal. 78
95. GLOBAL CERTIFICATE The Global Certificate contains the following provisions which apply to the Certificates whilst they are represented by the Global Certificate , some of which modify the effect of the Conditions. Unless otherwise defined, terms defined in the Conditions have the same meaning below. Form of the Certificates The Certificates will be in registered form and will be issued outside the United States to persons who are not U.S. persons in reliance on Regulation S. The Certificates will be represented by ownership interests in a global certificate in registered form (the Global Certificate). The Global Certificate will be deposited with a common depositary for Euroclear and Clearstream and will be registered in the name of a nominee for the common depositary. Persons holding ownership interests in the Global Certificate will be entitled or required, as the case may be, under the circumstances described below, to receive physical delivery of Definitive Certificates in fully registered form. Holders For so long as the Certificates are represented by the Global Certificate and the Global Certificate is held on behalf of Euroclear and/or Clearstream, Luxembourg, the registered holder of the Global Certificate shall, except as ordered by a court of competent jurisdiction or as required by law, be treated as the owner thereof (the Registered Holder). Each of the persons (other than another clearing system) who is for the time being shown in the records of either such clearing system as the holder of a particular aggregate face amount of such Certificates (the Accountholders) (in which regard any certificate or other document issued by a clearing system as to the aggregate face amount of such Certificates standing to the account of any person shall be conclusive and binding for all purposes save in the case of manifest error) shall be deemed to be the Certificateholder in respect of the aggregate face amount of such Certificates standing to its account in the records of Euroclear or Clearstream, Luxembourg, as the case may be, other than for the purpose of payments in respect thereof, the right to which shall be vested solely in the Registered Holder, as against the Trustee, and an Accountholder must look solely to Euroclear or Clearstream, Luxembourg, as the case may be, for its share of each payment made to the Registered Holder (and such payment obligations of the Trustee will be discharged by payment to the Registered Holder in respect of each amount so paid), and the expressions Certificateholder and holder of Certificates and related expressions shall be construed accordingly. In addition, holders of ownership interests in the Global Certificate will not have a direct right to vote in respect of the relevant Certificates. Instead, such holders will be permitted to act only to the extent that they are enabled by the relevant clearing system and its participants to appoint appropriate proxies. Cancellation Cancellation of any Certificate represented by the Global Certificate will be effected by reduction in the aggregate face amount of the Certificates in the Register. Payments Payments of any amount in respect of the Certificate represented by the Global Certificate will, in the absence of any provision to the contrary, be made to, or to the order of, the person shown on the Register as the registered holder of the Global Certificate at the close of business on the record date, which shall be the Clearing System Business Day immediately prior to the due date for payment (where Clearing System Business Day means Monday to Friday inclusive except 25 December and 1 January). Upon payment of any amount in respect of the Certificates represented by the Global Certificate, the details of such payment shall be entered by the Registrar in the Register. 79
96. None of the Trustee , the Delegate, any Paying Agent or the Registrar will have any responsibility or liability for any aspect of the records relating to or payments made on account of ownership interests in the Global Certificate or for maintaining, supervising or reviewing any records relating to such ownership interests. Payments of the Dissolution Distribution Amount in respect of Certificates represented by the Global Certificate will be made upon presentation and surrender of the Global Certificate at the specified office of the Registrar or such other office as may be specified by the Registrar subject to and in accordance with the Conditions and the Declaration of Trust. Distributions of amounts with respect to book-entry interests in the Certificates held through Euroclear or Clearstream, Luxembourg will be credited to the cash accounts of participants in the relevant clearing system in accordance with the relevant clearing system's rules and procedures. A record of each payment made in respect of the Certificates will be entered into the Register by or on behalf of the Registrar and shall be prima facie evidence that payment has been made. Notices For so long as all the Certificates are represented by the Global Certificate and the Global Certificate is held on behalf of Euroclear and/or Clearstream, Luxembourg, notices may be given by delivery of the relevant notice to those clearing systems for communication to entitled Accountholders in substitution for notification as required by the Conditions except that, so long as the Certificates are listed on any stock exchange, notices shall also be published in accordance with the rules of such stock exchange. Any such notice shall be deemed to have been given on the day on which such notice is delivered to the relevant clearing systems. Whilst any of the Certificates held by a Certificateholder are represented by the Global Certificate, notices to be given by such Certificateholder may be given (where applicable) through Euroclear and/or Clearstream, Luxembourg and otherwise in such manner as the Registrar and Euroclear and Clearstream, Luxembourg may approve for this purpose. Registration of Title The Registrar will not register title to the Certificates in a name other than that of a nominee for the Common Depositary for a period of seven calendar days preceding the due date for any payment of any Periodic Distribution Amount or the Dissolution Distribution Amount in respect of the Certificates. Record dates will be determined in accordance with the standard practices of Euroclear and Clearstream, Luxembourg. Transfers Transfers of book-entry interests in the Certificates will be effected through the records of Euroclear or Clearstream, Luxembourg and their respective direct and indirect participants in accordance with their respective rules and procedures. Exchange for Definitive Certificates Interests in the Global Certificate will be exchangeable (free of charge), in whole but not in part, for Definitive Certificates only upon the occurrence of an Exchange Event. The Trustee will promptly give notice to Certificateholders in accordance with Condition 17 (Notices) if an Exchange Event occurs. For these purposes, Exchange Event means that: (i) a Dissolution Event (as defined in the Conditions) has occurred; or (ii) the Certificates represented by the Global Certificate are held on behalf of Euroclear or Clearstream, Luxembourg or any other clearing system, and any such clearing system has been closed for business for a continuous period of 14 days (other than by reason of holidays, statutory or otherwise) or has announced an intention permanently to cease business or has in fact done so and no successor or alternative clearing system satisfactory to the Delegate is 80
97. available . If an Exchange Event occurs, any of the Trustee, the Delegate or Euroclear and/or Clearstream, Luxembourg (acting on the instructions of any holder of an interest in the Global Certificate) may give notice to the Registrar requesting exchange. In such circumstances, the Global Certificate shall be exchanged in full for Definitive Certificates and the Trustee will, at the cost of the Trustee (but against such indemnity as the Registrar or any relevant Transfer Agent may require in respect of any tax or other duty of whatever nature which may be levied or imposed in connection with such exchange), cause sufficient Definitive Certificates to be executed and delivered to the Registrar within 10 days following the request for exchange for completion and dispatch to the Certificateholders. Any exchange shall occur no later than ten days after the date of receipt of the first relevant notice by the Registrar. A person having an interest in the Global Certificate must provide the Registrar with a written order containing instructions (and such other information as the Trustee and the Registrar may require) to complete, execute and deliver such Definitive Certificates. In this Prospectus, Definitive Certificate means a trust certificate in definitive registered form issued by the Trustee in accordance with the provisions of the Declaration of Trust in exchange for the Global Certificate, such trust certificate substantially in the form set out in the Schedules to the Declaration of Trust. Electronic Consent and Written Resolution While any Global Certificate is registered in the name of any nominee for Euroclear or Clearstream, Luxembourg, then: (a) approval of a resolution proposed by the Trustee, KIB or the Delegate (as the case may be) given by way of electronic consents communicated through the electronic communications systems of the relevant clearing system(s) in accordance with their operating rules and procedures by or on behalf of the holders of not less than 75 per cent. in aggregate face amount of the Certificates then outstanding (an Electronic Consent as defined in the Declaration of Trust) shall, for all purposes (including matters that would otherwise require an Extraordinary Resolution to be passed at a meeting for which the special quorum (as specified in the Declaration of Trust) was satisfied), take effect as an Extraordinary Resolution passed at a meeting of Certificateholders duly convened and held, and shall be binding on all Certificateholders whether or not they participated in such Electronic Consent; and (b) where Electronic Consent is not being sought, for the purpose of determining whether a Written Resolution (as defined in the Declaration of Trust) has been validly passed, the Trustee, the Bank and the Delegate shall be entitled to rely on consent or instructions given in writing directly to the Trustee, the Bank and/or the Delegate, as the case may be, by Accountholders in the clearing system with entitlements to such Global Certificate or, where the Accountholders hold any such entitlement on behalf of another person, on written consent from or written instruction by the person for whom such entitlement is ultimately beneficially held, whether such beneficiary holds directly with the accountholder or via one or more intermediaries and provided that, in each case, the Trustee, the Bank and/or the Delegate, as the case may be, have obtained commercially reasonable evidence to ascertain the validity of such holding and have taken reasonable steps to ensure that such holding does not alter following the giving of such consent or instruction and prior to the effecting or implementation of such consent or instructions. Any resolution passed in such manner shall be binding on all Certificateholders, even if the relevant consent or instruction proves to be defective. As used in this paragraph, commercially reasonable evidence includes any certificate or other document issued by Euroclear, Clearstream, Luxembourg or any other relevant clearing system, or issued by an accountholder of them or an intermediary in a holding chain, in relation to the holding of interests in the Certificates. Any such certificate or other document shall, in the absence of manifest error, be conclusive and binding for all purposes. Any such certificate or other document may comprise any form of statement or print out of electronic records provided by the relevant clearing system (including Euroclear's EUCLID or Clearstream, Luxembourg's CreationOnline system) in accordance 81
98. with its usual procedures and in which the accountholder of a particular principal or nominal amount of the Certificates is clearly identified together with the amount of such holding . None of the Trustee, the Bank and/or the Delegate shall be liable to any person by reason of having accepted as valid or not having rejected any certificate or other document to such effect purporting to be issued by any such person and subsequently found to be forged or not authentic. 82
99. USE OF PROCEEDS The proceeds of the Certificates will be contributed by the Trustee (as Rab-al-Maal) to the Bank (as Mudareb) as Mudaraba Capital pursuant to the terms of the Mudaraba Agreement. The Mudareb will use the Mudaraba Capital to invest the Mudaraba Capital in its business activities carried out through the General Mudaraba Pool. 83
100. DESCRIPTION OF THE TRUSTEE The Trustee KIB Tier 1 Sukuk Limited (the Trustee), an exempted company incorporated in the Cayman Islands with limited liability, was incorporated on 18 March 2019 under the Companies Law (2018 Revision) of the Cayman Islands with company registration number 349126. The registered office of the Trustee is at MaplesFS Limited, PO Box 1093, Queensgate House, South Church Street, George Town, Grand Cayman, Cayman Islands KY1-1102, Cayman Islands and the telephone number is +1 345 945 7099. The authorised share capital of the Trustee is U.S.$50,000 divided into 50,000 ordinary shares of U.S.$1.00 each, 250 of which have been issued. All of the issued shares (the Shares) are fully-paid and are held by MaplesFS Limited as share trustee (in such capacity, the Share Trustee) under the terms of a share declaration of trust (the Share Declaration of Trust) under which the Share Trustee holds the Shares in trust until the Termination Date (as defined in the Share Declaration of Trust) and may only dispose or otherwise deal with the Shares in accordance with the Share Declaration of Trust. It is not anticipated that any distribution will be made whilst any Certificates are outstanding. Prior to the Termination Date, the trust is an accumulation trust, but the Share Trustee has the power to benefit Qualified Charities (as defined in the Share Trust Deed). It is not anticipated that any distribution will be made whilst any Certificate is outstanding. Following the Termination Date, the Share Trustee will wind up the trust and make a final distribution to charity. The Share Trustee has no beneficial interest in, and derives no benefit (other than its fee for acting as Share Trustee) from its holding of, the Shares. The Business of the Trustee The Trustee has no prior operating history or prior business other than in connection with the Certificates to be issued and will not have any substantial liabilities other than in connection with the Certificates. The Certificates are the obligations of the Trustee alone and not the Share Trustee. The objects for which the Trustee is established are set out in clause 3 of its Memorandum of Association as registered or adopted on 18 March 2019. Financial Statements Since the date of incorporation, no financial statements of the Trustee have been prepared. The Trustee is not required by Cayman Islands law, and does not intend, to publish audited financial statements or appoint any auditors. Directors of the Trustee The directors of the Trustee are as follows: Name: Principal Occupation: John Curran Vice President, Fiduciary at Maples Fund Services (Middle East) Limited Linval Stewart Vice President at MaplesFS Limited The business address of John Curran is c/o Maples Fund Services (Middle East) Limited, C1407, Level 14 Burj Daman, Dubai International Financial Centre, P.O. Box 506734, Dubai, United Arab Emirates. 84
101. The business address of Linval Stewart is c /o Maples Fund Services (Middle East) Limited, C1407, Level 14 Burj Damanm, Dubai International Financial Centre, P.O. Box 506734, Dubai, United Arab Emirates. The Trustee's Articles of Association provide that the board of directors of the Trustee will consist of at least one director. Conflicts There are no potential conflicts of interest between the private interests or other duties of the Directors listed above and their duties to the Trustee. The Administrator MaplesFS Limited also acts as the administrator of the Trustee (in such capacity, the Trustee Administrator). The office of the Trustee Administrator serves as the general business office of the Trustee. Through the office, and pursuant to the terms of the Corporate Services Agreement, the Trustee Administrator has agreed to perform in the Cayman Islands or such other jurisdiction as may be agreed by the parties from time to time various management functions on behalf of the Trustee and the provision of certain clerical, administrative and other services until termination of the Corporate Services Agreement. The Trustee Administrator will also provide registered office services to the Trustee in accordance with its standard terms and conditions for the provision of registered office services as published at http://www.maplesfiduciaryservices.com/terms (the Registered Office Terms). In consideration of the foregoing, the Trustee Administrator receives various fees payable by the Trustee at rates agreed upon from time to time, plus expenses. The terms of the Corporate Services Agreement and the Registered Office Terms provide that either the Trustee or the Trustee Administrator may terminate such appointments upon the occurrence of certain stated events, including any breach by the other party of its obligations under such agreements. In addition, the Corporate Services Agreement and the Registered Office Terms provide that either party shall be entitled to terminate such agreements by giving at least three months' notice in writing to the other party with a copy to any applicable rating agency. The Trustee Administrator is subject to the overview of the Trustee's Board of Directors. The Trustee Administrator's principal office is P.O. Box 1093, Boundary Hall, Cricket Square, Grand Cayman, KY1-1102, Cayman Islands. The directors of the Trustee are all employees or officers of the Trustee Administrator (or an affiliate thereof). The Trustee has no employees and is not expected to have any employees in the future. 85
102. SELECTED FINANCIAL INFORMATION The following information has been extracted from , and should be read in conjunction with, and is qualified in its entirety by reference to, the Financial Statements and should also be read in conjunction with “Financial review". All information in this section as at, and relating to the three-month periods ended, 31 March 2019 and 31 March 2018 is unaudited. Results for any interim period within a year will not necessarily be indicative of the results for the full year. See also “Presentation of financial and other information” for a discussion of the sources of the numbers contained in this section. CONSOLIDATED STATEMENT OF FINANCIAL POSITION DATA The table below shows the Group's consolidated statement of financial position data as at 31 March 2019 and as at 31 December in each of 2018, 2017 and 2016. As at 31 March As at 31 December 2019 2018 2017 2016 (Unaudited) (KD thousand) Assets Cash and balances with banks .................................... 50,249 41,585 19,450 18,140 Due from banks ..........................................................377,374 315,673 402,902 393,296 Financing receivables ................................................. 1,636,492 1,605,833 1,304,416 1,268,456 Investment securities .................................................. 81,296 105,975 83,840 86,007 Investment in an associate .......................................... 1,518 1,518 1,518 1,533 Investment properties ................................................. 58,451 58,523 60,391 40,235 Other assets................................................................. 13,158 10,987 17,298 12,789 29,085 28,501 26,225 25,574 Property and equipment.............................................. Total assets ................................................................ 2,247,623 2,168,595 1,916,040 1,846,030 Liabilities and equity Liabilities Due to banks and financial institutions ......................546,328 517,537 394,438 418,077 Depositors' accounts ................................................... 1,373,345 1,318,535 1,203,213 1,124,832 55,919 54,498 48,126 Other liabilities ........................................................... 54,792 Total liabilities ........................................................... 1,974,465 1,891,991 1,652,149 1,591,035 Equity Share capital ...............................................................103,732 103,732 103,732 103,732 Share premium ........................................................... 49,480 49,480 49,480 49,480 Treasury shares ...........................................................(45,234) (45,234) (45,234) (45,234) 165,212 152,589 143,803 Other reserves .............................................................161,694 Equity attributable to shareholders of the Bank.....................................................................269,672 273,190 260,567 251,781 3,414 3,324 3,214 Non-controlling interests ............................................ 3,486 276,604 263,891 254,995 Total equity................................................................273,158 Total liabilities and equity........................................ 2,247,623 2,168,595 1,916,040 1,846,030 86
103. CONSOLIDATED STATEMENT OF PROFIT OR LOSS DATA The table below shows the Group 's consolidated statement of profit or loss data for each of the three-month periods ended 31 March 2019 and 31 March 2018. Three months ended 31 March 2019 2018 (Unaudited) (KD thousand) Financing income ............................................................................ 24,565 20,537 Financing cost and estimated distribution to depositors ................. (11,140) (6,981) Net financing income ..................................................................... 13,425 13,556 Fees and commission income .......................................................... 2,491 2,544 Net gain from foreign exchange ...................................................... 192 503 Investment income .......................................................................... 769 607 Other income ................................................................................... 144 105 Total operating income.................................................................. 17,021 17,315 Staff costs ........................................................................................ (4,779) (4,371) General and administrative expenses .............................................. (2,595) (2,542) Depreciation .................................................................................... (895) (540) Total operating expenses ............................................................... (8,269) (7,453) Profit from operations before provisions and impairment losses ............................................................................................... 8,752 9,862 (2,173) (1,771) Provisions and impairment losses ................................................... Profit from operations ................................................................... 6,579 8,091 Provision for: Contribution to Kuwait Foundation for the Advancement of Sciences (KFAS) ............................................................................. (61) (74) Contribution to National Labour Support Tax (NLST) ................... (166) (205) Contribution to Zakat ...................................................................... (68) (80) Profit for the period....................................................................... 6,284 7,732 Attributable to: Shareholders of the Bank ................................................................ 6,212 7,700 Non-controlling interests ................................................................. 72 32 87
104. The table below shows the Group 's consolidated statement of profit or loss data for each of 2018, 2017 and 2016. 2018 Financing income ............................................................................ Financing cost and distribution to depositors .................................. Net financing income ..................................................................... Fees and commission income .......................................................... Net gain from foreign exchange ...................................................... Investment income .......................................................................... Other income ................................................................................... Total operating income.................................................................. Staff costs ........................................................................................ General and administrative expenses .............................................. Depreciation .................................................................................... Total operating expenses ............................................................... Profit from operations before provisions and impairment losses ............................................................................................... Provisions and impairment losses ................................................... Profit from operations ................................................................... Provision for: Contribution for Kuwait Foundation for the Advancement of Sciences (KFAS) ............................................................................. Contribution for National Labour Support Tax (NLST) ................. Contribution for Zakat ..................................................................... Board of Directors' remuneration .................................................... Profit for the year .......................................................................... Attributable to: Shareholders of the Bank ................................................................ Non-controlling interests ................................................................. 89,470 (35,815) 53,655 9,864 931 1,571 609 66,630 (19,089) (14,522) (2,275) (35,886) 2017 (KD thousand) 74,559 (25,514) 49,045 9,281 861 4,469 595 64,251 (17,603) (13,288) (1,889) (32,780) 2016 71,006 (21,257) 49,749 8,789 815 2,666 1,173 63,192 (16,109) (11,987) (2,003) (30,099) 30,744 (8,244) 22,500 31,471 (12,353) 19,118 33,093 (13,505) 19,588 (206) (582) (227) (450) 21,035 (174) (508) (193) (450) 17,793 (178) (520) (197) (450) 18,243 20,892 143 17,701 92 18,203 40 88
105. CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME DATA The table below shows the Group 's consolidated statement of profit or loss and other comprehensive income data for each of the three-month periods ended 31 March 2019 and 31 March 2018. Profit for the period ......................................................................... Other comprehensive income/(loss) Items that may be reclassified to interim condensed consolidated statement of profit or loss: Change in fair value of debt securities at fair value through other comprehensive income .................................................................... Items that will not be reclassified to interim condensed consolidated statement of profit or loss: Change in fair value of equity securities at fair value through other comprehensive income Other comprehensive income for the period ............................... Total comprehensive income for the period ................................ Attributable to: Shareholders of the Bank ................................................................ Non-controlling interests ................................................................. Three months ended 31 March 2019 2018 (Unaudited) (KD thousand) 6,284 7,732 624 (485) (50) 574 6,858 588 103 7,835 6,786 72 7,805 30 89
106. The table below shows the Group 's consolidated statement of profit or loss and other comprehensive income data for each of 2018, 2017 and 2016. 2018 Profit for the year ............................................................................ Other comprehensive income/(loss) Items that may be reclassified to consolidated statement of profit or loss: Change in fair value of financial assets available for sale .............. Transfer to consolidated statement of profit or loss on impairment of financial assets available for sale ................................................ Transfer to consolidated statement of profit or loss on disposal of financial assets available for sale .................................................... Change in fair value of debt securities at fair value through other comprehensive income .................................................................... Items that will not be reclassified to consolidated statement of profit or loss: Change in fair value of equity securities at fair value through other comprehensive income Revaluation of property and equipment .......................................... Other comprehensive income/(loss) for the year ........................ Total comprehensive income for the year.................................... Attributable to: Shareholders of the Bank ................................................................ Non-controlling interests ................................................................. 2017 (KD thousand) 21,035 17,793 2016 18,243 — 429 (2,938) — 485 95 — (317) 271 (321) (321) — 597 — (2,572) 1,382 — 1,061 22,096 — (157) 440 18,233 — (77) (2,649) 15,594 22,008 88 18,123 110 15,531 63 CONSOLIDATED STATEMENT OF CASH FLOWS DATA The table below summarises the Group's consolidated statement of cash flows data for each of the three-month periods ended 31 March 2019 and 31 March 2018. Three months ended 31 March 2019 2018 (Unaudited) (KD thousand) Net cash from operating activities .................................................. 28,397 84,636 Net cash from/(used in) investing activities ................................... 24,592 (3,443) Net cash used in financing activities .............................................. (53) (17) Cash and cash equivalents at 1 January.......................................... 96,208 50,516 Cash and cash equivalents at 31 March.......................................... 149,144 131,692 The table below summarises the Group's consolidated statement of cash flows data for each of 2018, 2017 and 2016. 2018 2017 2016 (KD thousand) Net cash from/(used in) operating activities................................... 77,433 (44,231) (6,490) Net cash (used in)/from investing activities ................................... (22,455) 3,223 (24,105) Net cash used in financing activities .............................................. (9,286) (9,310) (8,338) Cash and cash equivalents at 1 January.......................................... 50,516 100,834 139,767 Cash and cash equivalents at 31 December.................................... 96,208 50,516 100,834 90
107. SELECTED CONSOLIDATED RATIOS AND APMs The tables below show selected consolidated ratios for the Group as at , and for the three-month periods ended, 31 March 2019 and 31 March 2018 and as at, and for the years ended, 31 December in each of 2018, 2017 and 2016. The tables below also contain information relating to APMs. APMs are presented in this Prospectus because the Group considers them an important supplemental measure of the Group's operating performance and financial position and the Group believes they may be used by securities analysts, investors and other interested parties in the evaluation of banks in the banking industry. With the exception of the Group's capital adequacy and financial leverage ratios, none of the information in the table below has been audited or reviewed by the Auditors. See further “Presentation of financial and other information—Presentation of financial information—Certain nonIFRS and unaudited financial information”. As at/for three months ended 31 March As at/for years ended 31 December 2019 2018 2018 2017 2016 (per cent.) Performance measures Return on average assets(1) ............................................................. 1.1 1.6 1.0 0.9 1.0 Return on average equity(2) ............................................................. 9.3 12.0 7.9 7.0 7.4 Cost to income ratio(3) .................................................................... 48.6 43.0 53.9 51.0 47.6 Financial ratios Net financing margin(4) ................................................................... 2.6 3.1 2.8 2.8 3.0 Net profit margin(5) ......................................................................... 36.5 44.4 31.4 27.5 28.8 Asset quality Impaired financing receivables ratio(6) ........................................... 1.0 2.4 1.0 2.7 1.5 Financing receivables loss coverage 277.4 124.8 296.4 113.4 231.2 ratio(7) .............................................................................................. Liquidity coverage ratio(8) .............................................................. 167.7 152.0 140.2 169.5 152.9 Financing receivables to deposits ratio(9) ....................................... 86.4 81.5 87.0 83.0 84.0 Other ratios Tier 1 capital adequacy ratio(10) ...................................................... 15.34 17.25 15.45 17.89 19.39 Total capital adequacy ratio(10) ....................................................... 16.52 18.41 16.63 19.05 20.54 Financial leverage ratio(11) .............................................................. 10.15 10.48 10.48 10.92 10.73 _____________ Notes: (1) Profit for the period/year attributable to shareholders of the Bank divided by average assets for the period/year, with average assets for each year calculated as the sum of total assets on a quarterly basis divided by five and for each three month period calculated as the sum of the opening and closing balances of total assets divided by two. Profit for the quarterly period has been annualised. (2) Profit for the period/year attributable to shareholders of the Bank divided by average equity attributable to shareholders of the Bank for the period/year, with average shareholders' equity for each year calculated as the sum of equity attributable to shareholders of the Bank on a quarterly basis divided by five and for each three month period calculated as the sum of the opening and closing balances of equity attributable to shareholders of the Bank divided by two. Profit for the quarterly period has been annualised. (3) Total operating expenses for the period/year divided by total operating income for the period/year. (4) Net financing income for the period/year divided by average earning assets for the period/year, with average earning assets for each year calculated as the sum of earning assets on a quarterly basis divided by five and for each three month period calculated as the sum of the opening and closing balances of earning assets divided by two. Net financing income for the quarterly period has been annualised. Earning assets comprise balances with banks, due from banks, financing receivables and sukuk investment securities. For these purposes, balances with banks comprises “Balances with banks” and “Balances with CBK” as set out in Note 9 to each of t he Annual Financial Statements and sukuk investment securities comprises “Investment in sukuks” as set out in Note 12 to each of the Annual Financial Statements and Note 13 to the Interim Financial Statements. Balances with banks were KD 419.5 million as at 31 March 2019 and KD 423.8 million as at 31 March 2018, respectively. (5) Profit for the period/year attributable to shareholders of the Bank divided by total operating income for the period/year. (6) Gross impaired financing receivables as a percentage of total gross financing receivables along with bank exposures. For these purposes, gross impaired financing receivables amounted to KD 18.9 million as at 31 March 2019, KD 36.8 million as at 31 March 2018, KD 17.3 million as at 31 December 2018, KD 40.0 million as at 31 December 2017 and KD 21.5 million as at 31 December 2016 and gross financing receivables along with bank exposures amounted to KD 1,814.1 million as at 31 March 2019, KD 1,518.0 million as at 31 March 2018, KD 1,792.2 million as at 31 December 2018, KD 1,457.6 million as at 31 December 2017 and KD 1,429.3 million as at 31 December 2016. (7) Provision for impairment on financing receivables along with bank exposures as a percentage of gross impaired financing receivables. Provision for impairment on financing receivables along with bank exposures amounted to KD 52.4 million as at 31 March 2019, KD 91
108. (8) (9) (10) (11) 45.9 million as at 31 March 2018, KD 51.3 million as at 31 December 2018, KD 45.3 million as at 31 December 2017 and KD 49.8 million as at 31 December 2016. Financial measure calculated as stipulated in CBK Circular number 2/IBS/345/2014 dated 23 December 2014 and CBK Circular number 2/IBS/363/2016. Total financing receivables divided by the sum of depositors' accounts and due to banks and financial institutions. Calculated in accordance with the requirements of the CBK and the capital adequacy regulations issued by the CBK as stipulated in CBK Circular number 2/RB, RBA/A336/2014 dated 24 June 2014 (Basel III, as implemented in Kuwait). Calculated in accordance CBK Circular number 2/BS/342/2014 dated 21 October 2014. Distributable Funds The Group's Distributable Funds, calculated in accordance with Condition 1 (Interpretation), were KD 124.8 million as at 31 March 2019. 92
109. FINANCIAL REVIEW The following discussion and analysis should be read in conjunction with the information set out in “Presentation of financial and other information”, “Selected financial information” and the Financial Statements. The discussion of the Group's financial condition and results of operations is based upon the Financial Statements which have been prepared in accordance with IFRS, as adopted for use by Kuwait. This discussion contains forward-looking statements that involve risks and uncertainties. The Group's actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Prospectus, particularly under the headings “Cautionary note regarding forwardlooking statements” and “Risk factors”. All information in this section as at, and relating to the three-month periods ended, 31 March 2019 and 31 March 2018 is unaudited. Results for any interim period within a year will not necessarily be indicative of the results for the full year. See “Presentation of financial and other information” for a discussion of the source of the numbers presented in this section and certain other relevant information. OVERVIEW The Bank was established in 1973 as Kuwait Real Estate Bank and converted to a Sharia-compliant Islamic bank licensed by the CBK in 2007. It provides a range of Sharia-compliant corporate and retail products predominantly to the local market and operates through a network of 24 branches as at 31 December 2018 supported by alternative delivery channels, such as automated teller machines (ATMs), point of sale (POS) terminals, telebanking, internet banking and mobile banking. The Bank has a strong commercial and international banking portfolio and also provides real estate-related services, such as appraisals and property management, in addition to financing solutions for real estate customers. The Bank's retail operations principally comprise deposit taking and personal financings, which are usually backed by salary assignment. The Bank's major shareholder is Bukhamseen Holding Group, a holding company representing the diversified business interests of the Bukhamseen family, which, together with its consolidated and associated entities, held 36.03 per cent. of the Bank's share capital as at 31 December 2018. The Bank is listed on the Boursa Kuwait and, as at 31 December 2018, 46.14 per cent. of its shares were publicly held. The Bank's five-year strategy, launched in 2015, aims to fulfil the Bank's vision to become the ‘Islamic bank of choice in Kuwait' with five key aspirations that include making the Bank the fastest growing Islamic bank in Kuwait and being recognised as the most innovative bank in Kuwait. PRINCIPAL FACTORS AFFECTING RESULTS OF OPERATIONS The following is a discussion of the principal factors that have affected, or are expected to affect, the Group's results of operations. Economic conditions The Group is a Kuwaiti Sharia-compliant financial services group primarily focused on lending to, and accepting deposits from, institutions, companies and residents in Kuwait. As at 31 December 2018, the Group also owned 73.6 per cent. of Al Dawli Takaful Insurance Company KSCC (which operates as KIB Takaful) which provides Sharia-compliant insurance services, principally to Kuwaiti customers. As a result, the Group's revenue and results 93
110. of operations are principally affected by economic and market conditions in Kuwait , which in turn are significantly impacted by changes in international oil prices. See “Risk factors—Factors that may affect the Bank's ability to fulfil its obligations under or in connection with the Certificates—The Group is affected by regional and global financial markets and economic conditions and could be materially adversely affected by any deterioration in economic conditions in Kuwait”. According to the CSB, Kuwait's real GDP (based on constant 2010 prices) was estimated at KD 9,809.5 million in the third quarter of 2018, representing growth of 1.8 per cent. in real terms compared to estimated real GDP of KD 9,632.8 million in the third quarter of 2017. In 2017, Kuwait's estimated real GDP was KD 39,280.5 million compared to KD 40,697.4 million in 2016, principally reflecting lower crude oil production activity in 2017. According to the CSB, Kuwait's nominal GDP was estimated at KD 11,046.4 million in the third quarter of 2018, representing growth of 26.8 per cent. compared to an estimated KD 8,704.2 million in the third quarter of 2017, principally reflecting higher oil prices. In 2017, Kuwait's estimated nominal GDP was KD 36,260.7 million compared to KD 33,055.8 million in 2016, principally reflecting a 19.8 per cent. increase in the contribution of the oil sector, with the non-oil sector growing by 3.2 per cent. in 2017. The IMF's November 2018 Regional Economic Outlook: Middle East and Central Asia projected that Kuwait's economy would expand by 2.3 per cent. in real terms in 2018 and by 4.1 per cent. in 2019. In its January 2019 Staff Concluding Statement of the 2018 Article IV Mission, the IMF noted that it expects Kuwait's non-oil growth to increase in the period to 2020 as capital project implementation increases, with a sustained drop in oil prices (for example if trade tensions were to increase and global growth were to weaken) and delays in fiscal and structural reforms being the main downside risks. In addition, increased security tensions and a challenging geopolitical environment in the region are an additional source of risk that could dampen confidence, investment, and growth. In relation to the banking sector, the IMF also noted that the banking sector remains sound with Kuwaiti banks reporting high capitalisation and a rising return on assets. As growth recovers, and capital projects come on stream, the IMF expects that credit growth should pick up, supported by ample banking sector liquidity and the recent easing of lending limits on personal financing. Factors affecting net financing income The Group's net financing income is the major contributor to its total operating income, comprising 80.5 per cent. of its total operating income in 2018, 76.3 per cent. in 2017 and 78.7 per cent. in 2016. The Group's financing income is principally derived from three types of advance made to customers: • wakala receivables, which accounted for 45.9 per cent. of financing income in 2018, 45.2 per cent. in 2017 and 44.7 per cent. in 2016; • murabaha receivables, which accounted for 37.7 per cent. of financing income in 2018, 38.7 per cent. in 2017 and 37.9 per cent. in 2016; and • ijara receivables, which accounted for 14.9 per cent. of financing income in 2018, 15.0 per cent. in 2017 and 16.7 per cent. in 2016. The Group's financing cost principally comprises the share of profit paid to its depositors each year. The Bank's primary sources of funding are its customer deposits and, to a lesser extent, interbank deposits. The Group's net financing income is affected by a number of factors. It is primarily determined by the volume of income-earning assets relative to cost-bearing liabilities (including deposits eligible for profit distribution), as well as the differential between rates earned on income-earning assets and paid on cost-bearing liabilities. 94
111. The Group 's net financing income for 2018 was KD 4.6 million, or 9.4 per cent., higher than its net financing income in 2017. This increase in the Group's net financing income reflected both higher financing income and higher financing cost. The Group's financing income increased by KD 14.9 million, or 20.0 per cent., in 2018 compared to 2017 driven by a combination of factors, including: • a KD 7.4 million, or 21.8 per cent., increase in financing income earned on wakala receivables; • a KD 5.0 million, or 17.1 per cent., increase in financing income earned on murabaha receivables; and • a KD 2.2 million, or 19.6 per cent., increase in financing income earned on ijara receivables, which, in all three cases, principally reflected an increase in the underlying asset base as well as improved yields on such assets. The Group's financing cost and distribution to depositors increased by KD 10.3 million, or 40.4 per cent., in 2018 compared to 2017, principally as a result of increased volumes as well as higher profit distribution rates in line with market conditions. The Group's net financing income for 2017 was KD 0.7 million, or 1.4 per cent., lower than its net financing income in 2016. The decrease in the Group's net financing income in 2017 was principally driven by a KD 4.3 million, or 20.0 per cent., increase in financing cost and distribution to depositors compared to the KD 3.6 million, or 5.0 per cent., increase in its financing income. The increase in the Group's financing cost in 2017 compared to 2016 reflected both increased volumes of profit paying deposits and higher profit distribution rates in line with market conditions. The increase in its financing income in 2017 compared to 2016 was principally due to increases of KD 2.0 million, or 6.3 per cent., in financing income from wakala receivables and KD 1.9 million, or 7.2 per cent., in financing income from murabaha receivables, offset by a decrease of KD 0.7 million, or 5.9 per cent., in financing income from ijara receivables. These changes principally reflected increased underlying assets and improved yields on such assets. The CBK's discount rate was 2.25 per cent. in 2016, 2.5 per cent. up to 16 March 2017, 2.75 per cent. up to 21 March 2018 and 3 per cent. through the end of 2018. The CBK's discount rate directly impacts the profit rates chargeable by the Bank on its Kuwaiti dinar-denominated customer financing. Principally reflecting the factors described above, the Group's net financing margin was 2.8 per cent. in 2018, 2.8 per cent. in 2017 and 3.0 per cent. in 2016. Provisions and impairment losses The Group's provisions and impairment losses charged to its consolidated statement of profit or loss amounted to KD 8.2 million in 2018, KD 12.4 million in 2017 and KD 13.5 million in 2016. The Group's charge for provisions and impairment losses principally reflects its charge in respect of financing receivables net of any recoveries on financing receivables. In 2018, this net charge amounted to KD 9.1 million, compared to KD 10.3 million in 2017 and KD 12.9 million in 2016. In 2017 and 2016, the Group also recorded impairment charges of KD 2.3 million and KD 1.4 million, respectively, on available for sale financial assets. Since 1 January 2018, the Group determines its impairment charge for financing receivables as the higher of the ECL on credit facilities computed under IFRS 9 according to the CBK guidelines or the provisions as required by CBK Instructions. Prior to 1 January 2018, the Group assessed its financial assets for objective evidence of impairment in accordance with both CBK regulations relating to the method of calculating specific provisions and estimates made in accordance with IAS 39, as adopted for use by Kuwait for financial institutions regulated by the CBK. The IAS 39 requirement for collective provision had been replaced by the CBK's requirement for a minimum 95
112. general provision as described under the accounting policies for impairment and un-collectability of financial assets in the 2017 Financial Statements . The Group believes that the reducing trend in its net impairment charge for financing receivables in 2017 and 2018 reflects improved asset quality and recoveries. As at 31 December 2018, the Group's ECL for financing receivables (determined in accordance with IFRS 9 as adopted by CBK) amounted to KD 44.3 million, which was lower than the KD 51.0 million provision for credit losses required by the CBK. RECENT DEVELOPMENTS On 2 May 2019, the Bank published the Interim Financial Statements. The following discussion is based on the financial information included in the Interim Financial Statements which has not been audited. Total operating income The table below shows the breakdown of the Group's total operating income in each of the three-month periods ended 31 March 2019 and 31 March 2018. Net financing income ........................................ Fee and commission income ............................. Net gain from foreign exchange ........................ Investment income ............................................ Other income ..................................................... Total operating income ................................... Three months ended 31 March 2019 2018 (Unaudited) (Unaudited) (KD thousand) (per cent.) (KD thousand) (per cent.) 13,425 78.9 13,556 78.3 2,491 14.6 2,544 14.7 192 1.1 503 2.9 769 4.5 607 3.5 144 0.8 105 0.6 17,021 100.0 17,315 100.0 The Group's total operating income amounted to KD 17.0 million in the three months ended 31 March 2019 compared to KD 17.3 million in the corresponding period of 2018, a decrease of KD 294 thousand, or 1.7 per cent. This decrease principally reflected lower forex gains and net financing income offset by higher investment income. Total operating expenses The Group's operating expenses comprise its staff costs, general and administration expenses and depreciation charge. The table below shows the breakdown of the Group's total operating expenses in each of the three-month periods ended 31 March 2019 and 31 March 2018. Staff costs .......................................................... General and administration expenses ................ Depreciation ...................................................... Total operating expenses................................. Three months ended 31 March 2019 2018 (Unaudited) (Unaudited) (KD thousand) (per cent.) (KD thousand) (per cent.) 4,779 57.8 4,371 58.6 2,595 31.4 2,542 34.1 895 10.8 540 7.2 8,269 100.0 7,453 100.0 The Group's total operating expenses amounted to KD 8.3 million in the three months ended 31 March 2019 compared to KD 7.4 million in the corresponding period of 2018. 96
113. The increase of KD 816 thousand , or 10.9 per cent., in total operating expenses in the three months ended 31 March 2019 compared to the corresponding period of 2018 reflected: • an increase of KD 408 thousand, or 9.3 per cent., in staff costs, which principally reflected general increments and promotions; and • an increase of KD 355 thousand, or 65.7 per cent., in depreciation, which partly reflected the adoption of IFRS 16, “Leases”. Profit from operations before provisions and impairment losses Reflecting the above factors, the Group's profit from operations before provisions and impairment losses was KD 8.8 million in the three months ended 31 March 2019 compared to KD 9.9 million in the corresponding period of 2018, a decrease of KD 1.1 million, or 11.3 per cent. Provisions and impairment losses The Group's provisions and impairment losses charged to its consolidated statement of profit or loss amounted to KD 2.2 million in the three months ended 31 March 2019 compared to KD 1.8 million in the corresponding period of 2018. Provisions and impairment losses charged to the consolidated statement of profit or loss included KD 1.1 million relating to financing receivables in the first three months of 2019 compared to KD 2.1 million in the corresponding period of 2018. Profit for the period Reflecting the above factors and the Group's provisions for various required national contributions and zakat, the Group's profit for the period was KD 6.3 million in the three months ended 31 March 2019 compared to KD 7.7 million in the corresponding period of 2018, a decrease of KD 1.4 million, or 18.7 per cent. SIGNIFICANT ACCOUNTING POLICIES The Financial Statements have been prepared in accordance with IFRS, as adopted for use by Kuwait. For a discussion of the significant accounting policies applied by the Group generally, see note 2.5 to the 2018 Financial Statements. CRITICAL ACCOUNTING JUDGMENTS AND ESTIMATES In preparing the Group's consolidated financial statements, management is required to make certain estimates, judgments and assumptions. These affect the reported amounts of the Group's assets and liabilities, including disclosure of contingent assets and liabilities, at the date of the consolidated financial statements as well as the reported amounts of its revenues and expenses during the periods presented. Management bases its estimates and assumptions on historical experience and other factors that it believes to be reasonable at the time the estimates and assumptions are made and evaluates the estimates and assumptions on an ongoing basis. However, future events and their effects cannot be predicted with certainty and the determination of appropriate estimates and assumptions requires the use of judgment. Actual outcomes may differ from any estimates or assumptions made and such differences may be material to the financial statements. For a discussion of the most significant accounting estimates, judgments and assumptions made in the preparation of the Group's consolidated financial statements, see note 2.6 to the 2018 Financial Statements, which identifies the following factors: • Classification of financial assets - applicable from 1 January 2018. The Group determines the classification of financial assets based on the assessment of the business model within which the assets are held and assessment of whether the contractual terms of the financial asset are solely payments of principal 97
114. and profit on the principal amount outstanding . See the discussion relating to the classification of financial assets in note 2.5 to the 2018 Financial Statements for more information. • Classification of real estate. Management decides, when it acquires real estate, whether it should be classified as trading, investment property, property under development or property and equipment. The Group classifies real estate as “trading property” if it is acquired principally for sale in the ordinary course of business. The Group classifies real estate as “investment property” if it is acquired to generate rental income or for capital appreciation, or for undetermined future use. The Group classifies real estate as “property under development” if it is acquired with the intention of development and it classifies real estate as “property and equipment” when it is acquired for owner occupation. • Impairment of financial instruments - applicable from 1 January 2018. The Group estimates ECL for all financial assets carried at amortised cost or fair value through other comprehensive income except for equity instruments. Significant judgements are required in applying the accounting requirements for measuring ECL, including (i) determining criteria for significant increase in credit risk; (ii) choosing appropriate models and assumptions for the measurement of ECL; (iii) establishing the number and relative weightings of forwardlooking scenarios for each type of product/market and the associated ECL; and (iv) establishing groups of similar financial assets for the purpose of measuring ECL. The Group regularly reviews its model in the context of its actual loss experience and adjusts the model when necessary. • Impairment losses on financing receivables and investment in debt instruments - applicable before 1 January 2018. The Group reviewed problem financing receivables and investments in debt instruments on a regular basis to assess whether a provision for impairment should be recorded in the consolidated statement of profit or loss. In particular, considerable judgment by management was required in the estimation of the amount and timing of future cash flows when determining the level of provisions required. Such estimates were necessarily based on assumptions about several factors involving varying degrees of judgment and uncertainty. • Valuation of financial instruments with significant unobservable inputs. Valuation techniques for financial instruments with significant unobservable inputs include estimates such as expected cash flows discounted at current rates applicable for items with similar terms and risk characteristics; recent arm's length market transactions; current fair value of another instrument that is substantially the same; and other valuation models. Any changes in these estimates and assumptions as well as the use of different, but equally reasonable estimates and assumptions may have an impact on the carrying values of unquoted financial assets. 98
115. RESULTS OF OPERATIONS Total operating income The table below shows the breakdown of the Group 's total operating income in each of 2018, 2017 and 2016. 2018 Net financing income ........................... Fee and commission income ................ Net gain from foreign exchange ........... Investment income ............................... Other income ........................................ Total operating income ....................... (KD thousand) 53,655 9,864 931 1,571 609 66,630 2017 (KD (per cent.) thousand) 80.5 49,045 14.8 9,281 1.4 861 2.4 4,469 0.9 595 100.0 64,251 2016 (KD (per cent.) thousand) 76.3 49,749 14.4 8,789 1.3 815 7.0 2,666 1.0 1,173 100.0 63,192 (per cent.) 78.7 13.9 1.3 4.2 1.9 100.0 The Group's total operating income amounted to KD 66.6 million in 2018 compared to KD 64.2 million in 2017 and KD 63.2 million in 2016. 2018 and 2017 compared The increase of KD 2.4 million, or 3.7 per cent., in total operating income in 2018 compared to 2017 principally reflected an increase of KD 4.6 million, or 9.4 per cent., in net financing income which was offset by a decrease of KD 2.9 million, or 64.8 per cent., in investment income. The increase in net financing income is discussed under “—Principal factors affecting results of operations— Factors affecting net financing income” above. The decrease in investment income principally reflected no realised gain from sale of investment securities recorded on the consolidated statement of profit or loss in 2018 compared to a gain of KD 1.4 million in 2017, a KD 1.0 million loss in the fair value of financial assets through profit or loss in 2018 compared to no change in 2017 and a KD 0.5 million lower gain from the sale of investment property recorded in 2018 compared to 2017, in each case principally reflecting weaker market conditions. 2017 and 2016 compared The increase of KD 1.1 million, or 1.7 per cent., in total operating income in 2017 compared to 2016 principally reflected a KD 1.8 million, or 67.6 per cent., increase in investment income in 2017. This principally reflected a realised gain from the sale of investment securities of KD 1.4 million in 2017 compared to a KD 0.3 million loss in 2016 and a gain of KD 0.6 million on the sale of investment property in 2017 compared to no gain or loss in 2016. These positive factors were offset by a decrease of KD 0.4 million, or 26.5 per cent., in dividend income in 2017 compared to 2016. Total operating expenses The Group's total operating expenses comprise its staff costs, general and administration expenses and depreciation charge. 99
116. The table below shows the breakdown of the Group 's total operating expenses in each of 2018, 2017 and 2016. Staff costs ............................................. General and administration expenses ... Depreciation ......................................... Total operating expenses..................... 2018 2017 2016 (KD (KD (KD thousand) (per cent.) thousand) (per cent.) thousand) (per cent.) 19,089 16,109 53.2 17,603 53.7 53.5 14,522 11,987 40.5 13,288 40.5 39.8 2,275 2,003 6.3 1,889 5.8 6.7 35,886 100.0 32,780 100.0 30,099 100.0 The Group's total operating expenses amounted to KD 35.9 million in 2018 compared to KD 32.8 million in 2017 and KD 30.1 million in 2016. 2018 and 2017 compared The increase of KD 3.1 million, or 9.5 per cent., in total operating expenses in 2018 compared to 2017 reflected: • an increase of KD 1.5 million, or 8.4 per cent., in staff costs, principally as a result of senior management hires, changes in indemnity laws and rationalisation of staff remuneration in line with peers; • an increase of KD 1.2 million, or 9.3 per cent., in general and administration expenses, which principally reflected investments in IT infrastructure and related consultancy costs to support business growth as part of the Group's strategy and new branding; and • an increase of KD 0.4 million, or 20.4 per cent., in depreciation, which principally reflected increased capitalisation of projects undertaken in line with the Group's strategy. 2017 and 2016 compared The increase of KD 2.7 million, or 8.9 per cent., in total operating expenses in 2017 compared to 2016 principally reflected: • an increase of KD 1.5 million, or 9.3 per cent., in staff costs, principally as a result of additional staff and senior management positions being filled; and • an increase of KD 1.3 million, or 10.9 per cent., in general and administration expenses, which principally reflected expenses incurred in implementing the Group's strategy. Profit from operations before provisions and impairment losses Reflecting the above factors, the Group's profit from operations before provisions and impairment losses was KD 30.7 million in 2018 compared to KD 31.5 million in 2017 and KD 33.1 million in 2016, a decrease of KD 0.7 million, or 2.3 per cent., in 2018 compared to 2017 and a decrease of KD 1.6 million, or 4.9 per cent., in 2017 compared to 2016. Provisions and impairment losses Prior to 1 January 2018, the Group assessed its financial assets for objective evidence of impairment in accordance with both CBK regulations relating to the method of calculating specific provisions and estimates made in accordance with IAS 39, as adopted for use by Kuwait for financial institutions regulated by the CBK. Since 1 January 2018, the Group assesses its financial assets for impairment in accordance with the ECL requirements of 100
117. IFRS 9 and applicable CBK instructions . For a discussion of the Group's methodology for determining provisions and impairment losses, see “Risk management—Credit risk—Assessment of expected credit losses”. The Group's provisions and impairment losses charged to its consolidated statement of profit or loss amounted to KD 8.2 million in 2018, KD 12.4 million in 2017 and KD 13.5 million in 2016. The changes in the Group's provisions and impairment losses are discussed under “—Principal factors affecting results of operations— Provisions and impairment losses” above. Profit for the year Reflecting the above factors and the Group's provisions for various required national contributions, zakat and Board of Directors' remuneration, the Group's profit for the year was KD 21.0 million in 2018 compared to KD 17.8 million in 2017 and KD 18.2 million in 2016, an increase of KD 3.2 million, or 18.2 per cent., in 2018 compared to 2017 and a decrease of KD 0.5 million, or 2.5 per cent., in 2017 compared to 2016. Other comprehensive income/(loss) The Group's other comprehensive income and loss principally comprises the net change in the fair value of its investment securities and revaluations of its property and equipment. The Group's other comprehensive income was KD 1.1 million in 2018 compared to KD 0.4 million in 2017 and an other comprehensive loss of KD 2.6 million in 2016. Total comprehensive income Reflecting the above factors and the Group's profit for the year, the Group's total comprehensive income was KD 22.1 million in 2018 compared to KD 18.2 million in 2017 and KD 15.6 million in 2016, an increase of KD 3.9 million, or 21.2 per cent., in 2018 compared to 2017 and an increase of KD 2.6 million, or 16.9 per cent., in 2017 compared to 2016. SEGMENTAL ANALYSIS The Group has five reporting segments as follows: • Commercial and international banking (C&IB) - this reporting segment comprises a range of banking services and investment products provided to corporate customers, including commodity and real estate murabaha finance, ijara and wakala facilities; • Retail banking – this reporting segment comprises a range of banking services and investment products provided to individual customers, including commodity murabaha finance, ijara and wakala facilities; • Treasury, fund management and institutional banking (TFM&IB) – this reporting segment comprises liquidity management, correspondent banking, clearing, murabaha investments and exchange of deposits with banks and financial institutions; • Investment management – this reporting segment comprises the Bank's investment in an associate and other investments, including investment properties; and • Others – this reporting segment comprises all other activities of the Group, including those of its insurance subsidiary. 101
118. The table below shows the Group 's reporting segments as at, and for the years ended, 31 December in each of 2018, 2017 and 2016. C&IB 2018 Segment operating income ........ Depreciation .............................. Provisions and impairment losses ......................................... Segment profit/(loss) ................. Segment assets ........................... Segment liabilities ..................... 2017 Segment operating income ........ Depreciation .............................. Provisions and impairment losses ......................................... Segment profit/(loss) ................. Segment assets ........................... Segment liabilities ..................... 2016 Segment operating income ........ Depreciation .............................. Provisions and impairment losses ......................................... Segment profit/(loss) ................. Segment assets ........................... Segment liabilities ..................... 65,860 (6,973) 32,830 1,396,924 324,267 54,576 (7,957) 24,251 1,093,189 271,500 53,509 (10,681) 19,408 1,083,197 307,146 Retail banking 5,014 Investment TFM&IB management (KD thousand) (9,147) (2,230) (10) (857) 675 251,732 350,544 737,784 781,116 8,104 (5,985) (2,252) — 55 2,758 233,077 424,330 610,000 721,116 10,407 (6,699) (2,080) 38 1,640 4,222 215,709 404,471 494,765 744,426 2,399 20 (2,083) 134,959 — 4,914 (2,319) (1,006) 125,279 — 3,295 (1,376) (1,124) 106,671 — Other Total 2,504 (2,275) 66,630 (2,275) 949 (9,530) 34,436 48,824 (8,244) 21,035 2,168,595 1,891,991 2,642 (1,889) 64,251 (1,889) 175 (8,265) 40,165 49,533 (12,353) 17,793 1,916,040 1,652,149 2,680 (2,003) 63,192 (2,003) 594 (5,903) 35,982 44,698 (13,505) 18,243 1,846,030 1,591,035 Commercial and international banking The C&IB reporting segment recorded segment operating income of KD 65.9 million in 2018 compared to KD 54.6 million in 2017 and KD 53.5 million in 2016, an increase of KD 11.3 million, or 20.7 per cent., in 2018 compared to 2017 and an increase of KD 1.1 million, or 2.0 per cent., in 2017 compared to 2016. The increase in 2018 principally reflected significant increases in the deposit base and the financing receivables portfolio, in both cases reflecting higher volumes and more customers. The C&IB reporting segment records the majority of the Group's provisions and impairment losses, which amounted to KD 7.0 million in 2018, or 84.6 per cent. of the Group's total provisions and impairment losses in that year, KD 8.0 million, or 64.4 per cent., of the Group's total provisions and impairment losses in 2017 and KD 10.7 million, or 79.1 per cent., of the Group's total provisions and impairment losses in 2016. The declining trend in provisions and impairment losses principally reflected improved asset quality notwithstanding a significant increase in the financing receivables portfolio. The C&IB reporting segment recorded a segment profit of KD 32.8 million in 2018 compared to KD 24.3 million in 2017 and KD 19.4 million in 2016, an increase of KD 8.6 million, or 35.4 per cent., in 2018 compared to 2017 and an increase of KD 4.8 million, or 25.0 per cent., in 2017 compared to 2016. Retail banking The retail banking reporting segment recorded segment operating income of KD 5.0 million in 2018 compared to KD 8.1 million in 2017 and KD 10.4 million in 2016, a decrease of KD 3.1 million, or 38.1 per cent., in 2018 102
119. compared to 2017 and a decrease of KD 2 .3 million, or 22.1 per cent., in 2017 compared to 2016. These decreases principally reflected increased sales promotions and branding related expenses. The retail banking reporting segment recorded provisions and impairment losses of KD 2.2 million in 2018, KD 2.3 million in 2017 and KD 2.1 million in 2016. These largely stable provisioning levels principally reflected stable asset quality and relatively small increases in the financing receivables portfolio. The retail banking reporting segment recorded a segment loss of KD 0.9 million in 2018 compared to a segment profit of KD 55 thousand in 2017 and a segment profit of KD 1.6 million in 2016. The small segment loss and the small segment profit in 2018 and 2017, respectively, principally reflected the realignment of the segment for the purpose of becoming more customer-centric as part of the Group's strategy. See “Description of the Group— Strategy” Treasury, fund management and institutional banking The TFM&IB reporting segment recorded operating losses in each year, principally reflecting its cost of funds. The TFM&IB reporting segment's operating loss amounted to KD 9.1 million in 2018 compared to a loss of KD 6.0 million in 2017 and a loss of KD 6.7 million in 2016, an increase in loss of KD 3.2 million, or 52.8 per cent., in 2018 compared to 2017 and a decrease in loss of KD 0.7 million, or 10.7 per cent., in 2017 compared to 2016. The increase in segment operating loss in 2018 principally reflected an increased cost of funds in line with interest rate trends and weaker local market conditions. The TFM&IB reporting segment recorded immaterial provisions and impairment losses in 2018, no provisions or impairment losses in 2017 and an immaterial recovery in 2016. The TFM&IB reporting segment recorded a segment profit of KD 0.7 million in 2018 compared to KD 2.8 million in 2017 and KD 4.2 million in 2016, a decrease of KD 2.1 million, or 75.5 per cent., in 2018 compared to 2017 and a fall of KD 1.5 million, or 34.7 per cent., in 2017 compared to 2016. Investment management The investment management reporting segment recorded segment operating income of KD 2.4 million in 2018 compared to KD 4.9 million in 2017 and KD 3.3 million in 2016, a fall of KD 2.5 million, or 51.2 per cent., in 2018 compared to 2017 and an increase of KD 1.6 million, or 49.1 per cent., in 2017 compared to 2016. The variation between the years primarily reflects a gain in 2017 from the sale of assets. The investment management reporting segment recorded an immaterial recovery of provisions and impairment losses in 2018 compared to provisions and impairment losses of KD 2.3 million in 2017 and KD 1.4 million in 2016. The provisions and impairment losses in 2017 and 2016 principally reflected asset impairments. The investment management reporting segment recorded a segment loss of KD 2.1 million in 2018 compared to segment losses of KD 1.0 million in 2017 and KD 1.1 million in 2016, an increase in loss of KD 1.1 million, or 107.1 per cent., in 2018 compared to 2017 and a decrease in loss of KD 0.1 million, or 10.5 per cent., in 2017 compared to 2016. Others The others reporting segment recorded segment operating income of KD 2.5 million in 2018 compared to KD 2.6 million in 2017 and KD 2.7 million in 2016, a decrease of KD 0.1 million, or 5.2 per cent., in 2018 compared to 2017 and a decrease of 1.4 per cent., in 2017 compared to 2016. 103
120. The others reporting segment recorded recoveries of provisions and impairment losses of KD 0 .9 million in 2018, KD 0.2 million in 2017 and KD 0.6 million in 2016. The others reporting segment recorded a segment loss of KD 9.5 million in 2018 compared to segment losses of KD 8.3 million in 2017 and KD 5.9 million in 2016, an increase in loss of KD 1.3 million, or 15.3 per cent., in 2018 compared to 2017 and an increase in loss of KD 2.4 million, or 40.0 per cent., in 2017 compared to 2016. LIQUIDITY AND FUNDING Overview The Group's liquidity needs arise primarily from making advances to customers, the payment of expenses and investments in securities. To date, the Group's liquidity needs have been funded principally through deposits and operating cash flow, including income received on its financing receivables portfolio and, to a small extent, its portfolio of sukuk investment securities. See “—Funding”. Cash flow The tables below summarises the Group's cash flow from or used in operating activities, investing activities and financing activities for each of 2018, 2017 and 2016. Cash flow from operating activities before changes in operating assets and liabilities ......................................... Net cash from/(used in) operating activities.................... Net cash (used in)/from investing activities .................... Net cash used in financing activities ............................... Cash and cash equivalents at the beginning of the year .................................................................................. Cash and cash equivalents at the end of the year ............ 2018 2017 (KD thousand) 2016 29,052 77,433 (22,455) (9,286) 26,705 (44,231) 3,223 (9,310) 30,270 (6,490) (24,105) (8,338) 50,516 96,208 100,834 50,516 139,767 100,834 Operating cash flow The Group's cash flow from operating activities before changes in operating assets and liabilities amounted to KD 29.1 million in 2018, KD 26.7 million in 2017 and KD 30.3 million in 2016 and principally reflects its profit for the year adjusted to add back its provisions and impairment losses. The Group's net cash from operating activities was KD 77.4 million in 2018 compared to net cash used in operating activities of KD 44.2 million in 2017 and KD 6.5 million in 2016. Investing cash flow The Group's net cash used in investing activities was KD 22.5 million in 2018 compared to net cash from investing activities of KD 3.2 million in 2017 and net cash used in investing activities of KD 24.1 million in 2016. The Group's net cash from investing activities principally reflects cash used in or received from the purchase, redemption and sale of securities in its investment securities portfolio. These activities resulted in a net outflow of KD 22.0 million in 2018, compared to a net inflow of KD 1.9 million in 2017 and a net outflow of KD 25.5 million in 2016. 104
121. Financing cash flow The Group 's financing activity in each year comprised the payment of dividends, which amounted to KD 9.3 million in each of 2018 and 2017 and KD 8.3 million in 2016. Funding The Group's primary sources of funding in 2018, 2017 and 2016 were its customer deposits (referred to as depositors' accounts in the Annual Financial Statements) and, to a lesser extent, interbank deposits (referred to as due to banks and financial institutions in the Annual Financial Statements) made with it. During 2018, the Group also obtained an unsecured syndicated murabaha financing amounting to U.S.$250 million (equivalent to KD 76 million) with a tenor of three years. During 2018, the Group also repaid the remaining U.S.$80 million (equivalent to KD 24 million) balance of a U.S.$320 million unsecured syndicated murabaha obtained in 2015. These murabaha facilities are recorded as interbank deposits in the Group's statement of financial position. The Group also has a portfolio of investment securities, including quoted equity securities and investments in sukuk, that it can access to meet liquidity needs, in addition to its cash balances. The Group's depositors' accounts were KD 1,318.5 million, or 69.7 per cent. of its total liabilities, as at 31 December 2018, KD 1,203.2 million, or 72.8 per cent. of its total liabilities, as at 31 December 2017 and KD 1,124.8 million, or 70.7 per cent., of its total liabilities as at 31 December 2016. Growth in the Group's customer deposit base has been supported by innovative retail deposit product launches, increased promotional activity and the attractive profit rates offered by the Bank. The Group has a significant concentration of deposits from the Government and GREs (as is common for banks in Kuwait), which, in the Group's case, amounted to 48.5 per cent. of its total deposits as at 31 December 2018. See “Risk factors—Factors that may affect the Bank's ability to fulfil its obligations under or in connection with the Certificates—The Group's financial assets and depositors' accounts are concentrated in Kuwait” and “Risk factors—Factors that may affect the Bank's ability to fulfil its obligations under or in connection with the Certificates—The Group has significant customer and sector concentrations”. As at the date of this Prospectus, the Group currently has no outstanding liabilities recorded as borrowings on its statement of financial position as the syndicated murabaha financing referred to above is recorded as due to banks and financial institutions. The Group continues to diversify its long-term deposit base. The issue of the Certificates is intended to diversify the Group's sources of funding as well as strengthen its capital base. Deposits The table below shows the Group's funding in the form of depositors' accounts and amounts due to banks and financial institutions as at 31 December in each of 2018, 2017 and 2016. 2018 Depositors' accounts ........................................................ Due to banks and financial institutions ........................... Depositors' accounts ........................................................ Due to banks and financial institutions ........................... 1,318,535 517,537 71.8 28.2 2017 (KD thousand) 1,203,213 394,438 (per cent.) 75.3 24.7 2016 1,124,832 418,077 72.9 27.1 The Group's depositors' accounts take the form of current accounts, saving and fixed term deposit investment accounts, call accounts, margin accounts, mudaraba and wakala. 105
122. The Group does not make profit distributions in relation to its current and margin accounts . All of its other depositors' accounts bear profit. Amounts may be withdrawn from the Group's current accounts, call accounts and saving investment accounts at any time without notice. The remaining accounts are fixed term accounts, with maturities ranging between 1 months and 3 years. The Group accepts deposits in both dinar and a range of other currencies including U.S. dollar and Euro. The Group believes that its current accounts are diversified and sticky in nature, and constitute a stable and secure source of low cost funding. Maturity profile The table below shows the maturity profile of the Group's funding as at 31 December 2018, 2017 and 2016. This analysis is based on contractual undiscounted repayment obligations. Less than 1 month 31 December 2018 Due to banks and financial institutions Depositors' accounts ............................. Total ..................................................... 31 December 2017 Due to banks and financial institutions Depositors' accounts ............................. Total ..................................................... 31 December 2016 Due to banks and financial institutions Depositors' accounts ............................. Total ..................................................... 1-3 months 3-12 months 1-5 years (KD thousand) Total 76,108 594,699 670,807 113,838 267,085 380,923 239,532 322,889 562,421 93,397 135,878 229,275 522,875 1,320,551 1,843,426 100,265 489,496 589,761 42,627 405,687 448,314 171,340 253,896 425,236 84,890 55,693 140,583 399,122 1,204,772 1,603,894 127,452 520,766 648,218 68,495 333,392 401,887 144,094 216,001 360,095 80,465 56,220 136,685 420,506 1,126,379 1,546,885 A significant proportion of the Group's funding disclosed in the table above as at 31 December 2018 is short term in nature, with 36.4 per cent. of such funding being repayable on demand or within one month, a further 20.7 per cent. being repayable within one to three months and a further 30.5 per cent. being repayable between three and 12 months. See “Risk Factors—Factors that may affect the Bank's ability to fulfil its obligations under or in connection with the Certificates—The Group is subject to the risk that liquidity may not always be readily available or may only be available at costs which may adversely affect its business”. The issue of the Certificates is intended to help the Group diversify its sources of funding and to extend the average maturity of its funding base. Given the state-run and oil-driven nature of the domestic economy, the Group's deposit base is, at least in the near future, expected to remain concentrated by depositor type, namely cash-rich Government and Kuwaiti GREs. Significant time deposits from large customers are, with the customers' agreement, divided into smaller deposits with varying maturities, thereby partly mitigating the non-renewal risk associated with single large deposit. Equity For a discussion of the Group's share capital and reserves as at 31 December 2018, 2017 and 2016, see notes 19 and 20 to each of the Annual Financial Statements. 106
123. LENDING Financing receivables portfolio The Group 's financing receivables portfolio (net of deferred profit and provisions for impairment) was KD 1,605.8 million as at 31 December 2018 compared to KD 1,304.4 million as at 31 December 2017 and KD 1,268.5 million as at 31 December 2016. The table below shows the breakdown of the Group's financing receivables portfolio (net of provisions) by type as at 31 December in each of 2018, 2017 and 2016. 2018 Murabaha receivables ...................................................... Wakala receivables .......................................................... Ijara receivables ............................................................... Other receivables ............................................................. Less: deferred profit ........................................................ Net receivables ............................................................... Less: provision for impairment ....................................... 544,021 940,076 259,330 8,908 1,752,335 (95,469) 1,656,866 (51,033) 1,605,833 2017 (KD thousand) 507,259 742,429 185,308 5,924 1,440,920 (91,376) 1,349,544 (45,128) 1,304,416 2016 461,325 694,613 229,972 17,250 1,403,160 (85,151) 1,318,009 (49,553) 1,268,456 The Group's customer financing portfolio is principally denominated in dinar, although financing is also advanced in U.S. dollars. Distribution of financing receivables portfolio by maturity The table below shows the distribution of the Group's financing receivables portfolio by maturity as at 31 December in each of 2018, 2017 and 2016. As at 31 December 2018 ...................... As at 31 December 2017 ...................... As at 31 December 2016 ...................... Up to 1 month 1-3 months 165,489 133,921 170,495 318,845 194,451 194,580 3-12 months (KD thousand) 601,004 553,529 476,236 Over 1 year 520,495 422,515 427,145 Total 1,605,833 1,304,416 1,268,456 107
124. Sectoral and geographical breakdowns of financial assets and contingent liabilities The Group does not disclose the sectoral and geographical exposure of its financing receivables portfolio . However, it does disclose the sectoral and geographical exposure of its financial assets and contingent liabilities and this is set out in the table below as at 31 December in each of 2018, 2017 and 2016. Geographic region Asia....................................... North America ...................... Middle East (excl. Kuwait) .. Europe .................................. Kuwait .................................. Industry sector Personal ................................ Banking and financial institutions ............................ Real estate............................. Construction ......................... Others ................................... As at 31 December 2018 Financial Contingent assets liabilities As at 31 December 2017 Financial Contingent assets liabilities (KD thousand) As at 31 December 2016 Financial Contingent assets liabilities 59,067 7,020 71,988 843 1,891,803 2,030,721 12,226 — 15,809 1,371 260,997 290,403 33,176 3,836 44,454 1,260 1,695,256 1,777,982 19,705 58 30,756 2,274 275,555 328,348 33,517 5,007 44,710 1,113 1,643,012 1,727,359 19,540 116 18,616 3,225 232,945 274,442 245,684 — — 274,645 — 495,105 597,396 119,930 572,606 2,030,721 11,996 2,038 144,982 131,387 290,403 27,543 5,824 149,789 145,192 328,348 511,567 563,246 98,601 279,300 1,727,359 24,867 5,753 132,797 111,025 274,442 226,227 505,154 491,166 144,202 411,233 1,777,982 As at 31 December 2018, the Group's financial assets amounted to KD 2,030.7 million. Of this amount, 79.1 per cent. was in the form of financing receivables, 15.5 per cent. was amounts due from banks, 3.2 per cent. represented the Group's investment is sukuk, 1.7 per cent. represented the Group's balances with banks and the remaining 0.4 per cent. was in the form of other financial assets. The Group's financial assets are concentrated in the real estate and construction sectors, which together comprised 35.3 per cent. of the Group's financial assets as at 31 December 2018, 35.7 per cent. as at 31 December 2017 and 38.3 per cent. as at 31 December 2016. In addition, the banking and financial institutions sector comprised 24.4 per cent. of the Group's financial assets as at 31 December 2018, 28.4 per cent. as at 31 December 2017 and 29.6 per cent. as at 31 December 2016. The Group's financial assets are geographically concentrated in Kuwait, which comprised 93.2 per cent. of the Group's financial assets as at 31 December 2018, 95.3 per cent. as at 31 December 2017 and 95.7 per cent. as at 31 December 2016. See “Risk factors—Factors that may affect the Bank's ability to fulfil its obligations under or in connection with the Certificates—The Group's financial assets and depositors' accounts are concentrated in Kuwait” and “Risk factors—Factors that may affect the Bank's ability to fulfil its obligations under or in connection with the Certificates—The Group has significant customer and sector concentrations”. See also “Risk management—Credit risk” for a discussion of the Group's financing origination and monitoring procedures, its financing receivables classification system, collateral policy and an analysis of its non-performing financing receivables and provisioning and write-off policies. INVESTMENT SECURITIES PORTFOLIO 108
125. The Group 's investment securities portfolio comprises investment in sukuk and quoted and unquoted equity securities which are held either at FVTPL or at FVOCI (under IFRS 9 which the Group adopted in 2018) or available for sale (under IAS 39 which was applied in 2017 and 2016). The securities are issued by both domestic and international issuers. The Group invests in these securities both to generate returns and to provide an additional source of liquidity when needed. Its investment policy focuses on both high quality income generating assets and investment grade securities, primarily sovereigns. Structure of the investment securities portfolio The table below summarises the Group's investment securities portfolio as at 31 December 2018, 2017 and 2016. 2018 Financial assets at FVTPL Quoted equity securities .................................................. Financial assets at FVOCI/available for sale Quoted equity securities .................................................. Unquoted equity securities .............................................. Investment in sukuk......................................................... Total ............................................................................... 2017 (KD thousand) 2016 12,627 62 58 — 27,504 65,844 93,384 105,975 13,534 26,353 43,891 83,778 83,840 13,087 28,935 43,927 85,949 86,007 The Group's FVOCI/available for sale and FVTPL securities are measured at fair value. For further information on the manner in which the fair value of these securities is determined, see note 25(v) to each of the Annual Financial Statements. The growth in the Group's investment portfolio in 2018 was driven by investment in sukuk, which is part of the Group's strategy to diversify and optimise its balance sheet. Credit quality of the investment securities portfolio The Group's investment policy along with individual product criteria defines its investments in sukuk. The ECL allowance for the Group's sukuk portfolio was KD 28 thousand as at 1 January 2018 and KD 76 thousand as at 31 December 2018. See note 12 to the 2018 Financial Statements. None of the Group's investment in sukuk were past due or impaired as at 31 December in each of 2018 and 2017. Counterparties and geographic concentration The Group does not provide a breakdown of its investment securities by counterparty or by geography, although a significant proportion of its sukuk portfolio represents securities issued by government and GRE issuers. See “Risk factors—Factors that may affect the Bank's ability to fulfil its obligations under or in connection with the Certificate—The Group's financial assets and depositors' accounts are concentrated in Kuwait” and “Risk factors—Factors that may affect the Bank's ability to fulfil its obligations under or in connection with the Certificate—The Group has significant customer and sector concentrations”. CAPITAL ADEQUACY Capital adequacy, financial leverage and the use of various levels of regulatory capital are monitored regularly by the Group's management and are also governed by guidelines of the Basel Committee as adopted by the CBK. 109
126. The CBK Basel III framework consists of three Pillars : • Pillar 1 provides a framework for measuring capital requirements for credit, operational and market risks under the “Standardised Approach”; • Pillar 2 relates to the supervisory review process and emphasises the importance of the Internal Capital Adequacy Assessment Process (ICAAP) performed by banks; and • Pillar 3 aims to complement the above capital adequacy requirements under Pillar 1 and Pillar 2 by requiring banks to provide a consistent and understandable disclosure framework which facilitates comparison, thus enhancing the safety and soundness of the banking industry in Kuwait. The Basel III minimum requirements for capital are underpinned by a leverage ratio that serves as a backstop to the risk-based capital measures. There are also buffer requirements in the form of a capital conservation buffer, a counter-cyclical capital buffer and an additional surcharge for banks designated as domestic systemically important. A key objective for the Group is to maximise shareholders' value with optimal levels of risk, whilst maintaining a strong capital base to support the development of its business and comply with externally imposed capital requirements. The Group aims to ensure adherence to the CBK's requirements by monitoring its capital adequacy and adopting both a capital forecasting process that ensures that pro-active action is taken where necessary and a strategy that ensures that a sufficient capital buffer above minimum required levels is maintained at all times. The total capital adequacy ratio required by the CBK was 12.5 per cent. during 2016 and 13.0 per cent. during 2017 and 2018. The total capital adequacy ratio required by the CBK includes a capital conservation buffer. The Bank has not been designated as a domestically systemically important bank (D-SIB). The table below shows the composition of the Group's regulatory capital and its capital ratios as at 31 December in each of 2018, 2017 and 2016 (determined in accordance with Basel III as implemented in Kuwait). 2018 Risk-weighted assets ....................................................... Capital required ............................................................... Capital available Tier 1 capital............................................................... Tier 2 capital............................................................... Total capital ................................................................... Tier 1 capital adequacy ratio ........................................... Total capital adequacy ratio ............................................ 1,704,218 221,548 263,306 20,144 283,450 15.45% 16.63% 2017 (KD thousand) 1,406,336 182,824 251,615 16,305 267,920 17.89% 19.05% 2016 1,252,553 162,832 242,817 14,510 257,327 19.39% 20.54% The Group's total common equity tier 1 (CET 1) capital amounted to KD 262,919 thousand as at 31 December 2018 compared to KD 251,230 thousand as at 31 December 2017 and KD 242,444 thousand as at 31 December 2016, giving it CET 1 capital ratios of 15.43 per cent. at 31 December 2018 compared to 17.86 per cent. as at 31 December 2017 and 19.36 per cent. as at 31 December 2016. The decrease in the Group's capital ratios since 31 December 2016 has been driven by its capital increasing at a slower pace than its risk-weighted assets. The issue of the Certificates, which are expected to qualify as tier 1 capital, is expected to increase the Group's capital and improve its capital adequacy ratios. 110
127. The Bank is also subject to a CBK Basel III leverage ratio requirement of 3 .0 per cent. The Bank's financial leverage ratio was 10.48 per cent. as at 31 December 2018, 10.92 per cent. as at 31 December 2017 and 10.73 per cent. as at 31 December 2016. COMMITMENTS AND CONTINGENT LIABILITIES The Group has contingent liabilities in respect of revocable commitments to extend credit that it has made, as well as in relation to acceptances, letters of credit and letters of guarantee issued by it. The table below shows these contingent liabilities as at 31 December in each of 2018, 2017 and 2016. 2018 Letters of guarantee ............................................... Acceptances ........................................................... Letters of credit ..................................................... Revocable commitments to extend credit ............. 263,281 17,181 9,941 290,403 165,275 2017 (KD thousand) 269,324 36,958 22,066 328,348 169,050 2016 240,911 20,673 12,858 274,442 207,286 RELATED PARTY TRANSACTIONS The Group enters into transactions with certain related parties (major shareholders, associates, directors and executive officers of the Group, close members of their families and companies in which they are principal owners or over which they are able to exercise significant influence) who are customers of the Group in the ordinary course of business. These transactions are made on substantially the same terms, including profit rates, as those prevailing at the same time for comparable transactions with unrelated parties and do not involve more than a normal amount of risk. Further information on the Group's related party transactions in each of 2018, 2017 and 2016 is set out in note 23 to each of the Annual Financial Statements. 111
128. DESCRIPTION OF THE GROUP OVERVIEW The Bank was established in 1973 as Kuwait Real Estate Bank and converted to a Sharia-compliant Islamic bank licensed by the CBK in 2007 . It provides a range of Sharia-compliant corporate and retail products predominantly to the local market and operates through a network of 24 branches as at 31 December 2018 supported by alternative delivery channels, such as ATMs, POS terminals, telebanking, internet banking and mobile banking. The Bank has a strong commercial and international banking portfolio and also provides real estate-related services, such as appraisals and property management, in addition to financing solutions for real estate customers. The Bank's retail operations principally comprise deposit taking and personal financings, which are usually backed by salary assignment. The Bank's major shareholder is Bukhamseen Holding Group, a holding company representing the diversified business interests of the Bukhamseen family, which, together with its consolidated and associated entities, held 36.03 per cent. of the Bank's share capital as at 31 December 2018. The Bank is listed on the Boursa Kuwait and, as at 31 December 2018, 46.14 per cent. of its shares were publicly held. The Bank continues to implement its comprehensive strategic plan through a Bank-wide transformation launched in 2015. The five year strategy aims to fulfil the Bank's vision to become the ‘Islamic bank of choice in Kuwait' with five key aspirations: (i) be the fastest growing Islamic bank in Kuwait; (ii) improve asset quality with below market average NPFs; (iii) enhance shareholders' returns; (iv) be recognised as the most innovative Bank in Kuwait; and (v) become an employer of choice for the Kuwaiti youth. In addition, in 2018 the Bank launched its new brand and corporate identity. The new brand motto is “Bank for Life” and the new brand promise embraces six pillars: partnership, innovation, originality, energy, values and simplicity. As at 31 December 2018, the Bank's total assets were KD 2,168.6 million compared to KD 1,916.0 million as at 31 December 2017 and KD 1,846.0 million as at 31 December 2016 and its total equity was KD 276.6 million as at 31 December 2018 compared to KD 263.9 million as at 31 December 2017 and KD 255.0 million as at 31 December 2016. As at 31 December 2018, the Bank's portfolio of financing receivables was KD 1,605.8 million compared to KD 1,304.4 million as at 31 December 2017 and KD 1,268.5 million as at 31 December 2016 and its aggregate depositors' accounts and due to banks and financial institutions were KD 1,836.1 million compared to KD 1,597.7 million as at 31 December 2017 and KD 1,542.9 million as at 31 December 2016. In 2018, the Bank's profit for the year was KD 21.0 million compared to KD 17.8 million for 2017 and KD 18.2 million for 2016. As at 31 December 2018, the Bank's total and tier 1 capital adequacy ratios, calculated in accordance with Basel III methodology as adopted by the CBK, were 16.63 per cent. and 15.45 per cent., respectively, and its financial leverage ratio, calculated in accordance with CBK regulations, was 10.48 per cent. 112
129. HISTORY The Bank is a Kuwaiti public shareholding company that was incorporated on 13 May 1973 in Kuwait with commercial registration number 19634 . The Bank's registered office is at West Tower – Joint Banking Center – PO Box 22882, Safat 13089, Kuwait and its telephone number is +965 1 888 999. In 2007, the Bank converted to an Islamic bank. In the same year it acquired a 40 per cent. shareholding in Ritaj Takaful Insurance Company KSC (Closed) (now named Al Dawli Takaful Insurance Company KSCC and operating as KIB Takaful). It subsequently increased this shareholding which stood at 73.6 per cent. as at 31 December 2018. KIB Takaful remains the Bank's only consolidated subsidiary. The Bank has been listed on the Boursa Kuwait since 1984. Its total market capitalisation as at 31 December 2018 was KD 274 million. The Bank has won several awards in recent years from a range of providers, including: • Best Islamic Bank in Kuwait and GCC – 2018 from World Finance; • Best Islamic Bank in Kuwait – 2017, 2016, 2015 and 2014 from World Finance; • Best Sharia-compliant Bank MENA – 2018, 2017, 2016 and 2015 from Capital Finance International (CFI.co); and • Fastest Growing Islamic Bank MENA – 2018, 2017 and 2016 from Capital Finance International (CFI.co). STRATEGY In 2015, the Board of Directors approved a new five-year strategy, which had been developed in cooperation with a specialised global consultant. The strategy was built around the Bank's vision to become the Islamic bank of choice in Kuwait and is underpinned by three strategic pillars: 1. the Islamic Retail Bank of choice renowned for leading innovation; 2. the go-to advisor for mid-to-large companies in Kuwait and an internationally recognised partner; and 3. the one stop shop real estate bank in Kuwait. The strategy is supported by five core competencies: • digital innovation; • product and service innovation; • control and efficiency; • risk management excellence; and • strategic pricing. As part of its strategic implementation, the Bank's ambitious new approach to customer service is transforming the entire customer experience to include a mix of live and digital channels. For example, in 2018 the Bank launched an innovative visual interactive voice recognition service in addition to its ‘Live Chat' service, which provides 113
130. customers access to most of the Bank 's services through a visual interface rather than just a voice-activated selfservice interface, thereby enabling the Bank to offer a better self-service call experience. The Bank's new strategy focuses on becoming more customer-centric by offering an integrated customer banking experience, establishing the Bank as a partner in every aspect of its customers' lives; a true “Bank for Life”. A key component of this is a comprehensive digital strategy, which is set to deploy services across all of the Bank's digital channels, both online and mobile, to enhance and streamline the Bank's virtual customer banking experience. By embracing technology and innovation as the core component of its customer-centric business strategy, the Bank aims to provide the latest digital solutions that are user friendly and easily accessible at all times. The Bank also continues to strengthen its core capabilities, particularly in operational processes with the continuation of the Eshraaq Project, which aims to achieve operational excellence and has trained a team of aspiring young Kuwaitis nominated from across different departments within the Bank. The Eshraaq project aims to simplify and increase the digitisation of processes to deliver faster customer service. Initiatives including refining and simplifying the customer account opening process have been completed, which has improved customer experience and supports business objectives. Ongoing projects and initiatives designed to further implement the strategy include: • an integrated data management solution for digital reporting and dashboards for Bank-wide use; • the launch of a new call centre with video calling and web chat service for both smartphones and online; • rationalisation and re-distribution of the Bank's branch network to reach the largest possible segment of customers; • improved branch designs in partnership with a leading international design firm; • the improvement of omni-channel services to provide an enhanced digital banking experience through the internet and an improved smartphone app for both corporate and retail customers, utilising the latest technology available, which has attracted new customers and resulted in improved growth of depositors' accounts, especially Arzaq and Al Boushra deposits; • the introduction of a new switch for cards, ATMs and POS terminals, which includes the latest technologies for customer service, such as near field communication, and enhanced security, such as SD Secure. In 2019, the Bank will continue to focus on developing innovative products and services to its customers and fully deploying new value propositions to better serve its customers and drive value for its shareholders. These include a new Bank website; new stages of digital channels (mobile and internet banking); the first newly-designed branch; and the implementation of a business process management solution for straight through processing operations, swift automation and integration. The Bank's management has initiated a series of transformational initiatives in order to become a market leader in the segments that it serves. These initiatives, which were developed in conjunction with external consultants, focus on improving service delivery and implementing a best-in-market operational excellence platform and consistently delivering efficient and innovative Sharia-compliant financial products and services and a best-in-class customer experience. These initiatives are being delivered in three phases, with the first two phases, being a foundational phase and a quality phase, already complete. The third phase, which is ongoing, focuses on enhancing the Group's competitive edge and covers advanced intelligence, market leading process introduction, product digitisation and true customer contribution management. 114
131. In line with the Bank 's strategic ambition to transform the way it engages with its customers across every touch point and to offer a customer experience that establishes the Bank as a partner in every aspect of its customers' lives (a true ‘Bank for Life'), the Bank launched its new brand in 2018. Reflecting the Bank's success in implementing its new strategy, its retail customer deposits increased by 20.9 per cent. as at 31 December 2018 and its C&IB assets increased by 27.8 per cent. as at 31 December 2018, in each case compared to 31 December 2017. In addition, its Real Estate Department (the RED), which was reorganised in 2018 to offer integrated financing solutions, appraisals, property management and advisory services to its clients, continues to grow in line with the strategy. The Bank believes that its new strategy is enhancing its position as one of the leading financial institutions in Kuwait. The Bank was included in the MSCI FM Kuwait Small Cap Index with effect from 1 June 2017. FTSE Russell has also shortlisted the Bank to be included in its emerging markets list of securities. On 8 October 2018, Fitch Ratings affirmed its A+ long-term issuer default rating of the Bank with a stable outlook. The Bank has also been voted as a member of the Board of Directors of GBSA (the Gulf Bonds and Sukuks Association) for 2019 and has also joined and actively participated in the activities of the Middle East Investor Relations Association (MEIRA). Looking ahead, the Bank intends to continue to review and strengthen its core competencies by providing innovative products and services to better serve its customers and drive value for its shareholders. STRENGTHS Consistent financial performance Over the last five years as it has implemented its new strategy, the Group has remained profitable while growing its total assets from KD 1.7 billion as at 31 December 2014 to KD 2.2 billion as at 31 December 2018. Between 2014 and 2018, the Group's net profit for the year grew by 53.1 per cent., while its total assets grew by 30.4 per cent. The majority of the Group's assets comprise financing receivables, which increased by 23.1 per cent. as at 31 December 2018 compared to 31 December 2017 and increased by 49.7 per cent. as at 31 December 2018 compared to 31 December 2014, illustrating the success of the Bank's lending strategy and ability to capture business opportunities. The Group retains a high financing receivables loss coverage ratio (296.4 per cent. as at 31 December 2018 compared to 113.4 per cent. as at 31 December 2017 and 231.2 per cent. as at 31 December 2016) and its impaired financing receivables ratio was 1.0 per cent. as at 31 December 2018 compared to 2.7 per cent. as at 31 December 2017 and 1.5 per cent. as at 31 December 2016 (which is better than the Kuwaiti market average of 1.7 per cent. for the year 2018). The Group's net cash from operating activities before changes in operating assets and liabilities was KD 29.1 million in 2018 compared to KD 26.7 million in 2017 and KD 30.3 million in 2016. Ambitious new strategy and focus on innovation Since 2015, the Bank has pursued a new strategy which, among other things, aims at making the Bank the fastest growing Islamic bank and the most innovative bank in Kuwait. This has involved significant improvements across the Bank's processes, products and services and distribution network, as well as the launch of a new brand, see “— Strategy” above. With the implementation of its new strategy substantially complete, the Bank has re-engineered its customers' experience and upgraded its systems and platforms. It believes that presents a comprehensive virtual banking experience through its website, mobile application and all other communication channels with its customers. 115
132. Moreover , it continues to foster the value of the services offered to its customers, and to ensure that those services are easy to access anywhere on a 24/7 basis. As a result, the Bank believes that it is well poised to continue to grow its balance sheet and generate higher levels of operating income in a competitive market. However, see also “Risk factors—Factors that may affect the Bank's ability to fulfil its obligations under or in connection with the Certificates—The banking industry is competitive and the Group is exposed to significant competition in Kuwait”. Expertise in the Kuwaiti real estate market The Bank was incorporated in 1973 as Kuwait Real Estate Bank and converted to an Islamic bank in 2007. Reflecting its origins, the Bank retains a strong focus on real estate. As at 31 December 2018, the construction and real estate industry sectors accounted for 35.3 per cent. of the Group's credit risk exposure (excluding contingent liabilities) compared to 35.7 per cent. as at 31 December 2017. Although many other Kuwaiti banks also have significant exposure to the real estate industry in Kuwait, the Bank believes that its integrated RED, which offers property management and advisory services in addition to traditional financing solutions, provides it with a significant competitive advantage in this area. However, see also “Risk factors—Factors that may affect the Bank's ability to fulfil its obligations under or in connection with the Certificates—The Group has significant customer and sector concentrations”. Shareholders' support, experienced Board of Directors and qualified management The Group's main shareholders, including the Bukhamseen family, have consistently provided all necessary support to the Bank, including ensuring that the corporate governance standards are comprehensively adopted by the Bank and supporting its ambitious new strategy. There are three members of the Bukhamseen family on the Bank's Board of Directors and one of those directors is also the Bank's Vice Chairman and Chief Executive Officer (CEO). The Bank believes that it has a strong and stable Board, consisting of nine directors. All of the Bank's directors have experience in the financial services industry and a number are also experienced in the real estate industry. The Chairman of the Board has been in post since 2010. The executive management team has acquired vast experience and has a strong track record in Kuwait, regionally and internationally. See “Management and employees” for further information on the Bank's Board of Directors and management. Reputable Sharia advisory board Since the conversion of the Bank to comply with Islamic principles in 2007, the shareholders of the Bank have appointed an active, experienced and reputable Fatwa and Sharia Supervisory Board to provide management with the required support and guidance. The Fatwa and Sharia Supervisory Board consists of a number of well-regarded Sharia scholars who have significant experience in Islamic finance and sit on the Sharia advisory boards of many other Islamic financial institutions. The Fatwa and Sharia Supervisory Board has played a key role in assisting the Bank in developing its Sharia-compliant banking products and services. See “Management and employees—Fatwa and Sharia Supervisory Board” for further information on the Bank's Fatwa and Sharia Supervisory Board. 116
133. SHAREHOLDERS The table below shows the Bank 's principal shareholders (those owning more than 5 per cent. of its shares) and their shareholdings as at 31 December 2018. Shareholder Bukhamseen Holding Group and its consolidated entities ............................................ The Public Institution for Social Security (GRE) ......................................................... Other shareholders (free float) ...................................................................................... Treasury shares .............................................................................................................. Total .............................................................................................................................. Percentage of issued share capital 36.03% 7.84% 46.14% 9.99% 100.0% BUSINESS Reporting segments As at the date of this Prospectus, the Group operates through five segments for financial reporting purposes. These segments reflect the Group's operating business units and are described below: • C&IB – which comprises a range of banking services and investment products provided to corporate customers, including commodity and real estate murabaha finance, ijara and wakala facilities; • Retail Banking – which comprises a range of banking services and investment products provided to individual customers, including commodity murabaha finance, ijara and wakala facilities; • TFM&IB – which comprises liquidity management, correspondent banking, clearing, murabaha investments and deposits with and from banks and other financial institutions; • Investment Management – which comprises the Bank's investment in an associate and other investments, including investment properties; and • Others –which comprises the activities of KIB Takaful and all other business not included in the other segments. The table below is calculated from the financial information in Note 24 to each of the Annual Financial Statements. It shows the percentage contribution of certain financial information in relation to each reporting segment as at, and for the years ended, 31 December in, each of 2018, 2017 and 2016. C&IB 2018 Segment operating income ........ Segment profit/(loss) ................. Segment assets ........................... Segment liabilities ..................... 2017 Segment operating income ........ Segment profit/(loss) ................. Segment assets ........................... Segment liabilities ..................... Retail banking TFM&IB Investment management (per cent.) Other Total 98.8 156.1 64.4 17.1 7.5 (4.1) 11.6 39.0 (13.7) 3.2 16.2 41.3 3.6 (9.9) 6.2 — 3.8 (45.3) 1.6 2.6 100.0 100.0 100.0 100.0 84.9 136.3 57.1 16.4 12.6 0.3 12.2 36.9 (9.3) 15.5 22.1 43.7 7.7 (5.7) 6.5 — 4.1 (46.4) 2.1 3.0 100.0 100.0 100.0 100.0 117
134. C &IB 2016 Segment operating income ........ Segment profit/(loss) ................. Segment assets ........................... Segment liabilities ..................... Retail banking 84.7 106.4 58.7 19.3 16.5 9.0 11.7 31.1 TFM&IB (10.6) 23.1 21.9 46.8 Investment management (per cent.) Other 5.2 (6.2) 5.8 — 4.2 (32.4) 1.9 2.8 Total 100.0 100.0 100.0 100.0 Commercial and International Banking C&IB is the Group's most significant business in terms of operating income, profit and assets, accounting for 98.8 per cent., 156.1 per cent. and 64.4 per cent. of the Group's operating income, profit and assets respectively as at and for the year ended 31 December 2018. It also grew significantly in 2018, with its assets increasing by 27.8 per cent. and its liabilities increasing by 19.4 per cent., in each case compared to 2017. In addition C&IB's operating income increased by 20.7 per cent. and its segment profit increased by 35.4 per cent., in each case in 2018 compared to 2017. C&IB comprises two departments: the Wholesale Banking Department (WBD) and the RED. WBD The WBD offers its customers a comprehensive set of innovative products, services and solutions, including cash and non-cash financing services (such as working capital and long-term murabaha, real estate ijara, letters of credit and letters of guarantee). It also provides other banking services that serve corporate customers and financial institutions, including structured finance and syndications, correspondent banking, cash management and trade solutions, in addition to a range of current, call and term deposit accounts. The Bank believes that the WBD's benefits from: • its deep understanding of its customers' businesses; • its solid coverage model along industry lines to better serve its client base through industry and sector specialisation; and • its comprehensive and innovative range of services and strategic, solution-driven capabilities. WBD offers its products and services through a number of dedicated divisions, including its large corporates, public sector, project finance, trading, contracting, small and medium-size enterprises and real estate finance divisions. These products are offered to large, medium and small-sized corporate customers as well as governmental, GREs and financial institutions. The industry sectors served are the real estate sector, financial institutions, oil and gas, other industries, including construction, manufacturing, wholesale trade and retail. WBD's customers utilise trade financing facilities made available by the trade finance division. This division uses its extensive knowledge to help customers enhance their global competitiveness and reduce risk. The trade finance division offers a wide range of services, including: • letters of credit, including the extension of cash financing; and • letters of guarantee, including bid bonds, performance, advance payment, retention, purchase and counter guarantees; and bills for collection, both documentary and clean with payment at sight/acceptance, settlement and remittance proceeds 118
135. Notwithstanding intense competition during 2018 , WBD achieved strong results and expansion across all of its specialised units. This growth was attained by deepening existing relationships and acquiring new corporate customers with a special focus on large corporate clients and family conglomerates as they offer strong cross-sell opportunities, particularly in relation to trade, cash management and treasury products and services. WBD has also sought to offer its customers exceptional customer service standards, while maintaining a high-quality asset portfolio and providing greater value and enhanced product offerings. WBD also helped support the national economy through structuring and arranging facilities to pioneering local companies, as well as other leading companies in investment, communication, aviation leasing, oil and gas and financial services. RED Historically, the Bank has been one of the leading providers of real estate finance services in Kuwait. The Bank played a significant role in supporting corporate real estate developments, including the construction of commercial and residential properties. In 2018, the Bank launched the RED to offer integrated real estate products and services to its clients, including: • real estate financing: RED offers products such as murabaha, ijara and istisna'a to enable its customers to finance the purchase of investment, commercial and residential properties; • consultation: with its significant experience and extensive knowledge of the Kuwait real estate sector, the Bank believes that RED is positioned to offer unmatched advisory services to clients; • property management: the Bank is the only bank in Kuwait which offers property management services to its clients, including marketing and property management to improve both the utilisation of income and enhance property values; and • real estate appraisal activities: the Bank is one of only two banks in Kuwait that are authorised by the CBK for property valuation. RED's real estate appraisal service is a key reference for governmental authorities, banking institutions, investment and real estate companies in Kuwait. These services continue to grow in line with the Bank's strategy, enhancing the Group's revenues and supporting its credit portfolio. Retail Banking Retail Banking accounted for 11.6 per cent. of the Group's assets and 39.0 per cent. of its liabilities as at 31 December 2018. In 2018, its assets increased by 8.0 per cent. and its liabilities increased by 20.9 per cent., in each case compared to 2017. Retail Banking recorded a small loss in 2018 and a small profit in 2017. Particularly in the retail area, the Bank is executing a significant transformation focused on putting the customer at the centre of every interaction, across all touch points and channels. As part of this transformation, the Bank has launched a number of new digital banking solutions designed to improve the overall customer experience, including: • the first multi-channel contact centre in Kuwait which has a visual interactive voice response (VIVR) which provides customers with access to most of the Bank's services through a visual interface, rather than just a voice-activated self-service interface; • live chat assistance; • a new mobile and online solution; and 119
136. • 3D secure. The Group's strategy for the retail banking business also includes increasing its market share by focusing on salary acquisition with innovative salary campaigns, creating more visibility in the market and providing additional services and products to enhance customer experience, including providing targeted services for high net worth individuals (for example, priority banking with a dedicated service area within branches) and Kuwaiti youth (for example, incentivising youth to deposit their government allowances with the Bank by offering youth-related gadgets, petrol cards and consumer discounts). The strategy includes enhancing the distribution network, both physical and digital, simplifying existing products, launching new products and targeted promotions to increase value for the banks retail customers. The Group's new retail banking strategy is expected to enable the Group to continue to expand its retail customer base in the coming years. Retail Banking offers a range of deposit accounts, financing and card products and related services to personal customers in Kuwait through its distribution network, see “—Distribution network” below. In addition, the Group has a direct sales force which markets its retail products and services to its customers. Retail Banking's customers principally comprise Kuwaiti residents of various nationalities. Retail Banking's deposit accounts include current, savings and term deposit accounts. The saving accounts include profit-bearing investment accounts offered to Kuwaitis and expatriates and a savings account that offers quarterly profit distributions. The Group's term deposits are profit-bearing, can be denominated in a range of currencies and have terms of between one month to three years, depending on the customer's preference. The minimum opening balances required for the savings and deposit products vary based on the type of account. Retail Banking's financing products include construction, consumer and musawama (zero per cent.) auto financing products. The Bank's construction financing is available to customers who seek to purchase building or construction materials to build or renovate a home. The financing is advanced for a maximum term of 15 years and up to a maximum amount of KD 70,000, in each case in accordance with CBK requirements. The financing is available to Kuwaiti, GCC and other expatriates residing in Kuwait. Consumer and auto financing is advanced for a maximum term of five years and up to KD 25,000 (or 25 times the customers' salary, whichever is less). Personal financing can only be used for the purpose of paying medical and education expenses or purchasing furniture, electronic appliances, marine equipment and cars. Retail Banking offers Visa signature, classic, gold and platinum and MasterCard world credit cards and pre-paid Visa cards which can be reloaded by money transfer from a personal account. Different card types are focussed on different customer segments with a range of services and benefits attached to each card. Treasury, Fund Management and Institutional Banking TFM&IB accounted for 16.2 per cent. of the Group's assets and 41.3 per cent. of its liabilities as at 31 December 2018. TFM&IB recorded an operating loss in each of 2018, 2017 and 2016 principally reflecting its cost of funding. In each of 2018, 2017 and 2016, TFM&IB recorded a segment profit, of KD 0.7 million, KD 2.8 million and KD 4.2 million, respectively. TFM&IB applies dynamic funding strategies (which adjust according to TFM&IB's expectations of the profit rate and liquidity trends in the markets) to support the Group's business areas, while focusing on the efficient management of cost of funds to maximise profit. TFM&IB applies a transparent funds transfer pricing model (in which all relevant departments provide their input by taking balance sheet compositions, any growth trends and budget targets of the Group into consideration) to help management and the business units make the right pricing decisions on products and increase profitability. This model adopts a matched-maturity approach to reflect the true cost of funding through a robust methodology that determines the costs/benefits of liquidity based on maturities of assets and liabilities, thus allowing higher rates to be assigned to products that use/provide liquidity for longer periods of time. 120
137. TFM &IB is also responsible for the daily management of the Bank's liquidity, through a dedicated asset and liability management team to ensure compliance with internal policies and the daily limits set by the ALCO, as well as the regulatory requirements of the CBK (which include a liquidity coverage ratio, a net stable funding ratio, a liquidity ratio and maturity ladders). TFM&IB offers its customers (principally government-related entities and other financial institutions) foreign exchange transactions and Islamic deposits structured to meet their business requirements. In addition, TFM&IB: • manages the Bank's foreign exchange transactions and its overall foreign currency exposure in line with the Bank's set limits, both internal through the ALCO and the regulatory limits set by the CBK; and • manages the Group's profit rate exposure by deploying excess liquidity in line with profit rate forecasts and market movements and using liquidity maturity ladders (which compare the Group's future cash inflows to its future cash outflows over a series of specified time periods) according to the daily and cumulative limits set by ALCO and the CBK. Investment Management Investment Management accounted for 6.2 per cent. of the Group's assets as at 31 December 2018. Investment Management has no liabilities. Investment Management recorded small amounts of operating income and made a loss in each of 2018 and 2017. Investment Management continues to focus on deploying funds into stable income generating liquid assets with a primary focus on sukuk investment that provides a stable income and strong risk-adjusted return. The Investment Management portfolio comprises strategic investments, principally in entities in the financial industry that complement the Group's banking business, sukuk, real estate and equity investments. The majority of Investment Management's income is derived from yields on sukuk, rental income from investment properties and dividends from equity investments. Others Others accounted for 1.6 per cent. of the Group's assets and 2.6 per cent. of its liabilities as at 31 December 2018. Others recorded operating income of KD 2.5 million in 2018 and KD 2.6 million in 2017 and losses of KD 9.5 million in 2018 and KD 8.3 million in 2017. Others principally comprises the Group's majority shareholding in KIB Takaful. KIB Takaful is an Islamic insurance company registered in Kuwait. Its main activity is to provide takaful (co-operative) insurance to both corporates and individuals through medical, motor, marine, fire and general, travel and family income benefit plans. Distribution network The Bank's principal distribution channels, available to both its corporate and retail customers, comprise: • Branch network, ATMs and POS terminals: The Bank as at 31 December 2018 had a network of 24 strategically located branches in Kuwait that cater to all demographics and customer needs, and an ATM network of 96 machines (30 of which are located at its branches and 66 of which are located off-site). The Bank has 2,648 POS terminals, mainly in retail shops, restaurants, clinics, schools and real estate offices. 121
138. • Telebanking: The Bank provides banking services by telephone to its customers and also operates a call centre on a 24/7 basis. These services can be used by customers in Kuwait to conduct a variety of transactions, including making balance and account enquiries, transferring money, making credit card payments and enquiring about foreign exchange. In 2018, the call centre handled 618,640 customer calls of which 182,236 were transferred to an agent and 106,899 used the Bank's recently introduced visual telebanking service, which it believes is the first of its kind in Kuwait and which replaces traditional automatic answers with visual responses. • Internet banking: The services provided to accountholders through the platform include the provision of account balances and statements, funds transfers, bill payments and a secure channel for customers to request other products and services. • SMS and mobile banking: The Bank's customers may use its SMS banking services to receive regular account updates and SMS alerts. The Bank also offers a mobile banking application that, among other things, allows account balance checking, local and international fund transfers and credit card payments. • Direct sales force: The Bank's direct sales force brings the Bank's products and services to the homes or offices of its clients throughout Kuwait. The Bank has a direct sales force comprising 32 members as at 31 December 2018. The direct sales force focuses on customer acquisition. • Social media: This serves as a channel to engage with customers through the launch of KIB Instagram and Facebook accounts. • Payment gateway: This is an electronic solution provided by the Bank to business customers that allows them to charge for their goods and services over the internet. As at 31 December 2018, the Bank had 32 payment gateway customers. COMPETITION As at the date of this Prospectus, the Kuwaiti commercial banking sector (excluding foreign banks that operate in Kuwait) comprises five banks operating according to Sharia requirements (the Bank, Kuwait Finance House, Boubyan Bank, Ahli United Bank and Warba Bank ) and five banks with a conventional banking licence (National Bank of Kuwait, Burgan Bank, Gulf Bank, Al Ahli Bank of Kuwait and Commercial Bank of Kuwait). As at 31 December 2018, the Bank's total assets represented 7.1 per cent. of the total assets of the Kuwaiti Islamic commercial banking sector and 2.7 per cent. of the total assets of the Kuwaiti total commercial banking sector (excluding foreign banks). As at 31 December 2018, the Bank's customer deposits represented 6.5 per cent. of the total customer deposits of the Kuwaiti Islamic commercial banking sector and 2.7 per cent. of the total customer deposits of the Kuwaiti total commercial banking sector (excluding foreign banks). As at 31 December 2018, the Bank's total customer financings represented 8.6 per cent. of the total customer financings of the Kuwaiti Islamic commercial banking sector and 3.4 per cent. of the total customer financings of the Kuwaiti total commercial banking sector (excluding foreign banks). The Islamic banking sector in Kuwait is attracting a growing customer base, particularly among local cooperative and other similar bodies. A general prohibition on mortgages over private residences in Kuwait was introduced in 2008. However, in 2011 an exception was created in respect of Islamic banks only, allowing them to finance purchases of residential properties using a mortgage over the property as security. Accordingly, the principal competitive advantage enjoyed by Islamic banks is their ability to offer residential mortgage financing, which conventional banks are not permitted to do. Regulatory restrictions relating to profit rates and ratios for personal 122
139. lending typically favour Islamic banks over conventional banks . In particular, whereas the interest rates that can be charged by conventional banks are subject to caps, Islamic banks in Kuwait are able to earn higher margins than conventional banks on their financing portfolios, as the CBK permits Islamic banks, subject to CBK limits, to charge customers higher margins to compensate for the fixed nature of profit on financings. INFORMATION TECHNOLOGY The Group considers that IT is essential to its business. The Bank's core banking system carries out all business processes, including retail and corporate banking as well as supporting financial and management information system activities. Its Contact Centre system uses state-of-the-art technology to provide services and support to clients through IVR and Visual-IVR. The Bank's omni-channel (online banking, mobile banking and ATMs) systems provide both corporate and retail clients with easy and secure access to their accounts as well as services such as funds transfer, salary processing, finance payments and card services. The Group has an offsite IT disaster recovery site located in Kuwait that can be activated when required. This is to ensure that all critical systems are fully operational in line with the Group's business continuity plan, in order to provide essential services to its customers. The Group carries out daily and other periodic data back-ups which are stored in the main data centre and replicated online (in real time) to the disaster recovery centre. Additionally, the Group provides back-ups of all critical systems and data to an international location in compliance with CBK instructions. INFORMATION SECURITY Customer confidentiality and the protection of information assets are essential aspects of the Group's core values. Operating under the ISO 27001 framework, the most widely recognised, internationally accepted security standard and benchmark developed for information security management systems, the Group has integrated information security extensively in all its core business operations. The Group's information security strategy includes continuous comprehensive assessments to identify flaws and weaknesses in its entire infrastructure. The Group continually invests in information security to combat and deter cybersecurity attacks, a threat which it believes is severe and rapidly growing. Further, new initiatives and projects are undertaken to continue delivering information assets protection in line with the Group's ambition to become the leading digital bank in Kuwait. 123
140. RISK MANAGEMENT OVERVIEW Risk is inherent in all activities of the Group and is managed through a process of ongoing identification , measurement, mitigation and monitoring, subject to risk limits and other controls. This process of risk management is critical to the Group's financial health and continuing profitability. The Group's business generates exposure to the following broad risk types from its financial transactions, use of financial instruments and its operations: credit risk, market risk, liquidity risk and operational risk. In addition, there are other risk areas that need to be monitored and controlled. This section provides information about the Group's exposure to each of these risks, the Group's objectives, framework of policies, models and quantification techniques, and processes for identifying, measuring, mitigating and managing risks, and the management of Group's capital. RISK STRATEGY As an Islamic bank, the Bank's activities are principally related to the sourcing of funds through Sharia-compliant financial instruments within the guidelines prescribed by CBK and deploying these funds in Sharia-compliant financing and investment activities to earn a profit. The profits are shared between the shareholders and the profit sharing deposit account holders, in accordance with the policies and proportions determined by the Board of Directors and the Bank's Fatwa and Sharia Supervisory Board. The funds raised by the Bank vary in maturity between short and longer tenors and are mainly in dinar, apart from major foreign currencies (including GCC currencies). While deploying the funds, the Bank focuses on the safety of the funds as well as maintaining sufficient liquidity to meet all claims that may fall due. The safety of shareholder and depositor funds is further enhanced by diversification of financing activities across economic and geographic sectors, as well as borrower types. The Group's risk strategy is to establish a balance between (i) the expected growth in the markets in which the Group operates and (ii) managing the risks associated with the business environments in these markets through controlling risk tolerance levels, defined risk adjusted return on capital levels and collateral coverage assisted by due diligence that takes into account current market intelligence and emerging macroeconomic factors. The main objective of risk management in the Group is to achieve an optimum balance between the twin goals of profit maximisation and capital maintenance. The Group's risk management framework is built around this objective and seeks to address specific concerns of its various stakeholders, such as shareholders, CBK, rating agencies, customers, depositors and the general public. RISK MANAGEMENT STRUCTURE The Board of Directors has overall responsibility for the establishment and oversight of the Bank's risk management function. The Board has established a Board Risk Management Committee (the BRMC) which oversees the Bank's Risk Management Department (the RMD) and ensures that the Bank's policies embody sound risk management practices and are properly implemented. In addition to the BRMC, there are a number of management committees that have risk functions. These include the Credit Committee, the ALCO, the Management Risk Committee (the MRC) and the Investment Committee, each of which is discussed further under “Management and employees—Management—Management committees”. The Group has established a prudent and professional approach to risk taking with the following underlying principles that support its risk management framework: • actively promoting an overall culture that accords high value to disciplined and effective risk management; • using professionally qualified people with appropriate risk management skills; 124
141. • disciplined processes for evaluation and acceptance of risk within appropriate limits in individual transactions, products and the management of financing and investments; • a management information system that provides timely and accurate information on risks to the relevant management group and the commitment to continuously upgrade these systems and apply the most up-to-date analytical tools and systems to properly capture risks, monitor positions and determine the impact of potential management actions; and • an internal audit function to ensure ongoing adherence to and integrity of risk management processes. The RMD is primarily responsible for managing all risks arising from the use of financial instruments, including credit, liquidity, market (foreign exchange, profit rate and equity) and operational risks, in the Group. In accordance with CBK guidelines on corporate governance, the RMD is an independent department, is headed by a General Manager and is supported by an experienced and qualified team of risk managers, risk officers and analysts. The RMD reports directly to BRMC and administratively to the CEO. The Group's risk management methodologies include: • pro-active methodologies such as the continuous review and enhancement of the Group's policies and procedures; the development and enhancement of risk measurement tools such as risk grading models, pricing models and Value at Risk (VaR) models; risk inputs in respect of the Group's strategic planning as well as structuring and review of product and services; • on-going methodologies, such as risk management inputs in respect of proposed financing and investment applications; post approval compliance review of financing and investment facilities; periodic reviews of the financing and investment portfolio by way of reports and highlighting perceived risks to executive management as well as line functionaries; and the continuous monitoring of market, operational and technology related risks; and • post fact methodologies, such as the review of proposals and trends in respect of provisions; and write-offs and disposal of investments. RISK APPETITE The Group's risk appetite defines the maximum limit of risk that it is willing to accept in relevant business categories to achieve an optimal balance of risk and return which will enable the achievement of its strategic objectives and is proposed by the RMD and approved at Board of Directors level. Any risk which breaches the Group's stated risk appetite must be mitigated as a matter of priority to within acceptable levels. The risk appetite is reviewed and recommended by the BRMC to the Board of Directors for approval and periodic updates. This ensures the risk appetite statements are consistent with the Group's strategy and business environment. Through the risk appetite statements, the Board of Directors communicates to management the acceptable level of risk for the Group, determined in a manner which meets the objectives of shareholders, depositors and regulators. The RMD aims to identify early warning signs of risk limit and risk appetite breaches, and is responsible for notifying them to the BRMC and the Board of Directors. RISK MANAGEMENT SYSTEMS In order to manage risks in a holistic manner and to measure risks on a consolidated basis, the Group has a formal Risk Governance Framework, which provides detailed guidelines for a sound framework for enterprise-wide risk management. The objectives of risk management are supported by various risk policies that are reviewed and updated regularly. The risk policies, in general, cater to detailed planning for various risks based on business strategies, past performance, future expectations, economic conditions, and internal as well as external events. The 125
142. policies also require comprehensive analysis of a set of pre-determined parameters prior to introduction of new products or instruments . The policies have put in place internal limits (nominal as well as risk-based) for continuous monitoring and ensuring that risks are maintained within the Group's risk appetite. Periodic reporting of risks to various internal bodies, including the ALCO, the Credit Committee, the Investment Committee, the MRC and the BRMC, ensures that the Board of Directors and the executive management are continuously kept aware of positions thereby enabling informed decision-making. The risk management policies are established to identify, quantify, control, mitigate, and analyse the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and ensure adherence to the risk appetite limits. Risk management policies and systems are subject to review regularly, on an ongoing basis, to reflect changes in the economic environment, market conditions and products and services offered by the Group. The Group performs semi-annual stress tests under three scenarios: mild, medium and severe. These tests are based on two sets of assumptions: one based on CBK-prescribed parameters and the other based on the Group's own assumptions. These parameters cover stress scenarios for profitability parameters, assets and liabilities structures, financing exposures, capital adequacy, profit income, fee income, foreign exchange income, falls in collateral value and stock market declines resulting in additional impairment losses. The Group also undertakes scenario testing at periodic intervals to quantify potential and inherent risks that it faces. CREDIT RISK Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. This includes the risk of a decline in the credit standing of a customer. While such decline does not imply default, it increases the probability of the customer defaulting. Financial instruments that create credit risk for the Group include financing receivables, contingent liabilities and commitments to extend credit and investment in sukuk. Credit risk management structure To manage credit risk, the Group has established the Board Finance and Investment Committee (the BFIC) and three management committees: • the Credit Committee; • the Investment Committee; and • the Provisions Committee. The BFIC is responsible for reviewing and approving recommendations made by each of the Credit, Investment and Provision Committees' recommendations with regard to credit facilities, financing relationships, financing limits, pricing, profitability and investment activities. The Credit and Investment Committees are each responsible for safeguarding the Group's asset quality and ensuring profitable use of funds. These committees review the Group's credit policy in line with CBK guidelines for commercial, retail credit and interbank credit. These committees also approve or renew credit and investment proposals within their respective financing limits and each reviews and concurs in the approval process for the extension of credit or the making of investments in excess of its authority. The Provisions Committee is primarily responsible for determining the provisions required for impaired facilities when the facility is not already classified as irregular according to CBK regulations. In addition, the Provisions Committee reviews the required provisions for irregular financing facilities to ensure compliance with CBK regulations. 126
143. Credit risk management strategy and process The Bank manages its credit facilities portfolio with the objective of ensuring that it is well diversified and it earns a level of return appropriate to the risk it assumes . In the normal course of business, the Bank deploys its funds in various credit facilities, with the primary objective of generating profits for its shareholders and deposit holders. However, at the same time, the Bank seeks to ensure the quality of the credit facilities. The Bank continually strives to achieve an optimal balance between the return and credit quality of the portfolio. The Bank's policies and procedures manuals, dealing with credit, lay down the credit risk management framework by specifying various covenants and credit standards which include: • clear definition of roles and responsibilities of the various functionaries involved in the different stages of the credit facility life cycle; • establishing a clear approval authority structure both for routine as well as exceptional credit facilities; • listing beneficiary, facility, collateral and pricing parameters for the Bank's products; • standardising credit approval packages; • defining criteria for collateral valuation and policies for collateral management; • detailing the procedures for the entire credit life-cycle, including problem financing management; and • ensuring, by way of limits, a diversification of the credit portfolio across geographies (countries/regions), sectors, and counterparties. Credit concentration risk The Bank considers credit concentration risk as the risk that the Bank is exposed due to the level of exposure to any individual or related group of customers, specific industry or sector, country or geographic locations. Single name concentration Single name concentration is monitored on an individual basis and on a consolidated related party exposure basis. Every proposal is subjected to this check and no single name concentration may exceed the 15 per cent. capital limit set by CBK, unless specifically pre-approved by CBK. The Bank's top 25 exposures are monitored on daily basis and reported to senior management and other statutory reporting units. The Bank abides by single obligor rules set by CBK requiring Kuwaiti banks to seek CBK approval for any planned exposure to a single counterparty or groups of connected counterparties exceeding the limit applicable to that counterparty. Sector concentration The Bank has adopted measures to diversify its exposures to various sectors. As at the date of this Prospectus, real estate exposure is the major contributor to the Bank's financing receivables portfolio but it remains within the limits internally prescribed and has sufficient collateral coverage. The Bank has established industry limits to ensure portfolio diversification and employs stringent financing guidelines in conjunction with close portfolio monitoring for portfolios vulnerable to systemic downturns. 127
144. Geographic concentration The Bank 's operations are mainly concentrated within Kuwait. Where practicable, the Bank seeks to diversify its exposures across geographies to reduce the dependence on the local market. Diversifications across geographies expose the Bank to legal, transfer and sovereign risk. Exposures are monitored periodically to ensure compliance with the cross-border limits approved by the Board of Directors. The Risk Management Department monitors movements in the financing receivables portfolio and reports are submitted to senior management on both a monthly and quarterly basis. The reports highlight the market trends, the business directions and the risk parameters and suggest mitigants. Credit origination As part of the credit origination process, each business unit solicits, evaluates and manages credit in accordance with the strategies, business plan, policies and portfolio limits established by the Bank. Business proposals are initiated within a well-defined target market, in conformity with the above criteria. All financing proposals are risk graded based on internal rating models and within the threshold of approved risk based pricing criteria. The Credit Risk Review function analyses every credit proposal submitted by business units in line with the Bank's applicable policies and financing standards. Credit proposals, together with the credit risk review, are presented to the relevant approving committees for a decision. An approval authority matrix exists which defines the credit approval authorities, with the highest level being the BFIC and, at executive level, the Credit Committee and Investment Committee. For retail financing, product-wise delegated authority levels are in place for the retail banking business within the Board approved credit programme and there is an escalation process for exceptional cases. As an important part of the credit risk management function, the Bank uses an internal risk rating system to assess the credit quality of borrowers and counterparties. Each non-retail exposure is assigned a risk rating based on an eight grade scale that ranges from 1 (low risk) to 8 (high risk). In addition to the obligor rating, the Bank also determines facility ratings and each client exposure is then mapped into a final rating based on a matrix that links the obligor rating and the facility rating. Credit risk monitoring Credit risk monitoring is performed at various levels as follows: • monitoring of risk quality (obligor level): The Bank has a process of review of credit based on its internal rating grades. Every proposal has to carry a risk rating as the initial check on the quality of credit. In case of any deterioration, additional reviews are made and the Bank has a process of defining and reporting all the potential problem accounts. • monitoring of risk quality (portfolio level): The Bank monitors its portfolio based on economic sectors, industry, geography, ratings and business lines. Portfolio reports are generated periodically for senior management review. • monitoring of past dues on principal and profit: All past due principal and profit amounts are reported periodically to senior management. Measures to realise these past due amounts are initiated and followed. • monitoring of potential loss accounts (watch-list): This category comprises accounts where principal or profit are past due and which show some potential weakness in the borrower's financial position and credit worthiness, which requires greater follow-up and monitoring. The requirement for provisions is also periodically assessed. The assessment of the impaired portfolio and the provisioning requirement is vetted 128
145. through a Provisioning Committee at senior management level as mandated by CBK regulations and escalated to appropriate Board level committees . • collateral management: The Bank has adopted a rigorous system of controls, reviews and approvals to ensure effective collateral management. This includes a commitment to value requirement for each facility and specific collateral requirements for financing against shares and real estate. Collateral is regularly evaluated and, in addition to internal assessments, valuations are backed by independent third party reports. During the life of a financing, it may be classified as past due but not impaired or as impaired where payments due have been missed. Note 25(i) to each of the Annual Financial Statements contains, under the heading “Credit quality of financial instruments”, an ageing analysis of the Group's past due but not impaired and its impaired financing receivables. As at 31 December 2018, 62.1 per cent. of its past due but not impaired receivables were past due by 30 days or less, 12.4 per cent. were past due by between 31 and 60 days and the remaining 25.5 per cent. were past due by between 61 and 90 days. All of the Group's impaired financing receivables were past due by more than 90 days. Note 25(i) to each of the Annual Financial Statements contains, under the heading “Credit quality of financial instruments”, tables analysing the Group's exposure to credit risk by credit quality of the underlying assets which give rise to that risk as at 31 December in each of 2018, 2017 and 2016. These assets include financing receivables, amounts due from banks, investments in sukuk, balances held with banks and other assets, see note 25(i) to each of the Annual Financial Statements under the heading “Maximum exposure to credit risk” for an illustration of the relative importance of these assets as at 31 December in each of 2018, 2017 and 2016. In managing its portfolio, the Group also utilises ratings and other measures and techniques which seek to take account of all aspects of perceived risk. The Group uses an internal credit rating methodology. The Group also uses external ratings by recognised rating agencies for externally rated portfolios. CBK required provisions Under CBK regulations, irregular credit facilities comprise: • Watch list requiring specific provisions on assessment basis. This includes regular clients where, at management's discretion, provisions have been booked to address any possible future deterioration as well as credit facilities that are overdue for 90 days or less (inclusive). The specific provision percentage is determined based on review of each case and after a thorough study by the management and also after deducting deferred, suspended profit and eligible collateral. • Sub-standard. If facilities are irregular for a period of 91 – 180 days (inclusive), a minimum 20 per cent. provision rate must be applied to the total facilities net of deferred and suspended profit and eligible collateral. • Doubtful debts. If debts are irregular for a period of 181 – 365 days (inclusive), a minimum 50 per cent. provision rate must be applied to the total facilities net of deferred and suspended profit and eligible collateral. • Bad debts. If debts are irregular for more than 365 days, a provision rate of 100 per cent. must be applied to the total facilities net of deferred and suspended profit and eligible collateral. In addition, in accordance with CBK instructions, a minimum general provision is made on all applicable credit facilities (net of certain categories of collateral) that are not provided for specifically. The minimum general provision in excess of the present 1 per cent. for cash facilities and 0.5 per cent. for non-cash facilities is retained as a general provision until directed otherwise by the CBK. 129
146. In 2018 , the Bank implemented IFRS 9-based impairment assessments for specified asset (exposure) classes as mandated by the CBK. At 31 December 2018, the Bank's non-performing cash finance facilities amounted to KD 17.3 million (31 December 2017: KD 40.0 million), KD 15.6 million (31 December 2017: KD 38.5 million) after excluding deferred revenue, KD 15.2 million (31 December 2017: KD 38.3 million) after excluding deferred revenue and suspended profit and KD 12.5 million (31 December 2017: KD 31.6 million) after excluding eligible collateral in accordance with CBK regulations. As at 31 December 2018, the Bank's provision (along with provision for bank exposures) amounted to KD 51.3 million (31 December 2017: KD 45.3 million), including general provisions (along with provision for bank exposures) that amounted to KD 44.4 million (31 December 2017: KD 40.1 million). The Bank's CBK-mandated provisions for financing receivables exceeded its IFRS 9-required provisions in 2018 by KD 6.8 million. Assessment of ECLs The Group computes ECL on the following financial instruments that are not measured at fair value through profit or loss: • its financing receivables, including financing commitments; • its letters of credit and financial guarantee contracts, including commitments; • its investment in sukuk; and • its balances and deposits with banks. The Group applies a three stage approach to measure ECL as follows: Stage 1: 12-month ECL The Group measures loss allowances at an amount equal to 12-month ECL on financial assets where there has not been a significant increase in credit risk since their initial recognition or on exposures that are determined to have a low credit risk at the reporting date. The Group considers a financial asset to have low credit risk when its credit risk rating is equivalent to the globally recognised definition of ‘investment grade'. Stage 2: Lifetime ECL – not credit impaired The Group measures loss allowances at an amount equal to lifetime ECL on financial assets where there has been a significant increase in credit risk since initial recognition but the financial assets are not credit impaired. Stage 3: Lifetime ECL – credit impaired The Group measures loss allowances at an amount equal to lifetime ECL on financial assets that are determined to be credit impaired based on objective evidence of impairment. Significant increase in credit risk The Group continuously monitors all assets subject to ECLs. In order to determine whether an instrument or a portfolio of instruments is subject to 12 months ECL or lifetime ECL, the Group assess whether there has been a significant increase in credit risk since initial recognition. The quantitative criteria used to determine a significant increase in credit risk is a series of relative and absolute thresholds. All financial assets that are 30 days past due 130
147. are deemed to have significant increase in credit risk since initial recognition and migrated to stage 2 , even if other criteria do not indicate a significant increase in credit risk. The Group considers a two notch downgrade (without considering modifiers in the rating) as a significant increase in credit risk for externally rated instruments with an “investment grade” rating at inception and one notch downgrade as a significant increase in credit risk for instruments with a below “investment grade” rating at inception. Similarly, the Group applies a consistent quantitative criteria for its internally rated portfolio to assess whether or not there has been a significant increase in credit risk. In the absence of ratings at inception, the Group considers the current rating at the reporting date to determine if there is significant increase in credit risk and in such cases all instruments below investment grade or its equivalent are considered as stage 2. The Group considers a financial instrument with an external rating of “investment grade” as at the reporting date to have low credit risk. In addition to the above quantitative criteria, the Group applies qualitative criteria for the assessment of a significant increase in credit risk based on its monitoring of certain early warning signals. Definition of default The Group considers a financial asset to be in default and therefore at stage 3 (credit impaired) for ECL calculations when: • the customer is unlikely to pay its credit obligations to the Group in full, without recourse by the Group to actions such as realising security (if any is held); • the customer is past due more than 90 days on any material credit obligation to the Group; or • the customer is considered as credit impaired based on qualitative assessment for internal credit risk management purposes. Evidence of credit impairment includes observable data about significant financial difficulty of the customer or issuer; a breach of contract such as default or past due event; a lender having granted to the customer a concession that it would otherwise not consider, for economic or contractual reasons relating to the customer's financial difficulty; the disappearance of an active market for a security because of financial difficulties; and the purchase of a financial asset at a deep discount that reflects an incurred credit loss. Any credit impaired or stressed facility that has been restructured is also considered to be in default. The Group considers investments and interbank balances to be in default when the profit or principal payment is past due for one day. The Group considers any externally-rated financial asset with a rating of ‘D' for Standard & Poor's Credit Market Services Europe Limited and Fitch and ‘C' for Moody's Investors Service Ltd. (Moody's) to be in default. The Group considers a variety of indicators that may indicate unlikeliness to pay as part of a qualitative assessment of whether a customer is in default. Such indicators include: • breaches of covenants; • the customer having past due liabilities to public creditors or employees; and • the borrower being deceased. Calculation of ECLs 131
148. Lifetime ECLs are ECLs that result from all possible default events over the expected life of a financial instrument . The 12-months ECL is the portion of lifetime ECL that result from default events that are possible within the 12 months after the reporting date. Both lifetime ECLs and 12 month ECLs are calculated on either an individual basis or a collective basis depending on the nature of the underlying portfolio of financial instruments. The Group also considers key economic variables that are expected to have an impact on the credit risk and the ECL in order to incorporate forward-looking information into its ECL models. These primarily reflect reasonable and supportable forecasts of future macroeconomic conditions. The consideration of such factors increases the degree of judgment in determining ECLs. The Group employs statistical models (GCorr macro model) to incorporate macro-economic factors on historical default rates. The Group considers three scenarios (baseline, upside and downside) of forecasts of macroeconomic data separately for each geographical segment and appropriate probability weights are applied to these scenarios to derive a probability-weighted outcome of ECL. Management reviews the methodologies and assumptions including any forecasts of future economic conditions on a regular basis. ECLs are probability-weighted estimates of credit losses and are measured as the present value of all cash shortfalls discounted at the effective profit rate of the financial instrument. Cash shortfalls represent the difference between the cash flows due to the Group in accordance with the contract and the cash flows that the Group actually expects to receive. The key elements in the measurement of ECLs include probability of default (PD), loss given default (LGD) and exposure at default (EAD). Probability of default The PD is the likelihood that an obligor will default on its obligations in the future. IFRS 9 requires the use of separate PD for a 12-month duration and lifetime duration depending on the stage allocation of the obligor. A PD used for IFRS 9 should reflect the Group's estimate of the future asset quality. Through the cycle (TTC) PDs are generated based on the internal and external credit ratings. The Group converts the TTC PD to point in time (PIT) PD term structure using appropriate models and techniques. The Group assesses the PD for its retail portfolio through behavioural scorecards implemented in the Group. The scorecards are based on a logistic regression technique. This enables the evaluation of a score and associated PD for each facility. The term structure of the PD is based on a hazard rate concept. The survival distribution used is exponential. The probability distribution function of an exponentially distributed random variable is used with the hazard rate as the PD evaluated from the behavioural scorecard. Exposure at default EAD represents the amount which the obligor will owe to the Group at the time of default. The Group considers variable exposures that may increase the EAD in addition to the drawn financing. These exposures arise from undrawn limits and contingent liabilities. Therefore, the exposure will contain both on and off balance sheet values. EAD is estimated taking into consideration the contractual terms such as profit rates, frequency, reference curves, maturity, pre-payment options, amortisation schedule and usage given default. EAD for retail financings incorporates prepayment assumptions and for credit cards credit conversion factors are applied to estimate the future draw downs. Loss given default LGD is the magnitude of the likely loss if there is a default. The Group estimates LGD parameters based on historical recovery rates for claims against defaulted counterparties. The LGD models consider the structure, collateral, seniority of the claim, counterparty industry and recovery costs of any collateral that is integral to the financial asset. For all unsecured financings, the Group considers a minimum of 50 per cent. LGD for senior financings and 75 per cent. LGD for subordinated financings. 132
149. Loss allowances for ECL are presented as a deduction from the gross carrying amount of financial assets which are carried at amortised cost , including financing receivables, letters of credit and guarantees and balances with banks. In the case of its investment in sukuk, which is measured at FVOCI, the Group recognises the ECL charge in the consolidated statement of profit or loss and a corresponding amount is recognised in other comprehensive income with no reduction in the carrying amount of the sukuk in the consolidated statement of financial position. Credit risk mitigation The Bank uses collateral, netting and guarantees provided under certain conditions, which include such agreements being binding on all parties and legal enforceability, to mitigate its credit risk. The Bank's financing policy specifies the acceptable types of collateral, source of valuation, accuracy of valuation and frequency of revaluation in respect of collateral. The policy also specifies the maximum facility commitment to collateral value and approval levels for different types of collateral and facility. Cash, first demand bank guarantees, securities and real estate are all accepted as collateral. As part of its general collateral control mechanism, the Bank periodically revalues all collateral to ascertain that the collateral cover is not lower than the value at the time of the original approval. The Bank also continuously monitors the validity and expiry dates of mortgages to ensure their timely renewal. The main types of guarantors are individuals and corporate entities. Since none of the Bank's guarantor counterparties have been rated by any of the three rating agencies(approved by the CBK for the purposes of calculating its capital adequacy, the Group has not taken any guarantor-related credit risk mitigation allowance in calculating its capital adequacy. Collateral and other credit enhancements The amount and type of collateral required depend on an assessment of the credit risk of the counterparty. Guidelines are implemented regarding the acceptability of types of collateral and valuation parameters. Management monitors the market value of collateral, requests additional collateral in accordance with the underlying agreement, and monitors the market value of collateral obtained during its review of the adequacy of the allowance for impairment losses. It is the Bank's policy to generally dispose of repossessed properties in an orderly fashion. The proceeds are then used to reduce or repay the outstanding claim. In general, the Bank does not occupy repossessed properties for business use, although it may retain repossessed properties as investment properties in certain circumstances. At 31 December 2018, 53 per cent. of the Group's total outstanding financing receivables were fully secured compared to 51 per cent. as at 31 December 2017. LIQUIDITY RISK Liquidity risk is the risk that the Group will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset. To limit liquidity risk, management has arranged diversified funding sources in addition to its core deposit base, manages assets with liquidity in mind and monitors liquidity on a daily basis. The Group's management of liquidity risk is consistent with its overall risk management framework and includes establishing minimum liquid asset requirements and limits with regards to the acceptance of short-term wholesale deposits to protect against short-term liquidity demands. 133
150. The Group monitors liquidity risk by measuring the liquidity gaps on a daily basis and the position is reviewed by the ALCO on a monthly basis . Similarly the Group's liquidity reserve position and the ratio of its financing facilities to eligible deposits are monitored on a daily basis. The Group measures liquidity risk by monitoring the maturity profile of its assets and liabilities. Note 25(ii) to the 2018 Financial Statements contains such an analysis which shows, as at 31 December 2018, a negative net liquidity gap (liabilities in excess of assets) in the up to one month and one to three month categories of KD 157.0 million and KD 54.6 million, respectively. As at 31 December 2018, in each of the three to 12 month and over one year categories the Group had positive net liquidity gaps of KD 86.8 million and KD 401.4 million, respectively. In addition, Kuwaiti banks are subject to the Basel III Liquidity Coverage Ratio (LCR) as adopted by the CBK. The CBK issued its LCR regulations in 2014 and the CBK board of directors approved, in its session held on 25 October 2015, Net Stable Funding Ratio (NSFR) guidelines for both conventional and Islamic banks, including the branches of foreign banks operating in Kuwait. The CBK has introduced the LCR in a phased manner, setting a benchmark requirement of 70 per cent. in 2016 which has reached 100 per cent with effect from 1 January 2019. Banks are required to submit, along with existing liquidity reports, their LCR reports on a daily and monthly basis for monitoring purposes as well as their LCRs by major currency. The minimum required NSFR is calculated as a percentage of available stable funding to required stable funding that should not be less than 100 per cent. This requirement has been effective since 1 January 2018. MARKET RISK Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises profit rate risk, currency risk and other price risk. The objective of market risk management is to manage and control exposures within acceptable parameters, whilst optimising returns. Given the Group's current profile of financial instruments, management believes that the principal exposure is the risk of loss arising from fluctuations in the future cash flows or fair values of its financial instruments because of a change in market rates. This is managed principally through monitoring gaps and is reviewed periodically by the ALCO. Market risk management structure ALCO is the management committee that oversees the management of the Group's day to day market risks by the treasury department, which is headed by the General Manager - Treasury who reports to the CEO. The International Banking Department is responsible for proposing country limits based on Moody's long-term sovereign currency debt ratings, or equivalent ratings by two other rating agencies, and reviewing them annually. The measurement, monitoring and reporting of market risks is the responsibility of the market risk division within Risk Management Department. Market risk management strategy and process The Group has established risk management policies and limits within which exposure to market risks is monitored and controlled. The Group uses the VaR approach for measuring the risk of foreign exchange exposures and has suitable VaR limits apart from limits on the notional value. Earnings at Risk (EaR) based on the re-pricing gap method is used to assess the profit rate risk in the banking book and appropriate EaR limits are established. The Group also periodically measures the change in the Economic Value of Equity by applying a standard shock. Equity Price risk is measured through VaR. 134
151. Currency risk Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates . The Group is a Kuwaiti entity and the dinar is its functional currency. The Board of Directors has set limits on positions by currency. Positions are monitored on a daily basis to ensure that they are maintained within established limits. Note 25(iii)(a) to each of the Annual Financial Statements contains a table which shows the Group's net exposures denominated in foreign currencies as at 31 December in each of 2018, 2017 and 2016, with the principal exposures being to U.S. dollars and the Qatari riyal and, as at 31 December 2016, Saudi riyal. The Group does not provide an exchange rate sensitivity analysis in the Annual Financial Statements as management believes that the Group does not have significant exposure to foreign exchange risk. Equity price risk This is the risk that the fair value or future cash flow of a financial instrument will fluctuate as a result of changes in market prices (other than those arising from rate of return risk or currency risk), whether those changes are caused by factors specific to the individual instrument or its issuer or factors affecting all instruments traded in the market. The Group manages this risk through diversification of investments in terms of geographical distribution and industry concentration. Note 25 (iii)(b) to the 2018 Financial Statements contains a sensitivity analysis with respect to equity price risk which shows that for FVOCI investment securities, a 5 per cent. increase in stock prices as at 31 December 2018 would have increased equity by KD 3.3 million and for FVTPL investment securities, the impact on profit or loss would have been an increase of KD 0.6 million. An equal change in the opposite direction would have had an equal, but opposite, effect, on the basis that all other variables remained constant. OPERATIONAL RISK Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. This includes, but is not limited to, legal risk, fraud risk, risk due to money laundering and risk of non-compliance with Sharia principles. The Group's business and support units have primary responsibility for identifying, assessing and managing their operational risks. They employ internal control techniques to reduce their likelihood or impact to tolerable levels within the Group's risk appetite. Where appropriate, risk is mitigated by way of insurance. The Group has a set of policies and procedures that are applied to identify, assess and control operational risk in addition to other types of risks relating to the banking and financial activities of the Bank. Operational risk is managed through the Risk Management Department which ensures compliance with policies and procedures to identify, assess, control and monitor operational risk as part of overall risk management. The Group uses the following methodologies in managing operational risk: • Risk and control self-assessment (RCSA): The Group has in place a comprehensive process for RCSA. It uses the RCSA to identify and assess operational risks and evaluate the effectiveness of the controls that are in place to manage the identified risk. Risks are assessed based on their likelihood and potential financial impact. • Key risk indicators (KRI): KRIs are measures to monitor exposure to key operational risks. KRI provide management with a holistic view of operational risks. • Loss data management (LDM): The Group has in place an LDM process to record operational losses. All operational loss are recorded and analysed. Operational losses are classified as per Basel II event categories. 135
152. The Group 's business continuity strategy addresses the risks inherent with unexpected business interruptions and its business continuity management system is designed to provide a rigorous mechanism to ensure that its systems and procedures are capable of managing business disruptions. Technical, functional and simulation exercises are undertaken continuously to test preparedness. The Bank has been awarded the International Organization for Standardization (ISO) 22301:2012 Certificate for “Business Continuity Management System” and is the first bank in Kuwait to obtain an ISO 22301 certificate. The management of operational risks complies in all material respects with applicable CBK guidelines. OTHER RISKS Strategic risk The Group defines strategic risk as the current or prospective impact on its earnings and capital and risks arising from changes in the environment in which the Group operates, from adverse strategic decisions, improper implementation of decisions or lack of responsiveness to industry downturns, economic direction or technological changes. The Group has a strategic risk framework to identify measure, monitor and report strategic risk exposures. The sources of strategic risk are: • gap in execution of the strategy; • complexity of the strategy; • current risks to the achievement of the strategy; and • track record of achieving strategic goals in past three 3 years. Strategic risk is primarily assessed in terms of the controls available to mitigate such risks and the Group's ability to successfully implement its goals under its long-term strategic plan. Reputation risk Reputation risk is the risk of the current or prospective negative impact on the Group's earnings or capital arising from damage to its reputation in the perception of major stakeholders. The Group manages its reputation risk through a reputation risk management framework and under Pillar II risks (ICAAP/stress testing). The following factors are considered in measuring reputation risk: • financial performance (including return on equity, stock price and credit rating); • customer satisfaction; • regulatory breaches and fines; • negative media publicity; and • corporate social responsibility. The Bank has identified various reputation KRIs and has classified them under 12 drivers: customer satisfaction, financial soundness, corporate governance, management integrity, business practice, risk management and control environment, regulatory compliance, transparency, media and rumours, corporate culture, staff competence and crisis management. 136
153. Legal risk The Group defines legal risk as the risk of loss resulting from its inability to implement contracts or any other rights vested in it . The principal sources of legal risk are: • terms and conditions and general structure of the legal documents and contracts to which the Bank is party; • lack of proper documentation covering core banking business; • inadequate or missing authorisations and signatures; • violation of the Group's or legal rules; and • claims or counter-claims filed against the Group. The Group's approach to assessing the legal risk embedded in its contracts and processes considers four aspects: (i) historical losses arising from legal risk, (ii) an assessment of internal audit findings around processes, systems and controls relating to legal documentation and the execution of the contracts, (iii) internal control reviews related to financing contractual documentation and (iv) review of sample legal contracts. Compliance risks (both regulatory and Sharia) The Group follows a zero tolerance policy with respect to regulatory compliance risk. A comprehensive CBK compliance framework is in place to monitor and review adherence to regulatory requirements. The risk management framework also covers Sharia compliance risk. The Sharia Audit department audits the Bank's various departments twice a year, to assess their adherence to Sharia controls in respect of the Bank's products. Any profits, contrary to the principles of Sharia law, which are realised are set aside and not included in the Group's profit. Similarly, expenses incurred or profits accrued on account of transactions under contracts entered into with customers before the Bank's conversion to an Islamic bank and where the customer has not agreed to convert the contracts to comply with Sharia principles, are segregated and transferred to a special charities account. The net proceeds of this account are spent on charitable works approved by the Sharia Supervisory Board. COMPLIANCE Overview The Group's compliance function is responsible for overseeing and managing compliance aspects across the Group through a robust compliance framework. It also ensures the Group's compliance with applicable laws and regulations and CBK and CMA guidelines and internal instructions. The compliance framework consists of compliance policies and procedures and compliance is monitored through timely reports. The Group's compliance programme is built on a foundation of a sound understanding of the appropriate regulatory requirements, communicating internally compliance requirements and advising deviations through effective monitoring and review mechanisms, and escalating breaches for remedial action. Anti-money laundering and counter-terrorism financing The Group's anti-money laundering (AML) and counter-terrorism financing (CTF) measures take account of the Financial Action Task Force recommendations, international sanctions lists (such as those of the United Nations, 137
154. the European Union and the US Office for Foreign Assets Control ), applicable AML-related laws and regulations and CBK guidelines. The Group's AML/CTF policies apply customer due diligence principles for applicants and customers which include the following: • all new customers being identified and verified; • all customers being screened against all prohibited lists to ensure full compliance with international sanctions lists; and • all outward and inward transfers being screened to comply with all sanctions lists. Customer transactions are monitored on a daily basis under a risk-based approach to ensure that no money laundering transactions are conducted. In addition, the Group conducts enhanced due diligence in relation to highrisk customers. INTERNAL AUDIT The Group's internal audit division is an independent function that reports to the Board Audit Committee. The Board Audit Committee has three non-executive members, including its Chairman, and meets at least quarterly. The internal audit division is headed by the General Internal Auditor. Its primary role is to evaluate and improve the effectiveness of the Group's risk management, control and governance processes through independent and objective reviews of the Group's operations, risk management framework, processes, policies and governance arrangements. The division undertakes its activities through an approved risk-based audit plan. Internal audit results are discussed with the Group's management and reported to the Board Audit Committee. All internal audit findings are discussed with management and tracked through an electronic issue tracking system. Updates on the status of audit findings are presented to the Board Audit Committee. A continuous auditing process has been implemented with the objectives of raising control-related issues outside the routine audit cycle and laying the foundations, with other assurance providers, to introduce synergies in the overall efforts of the second and third lines of defence, whilst maintaining internal audit's objectivity and independence. 138
155. MANAGEMENT AND EMPLOYEES MANAGEMENT Corporate governance framework The Group 's corporate governance framework is based on principles and standards defined by leading professional bodies and regulatory authorities and is embedded into the business and practices of the Group. The framework is designed to secure effective oversight of the Group's strategy and business operations with a robust risk management approach, transparency and accountability. The Board of Directors reviews and updates the corporate governance framework on an annual basis, senior management ensures that it is implemented through policies and procedures, and employees follow the corporate governance requirements in their day-to-day business. The Group is committed to providing timely, consistent and accurate information to its stakeholders and has adopted a disclosure and transparency policy to ensure that this is achieved. This policy covers a wide range of areas, including the key quantitative and qualitative information related to financial performance and financial stability, risk management factors, remuneration, corporate governance, related-party transactions, conflicts of interest and substantial changes in business. Board of Directors The Bank operates under the direction of the Board of Directors, which comprises nine members elected during a shareholders' general assembly meeting for a period of three years and each member can be re-elected for an unlimited number of additional three-year terms. The Board of Directors meets as often as it deems necessary, subject to a minimum of six times a year. In line with CBK requirements, the Board of Directors must convene at least once each quarter. The Board of Directors convened 13 times in 2017 and 10 times in 2018. The Board of Directors has overall responsibility for the Bank, including approving and overseeing the implementation of its strategic objectives, risk strategy, corporate governance and corporate values. The Board is also responsible for providing oversight of the Bank's executive management, including the CEO. The Board assumes ultimate responsibility for the Bank's business and its financial soundness, the fulfilment of CBK requirements, the protection of the legitimate interests of shareholders, depositors, creditors, staff and stakeholders and ensuring that the Bank is managed in a prudent manner and within the applicable laws and regulations and internal policies and procedures. The Board of Directors appoints the CEO and approves the appointment of most senior management positions reporting to the CEO or Deputy CEO. The roles of the Board Chairman and the CEO are separate and independent of each another and there is a clear segregation of duties and responsibilities. The Chairman's responsibilities include ensuring the proper functioning of the Board of Directors and maintaining a relationship of trust with the other Board members. The Chairman ensures that Board decisions are taken on a sound and well-informed basis through proper discussion ensuring that dissenting views can be expressed and discussed within the decision-making process. The Chairman is also responsible for establishing a constructive relationship between the Board and senior management and ensuring that the Bank has sound corporate governance standards in place. 139
156. The table below shows the names of the members of the Board of Directors as at the date of this Prospectus . Name Position Sheikh Mohammed Jarrah Al-Sabah Chairman Mr. Raed Jawad Bukhamseen Vice Chairman and CEO Dr. Haider Hassan Al-Jumaa Director Mr. Anwar Jawad Bukhamseen Director Mr. Jassem Hassan Zainal Director Dr. Abdullah Abdul Samad Marafi Director Mr. Saleh Sulaiman AlTrad Director Mr. Marzouq Khalid Yousuf AlMarzouq Director Mr. Anwar Fouzan Abdullah Alsabej Director Brief biographical information on each Director is set out below. Sheikh Mohammed Jarrah Al-Sabah, Chairman Sheikh Mohammed Jarrah Al-Sabah was elected Chairman of the Board of Directors in 2010, after he had initially joined the Board of Directors in 2007. Sheikh Al-Jarrah has extensive experience in the banking, insurance and real estate investment sectors. Sheikh Al-Jarrah is also Chairman of the Union of Arab Banks and the President of its Supreme Council of Arbitration, a member of the board of directors of the World Union of Arab Bankers, a member of the board of directors of Kuwait Banking Association, a member of the board of trustees at the Arab Academy for Banking and Financial Sciences, and Vice Chairman of the board of directors of Warba Insurance Company. During his career, Sheikh Al-Jarrah has held several senior level positions at a number of institutions inside and outside Kuwait, including as Chairman and Managing Director of Commercial Bank of Kuwait and the General Manager of Arab International Insurance Co. in Bahrain. He has also held senior posts in Kuwait Real Estate Investment Consortium, Kuwait Re-Insurance Company, Salhiya Real Estate Company and Arab Insurance Group. Mr. Raed Jawad Bukhamseen, Vice Chairman and CEO Mr. Raed Bukhamseen was appointed CEO of the Bank in 2018 and has been the Vice Chairman of the Board of Directors since 2015, after having initially joined the Board in 2010. Mr. Bukhamseen has extensive experience in the banking, real estate and investment sectors. Mr. Bukhamseen is also a member of the board of directors of Bukhamseen Group Holding Company, Warba Insurance Company, The Shared Electronic Services Banking Company, Egyptian Gulf Bank in Egypt, Layan Real Estate Company in Dubai, Souk Al-Salmiah Real Estate Company and Credit-One Kuwait Holding Company. Previously, he was also Chairman and Chief Executive of Arab Investment Company. Mr. Bukhamseen has a Bachelor of Business Administration from Boston University in the United States and has undertaken executive programmes in investment and Banking. 140
157. Dr . Haider Hassan Al-Jumaa, Director Dr. Al-Jumaa joined the Board of Directors in 1998 and has extensive cross-industry experience. During his career, he held numerous leadership positions in the banking, insurance and real estate investment sectors. Dr. Al-Jumaa was a member of the board of directors at Al-Ahli Bank of Kuwait, Egyptian Gulf Bank and Land Mark Real Estate Investment & Tourism Company, both in Egypt, and was Chairman of the board of directors of both Warba Insurance Company and KIB Takaful. Dr. Al-Jumaa also worked as an Assistant Professor in the Accounting & Audit Department at Kuwait University. His publications include “Islamic Banks in the State of Kuwait”, “Corporate Governance, and its Role in Raising Efficiency of Institutions in both Conventional and Islamic Banks”, “Internal Audit as an Effective Tool for Corporate Governance” and “ Money Laundering, Definition, Effects and Ways of Control”. Dr. Al-Jumaa has a Bachelor's degree in Accounting from Kuwait University. He also has a Master's degree in Accounting from the University of Arizona and a PhD in Business Administration from the University of California. Mr. Anwar Jawad Bukhamseen, Director Mr. Anwar Bukhamseen joined the Board of Directors in 2004 and served as Vice Chairman of the Board from 2010 until 2015. He has broad experience in the banking, insurance and real estate investment sectors. During his professional career, Mr. Bukhamseen has held several leadership positions. He is currently Chairman of Warba Insurance Company, a member of the board of directors at Qatar First Bank, Executive Director to the board of directors of Bukhamseen Group Holding Company, a member of the board of directors at Kuwait Catalyst Company, a member of the Kuwaiti Industries Association and a member of the board of directors of the Kuwait Insurance Federation. Mr. Bukhamseen has a Bachelor of Commerce in Economics and Financial Management from the Faculty of Commerce, Economy and Political Sciences at Kuwait University. He also has a specialised degree from an executive programme in Foreign Trade Policies from Harvard University and a specialised degree conferred by the Kuwait Foundation for the Advancement of Sciences in the framework of Corporate Governance and Financial Institutions Business. Mr. Jassem Hassan Zainal, Director Mr. Jassem Zainal joined the Board of Directors in 2006 and has over 32 years' experience across various sectors. He is currently Vice Chairman & Chief Executive Officer of Arzan Financial Group. He is also a member of the board of directors of Bank of Bahrain & Kuwait in Bahrain and Miami International Holdings Inc. in New York. During his career, he has held several leadership positions, including Chairman and Managing Director in both Zumorroda Investment Company (Z-Invest) and Automated Systems Company (ASC). Additionally, he worked for a period of 25 years at Gulf Bank, during which he held a number of key positions. Mr. Zainal was also a member of the boards of directors at Khaleej Islamic Investment Bank Bahrain, Al Madina Finance and Investments and Kuwait Airways in Kuwait. Mr. Zainal has a Bachelor's degree in Civil Engineering and a Bachelor's degree in Mathematics from the University of Miami. He also holds a Master's degree in Civil Engineering from Kuwait University, and has completed executive programmes at Harvard, Wharton and other institutions. 141
158. Dr . Abdullah Abdul Samad Marafi, Director Dr. Abdullah Marafi joined the Board of Directors in 2010. He is the Chairman of KIB Takaful and is also a member of and chairs a number of boards at leading organisations, including Omniyat Holding Company and Kuwait Shipping Companies & Agents Association. Previously he was Chairman and a member of the board of directors of Al-Ahli Bank of Kuwait, Arab Real Estate Company, Burgan Group Holding Company, Al-Buraq Investment Holding Company and Kuwait Airways Company. Dr. Marafi has extensive experience in the field of research, much of which has been carried out in cooperation with the Kuwait Foundation for the Advancement of Sciences, as well as Kuwait University faculty members. He was also previously seconded to the Public Authority of Applied Education and Training as a faculty member at the School of Commercial Studies. Dr. Marafi has a Bachelor's degree in Statistics from the Faculty of Commerce, Economy and Political Sciences at Kuwait University. He also has a Master's degree in General Management and a PhD in Management & Finance from the American University in London. Mr. Saleh Sulaiman AlTrad, Director Mr. Saleh AlTrad joined the Board of Directors in 2016. Mr. AlTrad has more than 20 years' experience in the banking, investment and financial sectors, and is currently Vice Chairman of The Arab Investment Company and a member of the board of directors of KIB Takaful. Mr. AlTrad was previously President and Managing Director at Beaumont Partners SA in Geneva, in addition to being a former founding partner at Arabica Investments. During his career, Mr. AlTrad has been Managing Director and Head of the Qatar and Kuwait offices of Nomura International Plc., Senior Vice President in the Assets Management Department at Lehman Brothers Holding Inc. in New York, Executive Head of the Kuwait and Qatar offices of Lehman Brothers International Plc. and an investment analyst at B.V. Capital in the United States. Mr. AlTrad has a Bachelor's degree in Manufacturing Engineering from Boston University. Mr. Marzouq Khalid Yousuf AlMarzouq, Director Mr. Marzouq Khalid Yousuf AlMarzouq joined the Board of Directors in 2019. He has over 19 years' experience in real estate, investment and project management. Mr. AlMarzouq is currently the Deputy Chairman of Kuwait Asia and also the CEO of Souk Al-Salmiah Real Estate Company. He is also a Board member at Al Tanmiya International Investment. Mr. AlMarzouq has a Bachelor's degree in Business Administration (Marketing) from the Faculty of Commerce and Political Science, Kuwait University. He has also completed several professional courses and programmes in financial accounting, banking laws and credit management. Mr. Anwar Fouzan Abdullah Alsabej Mr. Anwar Fouzan Abdullah Alsabej joined the Board of Directors in 2019. He has over 20 years' experience in the insurance sector. Mr. Alsabej is currently the CEO of Warba Insurance Co. 142
159. Board committees The Board of Directors has established five Board committees which are described below . The roles and authority of the Board committees are defined and delegated by the Board and are described in each committee's charter. The Board committees submit reports to the Board depending on the nature of the tasks assigned to them. Board Finance and Investment Committee The role of the BFIC is to safeguard and protect the Bank's asset quality, ensure that exposures to finance and investment risks are in accordance with CBK rules and regulations and the Bank's applicable policies and ensure that finance transactions generate the highest returns and do not have an adverse impact on the financial stability of the Bank. The BFIC also ensures that the executive management is fully aware of the exposures to finance and investment risks in the Bank, continuously monitor those exposures and any non-performing finance and investment transactions and takes all remedial actions necessary to maintain the Bank interests and the quality of its assets. The BFIC met 21 times in 2017 and 26 times in 2018. The members of the BFIC are Sheikh Al-Sabah (Chairman), Mr. Anwar Bukhamseen, Dr. Marafi and Mr. Zainal. Board Audit Committee The Board Audit Committee (the BAC) is responsible for: • setting the appropriate standards to ensure a robust internal audit; • ensuring compliance with the Bank's internal policies and other applicable laws, regulations and instructions; • monitoring the level of compliance with the Sharia laws and principles, as well as the funds for listed investment accounts, and ensuring that expenses and profits are distributed according to Sharia provisions and the system approved by the Bank's Fatwa and Sharia Supervisory Board; • evaluating the effectiveness and efficiency of the internal Sharia audit and its contribution in securing compliance with Sharia principles; • ensuring that the internal control systems related to financial and management issues are comprehensive and are controlled and properly audited; and • assisting the Board of Directors in reviewing the financial reports, ensuring the Bank's compliance with the legal and regulatory requirements, ensuring the adequacy of the qualifications and the expertise of the independent auditors and creating a disciplined internal control environment in the Bank. The BAC met seven times in 2017 and 10 times in 2018. The members of the BAC are Dr. Al-Jumaa (Chairman), Mr. AlTrad and Mr. AlMarzouq. Board Nomination and Remuneration Committee The Board Nomination and Remuneration Committee (the BNRC) submits recommendations to the Board of Directors for proposed new Directors in accordance with CBK policies, standards and instructions. The BNRC also carries out periodic skills reviews of the Board and identifies any skills gaps to be filled. The BNRC also conducts an annual assessment of the performance of the Board as a whole, and the performance of each member independently, as well as endorsing the standards of selection and measures for appointment of the CEO and 143
160. executive managers . The BNRC also ensures the establishment and application of a remuneration framework for the CEO and other executive positions and reviews and submits recommendations concerning changes in the pay and remuneration policy, including end-of-service policies. The BNRC also monitors, and ensures transparency in, the appointment of the members of the Fatwa and Sharia Supervisory Board, and monitors its effectiveness as a whole and on an individual basis. The BNRC also ensures transparent compensation for Fatwa and Sharia Supervisory Board members in line with their duties and responsibilities. The BNRC met six times in 2017 and 10 times in 2018. The members of the BNRC are Mr. Anwar Bukhamseen (Chairman), Mr. AlTrad and Dr. Marafi. Board Risk Management Committee The BRMC oversees the Bank's Risk Management Department and ensures that the Bank's policies embody sound risk management practices and are properly implemented. The BRMC also monitors the Risk Management Department's compliance with CBK standards and the Islamic Financial Services Board to the extent that they do not conflict with Sharia principles or CBK regulations. The BRMC also monitors and assesses the Bank's capital adequacy and ensures that executive management is aware of, and continually oversees, the risks encountered by the Bank. The BRMC met 12 times in 2017 and eight times in 2018. The members of the BRMC are Mr. Zainal (Chairman), Mr Alsabej and Dr. Marafi. Board Corporate Governance Committee The Board Corporate Governance Committee (the BCGC) assists the Board of Directors in ensuring that its corporate governance responsibilities are discharged. In particular, the BCGC prepares and updates the Bank's corporate governance manual and oversees compliance with it. The BCGC's functions incorporate protection of investment account holders' interests and coordination with the Fatwa and Sharia Supervisory Board and the Audit Committee to ensure compliance with the Sharia audit manual. The BCGC met six times in 2017 and six times in 2018. The members of the BCGC are Sheikh Al-Sabah (Chairman), Mr. Zainal (Vice Chairman), Mr Anwar Bukhamseen and Mr. AlTrad. Executive Management The Bank's executive management team is responsible for day-to-day supervision and control of the Bank's business, particularly with respect to ensuring functionality of compliance and risk control, independence of functions and separation of duties. Business policies, accounting policies and operations procedures and controls are documented and communicated through policies and standard operating procedures manuals which cover all areas and activities of the Bank. All significant policies are reviewed and approved by the Board. 144
161. The Bank 's executive management team as of the date of this Prospectus comprises: Name and position Brief CV Mr. Raed Jawad Bukhamseen Vice Chairman and CEO See “—Board of Directors” above. Mohamed Said El Saka Mr. El Saka has over 28 years' experience in several financial fields and 17 years' experience in Islamic banking. He was previously the Chairman of the Accounting and Auditing Standard Board of the Accounting and Auditing Organization of the Islamic Financial Institutions (AAOIFI), in addition to being a member of AAOIFI and some of its technical committees for more than one term. He was also a member of some of the technical work groups for other Islamic financial institutions, such as the Islamic Financial Services Board. Mr. El Saka has also participated as a lecturer in several conferences and seminars. Deputy Chief Executive Officer Mr. El Saka joined the Bank in August 2014 as General Manager - Financial Control & Planning Department until May 2016, when he was promoted to Deputy CEO. He was also Acting CEO from September 2015 to September 2018. Mr. El Saka has a Bachelor of Commerce in Accounting from Ain Shams University in Egypt. He is also a U.S. Certified Public Accountant and a U.S. Certified Internal Auditor. Jamal Al-Barrak General Manager – Investment Department Mr. Jamal Al-Barrak has more than 18 years' banking experience, including investment banking, financial management and corporate banking. Mr. Al-Barrak leads the Bank's team of investment professionals in managing and expanding the Bank's investment portfolio. He is also actively involved in many of the Bank's strategic and corporate planning initiatives, as well as representing the Bank in numerous external Boards. Prior to joining the Bank, Mr. Al-Barrak held several positions at Gulf Bank, including Head of Investments, Assistant General Manager of Investment Banking and Assistant General Manager of Corporate Finance. Mr. Al-Barrak has a Master of Business Administration in Marketing and a Bachelor's degree in Economics and Government, both from Bentley University in Boston. He has also completed business programmes at 145
162. INSEAD , Harvard Business School and Sciences Po. Ahmad AlKazemi General Manager – Wholesale Banking Department Mr. Ahmad AlKazemi is a senior banker with experience in corporate banking. Mr. AlKazemi joined the Bank in 2016 in his current position. Mr. AlKazemi spent his banking career at Gulf Bank, progressing though different positions and levels of management over the course of more than 30 years. His last position at Gulf Bank was as Deputy General Manager of Corporate Banking, in addition to serving as Acting General Manager of the department. Mr. AlKazemi has a Bachelor's degree in Economics from the University of Kansas. Karim Namek Mr. Karim Namek joined the Bank in 2016. He has 25 years' banking experience. General Manager – Treasury Department Prior to joining the Bank, Mr. Namek served as the General Manager of the Treasury Department at the National Bank of Kuwait, where he was also a member of the executive and asset and liability committees. He also worked in the banking sector in Egypt, where he was General Manager of the Financial and Capital Markets Department in Alex Bank, and Head of the Treasury Investment Portfolio at Commercial International Bank. Prior to that, he was head of Trading at Credit Suisse. Mr. Namek has a Bachelor's degree in Commerce from Cairo University. Othman Tawfiqi General Manager – Retail Banking Department Mr. Othman Tawfiqi joined the Bank in 2018 and has more than 14 years' experience in the finance and banking industry. Mr. Tawfiqi is responsible for developing and monitoring the implementation of the Group's retail banking strategy. Prior to joining the Bank, Mr. Tawfiqi was at Al-Ahli Bank of Kuwait where he was first Head of Delivery Channels and then Assistant General Manager of Retail Banking. Before these roles, Mr. Tawfiqi managed the call centre at the National Bank of Kuwait. Mr. Tawfiqi has also been a member of the board of directors at The Shared Electronic Banking Services Company in Kuwait. Mr. Tawfiqi has a Bachelor's degree in Marketing from Kuwait University. He has also completed a strategic management and leadership executive programme at Harvard Business School. 146
163. Jassim Al-Abdulhadi Acting General Manager – Real Estate Department Mr. Jassim Al-Abdulhadi has been with the Bank since 1997. Mr. Al-Abdulhadi oversees the strategic and operational functions of the RED, guiding his team in developing banking solutions that are tailored to meet customer needs. Mr. Al-Abdulhadi has spent his entire banking career with the Bank and has extensive experience in the area of corporate finance, particularly for the real estate sector. Mr. Al-Abdulhadi has a Bachelor's degree in Accounting and Auditing from the College of Economics and Commerce at Kuwait University. He has also completed business programmes at Harvard Business School, the Kuwait Institute of Banking Studies and Euro Money Training. Hesham Elsayed Ezzeldine General Manager – Business Service Department Mr. Hesham Elsayed Ezzeldine joined the Bank in 2016 in his current role. He has over 30 years' experience across different functions and areas, with a key focus on operations management. Mr. Ezzeldine leads the strategic planning and execution of operational solutions and environments, in order to achieve the Bank's business goals and strategic objectives. Mr. Ezzeldine previously served in the role of Chief Operating Officer at several international banks in the Middle East and GCC, including Bank Al-Jazira (Saudi Arabia), Bank Credit Agricole (Egypt), National Bank of Oman, National Bank of Egypt and, most recently, Al Khaliji Bank (Qatar). Mr. Ezzeldine has a Bachelor's degree in Commerce from Cairo University. Ajai Thomas General Manager – Financial Control & Planning Department Mr. Ajai Thomas joined the Bank in 2014. He has 20 years' experience in assurance engagements and functional responsibilities in various financial industries. Mr. Thomas leads the financial control and planning activities, reporting to the CEO and the Board of Directors on all matters related to budgets, financial performance and investor relations. Prior to joining the Bank, Mr. Thomas spent over 10 years working with PricewaterhouseCoopers and Deloitte & Touche in Kuwait, where he led multicultural teams specialised in financial services and audits, in 147
164. addition to his various functional roles in Bahrain and India . Mr. Thomas is a Chartered Accountant (ICAI, India) and a Certified Information Systems Auditor (ISACA, United States). He also holds a Master's degree in Financial Management from Pondicherry University and a Bachelor's degree in Physics from Mahatma Gandhi University. Anthony John Erasmus General Manager – Human Resources Department Mr. Erasmus joined the Bank in 2017. He has experience spanning more than 35 years in human resources. Before joining the Bank, Mr. Erasmus was Global Head of Talent Management, Acquisition Development, HR Business Partners and International Business Banking Group – Human Resources Department - at Abu Dhabi Islamic Bank, and earlier was Assistant General Manager of Human Resources at the National Bank of Kuwait. He has also held a number of key positions at Barclays Africa, as well as several managerial and consultancy positions in the area of technological and operational development. Mr. Erasmus holds a Bachelor's degree in Business Administration Industrial Psychology (Hons) from the University of Pretoria and holds a number of diplomas and certifications from internationally accredited academic institutes. Feroz Noorani General Manager – Risk Management Department Mr. Noorani joined the Bank in 2017. He has over 35 years' experience in banking and financial services in the GCC, Middle East and India, where he has held several senior positions in commercial and investment banking. His core competencies are in risk management, governance and compliance. Prior to joining the Bank, Mr. Noorani was Chief Risk Officer at Warba Bank. Before that, he was Group Chief Risk Officer at Al Hilal Bank in Abu Dhabi and Head of Group Risk and Capital Strategy and Assistant General Manager for Corporate and Investment Banking at Samba Financial Group in Saudi Arabia. Mr. Noorani has a Master's degree in Business Strategy and Financial Management, as well as Bachelor's degrees in Laws and in Financial Accounting and Auditing from the University of Bombay. He also has several professional certifications in bank management, compliance, risk and corporate governance including an accreditation from INSEAD in the field of risk management within banks. 148
165. Essam Abouelfadl General Manager – Legal Affairs Department Mr. Essam Abouelfadl joined the Bank in 2012. He has almost 40 years' experience in corporate and labour law, including more than 14 years' experience in the banking sector. Mr. Abouelfadl oversees the Bank's legal and regulatory functions. He serves as legal counsel to the Bank's leadership and management, offering legal advice on all operational, administrative and financial activities. After initially starting his career practicing law at legal firms in Egypt and Kuwait, Mr. Abouelfadl made the transition into the banking sector. Before moving to his current post at the Bank, he was Legal Counsel at the Commercial Bank of Kuwait. Mr. Abouelfadl has a Bachelor's degree in Law from Cairo University, as well as a Graduate Diploma in Law. Mohamed Samir Abdel Ghany General Internal Auditor Mr. Mohamed Samir Abdel Ghany joined the Bank in 2016 He has almost 20 years' experience in internal audit within the financial and banking sectors. Mr. Ghany provides the strategic direction for the Bank's Internal Audit Department in line with applicable regulatory requirements and international audit standards. Before joining the Bank, Mr. Ghany was Head of Internal Audit at Ahli United Bank in Egypt, Head of Internal Audit at Mashreq Bank in Qatar and Executive Manager of the Internal Audit Group at Commercial International Bank in Egypt. Mr. Ghany has a Bachelor's degree and a post graduate degree in Accounting & Auditing from Egypt in addition to professional certifications, such as the Certification in Risk Management Assurance from the Institute of Internal Auditors in the United States, Certified Internal Control Auditor from the United States and Certified Islamic Professional Accountant from AAOIFI. Mr. Ghany is also a founding member of the Institute of Internal Auditors in Egypt. Ismail Ibrahim Al-Shaikh General Manager – Board of Directors Affairs Management Department Mr. Ismail Al-Shaikh joined the Bank in 2008 and assumed his current position in 2012. Mr Al-Shaikh arranges all Board, Board Committee and shareholder meetings, as manages strategic and corporate governance policies. He has held a number of senior positions, including 149
166. serving as General Manager of Administrative Affairs at a number of financial brokerage companies . Mr. Al-Shaikh has a Diploma in Business Administration, as well as other international certifications, such as Certified Risk and Compliance Management Professional and Certified Anti-Money Laundering Specialist certifications from the United States and Certified Compliance Professional from the United Kingdom. Mr. Mourad Mekhail Board Advisor Mr. Mourad Mekhail joined the Bank in 2011. He has more than 25 years' experience in the financial services industry. Mr. Mekhail has worked for Merrill Lynch, UBS, LBBW and Credit Suisse in a number of roles and locations. Mr. Mekhail has a Master of Business Administration in International Economics from Trier University, Germany. Management committees The Bank has the following management committees: Executive Management Committee (EMC) The EMC is responsible for following up implementation of administrative projects and matters related to human resources, IT, purchases and administrative affairs. Investment Committee The Investment Committee is responsible for reviewing and approving proposals for investments within the authority delegated to it in line with the approved delegation of authority; recommending new investment proposals to the BFIC where the proposals are beyond its delegated authority; reviewing and recommending proposals for sale, buyouts, mergers, acquisition or liquidation of existing financial or direct investments to the BFIC; reviewing on a periodic basis the Bank's investment portfolio, including but not limited to, adherence to limits and recommending suitable corrective actions to the BFIC; and evaluating investment key performance metrics based on a comparison of actual returns and other benchmarks. Credit Committee The Credit Committee is responsible for reviewing and approving proposals for financing within the authority delegated to it and conducting periodical reviews of the same; providing recommendations to the BFIC or the Board, as appropriate, on all proposals that are beyond its delegated authority; reviewing and approving proposals for bank lines, including limits for correspondent banks, country limits and sector limits within its delegated authority; providing recommendations to the BFIC on financing proposals that are beyond its delegated authority; reviewing and approving proposals for legal or any other action on problem financing within its delegated authority and making suitable recommendations to the BFIC on all proposals beyond its delegated authority; and annually evaluating the Bank's financing performance and comparing it to past periods. 150
167. Provisions Committee The Provisions Committee analyses and assesses risk exposures to approved credit facilities and investments with a view to making the required provisions in compliance with CBK requirements and IFRS . Asset Liability Management Committee The ALCO is responsible for all matters relating to the optimum balance of assets and liabilities in the short, medium and long term to ensure increased profitability aligned with compliance with regulatory requirements. Management Risk Committee The MRC is responsible for all matters relating to market and profitability risks, capital adequacy standards, and ICAAP in the short, medium and long term. The MRC meets at least once every two months. Strategy Management Committee (SMC) The SMC is responsible for overseeing the implementation of the Group's strategy and also makes recommendations to the Board of Directors and its committees in relation to the expenditure necessary to implement the strategy and any amendments to the organisational structure at the Bank level in general and at departmental level in particular. Business address and conflicts The business address of each member of the Board of Directors and each member of the executive management is West Tower – Joint Banking Center, P.O. Box 22822, Safat 1308, Kuwait. No member of the Board or executive management has any actual or potential conflict of interest between his duties to the Bank and his private interests and/or other duties. Fatwa and Sharia Supervisory Board The Fatwa and Sharia Supervisory Board is a group of scholars with comprehensive knowledge of Islamic laws, economics and banking. In accordance with Kuwaiti law, an independent Sharia supervisory board must be established in each Islamic bank to supervise its business. The number of members of the Fatwa and Sharia supervisory board must not be less than three, and shall be appointed by the Bank's General Assembly. The Fatwa and Sharia Supervisory Board reviews all products, contracts, transactions, investments, accounts, policies and manuals and periodically reviews financial accounts to ensure their compliance with Sharia rules and principles. The table below shows the names and positions of the current members of the Bank's Fatwa and Sharia Supervisory Board: 151
168. Name Position Sheikh Dr . Khalid Mathkour Al-Mathkour Chairman Sheikh Mustafa Sayed Hasan Al-Zalzalah Deputy Chairman Sheikh Ali Mohammed Hejji Al-Jady Member Sheikh Dr, Abdulaziz Khalifa Al-Qassar Executive member Brief biographical information on each member of the Fatwa and Sharia Supervisory Board is set out below. Sheikh Dr. Khalid Mathkour Al-Mathkour, Chairman Sheikh Al-Mathkour has a Ph.D. in Sharia and Law from Al-Azhar University - Cairo. He is a faculty member at Kuwait University in Comparative Fiqh and Sharia Policy at the Sharia and Islamic Studies College. He is Head of the Fatwa Committee at the Ministry of Awkaf and Islamic Affairs, State of Kuwait and the Head of the Higher Consulting Committee for the Application of Islamic Sharia Principles - Amiri Diwan - State of Kuwait. Sheikh Al-Mathkour is a member of the following organisations: the Scientific Committee for the Fiqh Encyclopedia at the Ministry of Awkaf and a member of the Fatwa and Supervision Panel; the Board of Directors of the International Islamic Authority for Information - Islamic World Union; and the International Islamic Charity Authority headquartered in Kuwait. Sheikh Al-Mathkour is also a member of the Sharia supervision body in a number of Islamic banks and financial institutions. Sheikh Mustafa Sayed Hasan Al-Zalzalah, Deputy Chairman Sheikh Al-Zalzalah has a Bachelor's degree in Statistics from Kuwait University. He is a lecturer in Islamic teaching on topics such as such as Jurisprudence, Fundamentals, Language, Logic and Quranic for various religious and educational TV programmes. He was a member of the Sharia Advisory Committee appointed for the conversion of the former Kuwait Real Estate Bank into Islamic banking and is also a Member of the Sharia Committee at Aqeela Statistics, Finance, and Investment Company. Sheikh Ali Mohammed Hejji Al-Jady Sheikh Al-Jady has a Bachelor's degree in Basic Education. He is a teacher of Jurisprudence and a member of the Sharia Supervision body of Al Ja'farry Awkaf. Sheikh Dr, Abdulaziz Khalifa Al-Qassar Sheikh Al-Qassar has a Ph.D. in Sharia and Law from Al Azhar University, Cairo. He is Professor of Comparative Fiqh at the Sharia and Islamic Studies College of Kuwait University and was previously the Assistant Dean for Scientific and Higher Studies and Research Affairs at the same institution. He is a member of the Sharia supervision body in many Islamic banks and financial institutions, both in Kuwait and abroad, and is a lecturer in Islamic Financial Transactions. He is the author of many studies in Islamic Fiqh and Contemporary Financial Transactions. 152
169. EMPLOYEES The Bank 's human resources policies are designed to attract, motivate and retain skilled, professional and knowledgeable employees to assist in driving the Bank's performance. The ongoing focus is to build for the future by developing and growing Kuwaitis through talent management initiatives. The Bank ensures the performance of its employees, managers and senior executives through a systematic performance management system with measurable metrics for performance rewards. Rewards vary based on the performance of all employees and executives which is linked to the overall performance of the Bank. As at 31 December 2018, the Bank employed 730 full-time staff compared to 730 full-time staff at 31 December 2017 and 704 full-time staff at 31 December 2016. In addition to a fixed salary, the Bank also pays performance-based remuneration to its staff based on appraisals of each applicable employee, which are carried out based on specific technical and professional standards. In 2018, the total remuneration (including salaries, wages and allowances as well as periodic or annual performance bonuses) paid to: • the Chairman and members of the Board of Directors amounted to KD 594 thousand compared to KD594 thousand for 2017; • the five senior executives who received the highest remuneration in the Bank amounted to KD 1.5 million compared to KD 1.1 million for 2017; • higher management (24 staff in 2018 and 23 staff in 2017) amounted to KD 2.8 million compared to KD 2.0 million for 2017, of which KD 1.9 million was paid as fixed remuneration in 2018 compared to KD 1.5 million in 2017 and KD 868 thousand was paid as variable remuneration in 2018 compared to KD 498 thousand in 2017; • staff participating in risk-embedded activities (12 staff in 2018 and 10 staff in 2017) amounted KD 1.6 million compared to KD 1.2 million for 2017, of which KD 1.0 million was paid as fixed remuneration in 2018 compared to KD 889 thousand in 2017 and KD 517 thousand was paid as variable remuneration in 2018 compared to KD 314 thousand in 2017; and • financial control and risk control staff (18 staff in 2018 and 15 staff in 2017) amounted KD 1.1 million compared to KD 646 thousand in 2017, of which KD 827 thousand was paid as fixed remuneration in 2018 compared to KD 498 thousand in 2017 and KD 244,000 was paid as variable remuneration in 2018 compared to KD 148 thousand in 2017. The Bank is committed to identifying, attracting and developing Kuwaiti nationals in its workforce. The Government's required policy is that not less than 64 per cent. of a bank's total personnel should consist of Kuwaiti nationals. The Bank's Kuwaitisation level as at 31 December 2018 was 64.9 per cent. and as at the date of this Prospectus, it is in compliance with all other applicable employment regulations. 153
170. OVERVIEW OF KUWAIT Unless indicated otherwise , information in this section has been derived from Kuwaiti government publications. COUNTRY PROFILE Kuwait is a sovereign state on the coast of the Arabian Gulf, enclosed by Saudi Arabia to the south and south west and Iraq to the north and west. Kuwait has proven conventional crude oil reserves of 101,500 million barrels, the fifth largest in the world (according to OPEC's Annual Statistical Bulletin 2018). The total area of Kuwait is 17,818 square kilometres. Kuwait is a constitutional monarchy with a parliamentary system of government and Kuwait City serves as the state's political and economic capital. Kuwait has an open economy which is primarily dependent on its oil industry and is dominated by the government sector. Based on information from the Public Authority for Civil Information, Kuwait's population is approximately 4.7 million, of which Kuwaiti nationals account for 29.9 per cent. POLITICAL OVERVIEW Kuwait is a constitutional monarchy with a parliamentary system of government. Under the Kuwait Constitution, which entered into force in 1963, the head of the State is the Amir, who is chosen from among the members of the ruling Al Sabah family and confirmed by members of parliament (the National Assembly). The current National Assembly was elected in November 2016. The current Amir is His Highness Sheikh Sabah Al Ahmed Al Jaber Al Sabah, who acceded to the throne in January 2006. The Amir has, among other powers, the power to appoint the Prime Minister, dissolve the National Assembly, suspend certain parts of the Constitution and refer bills to the National Assembly for consideration. The Amir has the right to propose legislation as well as the right to promulgate and sanction laws. The Emir's half brother, His Highness Sheikh Nawaf Al Ahmed Al Jaber Al Sabah, is the current Crown Prince and the current Prime Minister being His Highness Sheikh Jaber Al-Mubarak AlHamad Al-Sabah. Historically, the Amir has been selected by family consensus although the Amir Succession Law provides for National Assembly input under certain circumstances. In terms of foreign relations and membership of international organisations, Kuwait, together with Bahrain, Oman, Qatar, Saudi Arabia and the UAE, form the GCC. Kuwait is also a member of OPEC and the United Nations. It is also a member of numerous international and multilateral organisations, including the IMF, the International Bank for Reconstruction and Development, the World Trade Organisation, the League of Arab States, the Organisation of the Islamic Conference, the Multilateral Investment Guarantee Agency and the United Nations Educational, Scientific and Cultural Organisation (UNESCO). ECONOMIC OVERVIEW According to CSB data, Kuwait's real GDP increased by 0.5 per cent. in 2014, 0.6 per cent. in 2015 and 2.9 per cent. in 2016 and fell by 3.5 per cent. in 2017. Over the same period, Kuwait's non-oil real GDP increased by 4.8 per cent. in 2014, 0.4 per cent. in 2015, 1.6 per cent. in 2016 and 2.2 per cent. in 2017 whilst its oil GBP fell by 2.1 per cent. in 2014 and by 1.7 per cent. in 2015, increased by 3.2 per cent. in 2016 and fell by 7.2 per cent. in 2017. Oil sector real GDP is principally affected by changes in production. The non-oil sector in Kuwait has been supported by Government spending on development plans and projects. The IMF, in its World Economic Outlook Database for October 2018, estimates that Kuwait's real GDP will have increased by 2.3 per cent. in 2018 and that it will increase by 4.1 per cent. in 2019, although management believes that these figures are likely to be closer to 1.7 per cent. and 2.5 per cent., respectively. Kuwait's economy has generally benefitted from healthy fiscal and current account surpluses, although lower oil prices since mid-2014 meant that Kuwait realised net budget deficits (after transfers to the Future Generations Fund and excluding sovereign investment income) since then. According to the IMF's report on its Article IV 154
171. Consultation with Kuwait which was published in January 2018 , Kuwait's net budget outcomes (after transfers to the Future Generations Fund and excluding sovereign investment income) expressed as a percentage of its GDP were a surplus of 2.4 per cent. in 2014 and a deficit of 17.5 per cent. in 2015. The IMF estimated the deficit at 17.6 per cent. in 2016 and projected deficits of 14.9 per cent. in 2017, 15.5 per cent. in 2018 and 15.3 per cent. in 2019. In July 2014, the monthly average price of the OPEC reference basket was U.S.$105.61. Since that point, prices fell significantly, reaching a monthly average low of U.S$26.50 in January 2016. Since January 2016, international oil prices have generally increased, with the yearly average OPEC reference basket price being U.S.$40.76 in 2016, U.S.$52.43 in 2017 and U.S.$69.78 in 2018. The monthly average price of the OPEC reference basket was U.S.$58.74 in January 2019. The oil and oil products sector is the most significant contributor to Kuwait's GDP and accounted for 60.8 per cent. of Kuwait's nominal GDP in 2014, 43.2 per cent. in 2015, 38.8 per cent. in 2016 and 42.4 per cent. in 2017, according to CSB data. The sector is also the main contributor to Kuwait's annual revenues. On average, Kuwait produced 2.7 million barrels of crude oil each day in 2017 (source: OPEC Annual Statistical Bulletin 2018). In February 2015, the National Assembly approved a new five-year development plan (the Kuwait Development Plan) that envisaged spending of approximately KD 34 billion to implement over 500 projects. The Kuwait Development Plan commenced in April 2015 and is scheduled to end in March 2020. The Kuwait Development Plan is the second of a series of plans based on a strategic vision for 2035 (that was announced in 2010 and updated on 30 January 2017) that emphasises investment in infrastructure, health and education, and envisages significant co-participation of the private sector through the establishment of public shareholding companies. The primary objectives of the plan are to boost GDP, diversify the economy by increasing the private sector share of the economy and promoting foreign investment in non-oil sectors and raise the number of Kuwaitis in the private sector. These efforts have gained special importance in light of the lower oil price environment since mid-2014. Kuwait is estimated to have held reserves of foreign exchange and gold worth U.S.$33.1 billion as at 31 December 2017 (source: the CIA). In addition, Kuwait's sovereign wealth fund, the Kuwait Investment Authority, which was launched in 1953 and claims to be the oldest sovereign wealth fund in the world, had approximately U.S.$592 billion of assets under management as at November 2018, according to data from Statistica. The IMF's October 2018 World Economic Database indicates that inflation in Kuwait, on an average consumer price measure, was 3.1 per cent. in 2014, 3.7 per cent. in 2015, 3.5 per cent. in 2016 and 1.5 per cent. in 2017. The IMF estimates that inflation will have fallen to 0.8 per cent. in 2018. BANKING SECTOR IN KUWAIT Credit growth in Kuwait in the 11 months to November 2018 slowed to 3 per cent. compared to 4.3 per cent. for the same period in 2017. This reflected growth of 33 per cent. in credit extended to the oil sector, 4 per cent. in personal facilities and less than 1 per cent. in real estate facilities in the 2018 period. Credit facilities extended to non-bank financial institutions in Kuwait dropped by 13 per cent. in the first 11 months of 2018 and credit extended to the trade sector fell by 2 per cent. in the same period. Management believes that it is possible that amended regulations issued by CBK concerning the maximum limit of consumer loans (which raised the maximum limit of loans and Islamic financing for consumer purposes to 25 times the net monthly salary of the client subject to a maximum of KD 25,000) may enhance credit growth in the short and medium term. Deposits in Kuwait grew by 2.9 per cent. in the first 11 months of 2018, driven by growth in private sector deposits. Government deposits fell by 6 per cent. in the period. 155
172. The banking sector in Kuwait has a Basel III capital adequacy ratio of 18 .0 per cent. as at 30 September 2018. At the same date, the sector non-performing loans (NPLs) coverage ratio was 214.3 per cent. and NPLs were 2.0 per cent. of total loans compared to 2.5 per cent. as at 30 September 2017. Local banks in Kuwait maintained high liquidity levels, with total bank liquid reserves (comprising cash, deposits with the CBK and CBK bonds and tawarruq) being KD 6 billion as at 30 September 2018, equivalent to 9.2 per cent. of local banks' total assets, compared to 6.6 per cent. as at 30 September 2017. Local banks profits in Kuwait for the nine months ended 30 September 2018 were KD 660 million, up 18 per cent. compared to the same period in 2017. REAL ESTATE MARKET IN KUWAIT The Kuwaiti real estate market was positively influenced by economic improvement during 2018. Based on published data, the Bank estimates that real estate total sales (contracts and power of attorneys) amounted to KD 3.8 billion in 2018, 48 per cent. higher than the total sales in 2017 and the highest since 2014. In 2018, there were 6,361 real estate transactions, 21% per cent. higher than in 2017. The average transaction value in 2018 was KD 592 thousand, higher 2014 and 2015 but lower than 2016 and 2017. Management believes that the Kuwaiti real estate market may benefit from further economic progress, particularly with the fall in real estate prices during the last few years which has attracted more investors to the market. On the other hand, real estate investment returns may be negatively affected by higher interest rates and/or lower occupation levels in the short run, while further plot distributions from the Public Authority for Housing Welfare may increase pressure on residential house prices. However, management expects the commercial sector to continue to benefit from increased consumer confidence and higher spending levels, as well as by Government efforts to continue promoting doing business in Kuwait. 156
173. OVERVIEW OF BANKING AND FINANCE REGULATIONS IN KUWAIT Unless otherwise indicated , information in this section has been derived from Law No. 32 of 1968 as amended and the instructions issued by the CBK to banks operating in Kuwait (Instructions). CENTRAL BANK OF KUWAIT The CBK was established by Law No. 32 of 1968 and is managed by a board which is chaired by the Governor of the CBK. The membership of the board, in addition to the Governor, comprises the Deputy Governor, a representative from each of the Ministry of Finance and the Ministry of Commerce and Industry (the MOCI) and four additional members, each of whom must be a Kuwaiti national and must be nominated by the Minister of Finance (after obtaining the approval of the Council of Ministers). Each of the four additional board members is drawn from expert practitioners in economics, finance or banking and is appointed by an Amiri Decree for three years. The Governor of the CBK and the Deputy Governor are each appointed by decree for a five-year renewable term. The CBK's objectives are to: • issue currency on behalf of Kuwait; • secure the stability of the Kuwaiti dinar and its free convertibility into other currencies; • direct credit policy in order to contribute to Kuwait's social and economic progress and the growth of national income; • supervise the banking system in Kuwait; • serve as the Government's bank; and • render financial advice to the Government. The CBK, either directly or through other financial institutions, undertakes operations relating to the sale and management of securities issued or guaranteed by the Government, or issued in dinar by any public organisation or institution. The CBK may purchase, sell, discount and rediscount Government treasury bills and purchase and sell public debt securities issued and offered for sale by the Government. In its supervisory capacity, the CBK may at any time inspect banks, investment companies and other institutions subject to the CBK's supervision, including branches, companies and banks that operate abroad that are subsidiaries of Kuwaiti banks. The CBK may issue such Instructions to banks as it deems necessary to realise its credit or monetary policy or to ensure the sound progress of the banking business. The CBK is entitled to inspect any accounts, books, records, instruments and any other documents that it deems necessary for performing its supervisory role and may also request any other relevant data and information to be provided by any board member of any CBK-regulated institution. On completion of each inspection, the CBK issues a comprehensive report incorporating its recommendations of actions to be taken to address any issues identified during the inspection. The Instructions cover a wide range of matters, including the liquidity system, maximum limits for credit concentration, credit facilities classification, interest rate ceilings, the organisation of banks' credit policy, the extension of consumer loans and other instalment loans, the extension of banking services, foreign exchange translation and portfolio management (see “—Certain banking regulations” below). The CBK may impose penalties on any institution that fails to comply with an Instruction. The National Assembly passed Law No. 30/2003 (concerning Islamic Banks) that amended the Banking Law to include a special section on the rules and regulations governing Islamic banks (the Islamic Banking Law). The Islamic Banking Law allows conventional Kuwaiti banks to practise Islamic banking activities through affiliates in 157
174. which the principal bank owns at least 51 per cent . of the capital, and shall maintain that percentage at all times after the establishment. The Islamic Banking Law further provides that each bank is allowed to establish one affiliate that has only one headquarters with a capital of not less than KD 15 million. The Islamic Banking Law also allows the CBK to introduce Islamic instruments to deal with Islamic banks in order to regulate banking liquidity. In conjunction with instructions issued to conventional banks, the CBK also issues separate instructions for Islamic banks. The CBK has established the Financial Stability Office (the FSO), which aims to contribute to a sound financial system in Kuwait capable of withstanding financial and economic shocks by utilising financial stress testing and macro-economic models to identify key vulnerabilities in CBK-regulated institutions and suggesting appropriate corrective measures. The FSO also assists in maintaining an effective internal supervisory system and promoting sound risk management and governance practices. CERTAIN BANKING REGULATIONS All banks operating within Kuwait are subject to the supervision of the CBK, which is the primary regulator of banks and financial institutions (which engage in financing activity) in Kuwait whilst the CMA exercises supervisory authority over all Kuwaiti entities (including banks and financial institutions) which are listed on Boursa Kuwait or engage in securities activities as discussed further below. The CBK imposes the following regulations upon banks: Liquidity regulations The CBK requires banks to maintain 18 per cent. of their KD customer deposits in the form of balances with the CBK. Islamic banks must maintain 18 per cent. of their KD customer deposits in the form of balances with the CBK or finance sukuk issued by the Islamic Development Bank, The International Islamic Liquidity Management Corporation (IILM) or governments of the GCC member countries (provided that the sukuk are traded and are rated not less than BBB or equivalent). Bank liquidity in Kuwait is monitored using the Maturity Ladder Approach under which future cash inflows are compared with future cash outflows. The resulting liquidity mismatches are then examined in time bands against approved limits for each band. The relevant Instruction relating to liquidity establishes the elements to be included when calculating assets and liabilities for the purpose of determining liquidity. Additionally, Kuwaiti banks are subject to the Basel III Liquidity Coverage Ratio (LCR) as adopted by the CBK and the Net Stable Funding Ratio (NSFR) guidelines for both conventional and Islamic banks, including the branches of foreign banks operating in Kuwait. The CBK introduced the LCR in a phased manner, setting a benchmark requirement of 70 per cent. in 2016 which increased by 10 per cent. each year and has been 100 per cent. since 1 January 2019. Banks are required to submit, along with existing liquidity reports, their LCR reports on a daily and monthly basis for monitoring purposes as well as LCRs by major currency. The minimum required NSFR is calculated as a percentage of available stable funding to required stable funding that should not be less than 100 per cent. This requirement has been effective since 1 January 2018, although banks were to start reporting their NSFR to the CBK in January 2016. 158
175. Credit risk regulations Loans /financings to deposit ratio Kuwaiti banks are restricted by the CBK from lending or financing amounts in excess of a prescribed percentage of qualifying deposits (which do not include interbank deposits). With effect from October 2016, the prescribed percentage is 90 per cent., irrespective of the maturity of such deposits. Investment limits The total value of the securities portfolio held by a Kuwaiti bank should not exceed 50 per cent. of the bank's capital in its comprehensive concept, as defined under the relevant Instruction. Further, the value of an investment in the securities of any one issuer should be the lower of 10 per cent. of the bank's capital in its comprehensive concept or 10 per cent. of the issuer's capital. Credit facility classifications The CBK requires banks operating in Kuwait to evaluate and classify their credit facilities into two categories (regular and irregular) on a periodic basis. The relevant Instructions specify the cases when a credit facility must be classified as ‘irregular', which include where (i) payment of an instalment is not made, (ii) interest or profit is not paid on the maturity date or (iii) the debit balance exceeds the drawing limits determined for the customer. Foreign exchange transactions Local banks may deal with foreign banks for foreign exchange transactions, may deposit Kuwaiti dinar with foreign banks and may enter into foreign exchange swap and other derivative transactions, including options, futures and forward contracts. Concentration risk regulations Maximum limit for credit concentration Subject to certain exceptions or where prior CBK approval has been obtained, the total credit liabilities of any single customer (including its legally or economically associated entities) to a bank may not exceed 15 per cent. of the bank's capital base. Clustering limit – total limit for large concentrations The aggregate of large credit concentrations (being concentrations which exceed 10 per cent. of a bank's capital base), including any exceptions approved by the CBK, may not exceed four times a bank's capital base. Consumer loans and financings The relevant CBK Instruction provides that any consumer financing granted to a bank's customers can be utilised for the purpose of repaying an existing financing with another bank in Kuwait. Extension of facilities for non-residents Local banks are permitted to extend credit facilities in KD to non-residents without the need for prior consent from the CBK only in connection with financing contracts awarded by Government bodies in Kuwait whose value does not exceed KD 40 million and where the loan does not exceed 70 per cent. of the total value of the contract. In all other cases, CBK consent is required for loans to non-residents. 159
176. Capital adequacy regulations The CBK 's Instructions relating to Basel III require that the terms and conditions of Tier 1 or Tier 2 instruments issued by a licensed bank in Kuwait must contain a provision that permits such instruments to either be written-off or converted into common equity, as determined by the CBK, should a Trigger Event (as defined below) occur. Pursuant to the Instructions, a Trigger Event will have occurred if either of the following events occurs: (i) the issuing bank is instructed by its regulator to write-off or convert such instruments, on the grounds of nonviability; or (ii) an immediate injection of capital is required, by way of an emergency intervention, without which the issuing bank would become non-viable. Notwithstanding the definition of Trigger Event set out above, the Conditions only allow for a Write-down (as defined in the Conditions), and not a conversion into ordinary shares, of the Certificates to take place following the occurrence of a Trigger Event. Profit rate cap regulations The relevant Instructions on interest and profit rates provide that the maximum limits for such rates on KD financings to corporates should not exceed: • 2.5 per cent. over the CBK's discount rate in the case of commercial financings with a maturity of one year or less; and • 4 per cent. over the CBK's discount rate in the case of commercial financings exceeding one year. Interest and profit rates for consumer and instalment loans and financings denominated in Kuwaiti dinar are currently capped at the CBK discount rate plus 3 per cent. for each block of five years. Such rates may be adjusted by no more than plus or minus 2 per cent. for each subsequent block of five years. Interest and profit rates for loans in currencies other than the Kuwaiti dinar are not regulated by the CBK. Third party portfolio management Instructions apply to portfolios managed by banks and investment companies for the account of third parties and invested in foreign securities and other financial instruments. Sharia supervisory board Islamic banks in Kuwait must have a Sharia supervisory board, which must have a minimum of three members. The Sharia supervisory board is responsible for determining the Sharia compliance of bank products and transactions. The board of directors of an Islamic bank must implement the directives of the Sharia supervisory board regarding Sharia compliance. Other Instructions The CBK has also issued Instructions containing guidelines relating to, among other matters: (i) post-dated cheques; (ii) banks' credit policy ratios; (iii) verification of the purpose of credit facilities granted to customers; (iv) collateral to be granted by customers against credit facilities; (v) the provision of facilities for trading in shares listed on the Boursa Kuwait; (vi) the protection of customers; (vii) special needs of customers and (viii) anti-money laundering and combating the financing of terrorism. 160
177. CORPORATE GOVERNANCE During June 2012 , the CBK issued instructions relating to the corporate governance of Kuwaiti banks (the Governance Rules) which apply to all banks in Kuwait. The Governance Rules provide principles that should be followed and applied by Kuwaiti banks in order to ensure proper governance. These include, amongst other things, principles in relation to the independence of the board of directors, risk management controls, disclosure and transparency, remuneration policies and systems and the overall protection of shareholders' and other stakeholders' rights. The Governance Rules require each bank to adopt a corporate governance manual and establish a governance committee responsible for devising a framework to ensure adherence to the corporate governance manual. The Governance Rules define the role of a bank's board of directors and executive management (including the chief executive officer and other senior management), the executive committee (which is to include the chief executive officer), the risk committee, the internal and external audit committee, and any other committees that have an active role in the business of the bank. The Board of Directors of the Bank adopts and implements internationally recognised corporate governance practices and adheres to the CBK's requirements under the Governance Rules. APPLICATION OF CBK REGULATIONS TO THE BANK The Bank is incorporated as a public shareholding company in Kuwait. The Bank is licensed by the CBK to conduct banking activities and operates under its supervision. The Bank is also listed on Boursa Kuwait. As a company incorporated in Kuwait under the Commercial Companies' Law No. 15 of 1960 (as replaced), for the Bank to perform any commercial activities, it must have a valid commercial licence issued by the MOCI. The MOCI issued commercial licence is renewable every four years. The Bank's commercial licence was last renewed on 8 November 2016 for the period until 7 November 2020. The Bank has no reason to believe that its commercial licence will not be renewed by the MOCI. The CBK acts as lender of last resort to all of the Kuwaiti banks. As a financial institution, the Bank is required to submit various periodic and one-off reports to the CBK in a format prescribed by it. The CBK also conducts inspections of banking and financial institutions (banks, investment companies, money exchange companies and mutual funds) which are subject to its supervision in order to ascertain their financial sustainability and their adherence to their constitutional by-laws. These inspections may be in the form of a specific inspection or a full audit of all activities. The CBK periodically inspects all financial institutions which are subject to its supervision. The most recent inspection for which a report has been received was conducted between June and December 2018. The report, which was received on 10 February 2019, contained no material observations. Alongside the CBK, the Bank is also regulated by the CMA as it is a publicly traded company with shares listed on Boursa Kuwait and conducts certain regulated securities activities. BANKING SYSTEM The Kuwaiti banking sector currently comprises five locally incorporated conventional commercial banks, one specialised bank, five locally incorporated Sharia-compliant banks, branches of 11 non-Kuwaiti conventional banks and a non-Kuwaiti Sharia-compliant bank. The Kuwait banking sector has experienced increased competition and diversification from the entry of international banks establishing branches in Kuwait, following the promulgation of Law No. 28 of 2004 amending certain provisions of Law No. 32 of 1968 concerning Currency, CBK and the Organisation of Banking Business. As at 31 December 2018, total local bank assets in the Kuwaiti banking sector amounted to KD 66.6 billion and total credit facilities to Kuwaiti residents advanced by local banks amounted to KD 36.9 billion (source: CBK). 161
178. The key performance indicators of the major Kuwaiti banks as at 31 December 2018 are set out below (source: annual reports published on the company website of each bank listed below). Ahli United Bank........... Al-Ahli Bank of Kuwait Boubyan Bank ............... Burgan Bank .................. Commercial Bank of Kuwait ........................... Gulf Bank ...................... Kuwait Finance House .. The Bank ....................... National Bank of Kuwait ....................................... Warba Bank ................... ______ Notes: (1) (2) (3) (4) (5) (6) (7) Return on average assets(2) (per cent.) 1.353 0.945 1.350 1.121 Return on average equity(3) (per cent.) 12.24 7.28 14.33 11.59 Earnings per share(4) (fils)(7) 27.1 26.0 21.4 31.0 29.7 34.5 39.2 53.9 1.439 0.970 1.295 1.023 9.22 9.23 12.08 7.93 35.4 20.0 36.4 22.4 1.7 5.9 2.4 13.2 4.0 7.0 1.6 9.6 31.3 38.3 1.387 0.642 11.97 8.63 58.0 7.1 5.4 23.6 4.4 4.6 Cost/income ratio(1) (per cent.) 30.6 38.6 40.6 42.1 Growth in total assets(5) (per cent.) 6.8 4.3 9.4 (1.4) Growth in customer deposits(6) (per cent.) (0.1) 6.0 9.1 (9.3) Calculated as total operating costs divided by total operating income. Calculated as net profit for the year divided by average total assets (with the average being calculated as the sum of the opening and closing balances divided by two). Calculated as net profit for the year divided by average shareholders' equity attributable to the Bank (with the average being calculated as the sum of the opening and closing balances divided by two). As calculated by each bank. Total assets for 2018 minus total assets for 2017 divided by total assets for 2017. Customer deposits for 2018 minus customer deposits for 2017 divided by customer deposits for 2017. Customer deposits does not include interbank deposits. 100 fils equals KD 1.00. FINANCIAL STABILITY LAW AND DEPOSIT GUARANTEE LAW In response to the global financial crisis which began in 2008, the Government took a number of measures, including the passing of Decree No. 2 of 2009 (the Financial Stability Law). The Financial Stability Law sought to stabilise the financial sector in Kuwait and other economic sectors so as to encourage the financing of such sectors by local banks. The Financial Stability Law does not have a wide scope of application as the Government stability measures thereunder only apply to financial exposures of companies within the banking sector outstanding as at 31 December 2008. As a further measure, the Government passed Law No. 30 of 2008 regarding the guarantee of deposits held with local banks (the Deposit Guarantee Law). Under the Deposit Guarantee Law, the Government has undertaken to guarantee the principal (but not interest or profit) of all deposits held with local banks in Kuwait, including saving accounts and current accounts. 162
179. SUMMARY OF THE PRINCIPAL TRANSACTION DOCUMENTS The following is a summary of certain provisions of the principal Transaction Documents and is qualified in its entirety by reference to the detailed provisions of the principal Transaction Documents . Copies of the Transaction Documents will be available for inspection at the offices of the Principal Paying Agent (as defined in the Conditions). Declaration of Trust The Declaration of Trust will be entered into on the Issue Date between the Bank, the Trustee and the Delegate and will be governed by English law. Pursuant to the Declaration of Trust, the Trustee will declare a trust for the benefit of the Certificateholders over the Trust Assets. The Trust Assets will comprise: (a) the cash proceeds of the issuance of the Certificates pending application thereof in accordance with the terms of the Transaction Documents; (b) all of the Trustee's rights, title, interest and benefit, present and future, in, to and under the assets from time to time constituting the Mudaraba Assets; (c) all of the Trustee's rights, title, interest and benefit, present and future, in, to and under the Transaction Documents (other than in relation to any representations given by the Bank (acting in any capacity) pursuant to any of the Transaction Documents and the covenant to indemnify the Trustee given by the Bank pursuant to the Declaration of Trust); and (d) all amounts standing to the credit of the Transaction Account from time to time, and all proceeds of the foregoing. The Declaration of Trust shall provide that the rights of recourse in respect of Certificates shall be limited to the amounts from time to time available therefor from the Trust Assets, subject to the priority of payments set out in Condition 5.3 (The Trust). After enforcing or realising the Trust Assets and distributing the net proceeds of the Trust Assets in accordance with the Declaration of Trust, the obligations of the Trustee in respect of the Certificates shall be satisfied and no Certificateholder may take any further steps against the Trustee (or any steps against the Delegate) or any other person to recover any further sums in respect of the Certificates and the right to receive any such sums unpaid shall be extinguished. Pursuant to the Declaration of Trust, the Trustee will, inter alia: (a) hold the Trust Assets on trust absolutely for and on behalf of the Certificateholders pro rata according to the face amount of Certificates held by each Certificateholder in accordance with the provisions of the Declaration of Trust and the Conditions; and (b) act as trustee in respect of the Trust Assets, distribute the income from the Trust Assets and perform its duties in accordance with the provisions of the Declaration of Trust and the Conditions. In the Declaration of Trust, the Trustee shall irrevocably and unconditionally appoint the Delegate to be its delegate and attorney and in its name, on its behalf and as its act and deed, to execute, deliver and perfect all documents, and to exercise all of the present and future powers (including the power to sub-delegate), trusts, rights, authorities (including but not limited to the authority to request directions from any Certificateholders and the 163
180. power to make any determinations to be made under the Transaction Documents ) and discretions vested in the Trustee by the relevant provisions of the Declaration of Trust that the Delegate may consider to be necessary or desirable in order to, upon the occurrence of a Dissolution Event or a Potential Dissolution Event, and subject to its being indemnified and/or secured and/or pre-funded to its satisfaction, (i) exercise all of the rights of the Trustee and have all the protections of the Trustee under the Mudaraba Agreement and any of the other Transaction Documents and (ii) make such distributions from the Trust Assets as the Trustee is bound to make in accordance with the Declaration of Trust (together the Delegation of the Relevant Powers), provided that: (i) no obligations, duties, liabilities or covenants of the Trustee pursuant to the Declaration of Trust or any other Transaction Document shall be imposed on the Delegate by virtue of the Delegation; (ii) in no circumstances will such Delegation of the Relevant Powers result in the Delegate holding on trust the Trust Assets; and (iii) such Delegation of the Relevant Powers shall not include any duty, power, trust, right, authority or discretion to dissolve the trusts constituted by the Declaration of Trust following the occurrence of a Dissolution Event or Potential Dissolution Event or to determine the remuneration of the Delegate. The appointment of such delegate by the Trustee is intended to be in the interests of the Certificateholders and, subject to certain provisions of the Declaration of Trust, shall not affect the Trustee's continuing role and obligations as trustee. Pursuant to the Declaration of Trust: (a) upon the occurrence of a Bank Event and the delivery of a Dissolution Notice by the Delegate to the Trustee, to the extent that the amounts payable in respect of the Certificates have not been paid in full pursuant to Condition 12.1 (Bank Events), the Delegate may at its discretion (acting on behalf of Certificateholders) or shall, if so directed by an Extraordinary Resolution of the Certificateholders or if so requested in writing by Certificateholders holding at least one-fifth of the then aggregate face amount of the Certificates outstanding, and subject to its being indemnified and/or secured and/or prefunded to its satisfaction take one or more of the following steps: (i) institute any steps, actions or proceedings for the winding-up of the Bank and/or (ii) prove in the winding-up of the Bank and/or (iii) institute steps, actions or proceedings for the bankruptcy of the Bank and/or (iv) claim in the liquidation of the Bank and/or (v) take such other steps, actions or proceedings which, under the laws of Kuwait, have an analogous effect to the actions referred to in (i) to (iv) above, in each case for (subject to the provisos contained in Condition 12.3(a) (Proceedings for Winding-up)) all amounts of Mudaraba Capital, Rab-al-Maal Mudaraba Profit, Rab-al-Maal Final Mudaraba Profit and/or other amounts due to the Trustee on termination of the Mudaraba Agreement in accordance with its terms and the terms of the other Transaction Documents); and (b) without prejudice to Conditions 12.1 (Bank Events) and 12.3 (Winding-up, dissolution or liquidation) and the provisions of clause 16 (Enforcement of Rights) of the Declaration of Trust, the Trustee (or the Delegate) may at its discretion and the Delegate shall, in each case subject to Condition 12.3(e)(i) (Realisation of Trust Assets) if so directed by an Extraordinary Resolution of the Certificateholders or if so requested in writing by Certificateholders holding at least one-fifth of the then aggregate face amount of the Certificates outstanding and without further notice institute such steps, actions or proceedings against the Bank and/or the Trustee as it may think fit to enforce any term or condition binding on the Bank or the Trustee (as the case may be) under the Transaction Documents (other than any payment obligation of the Bank under or arising from the Transaction Documents, including, without limitation, payment of any principal or premium or satisfaction of any payments in respect of the Transaction Documents, including any damages awarded for breach of any obligations) including, without limitation, any failure by the Bank to procure the substitution of the Trustee in the circumstances described in Condition 12.2 (Trustee Events), and in no event shall the Bank, by virtue of the institution of any such steps, actions or proceedings, be obliged to pay any sum or sums, in cash or otherwise, sooner than the same would otherwise have been payable by it in accordance with the Transaction Documents. A Transaction Account will be established in London in the name of the Trustee. Monies received in the Transaction Account will, inter alia, comprise payments of amounts payable under the Mudaraba Agreement 164
181. immediately prior to each Periodic Distribution Date (see "—Mudaraba Agreement" below). The Declaration of Trust shall provide that all monies credited to the Transaction Account from time to time will be applied in the order of priority set out in Condition 5.3 (The Trust). Mudaraba Agreement The Mudaraba Agreement will be entered into on or before the Issue Date between the Bank (as the Mudareb) and KIB Tier 1 Sukuk Limited (as Trustee and Rab-al-Maal) and will be governed by English law save that Clause 2.4 (Status) of the Mudaraba Agreement will be governed by the laws of Kuwait. The Mudaraba will commence on the date of payment of the Mudaraba Capital to the Mudareb and will end on (i) the date on which the Certificates are redeemed in whole but not in part in accordance with the Conditions following the liquidation of the Mudaraba in accordance with the terms of the Mudaraba Agreement (the Mudaraba End Date) or (ii) if earlier, and in the case of a Write-down in whole only, on the Non-Viability Event Write-down Date. Pursuant to the Mudaraba Agreement the proceeds of the issue of the Certificates will be contributed by the Rab-alMaal to the Mudareb and shall form the Mudaraba Capital. The Mudaraba Capital shall be invested by the Bank (as Mudareb), on an unrestricted co-mingling basis, in its general business activities carried out through the General Mudaraba Pool in accordance with the investment plan prepared by the Mudareb and scheduled to the Mudaraba Agreement (the Investment Plan). The Mudareb will acknowledge and agree in the Mudaraba Agreement that the Investment Plan was prepared by it with due skill, care and attention, and acknowledge that the Trustee has entered into the Mudaraba in reliance on the Investment Plan. The General Mudaraba Pool does not include any other investment pool maintained by the Bank. The Mudareb is expressly authorised to co-mingle the Mudaraba Capital with its shareholders' equity and such amounts may be co-mingled in its general business activities carried out through the General Mudaraba Pool, provided that prior to the calculation of any Mudaraba Profit or Final Mudaraba Profit the Mudareb shall deduct a proportion of any profit earned (including, for the avoidance of doubt, any profit earned in respect of the proceeds of all current savings and investment deposit accounts forming part of the General Mudaraba Pool) for its own account. The Mudaraba Agreement provides that the profit (if any) generated by the Mudaraba will be distributed by the Mudareb on each Mudaraba Profit Distribution Date on the basis of a constructive liquidation of the Mudaraba by the Mudareb in accordance with the following profit sharing ratio: (a) the Trustee: 99 per cent.; and (b) the Mudareb: 1 per cent. If the Mudareb elects to make a payment of Mudaraba Profit or Final Mudaraba Profit is otherwise payable pursuant to the Mudaraba Agreement, and if the Trustee's share of the Mudaraba Profit (the Rab-al-Maal Mudaraba Profit) or the Trustee's share of the Final Mudaraba Profit (the Rab-al-Maal Final Mudaraba Profit) (as applicable) payable to the Trustee is: (a) greater than the then applicable Periodic Distribution Amount, the amount of any excess shall be credited to the Mudaraba Reserve and the Rab-al-Maal Mudaraba Profit or the Rab-al-Maal Final Mudaraba Profit (as applicable) payable to the Trustee will be reduced accordingly; or (b) is less than the then applicable Periodic Distribution Amount, the Mudareb shall first utilise any amount available in the Mudaraba Reserve (after re-crediting amounts to it in accordance with the terms of the Mudaraba Agreement if there is any such shortfall) and, if a shortfall still exists following such re-credit, 165
182. it may (at its sole discretion) elect (but shall not be obliged) to make one or more payments from its own cash resources in order to cover such shortfall (the Shortfall Cover Amount). The Mudareb shall be entitled to deduct amounts standing to the credit of the Mudaraba Reserve (at its sole discretion) at any time prior to the Mudaraba End Date and to use such amounts for its own purposes as an incentive fee, provided that such amounts shall be repaid by it to the Mudaraba Reserve if so required to fund a shortfall. If the Mudareb makes a Non-Payment Election or a Non-Payment Event occurs, then the Mudareb shall give notice to the Trustee, the Principal Paying Agent, the Delegate and the Certificateholders, in each case providing details of such Non-Payment Election or Non-Payment Event in accordance with the notice periods set out in the Mudaraba Agreement. The Trustee shall have no claim in respect of any Rab-al-Maal Mudaraba Profit or Rab-alMaal Final Mudaraba Profit not paid as a result of either a Non-Payment Event or (in the case of any Rab-al-Maal Mudaraba Profit only) a Non-Payment Election and such non-payment in whole or in part, as applicable, in such circumstance will not constitute a Dissolution Event. If any amount of Rab-al-Maal Mudaraba Profit or Rab-alMaal Final Mudaraba Profit is not paid as a consequence of a Non-Payment Election or a Non-Payment Event, then, from the date of such Non-Payment Election or Non-Payment Event (the Dividend Stopper Date), the Mudareb shall be prohibited from declaring or paying certain distributions or dividends, declaring or paying profit or other distributions on certain of its securities, or redeeming, purchasing, cancelling, reducing or otherwise acquiring certain of its share capital and securities, in each case unless or until (i) two consecutive payments of Rab-al-Maal Mudaraba Profit or, (ii) as the case may be, Rab-al-Maal Final Mudaraba Profit, in each case following a Dividend Stopper Date, is made in full to the Trustee following such Non-Payment Election or NonPayment Event (or an amount equal to that amount has been duly set aside or provided for in full for the benefit of the Trustee). Subject to certain conditions as set out in the Mudaraba Agreement, the Bank (as Mudareb) may (in its sole discretion) liquidate the Mudaraba in whole, but not in part, on the basis of a final constructive liquidation of the Mudaraba in the following circumstances: (a) on the First Call Date or any Periodic Distribution Date thereafter by giving not less than 35 nor more than 65 days' prior notice to the Trustee; or (b) on any date, on or after the Issue Date (whether or not a Periodic Distribution Date), by giving not less than 35 nor more than 65 days' prior notice to the Trustee: (i) upon the occurrence of a Tax Event; or (ii) upon the occurrence of a Capital Event. If the Mudareb were to exercise its option to liquidate in accordance with paragraph (a) or (b) above and the proceeds to be returned to the Trustee which would be generated upon such liquidation are less than the Required Liquidation Amount, the Mudareb shall either continue investing the Mudaraba Capital in the Mudaraba, and accordingly no distribution of the liquidation proceeds shall occur, or shall, if it were to proceed with such final constructive liquidation, indemnify the Trustee in respect of such shortfall and shall pay an amount equal to the Required Liquidation Amount in which case there shall be a final constructive liquidation of the Mudaraba. The Required Liquidation Amount means: (a) the Mudaraba Capital and, in the case of a final liquidation following the occurrence of a Capital Event pursuant to paragraph (b)(ii) above only, the Premium; (b) Subject to a NonPayment Event not having occurred and being continuing and provided that a Non-Payment Event will not occur as a result of such payments, the Rab-Al-Maal Final Mudaraba Profit (being an amount equal to the Periodic Distribution Amount payable on the redemption of the Certificates in full); and (c) the Shortfall Cover Amount (if any). 166
183. Under the terms of the Mudaraba Agreement , the Mudaraba will mandatorily be liquidated in whole but not in part if at any time an order is made, or an effective resolution is passed, for the winding-up, bankruptcy, dissolution or liquidation (or other analogous event) of the Mudareb and/or if a Bank Event occurs and a Dissolution Notice is delivered pursuant to Condition 12.1 (Bank Events). The Mudareb acknowledges under the Mudaraba Agreement that the Trustee shall in such case be entitled to claim for all amounts due in accordance with the terms of the Mudaraba Agreement in such winding-up, bankruptcy, dissolution or liquidation (or analogous event) subject to certain conditions being satisfied. The Mudaraba Agreement also provides that, if a Non-Viability Event occurs, a Write-down (in whole or in part, as applicable) will take place. In such circumstances, in the case of a Write-down in whole only, the Mudaraba Agreement will be automatically terminated (and the Trustee shall not be entitled to any claim for any amounts in connection with the Mudaraba Assets) and in the case of a Write-down in part only, the Mudaraba Capital shall be reduced in proportion to the face amount of the Certificates that are to be written-down and the Certificateholders' rights to the Trust Assets shall automatically be deemed to be irrevocably and unconditionally written-down in the same manner as the Certificates. The Bank (as Mudareb) and the Trustee undertake in the Mudaraba Agreement, in circumstances where the Certificates are required by the Bank to be varied upon the occurrence of a Tax Event or a Capital Event pursuant to the Conditions, to make such variations to the Mudaraba Agreement as are necessary to ensure that the Certificates become or, as appropriate, remain Qualifying Additional Tier 1 Instruments. The Mudareb shall not be responsible for any losses to the Mudaraba Capital suffered by the Trustee unless such losses are caused by (i) the Mudareb's breach of the Mudaraba Agreement or (ii) the Mudareb's gross negligence, wilful misconduct or fraud. The Mudareb shall exercise its rights, powers and discretions under the Mudaraba Agreement and shall take such action as it deems appropriate, in each case, in accordance with material applicable laws, with the degree of skill and care that it would exercise in respect of its own assets and in a manner that is not repugnant to Shari'a. Other than its share of profit from the Mudaraba and any incentive fee payable in accordance with the Mudaraba Agreement, the Mudareb shall not be entitled to receive any remuneration from the Mudaraba. The Mudareb will agree in the Mudaraba Agreement that all payments by it under the Mudaraba Agreement will be made free and clear of, and without any withholding or deduction for, or on account of, Taxes, unless such withholding or deduction is required by law, and provide for the payment of Additional Amounts so that the net amounts received by the Certificateholders shall equal the respective amounts that would have been received in the absence of such withholding or deduction. Any taxes incurred in connection with the operation of the Mudaraba (including in connection with any transfer, sale or disposal of any Mudaraba Asset during the Mudaraba Term), but excluding the Mudareb's obligations (if any) to pay any Taxes and/or Additional Amount, will be borne by the Mudaraba itself. Agency Agreement The Agency Agreement will be entered into on the Issue Date between the Trustee, the Bank, the Delegate, the Principal Paying Agent, the Calculation Agent, the Registrar and the Transfer Agent. Pursuant to the Agency Agreement, the Registrar has agreed to be appointed as agent of the Trustee and has agreed, amongst other things, to authenticate (or procure the authentication of) and deliver the Global Certificate and, if any, each Definitive Certificate; the Principal Paying Agent has agreed to be appointed as agent of the Trustee and has agreed, amongst other things, to pay all sums due under such Global Certificate; the Calculation Agent has agreed to be appointed as agent of the Trustee and has agreed, amongst other things, to calculate the Profit Rate in respect of each Reset Period commencing on the relevant Reset Date, subject to and in accordance 167
184. with the Conditions ; and the Transfer Agent has agreed to be appointed as agent of the Trustee and has agreed, amongst other things, to effect requests to transfer all or part of the Definitive Certificate and issue Definitive Certificates in accordance with each request. On the Issue Date, the Registrar will (i) authenticate (or procure the authentication of) the Global Certificate in accordance with the terms of the Declaration of Trust; and (ii) deliver the Global Certificate to the Common Depositary. The Bank shall cause to be deposited into the Transaction Account opened by the Trustee with the Principal Paying Agent, in same day freely transferable cleared funds, any payment which may be due under the Certificates in accordance with the Conditions. The Principal Paying Agent agrees that it shall, on each Periodic Distribution Date and on the date fixed for payment of the Dissolution Distribution Amount, or any earlier date specified for the liquidation of the Mudaraba, apply the monies standing to the credit of the Transaction Account in accordance with the order of priority set out in Condition 5.3 (The Trust). Shari'a Compliance Each Transaction Document and the Subscription Agreement (as defined below) will provide that each of the KIB Tier 1 Sukuk Limited and Kuwait International Bank K.S.C.P. agrees that it has accepted the Shari'a compliant nature of the Subscription Agreement and each Transaction Document to which it is a party and, to the extent permitted by law, further agrees that: (a) it shall not claim that any of its obligations under the Subscription Agreement and the Transaction Documents to which it is a party (or any provision thereof) is ultra vires or not compliant with the principles of Shari'a; (b) it shall not take any steps or bring any proceedings in any forum to challenge the Shari'a compliance of the Subscription Agreement and the Transaction Documents to which it is a party; and (c) none of its obligations under the Subscription Agreement and the Transaction Documents to which it is a party shall in any way be diminished, abrogated, impaired, invalidated or otherwise adversely affected by any finding, declaration, pronouncement, order or judgment of any court, tribunal or other body that the Subscription Agreement and the Transaction Documents to which it is a party are not compliant with the principles of Shari'a. 168
185. TAXATION The following is a general description of certain Kuwait , Cayman Islands, European Union and United States tax considerations relating to the Certificates. It does not purport to be a complete analysis of all tax considerations relating to the Certificates, whether in those jurisdictions or elsewhere, nor does it address the considerations that are dependent on individual circumstances. Prospective purchasers of Certificates should consult their own tax advisers as to which countries' tax laws could be relevant to acquiring, holding and disposing of Certificates and receiving payments under the Certificates and the consequences of such actions under the tax laws of those countries. This summary is based upon the law as in effect on the date of this Prospectus and is subject to any change in law that may take effect after such date. KUWAIT The following is a summary of taxation in Kuwait is based on the Kuwait Income Tax Decree No. 3 of 1955, as amended by Law No. 2 of 2008 "Amending Certain Provisions of Kuwait Income Tax Decree No. 3 of 1955" (the Amendment), the Executive Bylaws of the Amendment (the Regulations), and various ministerial resolutions and circulars relating thereto issued by the Kuwait Ministry of Finance (the MOF) and Ministry of Finance Administrative Order No. 2028 of 2015 (together, the Taxation Laws) as interpreted and implemented by the MOF's Department of Income Tax (the DIT) as at the date of this Prospectus. Any subsequent changes in either the Taxation Laws or the interpretation or implementation of the same by the DIT may alter and affect this summary. Income tax Under the Taxation Laws, income tax (at a flat rate of 15 per cent.) is levied on, inter alia, the net income and capital gains realised by any corporate entity (interpreted by the DIT to mean any form of company or partnership), wherever incorporated, that conducts business in Kuwait. However, the DIT to date has granted a concession to such corporate entities incorporated in Kuwait or in any other GCC country (being referred to in this Prospectus as GCC corporate entities) and has only imposed income tax on corporate entities which are not GCC corporate entities (being referred to in this Prospectus as non-GCC corporate entities), which, for the avoidance of doubt, includes shareholders of GCC corporate entities which are themselves non-GCC corporate entities, in each case, conducting business in Kuwait. The following paragraphs in this section are therefore applicable only to non-GCC corporate entities. Pursuant to the Regulations, income generated from the lending of funds inside Kuwait is considered to be income realised from the conducting of business in Kuwait, and is therefore subject to income tax. Pursuant to Law No. 22 of 2015 amending Law No. 7 of 2010 Concerning the Establishment of the Capital Markets Authority and the Regulating of Securities Activities (the CMA Law Amendment), yields of securities, bonds, finance sukuk and all other similar securities regardless of the issuer thereof shall be exempted from taxation. The CMA Law Amendment was acknowledged by the Ministry of Finance Administrative Resolution No. 2028 of 2015 (the Administrative Resolution). However, see "Risk Factors⎯The application and enforcement of the Kuwaiti income tax regime is uncertain and holders of the Certificates which are “non-GCC corporate entities” may become subject to the Kuwaiti income tax regime in certain limited circumstances". Individuals are not subject to any Kuwaiti income tax on their income or capital gains. Retention Under the Regulations, a Kuwaiti-based party making a payment (being referred to in this section as the payer) to any other party (being referred to in this section as the payee), wherever incorporated, is obliged to deduct 5 per 169
186. cent . of the amount of each such payment until such time as the DIT issues a tax clearance certificate approving the release of such amount. Unlike with withholding tax, the payer is not required to transfer directly the deducted amount to the DIT immediately, but instead retains such amount and releases it either: (i) to the payee upon presentation to the payer by such payee of a tax clearance certificate from the DIT confirming that the payee is not subject to or is exempt from income tax, or has realised a loss, or has paid or guaranteed the payment of its income tax; or (ii) in the absence of such a tax clearance certificate, to the DIT, on demand. According to a literal interpretation of the Regulations, payments which are subject to a deduction as described above would include principal and profit payments. Given that neither the CMA Law Amendment nor the Administrative Resolution addresses the issue of whether or not there remains an obligation, as described above, to make a deduction, a payer (such as the Trustee) could be required to deduct 5 per cent. from every payment made by it to a payee (such as the holders of the Certificates), which amount would be released by the payer upon presentation to it by the payee of a tax clearance certificate from the DIT. However, the holders of Certificates shall be able to rely on the provisions in the Conditions (in particular, on Condition 13 (Taxation)) which require the Trustee to gross up each payment by an amount equal to any deduction, irrespective of whether a tax clearance certificate is presented or not and, accordingly, in practice, a holder would not need to present such a tax clearance certificate.. Other taxes Save as described above, all payments in respect of the Certificates may be made without withholding, deduction or retention for, or on account of, present taxes, duties, assessments or governmental charges of whatsoever nature imposed or levied by or on behalf of Kuwait. No stamp, registration or similar duties or taxes will be payable in Kuwait by holders of Certificates in connection with the issue or any transfer of the Certificates. CAYMAN ISLANDS The following is a discussion on certain Cayman Islands income tax consequences of an investment in the Certificates. The discussion is a general summary of present law, which is subject to prospective and retroactive change. It is not intended as tax advice, does not consider any investor's particular circumstances, and does not consider tax consequences other than those arising under Cayman Islands law. Under existing Cayman Islands laws payments on the Certificates will not be subject to taxation in the Cayman Islands and no withholding will be required on the payments to any Certificateholder, nor will gains derived from the disposal of the Certificates be subject to Cayman Islands income or corporation tax. The Cayman Islands currently have no income, corporation or capital gains tax and no estate duty, inheritance tax or gift tax. The Trustee has received an undertaking from the Governor in Cabinet of the Cayman Islands pursuant to the Tax Concessions Law (2018 Revision) of the Cayman Islands that, for a period of 20 years from the date of the undertaking, no law which is enacted in the Cayman Islands imposing any tax to be levied on profits, income, gains or appreciations or which is in the nature of estate duty or inheritance tax shall be payable: (a) on or in respect of the shares, debentures or other obligations (which includes the Certificates) of the Trustee; or (b) by way of the withholding, in whole or part, of any relevant payment (as defined in the Tax Concessions Law (2018 Revision)). 170
187. Subject as set out below , no capital or stamp duties are levied in the Cayman Islands on the issue, transfer or redemption of Certificates. An instrument transferring title to any Certificates, if executed in or brought into the Cayman Islands, would be subject to Cayman Islands stamp duty. An annual registration fee is payable by the Trustee to the Cayman Islands Registrar of Companies, which is calculated by reference to the nominal amount of its authorised share capital. At current rates, this annual registration fee is approximately U.S.$854. THE PROPOSED FINANCIAL TRANSACTIONS TAX (FTT) On 14 February 2013, the European Commission published a proposal (the Commission's Proposal) for a Directive for a common FTT in Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia (the participating Member States). However, Estonia has since stated that it will not participate. The Commission's Proposal has very broad scope and could, if introduced, apply to certain dealings in the Certificates (including secondary market transactions) in certain circumstances. Primary market transactions referred to in Article 5(c) of Commission Regulation (EC) No 1287/2006 are expected to be exempt. Under the Commission's Proposal the FTT could apply in certain circumstances to persons both within and outside of the participating Member States. Generally, it would apply to certain dealings in the Certificates where at least one party is a financial institution, and at least one party is established in a participating Member State. A financial institution may be, or be deemed to be, "established" in a participating Member State in a broad range of circumstances, including (a) by transacting with a person established in a participating Member State or (b) where the financial instrument which is subject to the dealings is issued in a participating Member State. However, the FTT proposal remains subject to negotiation between the participating Member States. It may therefore be altered prior to any implementation, the timing of which remains uncertain. Additional EU Member States may decide to participate. Prospective holders of the Certificates are advised to seek their own professional advice in relation to the FTT. FOREIGN ACCOUNT TAX COMPLIANCE ACT Pursuant to certain provisions of the U.S. Internal Revenue Code of 1986, commonly known as FATCA, a "foreign financial institution" may be required to withhold on certain payments it makes (foreign passthru payments) to persons that fail to meet certain certification, reporting, or related requirements. The Trustee is a foreign financial institution for these purposes. A number of jurisdictions (including Kuwait) have entered into, or have agreed in substance to, intergovernmental agreements with the United States to implement FATCA (IGAs), which modify the way in which FATCA applies in their jurisdictions. Under the provisions of IGAs as currently in effect, a foreign financial institution in an IGA jurisdiction would generally not be required to withhold under FATCA or an IGA from payments that it makes. Certain aspects of the application of the FATCA provisions and IGAs to instruments such as the Certificates, including whether withholding would ever be required pursuant to FATCA or an IGA with respect to payments on instruments such as the Certificates, are uncertain and may be subject to change. Even if withholding would be required pursuant to FATCA or an IGA with respect to payments on instruments such as the Certificates, such withholding would not apply prior to the date that is two years after the date on which final regulations defining foreign passthru payments are published in the U.S. Federal Register and the Certificates if characterised as debt (or if not otherwise characterised as equity) for U.S. federal tax purposes are expected to be “grandfathered” for purposes of FATCA withholding unless materially modified after such date. Certificateholders should consult their own tax advisers regarding how these rules may apply to their investment in the Certificates. In the event any withholding would be required pursuant to FATCA or an IGA with respect to payments on the Certificates, no person will be required to pay additional amounts as a result of the withholding. 171
188. SUBSCRIPTION AND SALE Pursuant to a subscription agreement (the Subscription Agreement) dated 7 June 2019 between the Trustee, the Bank and the Managers, the Trustee has agreed to issue U.S.$300,000,000 in aggregate face amount of the Certificates and, subject to certain conditions, the Managers have jointly and severally agreed to subscribe or procure subscribers for the Certificates at the issue price of 100 per cent. of the face amount of Certificates less certain commissions as described below. The Subscription Agreement provides that the obligations of the Managers to pay for and accept delivery of the Certificates are subject to the approval of certain legal matters by their counsel and certain other conditions. The Managers will be paid certain commissions in respect of their services for managing the issue and sale of the Certificates. The Managers will also be reimbursed in respect of certain of their expenses, and each of the Trustee and the Bank has agreed to indemnify the Managers against certain liabilities incurred in connection with the issue and offering of the Certificates. Certain of the Managers and their respective affiliates have engaged, and may in the future engage, in investment banking and/or commercial banking transactions with, and may perform services to the Bank and/or their affiliates in the ordinary course of business. SELLING RESTRICTIONS United States The Certificates have not been and will not be registered under the Securities Act, and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. Terms used in this paragraph have the meanings given to them by Regulation S. Each Manager has agreed that, except as permitted by the Subscription Agreement, it will not offer or sell the Certificates (i) as part of their distribution at any time or (ii) otherwise until 40 days after the later of the commencement of the offering of the Certificates and the Issue Date, within the United States or to, or for the account or benefit of, U.S. persons, and it will have sent to each dealer to which it sells the Certificates during the distribution compliance period a confirmation or other notice setting out the restrictions on offers and sales of the Certificates within the United States or to, or for the account or benefit of, U.S. persons. The Certificates are being offered and sold outside of the United States to non-U.S. persons in reliance on Regulation S. In addition, until 40 days after the commencement of the offering of the Certificates, an offer or sale of Certificates within the United States by a dealer (whether or not participating in the offering of the Certificates) may violate the registration requirements of the Securities Act. United Kingdom Each Manager has represented and agreed that: (a) it has only communicated or caused to be communicated and will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of Section 21 of the FSMA) received by it in connection with the issue or sale of any Certificates in circumstances in which Section 21(1) of the FSMA does not apply to the Trustee or the Bank; and 172
189. (b) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to any Certificates in, from or otherwise involving the United Kingdom. Prohibition of Sales to EEA Retail Investors Each Manager has represented and agreed that it has not offered, sold or otherwise made available and will not offer, sell or otherwise make available any Certificates to any retail investor in the EEA. For the purposes of this provision the expression "retail investor" means a person who is one (or more) of the following: (a) a retail client as defined in point (11) of Article 4(1) of MiFID II; or (b) a customer within the meaning of the IMD, where that customer would not qualify as a professional client as defined in point (10) of Article 4(1) of MiFID II. UAE (excluding the Dubai International Financial Centre) Each Manager has represented and agreed that the Certificates have not been and will not be offered, sold or publicly promoted or advertised by it in the UAE other than in compliance with any laws applicable in the UAE governing the issue, offering and sale of securities. Cayman Islands Each Manager has represented and agreed that it has not made and will not make, whether directly or indirectly, any offer or invitation to the public in the Cayman Islands to subscribe for the Certificates. Dubai International Financial Centre Each Manager has represented and agreed that it has not offered and will not offer the Certificates to any person in the Dubai International Financial Centre unless such offer is: (a) an "Exempt Offer" in accordance with the Markets Rules (MKT) Module of the Dubai Financial Services Authority (DFSA) rulebook; and (b) made only to persons who meet the Professional Client criteria set out in Rule 2.3.3 of the DFSA Conduct of Business Module of the DFSA rulebook. Kingdom of Saudi Arabia No action has been or will be taken in the Kingdom of Saudi Arabia that would permit a public offering of the Certificates. Any investor in the Kingdom of Saudi Arabia or who is a Saudi person (a Saudi Investor) who acquires any Certificates pursuant to an offering should note that the offer of Certificates is a private placement under Article 9 or Article 10 of the "Rules on the Offer of Securities and Continuing Obligations" as issued by the Board of the Capital Market Authority resolution number 3-123-2017 dated 27 December 2017 (the KSA Regulations), made through an authorised person licensed to carry out arranging activities by the Capital Market Authority and following a notification to the Capital Market Authority under Article 11 of the KSA Regulations. The Certificates may thus not be advertised, offered or sold to any person in the Kingdom of Saudi Arabia other than to "sophisticated investors" under Article 9 of the KSA Regulations or by way of a limited offer under Article 10 of the KSA Regulations. Each Manager has represented and agreed that any offer of Certificates to a Saudi Investor will be made in compliance with Article 11 and either Article 9 or Article 10 of the KSA Regulations. 173
190. The offer of Certificates shall not therefore constitute a "public offer", an "exempt offer" or a "parallel market offer" pursuant to the KSA Regulations, but is subject to the restrictions on secondary market activity under Article 15 of the KSA Regulations. Any Saudi Investor who has acquired Certificates pursuant to a private placement under Article 9 or Article 10 of the KSA Regulations may not offer or sell those Certificates to any person unless the offer or sale is made through an authorised person appropriately licensed by the Capital Market Authority and: (a) the Certificates are offered or sold to a Sophisticated Investor (as defined in Article 9 of the KSA Regulations); (b) the price to be paid for the Certificates in any one transaction is equal to or exceeds Saudi Riyals 1 million or an equivalent amount; or (c) the offer or sale is otherwise in compliance with Article 15 of the KSA Regulations. State of Kuwait Each Manager has represented and agreed that the Certificates have not been and will not be offered, marketed and/or sold in Kuwait, except through a licensed person duly authorised to undertake such activity pursuant to the CMA Rules and unless all necessary approvals from the CMA pursuant to the CMA Rules, together with the various resolutions, regulations, directives and instructions issued pursuant thereto or in connection therewith (regardless of nomenclature), or any other applicable law or regulation in Kuwait, have been given in respect of the offering, marketing and/or sale of the Certificates. The Certificates may not be offered onshore in Kuwait except to Professional Clients as defined in the CMA Rules. Kingdom of Bahrain Each Manager has represented and agreed that it has not offered or sold, and will not offer or sell, any Certificates except on a private placement basis to persons in the Kingdom of Bahrain who are "accredited investors". For this purpose, an accredited investor means: (a) an individual holding financial assets (either singly or jointly with a spouse) of U.S.$1,000,000 or more excluding that person's principal place of residence; (b) a company, partnership, trust or other commercial undertaking which has financial assets available for investment of not less than U.S.$1,000,000; or (c) a government, supranational organisation, central bank or other national monetary authority or a state organisation whose main activity is to invest in financial instruments (such as a state pension fund). Hong Kong Each Manager has represented and agreed that: (a) it has not offered or sold and will not offer or sell in Hong Kong by means of any document, any Certificates other than: (a) to "professional investors" as defined in the Securities and Futures Ordinance (Cap. 571) of Hong Kong (the SFO) and any rules made under the SFO; or (b) in other circumstances which do not result in the document being a "prospectus" as defined in the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) of Hong Kong (the C(WUMP)O) or which do not constitute an offer to the public within the meaning of the C(WUMP)O; and (b) it has not issued or had in its possession for the purposes of issue, and will not issue or have in its possession for the purposes of issue, whether in Hong Kong or elsewhere, any advertisement, invitation or document relating to the Certificates, which is directed at, or the contents of which are likely to be accessed or read by, the public of Hong Kong (except if permitted to do so under the laws of Hong Kong) other than with respect to Certificates which are or are intended to be disposed of only to persons outside Hong Kong or only to "professional investors" as defined in the SFO and any rules made under the SFO. 174
191. Singapore Each Manager has acknowledged that this Prospectus has not been and will not be registered as a prospectus with the Monetary Authority of Singapore . Accordingly, each Manager has represented and agreed that it has not offered or sold any Certificates or caused such Certificates to be made the subject of an invitation for subscription or purchase, and will not offer or sell such Certificates or cause such Certificates to be made the subject of an invitation for subscription or purchase, and has not circulated or distributed, nor will it circulate or distribute, this Prospectus or any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of such Certificates, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor (as defined in Section 4A of the SFA) pursuant to Section 274 of the SFA, (ii) to a relevant person (as defined in Section 275(2) of the SFA) under Section 275(1) of the SFA, or any person pursuant to Section 275(1A) of the SFA in accordance with the conditions specified in Section 275 of the SFA, or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provisions of the SFA. Where the Certificates are subscribed or purchased under Section 275 of the SFA by a relevant person which is: (a) a corporation (which is not an accredited investor (as defined in Section 4A of the SFA)) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or (b) a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary of the trust is an individual who is an accredited investor, securities or securities-based derivatives contracts (each term as defined in Section 2(1) of the SFA) of that corporation or the beneficiaries' rights and interest (howsoever described) in that trust shall not be transferred within six months after that corporation or that trust has acquired the Certificates pursuant to an offer made under Section 275 of the SFA except: (i) to an institutional investor or to a relevant person, or to any person arising from an offer referred to in Section 275(1A) or Section 276(4)(i)(B) of the SFA; (ii) where no consideration is or will be given for the transfer; (iii) where the transfer is by operation of law; (iv) as specified in Section 276(7) of the SFA; or (v) as specified in Regulation 37A of the Securities and Futures (Offers of Investments) (Securities and Securities-based Derivatives Contracts) Regulations 2018. Malaysia Each Manager acknowledges that this Prospectus has not been registered as a prospectus with the Securities Commission of Malaysia (the SC) under the Capital Markets and Services Act 2007 (the CMSA). Accordingly, each Manager has represented and agreed that the Certificates have not been and will not be offered, sold or delivered and no invitation to subscribe for or purchase the Certificates has been or will be made, directly or indirectly, nor may any document or other material in connection therewith be distributed by it in Malaysia, other than to persons falling within any one of the categories of persons specified under Schedule 6 (or Section 229(1)(b)), Schedule 7 (or Section 230(1)(b)) and Schedule 8 (or Section 275(3)) of the CMSA, read together with Schedule 9 (or Section 257(3)) of the CMSA, subject to any law, order, regulation, or official directive of the Central Bank of Malaysia, the SC and/or any other regulatory authority from time to time. 175
192. Residents of Malaysia may be required to obtain relevant regulatory approvals including approval from the Controller of Foreign Exchange to purchase the Certificates . The onus is on the Malaysian residents concerned to obtain such regulatory approvals and none of the Managers is responsible for any invitation, offer, sale or purchase of the Certificates as aforesaid without the necessary approvals being in place. Switzerland Each Manager has represented and agreed that (i) the Certificates may not be publicly offered, sold or advertised, directly or indirectly, in or from Switzerland, (ii) neither this Prospectus nor any other offering or marketing material relating to the Certificates constitutes a prospectus as such term is understood pursuant to article 652a or article 1156 of the Swiss Federal Code of Obligations, and (iii) neither this Prospectus nor any other offering or marketing material relating to the Certificates may be publicly distributed or otherwise made publicly available in Switzerland. General None of the Trustee, the Bank nor any Manager has made any representation that any action will be taken in any jurisdiction by the Managers or the Trustee or the Bank that would permit a public offering of the Certificates, or possession or distribution of this Prospectus (in preliminary, proof or final form) or any other offering or publicity material relating to the Certificates (including roadshow materials and investor presentations), in any country or jurisdiction where action for that purpose is required. Each Manager has agreed that it will comply to the best of its knowledge and belief with all applicable laws and regulations in each jurisdiction in which it acquires, offers, sells or delivers any Certificates or has in its possession or distributes this Prospectus (in preliminary, proof or final form) or any such other offering or publicity material relating to the Certificates, in all cases at its own expense. 176
193. GENERAL INFORMATION Listing Application has been made to Euronext Dublin for the Certificates to be admitted to the Official List and to trading on the regulated market of Euronext Dublin . The regulated market of Euronext Dublin is a regulated market for the purposes of MiFID II. It is expected that the listing of the Certificates on the Official List and admission of the Certificates to trading on the regulated market of Euronext Dublin will be granted on or around 10 June 2019. The total expenses related to the admission to trading are estimated at €7,790. Maples and Calder is acting solely in its capacity as listing agent for the Trustee in relation to the Certificates and is not itself seeking admission of the Certificates to the Official List or to trading on the regulated market of Euronext Dublin. Authorisation The issue of the Certificates has been duly authorised by a resolution of the Board of Directors of the Trustee dated 16 May 2019. KIB Tier 1 Sukuk Limited, in its capacity as the Issuer and the Trustee, has obtained all necessary consents, approvals and authorisations in the Cayman Islands in connection with the issue of the Certificates and the entry into the Transaction Documents. The entry by the Bank into the Transaction Documents was authorised by the directors of the Bank on 6 March 2019. Clearing Systems The Certificates have been accepted for clearance through Euroclear and Clearstream, Luxembourg (which are the entities in charge of keeping the records) under common code 200514807 and ISIN XS2005148072. The address of Euroclear is Euroclear Bank SA/NV, 1 Boulevard du Roi Albert II, B-1210 Brussels and the address of Clearstream, Luxembourg is Clearstream Banking, 42 Avenue JF Kennedy, LI 855 Luxembourg. Significant or Material Change There has been no significant change in the financial or trading position of the Bank since 31 March 2019 and there has been no material adverse change in the prospects of the Bank since 31 December 2018. There has been no significant change in the financial or trading position of the Trustee and no material adverse change in the prospects of the Trustee, in each case since the date of its incorporation. Litigation The Trustee is not and has not been involved in any governmental, legal or arbitration proceedings (including any such proceedings which are pending or threatened of which the Trustee is aware) since the date of its incorporation which may have or have in such period had a significant effect on the financial position or profitability of the Trustee. The Bank has not been involved in any governmental, legal or arbitration proceedings (including any such proceedings that are pending or threatened of which the Bank is aware) during the 12 months preceding the date of the Prospectus that may have or have in such period had a significant effect on the financial position or profitability of the Bank. 177
194. Independent Auditors Since the date of its incorporation , no financial statements of the Trustee have been prepared. The Trustee is not required by the laws of the Cayman Islands, and does not intend, to publish audited financial statements or appoint any auditors. The Bank's appointed independent auditors are EY whose business address is P.O. Box 74, Safat 13001, Kuwait, Baitak Tower, 18th Floor, Safat Square, Ahmed Al-Jaber Street and Deloitte whose business address is Ahmed AlJaber Street, Sharq, Dar Al-Awadi Complex, Floors 7 & 9, P.O. Box 20174, Safat 13062, Kuwait. Each of EY and Deloitte is regulated in Kuwait by the Kuwait Ministry of Commerce and Industry and the CMA. Partners who are licensed to act as auditors in Kuwait by the Kuwait Association of Accountants and Auditors are registered with the CMA. The Annual Financial Statements have been jointly audited by EY and Deloitte in accordance with International Standards on Auditing as stated in their reports included herein. The Interim Financial Statements have been reviewed by EY and Deloitte in accordance with the International Standard on Review Engagements 2410, “Review of Interim Financial Information Performed by the Independent Auditor of the Entity” as stated in their review report included herein. With respect to the Interim Financial Statements, the independent auditors reported that they have applied limited procedures in accordance with International Standard on Review Engagements 2410, “Review of Interim Financial Information Performed by the Auditor of the Entity”. However, their review report dated 10 April 2019, included herein, states that they did not audit and they do not express any audit opinion on that interim financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. Documents Available For as long as any Certificates remain outstanding, copies of the following documents will be available in electronic and physical format and in English to be inspected and/or collected during normal business hours at the specified office for the time being of the Principal Paying Agent: (a) the Memorandum and Articles of Association of the Trustee and the constitutional documents (with an English translation thereof) of the Bank; (b) the Financial Statements; (c) a copy of this Prospectus together with any supplement to this Prospectus; and (d) the Transaction Documents. Managers Transacting with the Bank In the ordinary course of their business activities, the Managers and their affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers. Such investments and securities activities may involve securities and/or instruments of the Bank or the Bank's affiliates. Certain of the Managers or their affiliates that have a lending relationship with the Bank routinely hedge their credit exposure to the Bank consistent with their customary risk management policies. Typically, such Managers and their affiliates would hedge such exposure by entering into transactions which consist of either the purchase of credit default swaps or the creation of short positions in securities, including potentially the Certificates. Any such short positions 178
195. could adversely affect future trading prices of the Certificates . The Managers and their affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or financial instruments and may hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments. Shari'a Approvals The transaction structure relating to the Certificates (as described in this Prospectus) has been approved by a member of the the Shari'a Supervisory Board of Citi Islamic Investment Bank, the First Abu Dhabi Bank Shariah Supervisory Board, KFH Capital's Sharia Committee and the Sharia Supervisory Committee of Standard Chartered Bank. 179
196. INDEX TO FINANCIAL STATEMENTS Interim condensed consolidated financial information (unaudited) of the Bank as at and for the three-month period ended 31 March 2019, together with the review report thereon and the notes thereto F001 Audited consolidated financial statements of the Bank as at and for the year ended 31 December 2018, together with the independent auditors' report thereon and the notes thereto F017 Audited consolidated financial statements of the Bank as at and for the year ended 31 December 2017, together with the independent auditors' report thereon and the notes thereto F071 180
197. KIB Kuwait International Bank K .S.C.P. and its Subsidiary State of Kuwait Interim Condensed Consolidated Financial Information 31March2019 (Unaudited) F-001
198. Kuwait International Bank K .S.C.P. and its Subsidiary State of Kuwait I NDEX Page Independent Auditors' Report on Review oflnterim Condensed Consolidated Financial Infomtation 1-2 Interim Condensed Consolidated Statement of Profit or Loss (Unaudited) 3 Interim Condensed Consolidated Statement of Profit or Loss and Other Comprehensive Income (Unaudited) 4 Interim Condensed Consolidated Statement of Financial Position (Unaudited) 5 Interim Condensed Consolidated Statement of Changes in Equity (Unaudited) 6 Interim Condensed Consolidated Statement of Cash Flows (Unaudited) 7 Notes to the Interim Condensed Consolidated Financial Information (Unaudited) 8 - 14 F-002
199. Deloitte . Deloitt:e • Touche Al-Wezzan a. Co. Building a better working world Ernst& Young Al Aiban, /ii Osaimi & Partners P.O. Box74 1e-21st Floor, Baitak Tower Ahmed Al Jaber Street Safat Square 13001, Kuwait Ahmed Al-Jaber Street, Sharq Dar Al-Awad! Complex, Floors 7 & 9 Tel: -+965 2295 5000 Fax: +965 2245 6419 kuwait@kW.ey.com ey.com/mena l>,O. Box 10174, Safat 13062 l<uwlllt Tel : + 965 '-l408844, 22438060 Fax: + 965 22408855, 22452080 www.delolt lE.com REPORT ON REVIEW OF INTERIM CONDENSED CONSOLIDATED FINANCIAL INFORMATION TO THE BOARD OF DIRECTORS OF KUWAIT INTERNATIONAL BANK K.S.C.P. Introduction We have reviewed the accompanying interim condensed consolidated statement of financial position of Kuwait International Bank K.S.C.P. (the "Bank") and its subsidiary (together the "Group") as at 31 March 2019, and the related interim condensed consolidated statements of profit or loss, profit or loss and other comprehensive income, changes in equity and cash flows for the three-month period then ended. The management of the Bank is responsible for the preparation and presentation of this interim condensed consolidated financial ·information in accordance with the basis of presentation set out in Note 2. Our responsibility is to express a conclusion on this interim condensed consolidated financial information based on our review. Scope ofReview We conducted our review in accordance with International Standard on Review Engagements 2410, "Review of Interim Financial Information Performed by the Independent Auditor ofthe Entity". A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Conclusion Based on our review, nothing has come to our attention that causes us to believe that the accompanying interim condensed consolidated financial information is not prepared, in all material respects, in accordance with the basis of presentation set out in Note 2. Report on Other Legal and Regulatory Requirements Furthermore, based on our review, the interim condensed consolidated financial information is in agreement with the books of account of the Bank. We further report that, to the best of our knowledge and belief, we have not become aware of any violation of the Companies Law No. 1 of 2016, and its Executive Regulations, as amended, or of the Bank's Memorandum oflncorporation and the Articles of Association, as amended, during the threemonth period ended 31 March 2019 that might have had a material effect on the business of the Bank or on its financial position. F-003
200. Deloitte . Building a better working world REPORT ON REVIEW OF INTERIM CONDENSED CONSOLIDATED FINANCIAL INFORMATION TO mE BOARD OF DIRECTORS OF KUWAIT INTERNATIONAL BANK K.S.C.P. (CONTINUED) Report on Other Legal and Regulatory Requirements (continued) We further report that, during the course of our review, to the best of our knowledge and belief, we have not become aware of any violation of the provisions of Law No. 32of1968, as amended, concerning currency, the Central Bank of Kuwait and the organisation of banking business, and its related regulations, during the threemonth period ended 31March2019 that might have had a material effect on the busines o e , ank or on its financial position. c , ""\~ ----~~~~ --·------·-------·----·­ WALEEffA~-AI-osAiMi:"'---·----·-·---------·-·-·-·· BADER A. AL-WAZZAN LICENCE NO. 68 A LICENCE NO. ~2A EY AL AIBAN, AL OSAIMI & PAR1NERS DELOITTE & TbUCHE AL-WAZZAN & CO. 10 April 2019 Kuwait 2 F-004
201. Kuwait International Bank K .S.C.P. and its Subsidiary INTERIM CONDENSED CONSOLIDATED STATEMENT OF PROFIT OR LOSS (UNAUDITED) Period ended 31 March 2019 Notes Financing income Finance costs and estimated distribution to depositors KD OOO's Three months ended 31 March 31 Marcil 2018 2019 24,565 (11,140) 20,537 (6,981) 13,425 13,556 2,491 192 769 144 2,544 503 607 105 TOTAL OPERATING INCOME 17,021 17,315 Staff costs General and administrative expenses Depreciation (4,779) (2,595) (895) (4,371) (2,542) (540) TOTAL OPERATING EXPENSES (8,269) (7,453) 8,752 9,862 (2,173) (1,771) 6,579 8,091 3 Net financing income Fees and commission income Net gain from foreign exchange Investment income Other income Profit from operations before provisions and impairment losses Provisions and impairment losses 4 PROFIT FROM OPERATIONS Provision for: Contribution to Kuwait Foundation for the Advancement of Sciences (KFAS) Contribution to National Labor Support Tax (NLST) Contribution to Zakat (74) (205) (80) (61) (166) (68) PROFIT FOR THE PERIOD 6,284 7,732 Attributable to: Shareholders of the Bank Non-controlling interests 6,212 72 7,700 32 6,284 7,732 6.40 fils 7.93 fils Basic and diluted earnings per share attributable to shareholders of the Bank 5 The accompanying notes from I to 13 form an integral part of this interim condensed consolidated financial information. 3 F-005
202. Kuwait International Bank K .S.C.P. and its Subsidiary INTERIM CONDENSED CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME (UNAUDITED) Period ended 31 March 2019 KDOOO's Three months ended 31 Marcli 31 March 2019 2018 7,732 6,284 Profit for the period Other comprehensive income: Items that may be reclassified to interim condensed consolidated statement ofprofit or loss - Change in fair value of debt instruments at fair value through other comprehensive income 624 (485) Items that will not be reclassified to interim condensed consolidated statement ofprofit or loss - Change in fair value of equity investments at fair value through other comprehensive income {50) 588 Other comprehensive income for the period 574 103 Total comprehensive income for the period 6,858 7,835 Attributable to: Shareholders of the Bank Non-controlling interests 6,786 72 7,805 30 Total comprehensive income for the period 6,858 7,835 The accompanying notes from l to 13 form an integral part of this interim condensed consolidated financial information. 4 F-006
203. Kuwait International Bank K .S.C.P. and its Subsidiary INTERIM CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION (UNAUDITED) As at 31March2019 31 March 31 December KD OOO's 31 March 2018 2019 2018 (Audited) Other assets Property and equipment 50,249 377,374 1,636,492 81,296 1,518 58,451 13,158 29,085 4 1,585 315,673 1,605,833 105,975 1,518 58,523 10,987 28,501 35,716 395,246 1,354,617 87,117 1,518 60,314 14,56 1 26,637 TOTAL ASSETS 2,247,623 2,168,595 1,975,726 546,328 1,373,345 54,792 517,537 1,318,535 55,919 367,tl-94 1,287,702 58,196 1,974,465 1,891 ,991 1,713,392 Notes ASSETS Cash and balances with banks Due from banks Financing receivables Investment securities Investment in associate Investment properties 6 13 LIABILITIES AND EQUITY LIABILITIES Due to banks and financial institutions Depositors' accounts Other liabilities TOTAL LIABILITIES 7 EQUITY Share capital Share premium Treasury shares Other reserves 103,732 49,480 (45,234) 161,694 103,732 49,480 (45,234) 165,212 103,732 49,480 (45,234) 151 ,002 Equity attributable to shareholders of the Bank Non-controlling interests 269,672 3,486 273,1 90 3,414 258,980 3,354 TOTAL EQUITY 273,158 276,604 262,334 2,247,623 2,168,595 1,975,726 TOTAL LIABILITIES AND EQUITY Sheikh Mohammed Jarrah Al-Sabah Raed J awad Bukhamseen Chairman Vice Chairman and Chief Executive Officer The accompanying notes from 1 to 13 form an integral part of this interim condensed consolidated financial information. 5 F-007
204. Kuwait International Bank K .S.C.P. and its Subsidiary INTERIM CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED) Period ended 3 I March 2019 KDOOO's - Balance as at I .January 2019 Impact of adopting IFRS 16 at I .January 2019 (Refer to Note 2.2) Balance as at I January 2019 (Restated) EfJ.ui~ attributable to shareholders of.the Bank -·--- Other reserves Treasury Voluntary shares Retained reserve reserve earnings Share capital Share premium Treasury shares Statutory reserve 103,732 49,480 (45,234) 36,891 30,808 . . - ~ 4,846 - Fair valuation Revaluation reserve surplus Total other reserves Total Noncontrolling interests Tota! equity 61,967 15,763 14,937 165,212 273,190 3,414 276,604 (33) . . (33) (33) - (33) 103,732 49,480 (45,234) 36,891 30,808 4,846 61,934 15,763 14,937 165,179 273,157 3,414 276,571 - - . . . 6,212 72 6,284 - . 574 574 574 - 574 Total comprehensive income - . . 6,212 . . . 6,2 12 Other comprehensive income - - 6,212 574 . 6,786 6,786 72 6,858 . . . (10,271) - . (10,271 ) (10,271) - (I0,271) 161,694 269,672 3,486 273,158 152,589 260,567 3,324 263,891 (55) (55) - (55) Profit for the period Dividends (Note 8) - . . - . ·- - - Balance as at 31 March 2019 t03,732 49,480 (45,234) 36,891 30,808 4,846 57,875 16,337 14,937 Balance a~ at I January 2018 103,732 49,480 (45,234) 34,656 28,573 4,846 54,907 14,077 15,530 Impact of adopting IFRS 9 at I January 2018 - . - . - . (735) 680 . !03,732 49,480 (45,234) 34,656 28,573 4,846 54, 172 14,757 15,530 152,.534 260,512 3,324 263,836 . - . . 7,700 7,700 32 7,732 - - 7,700 - . . . Other comprehensive income/ (loss) . . - 105 . I05 105 (2) 103 Total comprehensive income - - - - 7,700 105 7,805 "!,805 30 7,835 . . - . - Di vidends (Note~) - . . (9,337) - - (9,337) (9,337) - (9,337) 103,732 49,480 (45,234) 34,656 28,573 4,846 52,535 14,862 15,530 15 1,!)()2 258,980 3,354 262,334 Balance as at l .January 20 18 (Restated) Profit for the period Balance as at 3 I March 20 18 --- --- --======-= --- ---- ---- The a~~_!:lpanying notes .ff~~ 1to 13 fonn an .i.!.1.!egral part of this ~'!!_~rim condensed consolida_t_ed_fi_n_an_c_ia_l_in_fi_o_nn _at_io_n_._____ _ _ __ __ ._ _ _ _ _ _ _ _ __ _ _ __ F-008 6
205. Kuwait International Bank K .S.C.P. and its Subsidiary INTERIM CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) Period ended 31 March 2019 Notes CASH FLOWS FROM O'P~RATl NG KD OOO's Three months ended 31 Marcil 31 March 2019 2018 ACTIVITIES Profit for the period 6,284 7,732 Adjustments for: (192) (503) (83) (498) (188) 895 2,173 (496) 1,771 8,391 8,933 Due from banks (17,425) 72,562 Financing receivables (31,749) (52,137) (2,161) 2,713 Due to banks and financial institutions 28,791 (26,944) Depositors' accounts 54,810 84,489 (12,260) (4,980) 28,397 84,636 (30,721) 56,449 (27,348) 23,950 (875) Net gain from foreign exchange Dividend income Change in fair value of financial assets at fair value through profit or loss Rental income from investment properties Depreciation Provisions and impairment losses 4 223 (334) 540 Changes in operating assets and liabilities: Other assets Other liabilities Net cash from operating activities CASH FLOWS FROM INVESTING ACTIVITIES Purchase of investment securities Proceeds on sale/ redemption of securities Purchase of property and equipment (1,407) Dividend income received Rental income received Net cash from (used in) investing activities 83 496 188 334 24,592 (3,443) CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid (53) (17) Net cash used in financing activities (53) (17) NET INCREASE IN CASH AND CASH EQUIVALENTS 52,936 81 ,176 Cash and cash equivalents at the beginning of the period 96,208 50,516 149,144 131 ,692 CASH AND CASH EQUIVALE~TS AT THE END OF THE PE RIOD 9 The accompanying notes from 1 to 13 form an integral part of this interim condensed consolidated financial information. 7 F-009
206. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED) 3 1 March20 19 1. INCORPORATION AND ACTIVITIES Kuwait International Bank K.S.C.P. (the "Bank") is a Kuwaiti public shareholding company incorporated in the State of Kuwait on 13 May 1973 as a specialised bank and is regulated by the Central Bank of Kuwait (the "CBK"). The Bank's shares are listed on Boursa Kuwait. In June 2007, the CBK licensed the Bank to operate in accordance with Islamic Sharia'a from 1 July 2007. From that date, all activities are conducted in accordance with Islamic Sharia' a, as approved by the Bank's Fatwa and Sharia' a Supervisory Board. The Bank is engaged principally in providing Islamic banking services, the purchase and sale of properties, leasing, and other trading activities. Trading activities are conducted on the basis of purchasing various conunodities and selling them on murabaha at agreed profit margin which can be settled in cash or on installment credit basis. The registered office of the Bank is at West Tower - Joint Banking Center, P.O. Box 22822, Safat 13089, Kuwait. The Bank owns 73.6% of issued share capital of Ritaj Takaful Insurance Company K .S.C.C. ("Ritaj" ), Kuwait. Ritaj is engaged in providing Sharia'a compliant insurance services. The interim condensed consolidated financial information of the Bank and its subsidiary (together the "Group") for the period ended 31 March 2019 were authorized for issue by the Bank's Board of Directors on 10 April 2019. 2. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES 2.1 BASIS OF PREPARATION The interim condensed consolidated financial information of the Group has been prepared in accordance with International Accounting Standard (IAS) 34, 'Interim Financial Reporting'. The accounting policies used in the preparation ofthese interim condensed consolidated financial information are consistent with those used in the preparation of the annual consolidated financial statements for the year ended 31 December 2018 except for the changes described below arising from adoption of IFRS 16 'Leases' effective from 1 January 2019. The annual consolidated financial statements for the year ended 31 December 2018 were prepared in accordance with the regulations of the State of Kuwait for financial services institutions regulated by the CBK. These regulations require expected credit loss ("ECL") to be measured at the higher of the ECL on credit facilities computed under lFRS 9 according to the CBK guidelines or the provisions as required by CBK instructions; the consequent impact on related disclosures; and the adoption of all other requirements of lntemational Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board (" IASB"). The ECL for credit facilities as at 31 March 2019 is lower than the provision for impairment of credit facilities required by CBK. The interim condensed consolidated financial information does not contain all information and disclosures required for the annual consolidated financial statements prepared in accordance with IFRSs, and should be read in conjunction with the Group's annual consolidated financial statements as at 31 December 2018. Further, results for interim periods are not necessarily indicative of the results that may be expected for the financial year ending 31 December 2019. The consolidated financial statements are presented in Kuwaiti Dinars ("KD") which is the functional currency of the Group, rounded to the nearest thousand Kuwaiti Dinars, except when otherwise stated. 8 F-010
207. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED) 31 March 2019 2. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) 2.2 CHANGES IN ACCOUNTING POLICIES AND DISCLOSURES Adoption oflFRS 16 'Leases' The Group has adopted IFRS 16 issued in January 2016 with a date ofinitial application of 1 January 2019. IFRS 16 n:places !AS 17, IFRIC '1, SIC-15 and SIC-27. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases. 11te Group, as a lessee, has adopted the following accounting policy in respect of its leases: At inception of a contract, the Group assesses whether the contract is a lease. A contract is a lease if the contract conveys the right to controi the use of an identified asset for a period of time in exchange for a consideration. If the contract is identified as a lease, the Group recognises a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred. The right-of-use asset is subsequently depreciated using the straight-line method over the lease term. In addition, the right-of-use asset is periodically reduced by impairment losses, if any. The lease liability is initiaJly measured at the present value of the lease payments that are not paid at the commencement date, discounted using the Group' s incremental borrowing rate. The lease liability is subsequently measured at amortised cost using the effective yield method. Impact on adoption ofIFRS 16 The Group has applied IFRS 16 using the modified retrospective approach and therefore the comparative information has not been restated. Lease liabilities and right of use of assets were both recorded at the present value of future lease payments, and the impact was recorded on the opening retained earnings. The Group presents right-of-use assets in 'other assets' and lease liabilities in 'other liabilities' in the interim condensed consolidated statement of financial position. 3. FINANCE COSTS AND ESTIMATED DISTRIBUTION TO DEPOSITORS The management of the Bank has estimated distribution to depositors and profit attributable to Bank's shareholders based on the results for the three-month period ended 31 March 2019. The actual distribution to depositors for deposits of tenures exceeding 6 months could be different from the amounts presented in the interim condensed consolidated statement of profit or loss. The actual profit to be distributed to these depositors will be determined by the Board of Directors of the Bank in accordance with the Bank's articles of association, based on the annual audited results for the financial year ending 31 December 2019. 4. PROVISIONS AND IMPAIRMENT LOSSES Provisions and impairment losses include KD 1,081 thousand (31 March 2018: KD 2, 114 thousand) relating to financing receivables. 5. BASIC AND DILUTED EARNINGS PER SHARE Basic and diluted earnings per share are computed by dividing profit for the period attributable to the shareholders of the Bank by the weighted average number of shares outstanding during the period, less treasury shares, as follows: Three months ended 31 March 31 March 2019 2018 6,212 7,700 Weighted average number of shares outstanding (shares'OOO) 971,037 971,037 Basic and diluted earnings per share 6.40 fils 7.93 fils Profit for the period attributable to the shareholders of the Bank (KD OOO' s) Basic and diluted earnings per share for the current and comparative period presented has been adjusted to reflect the effect of bonus shares for 2018 (Note 8). 9 F-011
208. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE INTERIM CONDENSED CONSOLIDATED Fll"1ANCIAL JNFORMATION (UNAUDITED) 31 March 2019 6. DUE FROM BANKS KD OOO's 31 March 31 December 2019 2018 (Audited) 31 March 2018 Tawarruq transactions with CBK and government debts Murabaha finance with banks (contractual maturity of90 days or less) Murabaha finance with banks (contractual maturity of more than 90 days) 228,041 98,895 50,442 223,240 54,623 37,815 290,362 95,976 8,912 Less: Expected credit losses 377,378 (4) 315,678 (5) 395,250 (4) 377,374 315,673 395,246 31 M arch 31 December 1019 2018 (Audited) 31 March 2018 132,867 402,311 11,150 85, 176 422,098 10,263 28,005 332,031 7,458 546,328 517,537 367,494 7. DUE TO BANKS AND FINANCIAL INSTITUTIONS KD OOO's Murabaha payable to banks (a) Murabaha payable tu financial institutions Current and call accounts a) During the last year, the Bank obtained an unsecured syndication Murabaha financing amounting to USD 250 million (equivalent to KD 76 million) for a tenor of3 years. 8. SHAREHOLDERS' MEETINGS On 28 March 2019, the Annual General Assembly and Extraordinary General Assembly meetings of the Bank's shareholders approved the distribution of dividends for the financial year ended 31 December 2018 as follows: a) Cash dividends of 11 fils per share amounting to KD I 0,27 I thousand (31 December 2017: 10 fils per share amounting to KD 9,337 thousand) to the eligible shareholders as detailed in the schedule approved by A1Ulual General Assembly, after excluding treasury shares; and b) Bonus shares of 4% (31 December 2017: Nil) to the eligible shareholders as detailed in the schedule approved by Annual General Assembly. Such cash dividends and bonus shares shall be distributed to the entitled shareholders on 28 April 2019, in accordance with Boursa Kuwait regulations, and the cash dividends are included in other liabilities as at 31March2019. The Bank has completed the registration procedures for the issuance of bonus shares and has notified the regulatory authorities to adjust the authorized, issued and fully paid-up shares to 1,078,819,738 shares of 100 fils each. The Annual General Assembly approved the issuance of Sukuk as per the principles oflslamic Sharia 'a and capital adequacy requirements ("Basel Ill") for Islamic Banks and delegated the Board of Directors to identify the terms and conditions of these Sukuk. Currently, the Bank is to obtain the regulatory bodies approval to issue the Sukuk. 10 F-012
209. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL INFO~TION (UNAUDITED) 31 March 2019 9. CASH AND CASH EQUIVALENTS 31 Marc/1 31 December 2019 2018 (Audited) Cash and balances with banks Murabaha finance wiili hank" (contractual maturity of90 days or less) 10. KDOOO's 31 March 2018 50,249 98,895 41,585 54,623 35,716 95,976 149,144 96,208 131,692 RELATED PARTY TRANSACTIONS These are transactions with certain related parties (major shareholders, associate, directors and executive officers of the Group, close members of their families and companies in which they are principal owners or over which they are able to exert significant influence) who were customers of the Group in the ordinary course of business. Such transactions were made on substantially the same terms including profit rates and collateral as those prevailing at the same time for comparable transactions with unrelated parties and did not involve more than a normal amount of risk. Transactions with subsidiary are eliminated in full and hence not disclosed. The transactions and balances with related parties included in the interim condensed consolidated financial information are as follows: KDOOO"s Total Major shareholders and other related f!.Orlies Associate Directors and Eucutive officers 31 March 31 December 2019 31 March 2018 2018 (Audited) Balances Financing receivables Credit cards Deposits Commitments and contingent liabilities Collaterals against credit facilities 116,268 44,311 160,579 164,715 80 80 74 65 2,826 15,588 17,131 18,403 33,020 5,885 38,905 39,034 45, 140 102,677 60,544 163,221 168,647 160,415 1,444 709 2,153 7,300 1,686 56 4 60 183 57 86 86 436 77 12,755 7 158,283 Transactions Financing income Estimated distribution to depositors Others 11 F-013
210. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED) 31 March 2019 10. RELATED PARTY TRANSACTIONS (continued) 31 March 1019 No.of Directors ancl Executive oQ1cers 31 December 31 March 2018 2018 (Audited2 No. of No. of Directors and Directors and Executive Execuliw' officers officers K» OOO':r KDOOO's KD OOO's Directors Financing receivables 6 44,130 Credit cards 1 2 Deposits 9 1,443 Commitments and contingent liabilities 4 S,811 C~llaterals 5 60,514 against credit facilities 5 41,613 5 38,931 8 312 7 707 4 2,306 4 712 4 62,227 4 61,726 Executive officers Financing receivables 6 181 6 186 6 45 Credit cards 17 78 17 74 15 65 Deposits 20 1,383 20 986 19 689 Commitments and contingent liabilities 19 74 19 73 16 67 5 30 7 29 8 39 Collaterals against credit facilities Key management personnel compensation KDOOO's Three months ended 31 March 31 March 2018 2019 Short-term benefits Post-employment benefits 11. 435 29 584 38 COMMITMENTS ANO CONTINGENT LIABILITIES KD OOO's 31 March 31 December 2018 2019 (Audited) Acceptances Letters of credit Letters of guarantee 31 March 2018 17,293 9,045 256,083 17,181 9,941 263,281 24,896 19,542 279,323 282,421 290,403 323,761 The Group also has revocable cash commitments to extend credit amounting to KD 178,3 71 thousand (31 December 2018: KD 165,275 thousand, 31March2018: KD 212,550 thousand). 12 F-014
211. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED) 31March2019 12. SEGMENT INFORMATION The Group' s operating segments are determined based on the reports reviewed by the Chief Executive Officer that are used for strategic decisions. These segments are strategic business units that offer different products and services. They are managed separately since the nature of the products and services, class of customers and marketing strategies of these segments are different. These operating segments meet the criteria for reportable segments and are as follows: Commercial and International Banking Comprising of range of banking services and investment products to corporate customers providing commodity and real estAte Mura.baha finance, Ijara and Wakala facilities. Retail Banking Comprising of range of banking services and investment products to individual customers, providing commodity and real estate Murabaha finance, Ijara and Wakala facilities. Treasury, Fund Management and Institutional Banking Comprising of liquidity management, correspondent banking, clearing, murabaha investments, exchange of deposits with banks and financial institutions. Investment Management Comprising of investment in associate and other investments, including investment properties. Others Comprising of those which is not pertaining to the above segments and includes those relating to a subsidiary. Management monitors the operating segments separately for the purpose of making decisions about resource allocation and performance assessment. The Group measures the performance of operating segments through measure of segment revenue and results in management and reporting systems. Segment assets principally comprise all assets and segment liabilities comprise all liabilities that are attributable to the segment. The following table presents operating income, results for the period, total assets and total liabilities information regarding the Group's reportable segments. KD OOO's Treasury, Fund Management Commercial and and International Retail Institutional Investment Banking_ Banking Banking_ management Others Total 31 March 2019 Segment operating income/(loss) 1,044 (3,227) 17,463 1,055 686 17,021 Segment result (685) (387) 8,518 (351) (811) 6,284 Segment assets 1,410,882 258,993 407,638 133,021 37,089 2,247,623 Segment liabilities 354,472 719,059 854,039 46,895 1,974,465 31 December 2018 Segment assets Segment liabilities 1,396,924 324,267 251 ,732 737,784 350,544 781,116 134,959 34,436 48,824 2,168,595 1,891,991 31 March 2018 Segment operating income/(loss) Segment result Segment assets Segment liabilities 15,114 7,673 1, 145,963 28i ,336 1,902 925 237,998 632,197 (990) 697 425,338 746,687 736 (353) 128,661 553 (l ,210) 37,766 53,172 17,315 7,732 1,975,726 1,71J,J92 The Group operates from the State of Kuwait only. 13 F-015
212. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED) 31 March 2019 13. FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in orderly transaction between market participants at the measurement date. The Group uses the following hierarchy for determining and disclosing the fair values of financial instruments that are carried at fair value: Level I: inputs are quoted prices (unadjusted) in active markets for identical assets and ]]abilities that the entity can access at the measurement date; Level 2: inputs are inputs, other than quoted prices included within Level l, that are observable for the asset or liability either directly or indirectly; and Level 3: inputs are unobservable inputs for the asset or liability. The following table shows an analysis of financial instruments recorded at fair value by level of the fair value hierarchy: KD OOO's Level 1 31 March 2019 Investment securities Financial assets at fair value through profit or loss: Quoted equity securities Financial assets at fair value through other comprehensive income: Unquoted equity securities Investment in sukuk Level 2 Level 3 12,714 12,714 27,455 41,127 53,841 Total 27,455 41,127 27,455 81,296 31 December 2018 Investment securities Financial assets at fair value through profit or loss: Quoted equity securities Financial assets at fair value through other comprehensive income: Unquoted equity securities Investment in sukuk 12,627 12,627 27,504 27,504 65,844 27,504 105,975 65,844 78,471 31March2018 Investment securities Financial assets at fair value through profit or loss: Quoted equity securities 13,382 Financial assets at fair value through other comprehensive income: Unquoted equity securities Investment in sukuk 13,382 26,967 26,967 46,039 729 46,768 59,421 27,696 87, 117 There has been no change in valuation techniques as compared to prior periods. During the period ended 31 March 2019, there were no transfers between the levels. 14 F-016
213. KUWAIT INTERNATIONAL BANK K .S.C.P AND ITS SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2018 F-017
214. Kuwait International Bank K .S.C.P. and its Subsidiary INDEX Page Independent Auditors’ Report 1–5 Consolidated Statement of Profit or Loss 6 Consolidated Statement of Profit or Loss and Other Comprehensive Income 7 Consolidated Statement of Financial Position 8 Consolidated Statement of Changes in Equity 9 Consolidated Statement of Cash Flows 10 Notes to the Consolidated Financial Statements 11 – 52 F-018
215. F-019
216. F-020
217. F-021
218. F-022
219. F-023
220. Kuwait International Bank K .S.C.P. and its Subsidiary CONSOLIDATED STATEMENT OF PROFIT OR LOSS For the year ended 31 December 2018 Notes Financing income Finance cost and distribution to depositors 3 4 Net financing income Fees and commission income Net gain from foreign exchange Investment income Other income KD 000’s 2017 89,470 (35,815) 74,559 (25,514) ────────── ────────── 9,864 931 1,571 609 9,281 861 4,469 595 53,655 5 6 TOTAL OPERATING INCOME ────────── ────────── ────────── (19,089) (14,522) (2,275) TOTAL OPERATING EXPENSES 7 PROFIT FROM OPERATIONS ────────── ────────── 30,744 31,471 (8,244) ────────── ────────── 8 19,118 (174) (508) (193) (450) ────────── ────────── ═════════ ═════════ 20,892 143 17,701 92 17,793 ────────── ────────── ═════════ ═════════ 21,035 Basic and diluted earnings per share attributable to the shareholders of the Bank (12,353) ────────── 21,035 Attributable to: Shareholders of the Bank Non-controlling interests (32,780) ────────── (206) (582) (227) (450) PROFIT FOR THE YEAR (17,603) (13,288) (1,889) ────────── 22,500 Provision for: Contribution for Kuwait Foundation for the Advancement of Sciences (KFAS) Contribution for National Labor Support Tax (NLST) Contribution for Zakat Board of Directors’ remuneration 64,251 ────────── (35,886) Profit from operations before provisions and impairment losses 49,045 ────────── 66,630 Staff costs General and administrative expenses Depreciation Provisions and impairment losses KD 000’s 2018 22.38 fils ═════════ The accompanying notes from 1 to 26 form an integral part of these consolidated financial statements. 6 17,793 18.96 fils ═════════ F-024
221. Kuwait International Bank K .S.C.P. and its Subsidiary CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME For the year ended 31 December 2018 KD 000’s 2018 Profit for the year Other comprehensive income: Items that may be reclassified to consolidated statement of profit or loss - Change in fair value of financial assets available for sale - Transfer to consolidated statement of profit or loss on impairment of financial assets available for sale - Transfer to consolidated statement of profit or loss on disposal of financial assets available for sale - Change in fair value of debt securities at fair value through other comprehensive income 21,035 17,793 ────────── ────────── - 429 - 485 - (317) Other comprehensive income for the year Total comprehensive income for the year Attributable to: Shareholders of the Bank Non-controlling interests Total comprehensive income for the year - (321) ────────── Items that will not be reclassified to consolidated statement of profit or loss - Change in fair value of equity investments at fair value through other comprehensive income - Revaluation of property and equipment KD 000’s 2017 (321) ────────── 597 (157) 1,382 - ────────── ────────── ────────── ────────── ═════════ ═════════ 22,008 88 18,123 110 ────────── ────────── ═════════ ═════════ 1,061 22,096 22,096 The accompanying notes from 1 to 26 form an integral part of these consolidated financial statements. 7 440 18,233 18,233 F-025
222. F-026
223. Kuwait International Bank K .S.C.P. and its Subsidiary CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2018 Share Share Treasury capital premium shares Balance as at 1 January 2018 Impact of adoption IFRS 9 at 1 January 2018 (Note 2.2) Balance as at 1 January 2018 (Restated) Profit for the year Other comprehensive income/(loss) Total comprehensive income Depreciation transfer for buildings Gain on sale from financial assets at FVOCI Dividends (Note 19) Transfer to reserves Balance as at 31 December 2018 Balance as at 1 January 2017 Profit for the year Other comprehensive income/(loss) Total comprehensive income/(loss) Depreciation transfer for buildings Dividends (Note 19) Transfer to reserves Balance as at 31 December 2017 103,732 - 49,480 (45,234) Equity attributable to the shareholders of the Bank Other reserves Treasury Fair Statutory Voluntary shares Retained valuation Revaluation reserve reserve reserve earnings reserve surplus 34,656 28,573 4,846 54,907 14,077 - - - - (735) 680 49,480 (45,234) - 34,656 - 28,573 - 4,846 - 54,172 20,892 - 14,757 1,116 - Total other reserves Noncontrolling interests KD 000’s Total equity Total 15,530 152,589 260,567 3,324 263,891 - (55) (55) - (55) 15,530 - 152,534 20,892 1,116 260,512 20,892 1,116 3,324 143 (55) 263,836 21,035 1,061 22,008 - 22,008 - 88 - 22,096 - ──────── ──────── ──────── ───────── ───────── ───────── ───────── ───────── ─ ─ ─ ───────── ───────── ───────── ───────── ───────── ──────── ──────── ──────── ───────── ───────── ───────── ───────── ───────── ──-─ 20,892 1,116 ───────── ───────── ───────── ───────── ───────── 103,732 - - - - - - 593 - (593) - - - - - - - - - 2,235 2,235 - 117 (9,337) (4,470) (110) - - 7 (9,337) - 7 (9,337) - 2 - 9 (9,337) - 14,937 165,212 273,190 3,414 276,604 16,283 (157) 143,803 17,701 422 251,781 17,701 422 3,214 92 18 254,995 17,793 440 (157) (596) - 18,123 (9,337) - 18,123 (9,337) - 110 - 18,233 (9,337) - 15,530 152,589 260,567 3,324 263,891 ──────── ──────── ──────── ───────── ───────── ───────── ───────── ───────── 103,732─ 49,480─ (45,234)─ 36,891 30,808 4,846 61,967 15,763 ═══════ ═══════ ═══════ ════════ ════════ ════════ ════════ ════════ 103,732 - 49,480 (45,234) - 32,754 - 26,671 - 4,846 - 49,751 17,701 - 13,498 579 1,902 1,902 - 17,701 596 (9,337) (3,804) 579 - ───────── ───────── ───────── ───────── ───────── ════════ ════════ ════════ ════════ ════════ ──────── ──────── ──────── ───────── ───────── ───────── ───────── ───────── ─ ─ ─ ───────── ───────── ───────── ───────── ───────── ──────── ──────── ──────── ───────── ───────── ───────── ───────── ───────── 103,732─ 49,480─ (45,234)─ 34,656 28,573 4,846 54,907 14,077 ───────── ───────── ───────── ───────── ───────── - - - ═══════ ═══════ ═══════ ════════ ════════ ════════ ════════ ════════ The accompanying notes from 1 to 26 form an integral part of these consolidated financial statements. 9 ════════ ════════ ════════ ════════ ════════ F-027
224. Kuwait International Bank K .S.C.P. and its Subsidiary CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended 31 December 2018 Notes CASH FLOWS FROM OPERATING ACTIVITIES Profit for the year Adjustments for: Net gain from foreign exchange Dividend income Changes in fair value of financial assets at fair value through profit or loss Realised gain from sale of investment securities Share of results from an associate Gain from sale of investment property Rental income from investment properties Depreciation Provisions and impairment losses 6 6 6 6 6 6 7 Changes in operating assets and liabilities: Due from banks Financing receivables Other assets Due to banks and financial institutions Depositors’ accounts Other liabilities KD 000’s 2017 21,035 17,793 (931) (1,282) 954 (125) (1,118) 2,275 8,244 (861) (1,203) (1,415) 15 (627) (1,239) 1,889 12,353 ────────── ────────── 29,052 26,705 110,791 (311,974) 6,238 123,099 115,322 4,905 (61,234) (69,316) (2,509) (23,639) 78,381 7,381 ────────── Net cash from/(used in) operating activities 77,433 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of investment securities Proceeds on redemption/ sale of investment securities Proceeds from sale of investment property Purchase of property and equipment Dividend income received Rental income received Net cash (used in)/from investing activities (81,656) 59,630 1,420 (4,249) 1,282 1,118 (93,546) 95,406 1,500 (2,579) 1,203 1,239 ────────── ────────── ────────── ────────── (9,286) (9,286) NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at the beginning of the year 3,223 (9,310) ────────── (9,310) ────────── ────────── 45,692 50,516 (50,318) 100,834 ────────── 21 (44,231) ────────── ────────── Net cash used in financing activities ────────── ────────── (22,455) CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR KD 000’s 2018 96,208 ═════════ The accompanying notes from 1 to 26 form an integral part of these consolidated financial statements. 10 ────────── 50,516 ═════════ F-028
225. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2018 1. INCORPORATION AND ACTIVITIES Kuwait International Bank K.S.C.P. (the “Bank”) is a Kuwaiti public shareholding company incorporated in the State of Kuwait on 13 May 1973 as a specialised bank and is regulated by the Central Bank of Kuwait (“CBK”). The Bank’s shares are listed on the Boursa Kuwait. In June 2007, the CBK licensed the Bank to operate in accordance with Islamic Shariaá from 1 July 2007. From that date, all activities are conducted in accordance with Islamic Shariaá, as approved by the Bank’s Fatwa and Shariaá Supervisory Board. The Bank is engaged principally in providing Islamic banking services, the purchase and sale of properties, leasing, and other trading activities. Trading activities are conducted on the basis of purchasing various commodities and selling them on Murabaha at agreed profit margin which can be settled in cash or on installment credit basis. The registered office of the Bank is at West Tower – Joint Banking Center, P.O. Box 22822, Safat 13089, Kuwait. The Bank operates through 24 local branches (2017: 26) and employed 730 employees as of 31 December 2018 (2017: 730). The Bank owns 73.6% of issued share capital of Ritaj Insurance Company KSC (Closed). (“Ritaj”), Kuwait. Ritaj is engaged in providing Shariaá compliant insurance services. The consolidated financial statements of the Bank and its subsidiary (together the “Group”) for the year ended 31 December 2018 were authorised for issue by the Chairman on 31 January 2019 in accordance with a resolution of the Bank’s Board of Directors on 9 January 2019. The Annual General Assembly (“AGM”) of the Bank’s shareholders has the power to amend these consolidated financial statements after issuance. 2. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES 2.1 BASIS OF PREPARATION The consolidated financial statements have been prepared in accordance with the regulations for financial services institutions as issued by the CBK in the State of Kuwait. These regulations require expected credit loss (“ECL”) to be measured at the higher of the ECL on credit facilities computed under IFRS 9 according to the CBK guidelines or the provisions as required by CBK instructions; the consequent impact on related disclosures; and the adoption of all other requirements of International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). (collectively referred to as IFRS, as adopted for use by the State of Kuwait). The consolidated financial statements have been prepared under the historical cost basis except for measurement of financial assets at fair value through other comprehensive income, financial assets through profit or loss and land and buildings under property and equipment. The consolidated financial statements are presented in Kuwaiti Dinars (“KD”) which is the functional currency of the Bank and Ritaj, rounded to the nearest thousand Kuwaiti Dinars, except when otherwise stated. 2.2 CHANGES IN ACCOUNTING POLICIES AND DISCLOSURES The accounting policies used in the preparation of these consolidated financial statements are consistent with those used in the previous year except for the adoption of IFRS 9 Financial Instruments and adoption of IFRS 15 Revenue from Contracts with Customers. IFRS 9 - Financial Instruments The Group has adopted IFRS 9 ‘Financial Instruments’ issued in July 2014 with a date of initial application of 1 January 2018, with the exception of requirements of the expected credit losses on financing receivables as noted above in Note 2.1. The requirements of IFRS 9 represent a significant change from IAS 39 Financial Instruments: Recognition and Measurement. The IFRS 9 brings fundamental changes to the accounting for financial assets and to certain aspects of the accounting for financial liabilities. The Group has not restated comparative information for 2017 as permitted by the transitional provisions of IFRS 9. Therefore, the information presented for 2017 does not reflect the requirements of IFRS 9 and is not comparable to the information presented for 2018. Differences in the carrying amount of financial assets resulting from the adoption of IFRS 9 are recognised in retained earnings and reserves as at 1 January 2018 and are disclosed in Note 2.2 below. 11 F-029
226. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2018 2. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) 2.2 CHANGES IN ACCOUNTING POLICIES AND DISCLOSURES (continued) IFRS 9 - Financial Instruments (continued) The key changes to the Group’s accounting policies resulting from the adoption of IFRS 9 are summarised below: Classification and measurement of financial assets 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 or loss (“FVTPL”). The classification of financial assets under IFRS 9 is based on the business model in which a financial asset is managed and its contractual cash flow characteristics. IFRS 9 eliminated the previous IAS 39 categories of held to maturity, loans and receivables and available for sale. The adoption of IFRS 9 did not have a significant effect on the Group’s accounting policies for financial liabilities. Business model assessment The Group determines its business model at the level that best reflects how it manages groups of financial assets to achieve its business objective. The Group's business model is not assessed on an instrument by instrument basis but at a higher level of aggregated portfolios and is based on a number of observable factors. The information considered includes:    The stated policies and objectives for the portfolio and the operation of those policies in practice; 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; and The frequency, volume and timing of sales in prior periods, the reasons for such sales and its expectations about future sales activity. The business model assessment is based on reasonably expected scenarios without taking 'worst case' or 'stress case’ scenarios into account. If cash flows after initial recognition are realised in a way that is different from the Group's original expectations, the Group does not change the classification of the remaining financial assets held in that business model, but incorporates such information when assessing newly originated or newly purchased financial assets going forward. Assessment of whether contractual cash flows are solely payments of principal and profit (SPPP test) The Group assesses the contractual terms of financial assets to identify whether they meet the SPPP test. ‘Principal’ for the purpose of this test is defined as the fair value of the financial asset at initial recognition and may change over the life of the financial asset. Profit is defined as consideration for time value of money and for the credit risk associated with the principal and for other basic lending risks and costs as well as a profit margin. In assessing whether the contractual cash flows are solely payments of principal and profit, the Group considers 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. The Group considers:      Contingent events that would change the amount and timing of cash flows; Leverage features; Prepayment and extension terms; Terms that limit the Group’s claim to cash flows from specified assets (e.g. non-recourse asset arrangements); and Features that modify consideration of the time value of money – e.g. periodical reset of profit rates. Contractual terms that introduce a more than de minimis exposure to risks or volatility in the contractual cash flows that are unrelated to a basic lending arrangement do not give rise to contractual cash flows that are solely payment of principal and profit. In such cases, the financial asset is measured at fair value through profit or loss. The Group classifies its financial assets upon initial recognition into the following categories:  Financial assets carried at amortised cost  Financial assets carried at FVOCI  Financial assets carried at FVTPL 12 F-030
227. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2018 2. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) 2.2 CHANGES IN ACCOUNTING POLICIES AND DISCLOSURES (continued) IFRS 9 - Financial Instruments (continued) Classification and Measurement of Financial assets (continued) Financial assets carried at Amortised cost: A financial asset is measured at amortised cost if it meets both of the following conditions:  it is held within a business model whose objective is to hold assets to collect contractual cash flows; and  its contractual terms give rise, on specified dates, to cash flows that are solely payments of principal and profit on the principal amount outstanding Financial assets carried at amortised cost are subsequently measured at amortised cost using the effective yield method. Profit income, foreign exchange gains and losses and charge for expected credit losses are recognised in the consolidated statement of profit or loss. Any gain or loss on de-recognition is recognised in the consolidated statement of profit or loss. Financial assets carried at FVOCI: (i) Debt Securities (Sukuk) at FVOCI A debt investment is measured at FVOCI if it meets both of the following conditions:  it is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and  its contractual terms give rise on specified dates to cash flows that are solely payments of principal and profit on the principal amount outstanding. Debt Securities at FVOCI are subsequently measured at fair value. Profit income calculated using the effective yield method, foreign exchange gains and losses and impairment losses are recognised in the consolidated statement of profit or loss. Fair value changes which are not part of an effective hedging relationship are recognised in other comprehensive income and presented in the fair value reserves as part of equity until the asset is derecognised or reclassified. When the financial asset is derecognised, the cumulative gain or loss previously recognised in other comprehensive income is reclassified from equity to the consolidated statement of profit or loss. (ii) Equity investments at FVOCI Upon initial recognition, the Group makes an irrevocable election to classify some of its equity investments as equity investments at FVOCI if they meet the definition of Equity under IAS 32 Financial Instruments: Presentation and are not held for trading. Such classification is determined on an instrument by instrument basis. Equity investments at FVOCI are subsequently measured at fair value. Changes in fair values including foreign exchange component are recognised in other comprehensive income and presented in the fair value reserves as part of equity. Cumulative gains and losses previously recognised in other comprehensive income are transferred to retained earnings on derecognition and are not recognised in the consolidated statement of profit or loss. Dividend income on equity investments at FVOCI are recognised in the consolidated statement of profit or loss unless they clearly represent a recovery of part of the cost of the investment in which case they are recognised in other comprehensive income. Equity investments at FVOCI are not subject to impairment assessment. Financial assets carried at FVTPL: Financial assets in this category are those assets which have been either designated by management upon initial recognition or are mandatorily required to be measured at fair value under IFRS 9. Management designates an instrument at FVTPL that otherwise meet the requirements to be measured at amortised cost or at FVOCI only if it eliminates, or significantly reduces, an accounting mismatch that would otherwise arise. Financial assets with contractual cash flows not representing solely payment of principal and profit are mandatorily required to be measured at FVTPL. Financial assets at FVTPL are subsequently measured at fair value. Changes in fair value are recognised in the consolidated statement of profit or loss. Dividend income from equity investments measured at FVTPL is recognised in the consolidated statement of profit or loss when the right to the payment has been established. Reclassification of financial assets The Group does not reclassify its financial assets subsequent to their initial recognition apart in the exceptional circumstances in which the Group acquires, disposes of, or terminates a business line. 13 F-031
228. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2018 2. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) 2.2 CHANGES IN ACCOUNTING POLICIES AND DISCLOSURES (continued) IFRS 9 - Financial Instruments (continued) Classification and Measurement of Financial assets (continued) Hedge accounting The general hedge accounting requirements of IFRS 9 aim to simplify hedge accounting, creating a stronger link with risk management strategy and permitting hedge accounting to be applied to a greater variety of hedging instruments and risks. The adoption of general hedge accounting requirements of IFRS 9 does not change the general principles of how an entity account for effective hedges. Since the Group is not dealing in any derivative instruments, the hedging requirements of IFRS 9 will not have a significant impact on the Group’s consolidated financial statements. Impairment of financial assets The Group computes Expected Credit Losses (“ECL”) on the following financial instruments that are not measured at fair value through profit or loss:     Financing receivables including loan commitments Letters of credit and financial guarantee contracts including commitments Investment in debt securities measured FVOCI (i.e. Investment in Sukuks) Balances and deposits with banks Balances with CBK, bonds, treasury bills, public debt instruments and Islamic financial instruments such as Sukuk issued by CBK and Government of Kuwait is low risk and fully recoverable and hence no ECL is measured on these instruments. Impairment of financing facilities Financing facilities granted by the Group consists of financing receivables, letters of credit and financial guarantee contracts and commitments to grant credit facilities. Impairment on financing receivables shall be recognised in the consolidated statement of financial position at an amount equal to the higher of ECL under IFRS 9 according to the CBK guidelines, and the provisions required by the CBK instructions. Impairment of financial assets other than financing receivables The Group recognises ECL on investment in debt securities at FVOCI and on balances and deposits with banks. Equity investments are not subject to expected credit losses. Expected Credit losses The Group applies a three stage approach to measure the expected credit loss as follows. Assets migrate through the following three stages based as the change in credit quality since initial recognition. Stage 1: 12-month ECL The Group measures loss allowances at an amount equal to 12-month ECL on financial assets where there has not been significant increase in credit risk since their initial recognition or on exposures that are determined to have a low credit risk at the reporting date. The Group considers a financial asset to have low credit risk when its credit risk rating is equivalent to the globally recognised definition of ‘investment grade’. Stage 2: Lifetime ECL – not credit impaired The Group measures loss allowances at an amount equal to lifetime ECL on financial assets where there has been a significant increase in credit risk since initial recognition but are not credit impaired. 14 F-032
229. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2018 2. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) 2.2 CHANGES IN ACCOUNTING POLICIES AND DISCLOSURES (continued) IFRS 9 - Financial Instruments (continued) Impairment of financial assets (continued) Stage 3: Lifetime ECL – credit impaired The Group measures loss allowances at an amount equal to lifetime ECL on financial assets that are determined to be credit impaired based on objective evidence of impairment. Life time expected credit losses are ECLs that result from all possible default events over the expected life of a financial instrument. The 12 months ECL is the portion of life time expected credit loss that result from default events that are possible within the 12 months after the reporting date. Both life time expected credit losses and 12 month ECLs are calculated on either an individual basis or a collective basis depending on the nature of the underlying portfolio of financial instruments. At each reporting date, the Group assesses whether a financial asset or group of financial assets is credit impaired. The Group considers a financial asset to be impaired when one or more events that have a detrimental impact on the estimated future cashflows of the financial asset have occurred or when contractual payments are 90 days past due. Determining the stage for impairment At each reporting date, the Group assesses whether there has been significant increase in credit risk since initial recognition by comparing the risk of default occurring over the remaining expected life from the reporting date with the risk of default at the date of initial recognition. The quantitative criteria used to determine a significant increase in credit risk is a series of relative and absolute thresholds. All financial assets that are 30 days past due are deemed to have significant increase in credit risk since initial recognition and migrated to stage 2 even if other criteria do not indicate a significant increase in credit risk. At each reporting date, the Group also assesses whether a financial asset or group of financial assets is credit impaired. The Group considers a financial asset to be impaired when one or more events that have a detrimental impact on the estimated future cash-flows of the financial asset have occurred or when contractual payments are 90 days past due. All credit impaired financial assets are classified as stage 3 for ECL measurement purposes. Evidence of credit impairment includes observable data about the following:      Significant financial difficulty of the borrower or issuer. A breach of contract such as default or past due event. The lender having granted to the borrower a concession, that the lender would otherwise not consider, for economic or contractual reasons relating to the borrower’s financial difficulty. The disappearance of an active market for a security because of financial difficulties. Purchase of a financial asset at a deep discount that reflects the incurred credit loss. At the reporting date, if the credit risk of a financial asset or group of financial assets has not increased significantly since initial recognition or not credit impaired, these financial assets are classified as stage 1. Measurement of ECLs Expected credit losses are probability-weighted estimate of credit losses and are measured as the present value of all cash shortfalls discounted at the effective profit rate of the financial instrument. Cash shortfall represent the difference between cashflows due to the Group in accordance with the contract and the cash-flows that the Group expects to receive. The key elements in the measurement of ECL include probability of default (“PD”), loss given default (“LGD”) and exposure at default (“EAD”). The Group estimates these elements using appropriate credit risk models taking into consideration of the internal and external credit ratings of the assets, nature and value of collaterals, forward looking macroeconomic scenarios etc. Incorporation of forward looking information The Group considers key economic variables that are expected to have an impact on the credit risk and the ECL in order to incorporate forward-looking information into the ECL models. These primarily reflect reasonable and supportable forecasts of the future macroeconomic conditions. The consideration of such factors increases the degree of judgment in determination of ECL. The management reviews the methodologies and assumptions including any forecasts of future economic conditions on regular basis. 15 F-033
230. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2018 2. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) 2.2 CHANGES IN ACCOUNTING POLICIES AND DISCLOSURES (continued) IFRS 9 - Financial Instruments (continued) Impairment of financial assets (continued) Modification of financing receivables Under certain circumstances, the Group seeks to restructure financing to customers rather than taking possession of collateral. This may involve extending the payment arrangements, reduction in the amount of principal or profit and the agreement of new facility or financing conditions. If the modifications are substantial, such a facility is derecognised and a new facility is recognised with substantially different terms and conditions. The facility will have a loss allowance measured based on 12 month ECL except in rare occasions where the new facility is considered to be originated - credit impaired. Management continuously reviews modified Islamic financing to customers to ensure that all criteria are met and that future payments are likely to occur. Management also assesses whether there has been significant increase in credit risk or the facility should be classified in stage 3. When Islamic financing to customers have been modified but not derecognised, any impairment is measured using the original effective profit rate as calculated before the modification of terms. Write-offs The gross carrying amount of a financial asset is written off (either partially or in full) when the Group determines that the debtor does not have assets or sources of income that could generate sufficient cash flows to repay the amounts. However, financial assets that are written off could still be subject to enforcement activities in order to comply with the Group’s procedures for recovery of amounts due. Presentation of allowance for ECL in the consolidated statement of financial position Loss allowances for ECL are presented as a deduction from the gross carrying amount of the financial assets for financial assets carried at amortised cost. In the case of debt instruments measured at FVOCI, the Group recognises the ECL charge in the consolidated statement of profit or loss and a corresponding amount is recognised in other comprehensive income with no reduction in the carrying amount of the financial asset in the consolidated statement of financial position. Provisions for credit losses in accordance with CBK instructions The Group is required to calculate provisions for credit losses on financing receivables in accordance with the instructions of CBK on the classification of financing receivables and calculation of provisions. Financing receivables are classified as past due when a payment has not been received on its contractual payment date or if the facility is in excess of pre-approved limits. A financing receivable is classified as past due and impaired when the profit or a principal instalment is past due for more than 90 days and if the carrying amount of the facility is greater than its estimated recoverable value. Past due and past due and impaired financing receivables are managed and monitored as irregular facilities and are classified into the following four categories which are then used to determine the provisions. Category Watch list Substandard Doubtful Bad Criteria Irregular for a period of 90 days Irregular for a period of 91- 180 days Irregular for a period of 181- 365 days Irregular for a period exceeding 365 days Specific provisions 20% 50% 100% The Group may also include a credit facility in one of the above categories based on management’s judgement of a customer’s financial and/or non-financial circumstances. In addition to specific provisions, minimum general provisions of 1% on cash facilities and 0.5% on non-cash facilities are made on all applicable financing receivables (net of certain restricted categories of collateral) which are not subject to specific provisioning. In March 2007, CBK issued a circular amending the basis of calculating general provisions on facilities changing the rate from 2% to 1% for cash facilities and from 1% to 0.5% for non-cash facilities. The required rates were to be applied effective from 1 January 2007 on the net increase in facilities, net of certain categories of collateral, during the reporting period. The general provision in excess of the present 1% for cash facilities and 0.5% for non-cash facilities as of 31 December 2006 would be retained as a general provision until a further directive from the CBK is issued. 16 F-034
231. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2018 2. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) 2.2 CHANGES IN ACCOUNTING POLICIES AND DISCLOSURES (continued) IFRS 9 - Financial Instruments (continued) IFRS 9 transition disclosures The following table shows the original measurement categories in accordance with IAS 39 and the new measurement categories under IFRS 9 for the Group’s financial assets as at 1 January 2018. KD 000’s Financial assets: Cash and balances with banks Due from banks Investments - Debt Investments - Equity Investments - Equity Investments - Equity Investments - Equity Other assets Original classification under IAS 39 Loans and receivable Loans and receivable AFS AFS AFS FVTPL FVTPL Loans and receivable Original New carrying ReNew carrying classification amount under measurement amount under under IFRS 9 IAS 39 ECL IFRS 9 Amortised cost 19,450 (2) 19,448 Amortised cost FVOCI FVOCI FVTPL FVOCI FVTPL 402,902 43,891 26,353 13,534 8 54 (14) - 402,888 43,891 26,353 13,534 8 54 Amortised cost 17,298 (39) 17,259 Adoption of IFRS 9 did not result in any change in classification or measurement of financial liabilities. The following table analysis the impact of transition to IFRS 9 on reserves and retained earnings. Retained earnings Closing balance under IAS 39 (31 December 2017) Impact on reclassification and re-measurements: Investment securities - equity from available-for-sale to FVTPL Impact on recognition of ECL on financial assets other than financing receivables: ECL under IFRS 9 for financial assets - debt at FVOCI ECL under IFRS 9 for financial assets - other assets at amortised cost Opening balance under IFRS 9 on date of initial application of 1 January 2018 17 KD 000’s Fair value reserve 54,907 14,077 (652) 652 (28) (55) 28 - ─────── ─────── ═══════ ═══════ 54,172 14,757 F-035
232. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2018 2. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) 2.2 CHANGES IN ACCOUNTING POLICIES AND DISCLOSURES (continued) IFRS 15 - Revenue from Contracts with customers The Group has adopted IFRS 15 ‘Revenue from contracts with customers’ effective from 1 January 2018. This standard supersedes IAS 11 Construction Contracts and IAS 18 Revenue along with related IFRIC 13, IFRIC 15, IFRIC 18 and SIC 31. This standard removes inconsistencies and weaknesses in previous revenue recognition requirements, provides a more robust framework for addressing revenue issues and improves comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. The adoption of this standard did not result in any change in accounting policies of the Group and did not have any material effect on the Group's consolidated financial statements. 2.3 NEW STANDARDS AND INTERPRETATIONS ISSUED BUT NOT YET ADOPTED The standards and interpretations issued, but not yet effective, up to the date of issuance of the Group’s consolidated financial statements are disclosed below. The Group intends to adopt these standards, if applicable, when they become effective. IFRS 16 - Leases In January 2016, the IASB issued IFRS 16 ‘Leases’ with an effective date of annual periods beginning on or after 1 January 2019. IFRS 16 results in lessees accounting for most leases within the scope of the standard in a manner similar to the way in which finance leases are currently accounted for under IAS 17 ‘Leases’. Lessees will recognise a ‘right of use’ asset and a corresponding financial liability on the balance sheet. The asset will be amortised over the length of the lease and the financial liability measured at amortised cost. Lessor accounting remains substantially the same as in IAS 17. Based on a quantitative assessment carried out by the Group, the impact of adopting IFRS 16 on the Group's consolidated financial statements is not material. 2.4 BASIS OF CONSOLIDATION The financial statements of subsidiary is included in the consolidated financial statements of the Group from the date that control commences until the date that control ceases. Where necessary, adjustments are made to the financial statements of subsidiary to bring its accounting policies in line with those used by the Bank. All significant intra-group balances, transactions and unrealized gains or losses resulting from intra-group transactions and dividends are eliminated in full. The subsidiary’s financial statements are prepared either to the Bank’s reporting date or to a date not earlier than three months of the Bank’s reporting date. Interest in the equity of subsidiaries not attributable to the Group is reported as non-controlling interests in the consolidated statement of financial position. Non-controlling interests in the acquiree is measured at the proportionate share in the recognized amount of the acquiree’s identifiable net assets. Losses are allocated to the non-controlling interests even if they exceed the noncontrolling interest’s share of equity in the subsidiary. Transactions with non-controlling interests are treated as transactions with equity owners of the Group. Gains or losses on disposals of non-controlling interests without loss of control are recorded in equity. On loss of control, the Group derecognises the assets and liabilities of the subsidiary, any non-controlling interests and the other components of equity related to the subsidiary. Any surplus or deficit arising on loss of control is recognised in the consolidated statement of profit or loss. If the Group retains any interest in the previous subsidiary, then such interest is measured at fair value at the date that control is lost. Subsequently it is accounted for as an equity-accounted investee or as a financial asset depending on the level of influence retained. 18 F-036
233. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2018 2. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) 2.5 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business Combinations Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Group. The Group controls an investee if and only if the Group has:  Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee);  Exposure, or rights, to variable returns from its involvement with the investee; and  The ability to use its power over the investee to affect its returns. When the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including:  The contractual arrangement with the other vote holders of the investee;  Rights arising from other contractual arrangements;  The Group’s voting rights and potential voting rights; The Group measures goodwill at the acquisition date as:     The fair value of the consideration transferred; plus The recognised amount of any non-controlling interests in the acquiree; plus If the business combination is achieved in stages, the fair value of the pre-existing equity interest in the acquiree; less The net recognised amount of the identifiable assets acquired and liabilities assumed. When the excess is negative, a bargain purchase gain is recognised immediately in consolidated statement of profit or loss. Transactions costs, other than those associated with the issue of debt or equity securities, that the Group incurs in connection with a business combination are expensed as incurred. 19 F-037
234. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2018 2. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) 2.5 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Financial instruments – Classification, recognition, de-recognition and measurement Recognition of financial assets A financial asset or a financial liability is recognised when the Group becomes a party to the contractual provisions of the instrument. All regular way purchases and sales of financial assets are recognised using settlement date accounting i.e. the date that the Group receives or delivers the assets. Changes in fair value between the trade date and settlement date are recognised in the consolidated statement of profit or loss, or in consolidated statement of profit or loss and other comprehensive income in accordance with the policy applicable to the related instrument. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulations or conventions in the market place. De-recognition of financial assets A financial asset is de-recognised (in whole or in part) where:  the contractual rights to receive cash flows from the financial assets have expired, or  the Group retains the contractual right to receive the cash flows of the financial asset, but has assumed a contractual obligation to pay them in full without material delay to a third party under a ‘pass through’ arrangement, or  the Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. When the Group has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Group’s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay. A financial liability is derecognised when the obligation specified in the contract is discharged, cancelled or expired. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in the consolidated statement of profit or loss. Property acquired on settlement of debt is stated at the lower of the related financing receivables and the current fair value of such assets. Gains or losses on disposal and revaluation losses are recognised in the consolidated statement of profit or loss. The Group has determined the classification and measurement of its financial assets as follows: Cash and balances with banks and due from banks Cash and balances with banks consist of cash in hand, current account and money at call with other banks and deposits with banks maturing within seven days. Cash and balances with banks and due from banks including Tawarruq with CBK and government debts, are carried at amortised cost using effective yield rate. Financing receivables Financing receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. The Bank offers Shariaá compliant products and services such as Murabaha, Wakala, Istisna’a, and Ijara which are stated at amortised cost and presented as financing receivables in the consolidated statement of financial position. The amount due is settled either by installments or on a deferred payment basis. 20 F-038
235. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2018 2. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) 2.5 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Financial instruments – Classification, recognition, de-recognition and measurement (continued) Financing receivables (continued) Murabaha is a sale agreement for commodities and real estate to “a promise to buy” customer, at a price comprising of cost plus agreed profit, after the Bank has acquired the asset. Wakala is an agreement whereby the Group provides a sum of money to a customer under an agency arrangement, who invests it according to specific conditions in return for a fee. The agent is obliged to return the amount in case of default, negligence or violation of any terms and conditions of the wakala. Istisna’a is a sale contract between a contract owner and a contractor whereby the contractor based on an order from the contract owner undertakes to manufacture or otherwise acquire the subject matter of the contract according to specifications, and sells it to the contract owner for an agreed upon price and method of settlement whether that be in advance, by installments or deferred to a specific future date. Group as a lessor Ijara receivable Ijara is an Islamic transaction involving the purchase and immediate lease of an asset at cost where the lessor conveys to the lessee the right to use the asset for an agreed period of time in return for a payment or series of payments. At the end of the lease term the lessee has the option to purchase the asset. Ijara receivables are stated at the aggregate of the minimum lease payments due less provision for impairment, if any, and are presented net of deferred income. Operating leases Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Leased assets are stated at amounts equal to the net investment outstanding in the leases. Investment securities - Policy applicable from 1 January 2018 Group’s financial investments consists of investment in sukuk, equity investments and other investments.  Debt securities (Sukuk) are classified as either at amortised cost or at FVOCI based on the business model in which these securities are managed.  Equity investments are generally carried at FVTPL except for those specific investments for which the Group has made an election to classify at FVOCI.  Other investments are carried at FVTPL. Investment securities (available for sale) - Policy applicable before 1 January 2018 Available for sale investments are non-derivative financial assets that are not classified in any of the above categories of financial assets. Available for sale investment are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, they are measured at fair value and changes therein, other than impairment losses and foreign currency differences on available for sale debt instruments, are recognised in other comprehensive income and presented in the fair value reserve in equity. When an investment is derecognised or is determined to be impaired, the gain or loss accumulated in equity is reclassified to consolidated statement of profit or loss. Financial liabilities Financial liabilities include due to banks and financial institutions, depositors’ accounts created by Mudaraba and Wakala contracts and other liabilities. Mudaraba represents an agreement whereby the Bank and the customer share an agreed percentage of any profit earned on customers’ investments as agreed. Wakala represents an agreement whereby the Bank aims to provide a certain rate of return for the transactions entered on behalf of the customer. 21 F-039
236. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2018 2. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) 2.5 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Financial instruments – Classification, recognition, de-recognition and measurement (continued) Offsetting Financial assets and financial liabilities are only offset and the net amount reported in the consolidated statement of financial position when there is a legally enforceable right to set off the recognised amounts and the Group intends to either settle on a net basis, or to realise the asset and settle the liability simultaneously. Collateral pending sale The Group occasionally acquires non-monetary assets in settlement of certain financing receivables. Such assets are stated at the lower of the carrying value of the related financing receivables and the current fair value of such assets. Gains or losses on disposal, and revaluation losses, are recognised in the consolidated statement of profit or loss. Financial guarantees In the ordinary course of business, the Group provides financial guarantees, consisting of letters of credit, guarantees and acceptances. Financial guarantees are initially recognised in the consolidated financial statements at fair value, being the premium received, in other liabilities. The premium received is recognised in the consolidated statement of profit or loss in ‘fees and commission income’ on a straight-line basis over the life of the guarantee. Subsequently, the liability is measured at the higher of the best estimate of the expenditure required to settle the present obligation at the reporting date and the amount recognized less cumulative amortization. When a payment under the guarantee is likely to become payable, the present value of the expected net payments less the unamortised premium, is charged to the consolidated statement of profit or loss. Financial guarantees and letter of credit are assessed and provision for impairment is made in a similar manner to that for financing receivables. Revenue recognition Income from Murabaha, Wakala and Istisna’a are recognised on an effective yield basis which is established on initial recognition of the asset and is not revised subsequently. Income from Ijara is recognised over the term of the Ijara agreement to yield a constant rate of return on the net investment outstanding. The calculation of the effective yield includes all fees paid or received, transactions costs and discounts or premiums that are an integral part of the effective yield. Fees and commission income earned from services provided over a period of time is recognised over the period of service. Dividend income is recognised when the right to receive payment is established. Rental income from investment properties is recognised on a straight line basis over the period of the lease. Once a financial instrument categorised as “financing receivables” is written down to its estimated recoverable amount, related income is thereafter recognised on the unimpaired portion based on the original effective yield rate that was used to discount the future cash flows for the purpose of measuring the recoverable amount. Finance cost Finance cost is directly attributable to due to banks and financial institutions and depositors’ accounts. All finance costs are expensed in the period they occur. Foreign currency Foreign currency transactions are recorded at rates of exchange ruling at the date of the transactions. Monetary assets and liabilities in foreign currencies outstanding at the year-end are translated into Kuwaiti Dinars at rates of exchange ruling at the reporting date. Any resultant gains or losses are taken to the consolidated statement of profit or loss. Non-monetary items carried at fair value that are denominated in foreign currencies are translated at the rates prevailing on the date when the fair value was determined. Translation difference on non-monetary items classified as “at fair value through profit or loss” are reported as part of the fair value gain or loss in the consolidated statement of profit or loss whereas, where as those on non-monetary items classified as FVOCI financial assets are included in consolidated statement of profit or loss and other comprehensive income. 22 F-040
237. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2018 2. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) 2.5 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Dividends on ordinary shares Dividends on ordinary shares are recognised as a liability and deducted from equity when they are approved by the Bank’s shareholders in the Annual General Assembly. Dividends for the year that are approved by the Annual General Assembly after the reporting date are disclosed as an event after the reporting date. Statutory contributions Kuwait Foundation for the Advancement of Sciences (“KFAS”) The Bank calculates the contribution to KFAS at 1% of profit in accordance with the calculation based on the KFAS’s Board of Directors resolution, excluding transfer to statutory reserve from profit for the year. National Labour Support Tax (“NLST”) The Bank calculates NLST in accordance with Law No. 19/2000 and the Minister of Finance Resolution No. 24/2006 at 2.5% of taxable profit for the year. Cash dividends from listed companies which are subject to NLST are deducted from the profit for the year to determine the taxable profit. Zakat Contribution to Zakat is calculated at 1% of the profit in accordance with the Ministry of Finance resolution No. 58/2007. Cash and cash equivalents For the purpose of the consolidated statement of cash flows, cash and cash equivalents includes, cash and balances with banks (as set out in Note 9) and Murabaha finance with banks (contractual maturity of 90 days or less) (as set out in Note 10). Investment in associates An associate is an entity over which the Group exerts significant influence. Investment in associates is accounted for under the equity method of accounting. Where an associate is acquired and held exclusively for resale, it is accounted for as a non-current asset held for resale under IFRS 5. Under the equity method, the investment in associate is initially recognised at cost and adjusted thereafter for the post-acquisition change in the Group’s share of the associate’s net assets. Goodwill relating to an associate is included in the carrying amount of the investment and is neither amortised nor individually tested for impairment. The Group recognises in the consolidated statement of profit or loss its share of the total recognised profit or loss of the associate from the date that influence or ownership effectively commenced until the date that it effectively ceases. Distributions received from the associate reduce the carrying amount of the investment. Adjustments to the carrying amount may also be necessary for changes in Group’s share in the associate arising from changes in the associate’s equity that have not been recognised in the associate’s profit or loss statement. The Group’s share of those changes is recognised in the consolidated statement of profit or loss and other comprehensive income. Unrealised gains on transactions with associates are eliminated to the extent of the Group’s share in the associate. Unrealised losses are also eliminated unless the transaction provides evidence of impairment in the asset transferred. An assessment for impairment of investments in associates is performed when there is an indication that the asset has been impaired, or that impairment losses recognised in prior years no longer exist. If such indication exists, the Group estimates the asset’s recoverable amount. A previously recognised impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognised. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in the consolidated statement of profit or loss. The associate’s financial statements are prepared either to the Group’s reporting date or to a date not earlier than three months of the Group’s reporting date using consistent accounting policies. Where practicable, adjustments are made for the effects of significant transactions or other events that occur between the reporting date of the associates and the Group’s reporting date. Upon loss of significant influence over the associate, the Group measures and recognises any retained investment at fair value. Any difference between carrying amount of the investment in associate upon loss of significant influence and the fair value of the retained investment and proceeds from disposal is recognised in the consolidated statement of profit or loss. 23 F-041
238. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2018 2. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) 2.5 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Investment properties Land and buildings, held for long-term capital appreciation and rental yields, and not occupied by the Group, are classified as investment properties. These also include properties acquired by the Group in settlement of financing receivables. Investment properties are carried at cost which includes purchase price and transaction costs less accumulated depreciation and impairment losses. Freehold land is not depreciated. Depreciation is computed on a straight line basis over the estimated useful lives of 20 years. Fair values of investment properties are determined periodically by external appraisers having an appropriate recognised professional qualifications and recent experience in the location and category of the property being valued. The asset’s residual values and useful lives are reviewed, and adjusted if appropriate, at each year end. The carrying amount of each item is reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, the assets are written down to their recoverable amount and the impairment loss is recognised in the consolidated statement of profit or loss. Impairment is tested at the lowest level of the cash generating unit (“CGU”) to which the item belongs. An investment property is derecognised when either it has been disposed of, or when the investment property is permanently withdrawn from use and no future economic benefit is expected from its disposal. Any gains or losses on the retirement or disposal of an investment property are recognised in the consolidated statement of profit or loss in the period of retirement or disposal. Transfers are made to or from investment property only when there is a change in use. For a transfer from investment property to property and equipment, the deemed cost for subsequent accounting is the carrying value at the date of change in use. If property and equipment becomes an investment property, the Group accounts for such property in accordance with the policy stated under property and equipment up to the date of change in use. When the Group begins to redevelop an existing investment property with a view to selling the property, it is transferred to trading properties at carrying value. Property and equipment Land and buildings are measured at fair value less accumulated depreciation on buildings and impairment losses recognised after the date of the revaluation. Valuations are performed annually to ensure that the fair value of a revalued asset does not differ materially from its carrying amount. Any revaluation change is credited to the revaluation surplus reserve in equity, except to the extent that it reverses a revaluation decrease of the same asset previously recognised in the consolidated statement of profit or loss, in which case the increase is recognised in the consolidated statement of profit or loss. A revaluation deficit is recognised in the consolidated statement of profit or loss, except to the extent that it offsets an existing surplus on the same asset recognised in the revaluation surplus reserve. An annual transfer from the revaluation surplus reserve to retained earnings is made for the difference between depreciation based on the revalued carrying amount of the assets and depreciation based on the asset’s original cost. Additionally, accumulated depreciation as at the revaluation date is eliminated against the gross carrying amount of the asset and the net amount is restated to the revalued amount of the asset. Upon disposal, any revaluation reserve relating to the particular asset being sold is transferred to retained earnings. Computer and other equipment are carried at cost less accumulated depreciation and accumulated impairment loss. Depreciation is charged on a straight-line basis over their estimated useful lives: Building Computer and other equipment 20 years 3 – 5 years 24 F-042
239. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2018 2. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) 2.5 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Fair value measurement Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:  In the principal market for the asset or liability, or  In the absence of a principal market, in the most advantageous market for the asset or liability. The principal or the most advantageous market must be accessible to by the Group. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. All assets and liabilities for which fair value is measured or disclosed in the consolidated financial statements are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole: Level 1: inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date; Level 2: inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability either directly or indirectly; and. Level 3: inputs are unobservable inputs for the asset or liability. For financial instruments quoted in an active market, fair value is determined by reference to quoted market prices. Bid prices are used for assets and offer prices are used for liabilities. The fair value of investments in mutual funds, unit trusts or similar investment vehicles are based on the last published net assets value. For unquoted financial instruments fair value is determined by reference to the market value of a similar investment, discounted cash flows, other appropriate valuation models or brokers’ quotes. For financial instruments carried at amortised cost, the fair value is estimated by discounting future cash flows at the current market rate of return for similar financial instruments. The fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. For assets and liabilities that are recognised in the consolidated financial statements on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. For the purpose of fair value disclosures, the Group has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained above. 25 F-043
240. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2018 2. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) 2.5 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Impairment of non-financial assets The Group assesses at each reporting date whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Group estimates the asset’s recoverable amount. An asset’s or cash-generating unit’s (CGU) recoverable amount is the higher of its fair value less costs to sell and its value in use. Where the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pretax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs to sell, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded companies or other available fair value indicators. For non-financial assets excluding goodwill, an assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, the Group estimates the asset’s or CGU’s recoverable amount. A previously recognised impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognised. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceeds the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in the consolidated statement of profit or loss. Post-employment benefits The Group is liable under Kuwait Labour Law to make payments under defined benefit plans to employees at cessation of employment. The defined benefit plan is unfunded and is based on the liability that would arise on involuntary termination of all employees on the reporting date. This basis is considered to be a reliable approximation of the present value of this liability. Provisions Provisions are recognised when, as a result of past events, it is probable that an outflow of economic resources will be required to settle a present, legal or constructive obligation and the amount can be reliably estimated. Treasury shares The Bank’s holding in its own shares is stated at acquisition cost and is recognised in equity. The treasury shares are accounted for using the cost method. Under this method, the weighted average cost of the shares reacquired is charged to a contra account in the equity. When the treasury shares are sold, gains are credited to a separate account in equity, “treasury shares reserve”, which is not distributable until all the treasury shares are disposed. Any realised losses are charged to the same account to the extent of the credit balance on that account. Any excess losses are charged to retained earnings then to the voluntary reserve and statutory reserve. Gains realised subsequently on the sale of treasury shares are first used to offset any previously recorded losses in the order of reserves, retained earnings and the treasury shares reserve account. These shares are not entitled to any cash dividend that the Bank may propose. The issue of bonus shares increases the number of shares proportionately and reduces the average cost per share without affecting the total cost of treasury shares. Contingencies Contingent assets are not recognised in the consolidated financial statements, but are disclosed when an inflow of economic benefit is probable. Contingent liabilities are not recognised in the consolidated financial statements, but are disclosed unless the possibility of an outflow of resources embodying economic benefit is remote. Segment information A segment is a distinguishable component of the Group that engages in business activities from which it earns revenues and incurs costs. The operating segments are used by the management of the Group to allocate resources and assess performance. Operating segments exhibiting similar economic characteristics, product and services and class of customers are appropriately aggregated and reported as reportable segments. 26 F-044
241. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2018 2. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) 2.6 SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS The preparation of the Group’s consolidated financial statements requires management to make judgments, estimates and assumptions that affect the reported amount of revenues, expenses, assets and liabilities, and the accompanying disclosures, as well as the disclosure of contingent liabilities. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods. Judgments In the process of applying the Group’s accounting policies, management has made the following judgments, apart from those involving estimations, which have the most significant effect on the amounts recognised in the consolidated financial statements: Classification of financial assets - applicable from 1 January 2018 The Group determines the classification of financial assets based on the assessment of the business model within which the assets are held and assessment of whether the contractual terms of the financial asset are solely payments of principal and profit on the principal amount outstanding. Refer note 2.5 classification of financial assets for more information. Classification of real estate Management decides on acquisition of a real estate whether it should be classified as trading, investment property, property under development or property and equipment. The Group classifies it as “trading property” if it is acquired principally for sale in the ordinary course of business. The Group classifies it as “investment property” if it is acquired to generate rental income or for capital appreciation, or for undetermined future use. The Group classifies property as “property under development” if it is acquired with the intention of development. The Group classifies property as “property and equipment” when it is acquired for owner occupation. Estimation uncertainty and assumptions The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below: Impairment of financial instruments - applicable from 1 January 2018 The Group estimates ECL for all financial assets carried at amortised cost or fair value through other comprehensive income except for equity instruments. Significant judgements are required in applying the accounting requirements for measuring ECL, such as:  Determining criteria for significant increase in credit risk;  Choosing appropriate models and assumptions for measurement of ECL;  Establishing the number and relative weightings of forward-looking scenarios for each type of product/market and the associated ECL; and  Establishing group of similar financial assets for the purpose of measuring ECL. The Group has the policy to regularly review its model in the context of actual loss experience and adjust when necessary. Impairment losses on financing receivables and investment in debt instruments - applicable before 1 January 2018 The Group reviews problem financing receivables and investments in debt instruments on a regular basis to assess whether a provision for impairment should be recorded in the consolidated statement of profit or loss. In particular, considerable judgment by management is required in the estimation of the amount and timing of future cash flows when determining the level of provisions required. Such estimates are necessarily based on assumptions about several factors involving varying degrees of judgment and uncertainty. Valuation of financial instruments with significant unobservable inputs Valuation techniques for financial instruments with significant unobservable inputs includes estimates such as expected cash flows discounted at current rates applicable for items with similar terms and risk characteristics; recent arm’s length market transactions; current fair value of another instrument that is substantially the same; valuation models etc. Any changes in these estimates and assumptions as well as the use of different, but equally reasonable estimates and assumptions may have an impact on the carrying values of unquoted financial assets. 27 F-045
242. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2018 3. FINANCING INCOME Income from Murabaha Income from Wakala Income from Ijara Others KD 000’s 2018 KD 000’s 2017 33,764 41,065 13,368 1,273 28,845 33,713 11,174 827 ────────── ────────── ═════════ ═════════ 89,470 4. 74,559 FINANCE COST AND DISTRIBUTION TO DEPOSITORS The Bank’s Board of Directors determined the depositors’ share of profit based on the results for the respective year. 5. FEES AND COMMISSION INCOME This represents income earned from property appraisals, property management fees, letters of credit and guarantee fees, debit/credit card and point of sales fees etc. 6. INVESTMENT INCOME KD 000’s 2018 Dividend income Changes in fair value of financial assets through profit or loss Realised gain from sale of investment securities Share of results from associate Gain from sale of investment property Rental income from investment properties 1,282 (954) 125 1,118 PROVISIONS AND IMPAIRMENT LOSSES Financing receivables (a) (Note 11) Expected credit losses for investment in sukuk (Note 12) Expected credit losses for other financial assets Reversal of impairment losses/ (impairment losses) on Murabaha finance with banks Reversal of impairment losses on financing receivables (Note 18) Reversal of impairment on non-cash credit facilities Provision no longer required Impairment losses on investment properties Impairment losses on financial assets available for sale ────────── ═════════ ═════════ KD 000’s 2018 KD 000’s 2017 4,469 11,348 - 21,047 48 (29) 140 (11,982) (921) (330) 271 - (93) (1,045) (176) 2,319 ────────── ────────── ═════════ ═════════ 8,244 (a) 1,203 1,415 (15) 627 1,239 ────────── 1,571 7. KD 000’s 2017 12,353 Included in impaired losses against financing receivables is KD 9,066 thousand in relation the court verdict for a previous Ijara contracts (Note 18). 28 F-046
243. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2018 8. BASIC AND DILUTED EARNINGS PER SHARE Basic and diluted earnings per share is computed by dividing the profit for the year attributable to the shareholders of the Bank by the weighted average number of shares issued, less treasury shares. The computation of earnings per share is as follows: KD 000’s 2018 Profit for the year attributable to the shareholders of the Bank KD 000’s 2017 20,892 17,701 ═════════ ═════════ (Shares in ‘000) 2018 Weighted average number of shares issued Less: Weighted average number of treasury shares Weighted average number of shares outstanding 9. 1,037,327 (103,638) 1,037,327 (103,638) ────────── ────────── ═════════ ═════════ ────────── ────────── ═════════ ═════════ KD 000’s 2018 KD 000’s 2017 6,962 2,068 32,560 6,797 2,466 10,187 ────────── ────────── ────────── ────────── ═════════ ═════════ KD 000’s 2018 KD 000’s 2017 223,240 54,623 37,815 306,268 31,066 65,568 933,689 Basic and diluted earnings per share 22.38 fils CASH AND BALANCES WITH BANKS Cash Balances with banks Balances with CBK 41,590 (5) Less: Expected credit losses 41,585 10. 2017 933,689 18.96 fils 19,450 19,450 DUE FROM BANKS Tawarruq transactions with CBK and government debts Murabaha finance with banks (contractual maturity of 90 days or less) Murabaha finance with banks (contractual maturity of more than 90 days) ────────── ────────── ────────── ────────── ═════════ ═════════ 315,678 (5) Less: Expected credit losses 315,673 29 402,902 402,902 F-047
244. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2018 11. FINANCING RECEIVABLES Financing receivables comprise of facilities extended to the customers of the Bank in the form of Murabaha, Wakala, Ijara and other contracts. Wherever necessary, financing receivables are secured by acceptable forms of collateral to mitigate the related credit risk. Financing receivables comprise the following: KD 000’s KD 000’s 2017 2018 Financing receivables Murabaha receivables 507,259 544,021 Wakala receivables 742,429 940,076 Ijara receivables 185,308 259,330 Other receivables 5,924 8,908 ───────── ───────── ───────── ───────── ───────── ───────── ════════ ════════ KD 000’s 2018 KD 000’s 2017 1,403,182 253,684 1,116,304 233,240 ───────── ───────── 1,656,866 (51,033) 1,349,544 (45,128) ───────── ───────── ════════ ════════ 1,440,920 (91,376) 1,752,335 (95,469) Less: Deferred profit Net receivables Less: Provision for impairment 1,349,544 (45,128) 1,656,866 (51,033) 1,304,416 1,605,833 Further analysis of financing receivables based on class of financial assets is given below: Corporate Retail Less: Provision for impairment 1,304,416 1,605,833 Movement in provision for impairment: Balance at beginning of year Provision charged (Note 7) Amounts written off/ Recovery Re-classification of provision Balance at end of year KD 000’s KD 000’s Total Specific provision 2017 General provision 39,885 4,116 45 - 45,128 21,047 (15,142) - 3,087 7,986 (15,780) 9,950 46,466 3,362 7 (9,950) 49,553 11,348 (15,773) - 44,046 51,033 5,243 39,885 45,128 Specific provision 2018 General provision 5,243 16,931 (15,187) 6,987 Total ────────── ────────── ────────── ────────── ────────── ────────── ═════════ ═════════ ═════════ ═════════ ═════════ ═════════ The management believes that the impairment provision for financing receivables complies in all material respects with the specific provision requirements of CBK. The surplus general provision arising on the change in the general provision rate in March 2007 amounts to KD 5,044 thousand and is retained as general provision until further directive from the CBK. Provision on non-cash credit facilities of KD 5,011 thousand (2017: KD 5,932 thousand) is included in other liabilities (Note 18). The Expected credit losses for financing receivables as at 31 December 2018 is KD 44,251 which is lower than provision for credit losses required by CBK. 30 F-048
245. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2018 12. INVESTMENT SECURITIES KD 000’s 2018 Financial assets at fair value through profit or loss: Quoted equity securities 12,627 Financial assets at fair value through other comprehensive income/ available for sale: Quoted equity securities Unquoted equity securities Investment in sukuk KD 000’s 2017 62 ────────── ────────── 27,504 65,844 13,534 26,353 43,891 ────────── 93,348 ────────── 83,778 ────────── ────────── ═════════ ═════════ 105,975 83,840 Investments in sukuk are subject to expected credit losses. An analysis of changes in the gross carrying amount and the corresponding expected credit losses in relation to investment in sukuk are as follows: 2018 Gross carrying amount as at 1 January 2018 Net movement during the year At 31 December 2018 KD 000’s Stage 2 KD 000’s Stage 3 KD 000’s Total 43,891 21,953 - - 43,891 21,953 ────────── ────────── ────────── ────────── ═════════ ═════════ ═════════ ═════════ KD 000’s Stage 1 KD 000’s Stage 2 KD 000’s Stage 3 KD 000’s Total 28 48 - - 28 48 65,844 2018 ECL allowance as at 1 January 2018 Provision charged (Note 7) At 31 December 2018 13. KD 000’s Stage 1 - - 65,844 ────────── ────────── ────────── ────────── ═════════ ═════════ ═════════ ═════════ 76 - - 76 INVESTMENT IN AN ASSOCIATE Associate of Ritaj Partners Properties Co. W.L.L. Country of incorporation Principal activity Kuwait Real Estate % of holding 2017 2018 KD 000’s 2018 KD 000’s 2017 25.5 1,518 1,518 25.5 There was no published price quotation for the associate of the Group. Furthermore, there is no significant restrictions on the ability of the associate to transfer funds to the Group in the form of cash dividends or repayment of credit facilities. 31 F-049
246. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2018 14. INVESTMENT PROPERTIES KD 000’s 2018 Balance at beginning of year Additions (a) Disposal Impairment Depreciation 60,391 (1,295) (271) (302) Balance at end of year (a) KD 000’s 2017 40,235 23,147 (2,873) (118) ────────── ────────── ═════════ ═════════ 58,523 60,391 In 2017, properties amounting to KD 23,147 thousand are on account of Ijara contracts of two customers who defaulted in fulfilling contractual obligations towards the Bank. These are carried at lower of the fair value of those properties or the related financial receivables due. The fair value of investment properties as at 31 December 2018 was KD 62,441 thousand (2017: KD 64,035 thousand) which was determined by independent valuers who have appropriate qualifications and recent experience in the valuation of properties in the relevant locations. The fair values were determined based on combination of valuation techniques which include market comparison approach and income capitalisation approach. In estimating the fair values of the properties, the highest and the best use of the properties is their current use where price per square meter, annual lease income and recent sale transaction for similar properties are the significant inputs. There has been no change to the valuation techniques during the year. All of the Group’s investment properties are included in level 3 of fair value hierarchy. 15. PROPERTY AND EQUIPMENT Land and buildings were revalued at KD 20,332 thousand (2017: KD 20,972 thousand) using the average of the fair values determined by two external valuers who have appropriate qualifications and recent experience in the valuation of properties in the relevant locations. The fair values were determined based on combination of valuation techniques which include market comparison approach and income capitalization approach. In estimating the fair values of the properties, the highest and the best use of the properties is their current use. There has been no change to the valuation techniques during the year. Freehold land and buildings are included in level 3 of the fair value hierarchy. Other equipment are carried at cost less accumulated depreciation amounting to KD 8,169 thousand (2017: KD 5,253 thousand). If buildings had been carried at cost less depreciation, the net carrying amount that would have been included in these consolidated financial statements is KD 6,808 thousand (2017: KD 7,013 thousand). 16. DUE TO BANKS AND FINANCIAL INSTITUTIONS Murabaha payable to banks (a) Murabaha payable to financial institutions Current and call accounts KD 000’s 2018 KD 000’s 2017 85,176 422,098 10,263 86,892 296,467 11,079 ────────── ────────── ═════════ ═════════ 517,537 (a) 394,438 During the current year, the Bank obtained an unsecured syndication Murabaha financing amounting to USD 250 million (equivalent to KD 76 million) for a tenor of 3 years. The Bank also fully settled the remaining balance of USD 320 million unsecured syndication Murabaha obtained in 2015 amounting to USD 80 million (equivalent to KD 24 million) during the year. 32 F-050
247. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2018 17. DEPOSITORS’ ACCOUNTS Depositors’ accounts represent Current accounts, Savings accounts, Call accounts, Margin accounts, Mudaraba and Wakala. 18. OTHER LIABILITIES Depositors’ profit payable Provision on non-cash credit facilities (Note 11) Accrued staff benefits Payables and purchase orders Dividend payable Accrued expenses Taxes and other dues Court settlement (a) Recovery pending final decision (b) Others KD 000’s 2018 KD 000’s 2017 9,918 5,011 11,961 8,345 1,278 6,314 1,465 9,066 2,561 6,989 5,932 11,861 8,063 1,227 4,218 1,325 10,749 4,134 ────────── 55,919 ═════════ ────────── 54,498 ═════════ (a) During December, the Bank recorded KD 9,066 thousand which represents an obligation from the Court of Cassation judgement in relation to previous Ijara contracts with customers, whereby there has been no impact on the ownership of the previously acquired underlying Ijara properties as a result of the court judgement (note 7). (b) The collected amount of KD 10,749 thousand dated 31 October 2016 from the Execution Department as a result of execution procedures through the certified contracts net of incidental charges, has been recognised as reversal of impairment during the year. (Note 7). 19. SHAREHOLDERS’ EQUITY a) Share capital The authorised, issued and fully paid up capital of the Bank comprises of 1,037,326,672 ordinary shares of 100 fils each (2017: 1,037,326,672 ordinary shares of 100 fils each), all shares are paid up in cash. b) Treasury shares Number of treasury shares (‘000 shares) Percentage of treasury shares Cost of treasury shares (KD 000’s) Market value of treasury shares (KD 000’s) 2018 2017 103,637 9.99% 45,234 27,360 103,637 9.99% 45,234 23,629 Weighted average market price of the Bank’s shares for the current year is 246 fils per share (2017: 240 fils per share). The Board of Directors has been authorised by the shareholders to purchase treasury shares up to a maximum of 10% of the share capital of the Bank. Reserves equivalent to the cost of the treasury shares held are not available for distribution. An amount of KD 45,234 thousand (2017: KD 45,234 thousand) from statutory and voluntary reserves equivalent to the cost of the treasury shares held by the Group is not available for distribution throughout the holding period of treasury shares. c) Dividends The Board of Directors’ meeting held on 9 January 2019 recommended the distribution of cash dividend of 11 fils per share amounting to KD 10,271 thousand (2017: 10 fils per share amounting to KD 9,337 thousand) on outstanding shares (excluding treasury shares) and bonus shares of 4% (2017: Nil) on outstanding shares as at 31 December 2018. This proposal is subject to the approval by the shareholders’ Annual General Assembly. The cash dividends for the year ended 31 December 2017 were approved by the shareholders at the Annual General Assembly held on 24 March 2018. 33 F-051
248. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2018 20. OTHER RESERVES a) Statutory reserve In accordance with the Companies’ Law (as amended) and the Articles of Association, the Bank is required to transfer to statutory reserve, 10% of the profit for the year before contribution to KFAS, NLST, Zakat and directors’ remuneration. Distribution of the statutory reserve is limited to the amount required to enable the payment of a dividend of 5% of share capital in years when retained earnings are not sufficient for the payment of a dividend of that amount. The Bank has transferred KD 2,235 thousand to the statutory reserve for the year ended 31 December 2018 (2017: KD 1,902 thousand). b) Voluntary reserve In accordance with the Bank’s Articles of Association, 10% of the profit for the year before contribution to KFAS, NLST, Zakat and directors’ remuneration is required to be transferred to voluntary reserve. Such annual transfers may be discontinued by a resolution of the Bank’s shareholders Annual General Assembly upon a recommendation by the Board of Directors. The Bank has transferred KD 2,235 thousand to the voluntary reserve for the year ended 31 December 2018 (2017: KD 1,902 thousand). c) Share premium The share premium account is not available for distribution. d) Revaluation surplus The revaluation surplus represents the surplus of market value over carrying value of freehold land and buildings (net of incremental depreciation). The balance in this reserve will be directly transferred to retained earnings on disposal of the underlying assets. 21. CASH AND CASH EQUIVALENTS Cash and balances with banks (Note 9) Murabaha finance with banks (contractual maturity of 90 days or less) (Note 10) KD 000’s 2018 KD 000’s 2017 41,585 54,623 19,450 31,066 ────────── ────────── ═════════ ═════════ 96,208 22. 50,516 COMMITMENTS AND CONTINGENT LIABILITIES To meet the financial needs of customers, the Group enters into various contingent liabilities and revocable commitments. Even though these obligations may not be recognised on the consolidated statement of financial position, they expose the Group to credit risk and therefore form part of the overall risk of the Group. The total outstanding commitments and contingent liabilities are as follows: Acceptances Letters of credit Letters of guarantee KD 000’s 2018 KD 000’s 2017 17,181 9,941 263,281 36,958 22,066 269,324 ────────── ────────── ═════════ ═════════ 290,403 328,348 The Group also has revocable commitments to extend credit amounting to KD 165,275 thousand (2017: KD 169,050 thousand). 34 F-052
249. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2018 23. RELATED PARTY TRANSACTIONS These are transactions with certain related parties (major shareholders, associates, directors and executive officers of the Group, close members of their families and companies in which they are principal owners or over which they are able to exercise significant influence) who were customers of the Group in the ordinary course of business. Such transactions were made on substantially the same terms including profit rates as those prevailing at the same time for comparable transactions with unrelated parties and did not involve more than a normal amount of risk. Transactions with subsidiary is eliminated in full and hence not disclosed. The transactions and balances with related parties included in this consolidated financial statements are as follows: Balances Financing receivables Credit cards Deposits Commitments and contingent liabilities Collaterals against credit facilities Transactions Financing income Distribution to depositors Major shareholders and other related parties Associate Directors and Executive officers KD 000’s KD 000’s 87,363 15,183 31,791 97,091 7 - 18,892 74 1,230 1,335 36,099 106,255 74 16,420 33,126 133,190 93,077 59 12,286 36,022 113,366 4,240 173 - 834 10 5,074 183 4,284 128 2018 Directors Financing receivables Deposits Commitments and contingent liabilities Collaterals against credit facilities Executive officers Financing receivables Credit cards Deposits Commitments and contingent liabilities Collaterals against credit facilities No. of Directors and Executive officers 2018 2017 2017 No. of Directors and KD 000’s Executive officers KD 000’s 5 8 4 4 18,706 244 1,262 36,070 4 7 4 4 26,491 2,977 747 46,387 6 17 20 19 7 186 74 986 73 29 8 14 19 16 9 63 59 501 79 41 KD 000’s 2018 KD 000’s 2017 2,508 128 1,892 100 The key management and directors’ remuneration during the year was as follows: Key management personnel compensation: Short-term benefits Post-employment benefits ────────── ────────── ═════════ ═════════ 2,636 1,992 The Bank’s Board of Directors has proposed Directors’ fees of KD 450 thousand for the year ended 31 December 2018 (2017: KD 450 thousand) which is within the limit permissible under local regulations and are subject to approval of shareholders at their Annual General Meeting (“AGM”). Remuneration of Chairman and Board of Directors includes compensation for contribution related to participation in the board committees in accordance with Board of Directors’ decisions. In addition to the Board of Directors’ remuneration, an amount of KD 144 thousand (2017: KD 144 thousand) is paid to the Chairman as approved by the shareholders at their AGM dated 24 March 2018 (2017: AGM dated 18 March 2017). 35 F-053
250. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2018 24. SEGMENT INFORMATION The Group’s operating segments are determined based on the reports reviewed by the Chief Executive Officer that are used for strategic decisions. These segments are strategic business units that offer different products and services. They are managed separately since the nature of the products and services, class of customers and marketing strategies of these segments are different. These operating segments meet the criteria for reportable segments and are as follows: Commercial and International Banking : Comprising of range of banking services and investment products to corporate customers providing commodity and real estate Murabaha finance, Ijara and Wakala facilities. Retail Banking : Comprising of range of banking services and investment products to individual customers, providing commodity Murabaha finance, Ijara and Wakala facilities. Treasury, Fund Management and Institutional Banking : Comprising of liquidity management, correspondent banking, clearing, Murabaha investments, exchange of deposits with banks and financial institutions. Investment Management : Comprising of investment in an associate and other investments, including investment properties. Others : Comprising of those which is not pertaining to the above segments and includes those relating to a subsidiary. Management monitors the operating segments separately for the purpose of making decisions about resource allocation and performance assessment. The Group measures the performance of operating segments through measures of segment operating income and results in management reporting system. Segment assets principally comprise of all assets and segment liabilities comprise of all liabilities that are attributable to the segment. Commercial and International 2018 Segment operating income Segment results - Depreciation - Provisions and impairment losses Segment profit/(loss) Segment assets Segment liabilities 2017 Segment operating income Segment results - Depreciation - Provisions and impairment losses Segment profit/(loss) Segment assets Segment liabilities 65,860 Retail 5,014 Treasury, Fund Management and Institutional Banking (9,147) Investment Management 2,399 Others 2,504 KD 000’s Total 66,630 ═════════ ═════════ ═════════ ═════════ ═════════ ═════════ (6,973) 32,830 (2,230) (857) (10) 675 20 (2,083) (2,275) 949 (9,530) (2,275) (8,244) 21,035 ═════════ ═════════ ═════════ ═════════ ═════════ ═════════ 1,396,924 251,732 350,544 134,959 34,436 2,168,595 ═════════ ═════════ ═════════ ═════════ ═════════ ═════════ 324,267 ═════════ 54,576 737,784 ═════════ 8,104 781,116 ═════════ (5,985) - ═════════ 4,914 48,824 ═════════ 2,642 1,891,991 ═════════ 64,251 ═════════ ═════════ ═════════ ═════════ ═════════ ═════════ (7,957) 24,251 (2,252) 55 2,758 (2,319) (1,006) (1,889) 175 (8,265) (1,889) (12,353) 17,793 ═════════ ═════════ ═════════ ═════════ ═════════ ═════════ 1,093,189 233,077 424,330 125,279 40,165 ═════════ ═════════ ═════════ ═════════ ═════════ 1,916,040 ═════════ 271,500 610,000 721,116 - 49,533 1,652,149 ═════════ ═════════ ═════════ ═════════ ═════════ ═════════ The Group operates from the State of Kuwait only. 36 F-054
251. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2018 25. FINANCIAL INSTRUMENT AND RISK MANAGEMENT (a) Strategy in using financial instruments As an Islamic bank, the Bank’s activities are principally related to the sourcing of funds through Shariaá compliant financial instruments, within the guidelines prescribed by CBK and deploying these funds in Shariaá compliant financing and investment activities, to earn a profit. The profits are shared between the shareholders as well as the profit sharing deposit account holders, as per policies and proportions determined by the Board of Directors and Fatwa and Shariaá Supervisory Board. The funds raised vary in maturity between short and longer tenors and are mainly in Kuwaiti Dinars, apart from major foreign currencies (including GCC currencies). While deploying the funds, the Bank focuses on the safety of the funds as well as maintaining sufficient liquidity to meet all claims that may fall due. Safety of shareholders and depositor funds is further enhanced by diversification of financing activities across economic and geographic sectors, as well as borrower types. (b) Overall risk management The main objective of risk management in the Group is to achieve an optimum balance between the twin goals of profit maximisation and capital maintenance. The Group’s risk management framework is built around this objective and seeks to address specific concerns of the various stakeholders such as shareholders, CBK, rating agencies, customers, depositors and the general public. The Group’s commitment to the creation and maintenance of effective risk management systems and procedures is evidenced by the oversight responsibility given to the Board Risk Management Committee. The Group has established a prudent and professional approach to risk taking with the following underlying principles that support its risk management framework:      Actively promoting an overall culture that accords high value to disciplined and effective risk management; Using professionally qualified people with appropriate risk management skills; Disciplined processes for evaluation and acceptance of risk within appropriate limits in individual transactions, products and the management of financing and investments; A management information system that provides timely and accurate information on risks to the relevant management group and the commitment to continuously upgrade these systems and apply the most up-to-date analytical tools and systems to properly capture risks, monitor positions and determine the impact of potential management actions; and An internal audit function to ensure ongoing adherence to and integrity of risk management processes. The Bank has a Risk Management Department, which is primarily responsible for the risk management in the Bank. The Risk Management Department is structured in a manner which facilitates focused attention on each of the specific risk arising from financial instruments areas, e.g., credit, liquidity, market (encompassing foreign exchange, profit rate, equity risks) and other risks such as operational risks. The Group’s risk management methodologies include:    Pro-active methodologies such as continuous review and enhancement of: the Group’s policies and procedures; development and enhancement of risk measurement tools such as risk grading models, pricing models and VaR models; risk inputs in respect of the Group’s strategic planning as well as structuring and review of product and services. On-going methodologies, such as risk management inputs in respect of proposed financing and investment applications; compliance review - post approval - of financing and investment facilities; periodical review of the financing and investment portfolio by way of reports and highlighting perceived risks to top management as well as line functionaries; continuous monitoring of market, operational and technology related risks. Post fact methodologies, such as review of proposals and trends in respect of provisions; write-offs and disposal of investments. 37 F-055
252. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2018 25. FINANCIAL INSTRUMENT AND RISK MANAGEMENT (continued) The Group is exposed to credit risk, liquidity risk, market risk and operational risk. (i) Credit risk Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. This includes the risk of decline in the credit standing of the customer. While such decline does not imply default, it increases the probability of the customer defaulting. Financial instruments that create credit risk include financing receivables, contingent liabilities and commitments to extend credit and investment in sukuk. Credit risk management structure To manage credit risk, the Group has established a board level Financing and Investment Committee (“BFIC”) and the following management committees:  Credit Committee  Investment Committee  Provision Committee The BFIC is responsible for reviewing and approving the management level Credit, Investment and Provision Committee’s recommendations with regard to credit facilities, financing relationships, financing limits, pricing, profitability and investment activities. The management level Credit and Investment Committee (the “Committees”) are responsible for safeguarding the asset quality of the Bank and ensuring profitable use of funds. The Committees review the Bank’s credit policy in line with CBK guidelines for commercial and retail credit as well as the inter-bank. The Committees approve or renew credit and investment proposals within the Committee’s lending limits and reviews and concurs in the approval process for extension of credit in excess of the authority of the Committees. The Provision Committee is primarily responsible for determining the provisions required for impaired facilities when the facility is not already classified as irregular according to CBK regulations (i.e. the Watch list classification of financing facilities). In addition, the Committee also reviews the required provisions for irregular financing facilities to ensure compliance with CBK regulations. In accordance with the instructions of the CBK dated 18 December 1996, setting out the rules and regulations regarding the classification of credit facilities, the Bank has formed an internal committee which is composed of competent professional staff and which is responsible for the study and evaluation of the existing credit facilities of each customer of the Bank. This Committee, which meets regularly throughout the year, is required to identify any abnormal situations and difficulties associated with a customer’s position, which may cause the debt to be classified as irregular, and to determine an appropriate provisioning level. The Committee also studies the position of customers whose irregular balances exceed 25% of their total debt, in order to determine whether further provisions are required. Credit risk management strategy and process The Bank manages its credit facilities portfolio with the objective of ensuring that it is well diversified and it earns a level of return appropriate to the risk it assumes. In the course of normal business, the Bank deploys its funds in various credit facilities, with the primary objective of generating profits for the shareholders and deposit holders. However, at the same time, the Bank seeks to ensure the quality of the credit facilities. The Bank continually strives to achieve an optimal balance between the return and credit quality of the portfolio. The Bank’s policies and procedures manuals, dealing with credit, lay down the credit risk management framework by specifying various covenants and credit standards which include:  clear definition of roles and responsibilities of the various functionaries involved in the different stages of the credit facility life cycle;  establishing clear approval authority structure both for routine as well as exceptional credit facilities;  listing beneficiary, facility, collateral and pricing parameters for the Bank’s product-set;  standardising credit approval packages;  defining criteria for collateral valuation and policies for collateral management;  detailing the procedures for the entire credit life-cycle, including problem loan management;  ensuring, by way of limits, a diversification of the credit portfolio across geographies (countries/regions), sectors, and counterparties. 38 F-056
253. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2018 25. FINANCIAL INSTRUMENT AND RISK MANAGEMENT (continued) (i) Credit risk (continued) Credit risk measurement The Bank measures credit risk in terms of asset quality using two primary measures - the provisioning ratio and the nonperforming financing receivables ratio. The non-performing financing receivables ratio is the ratio of non-performing financing receivables to total financing receivables. Assessment of expected credit losses Definition of default The Group considers a financial asset to be in default and therefore Stage 3 (credit impaired) for ECL calculations when:  the borrower is unlikely to pay its credit obligations to the Group in full, without recourse by the Group to actions such as realising security (if any is held);  the borrower is past due more than 90 days on any material credit obligation to the Group; or  borrower is considered as credit impaired based on qualitative assessment for internal credit risk management purposes Any credit impaired or stressed facility that has been restructured would also be considered as in default. The Group considers investments and inter-bank balances as in default when the coupon or principal payment is past due for 1 day. The Group considers externally-rated portfolio with ratings ‘D’ for S&P and Fitch, and ‘C’ for Moody’s as defaulted. The Group considers a variety of indicators that may indicate unlikeliness to pay as part of a qualitative assessment of whether a customer is in default. Such indicators include:  breaches of covenants  borrower having past due liabilities to public creditors or employees  borrower is deceased Significant increase in credit risk The Group continuously monitors all assets subject to ECLs. In order to determine whether an instrument or a portfolio of instruments is subject to 12months ECL or life time ECL, the Group assess whether there has been a significant increase in credit risk since initial recognition. The quantitative criteria used to determine a significant increase in credit risk is a series of relative and absolute thresholds. All financial assets that are 30 days past due are deemed to have significant increase in credit risk since initial recognition and migrated to stage 2 even if other criteria’s do not indicate a significant increase in credit risk. The Group considers a 2 notch downgrade (without considering modifiers in the rating) as a significant increase in credit risk for externally rated instruments with an “investment grade” rating at inception whereas for instruments with a below “investment grade” rating at inception, 1 notch downgrade is considered as a significant increase in credit risk. Similarly the Group applies a consistent quantitative criteria for internally rated portfolio to assess significant increase in credit risk. In the absence of ratings at inception, the Group considers current rating at reporting date to determine if there is significant increase in credit risk and in such cases the instruments below investments grade or its equivalent will be considered as stage 2. The Group considers a financial instrument with an external rating of “investment grade” as at the reporting date to have low credit risk. In addition to the above quantitative criteria, the Group applies qualitative criteria for the assessment of significant increase in credit risk based on monitoring of certain early warning signals. Internal rating and PD estimation process In managing its portfolio, the Group utilises ratings and other measures and techniques which seek to take account of all aspects of perceived risk. The Group uses Moody’s Risk Analyst (“MRA”) as its internal credit-rating engine. The MRA tool provides the ability to analyze a business and produce risk ratings at both the obligor and facility level. The analysis supports the usage of financial factors as well as non-financial subjective factors. The Group also uses external ratings by recognised rating agencies for externally rated portfolios. 39 F-057
254. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2018 25. FINANCIAL INSTRUMENT AND RISK MANAGEMENT (continued) (i) Credit risk (continued) Internal rating and PD estimation process (continued) The Probability of Default (“PD”) is the likelihood that an obligor will default on its obligations in the future. IFRS 9 requires the use of separate PD for a 12-month duration and lifetime duration depending on the stage allocation of the obligor. A PD used for IFRS 9 should reflect the Group’s estimate of the future asset quality. The through the cycle (“TTC”) PDs are generated from MRA based on the internal/external credit ratings. The Group converts the TTC PD to a point in time (“PIT”) PD term structures using appropriate models and techniques. The Group assesses the PD for its retail portfolio through behavioral scorecards implemented in the Group. The scorecards are based on logistic regression technique. This enables the evaluation of score and PD associated against each facility. Term structure of PD is based on hazard rate concept. The survival distribution used is exponential distribution. The probability distribution function of an exponentially distributed random variable is used with the hazard rate as the PD evaluated from the Behavioral scorecard. Exposure at default Exposure at default (“EAD”) represents the amount which the obligor will owe to the Group at the time of default. The Group considers variable exposures that may increase the EAD in addition to the drawn credit line. These exposures arise from undrawn limits and contingent liabilities. Therefore, the exposure will contain both on and off balance sheet values. EAD is estimated taking into consideration the contractual terms such as coupon rates, frequency, reference curves, maturity, pre-payment options, amortization schedule, usage given default, etc. EAD for retail loans incorporate prepayment assumptions whereas for credit cards portfolio, credit conversion factors are applied to estimate the future draw downs. Loss given default Loss given default (“LGD”) is the magnitude of the likely loss if there is a default. The Group estimates LGD parameters based on the history of recovery rates of claims against defaulted counterparties. The LGD models consider the structure, collateral, seniority of the claim, counterparty industry and recovery costs of any collateral that is integral to the financial asset. For all unsecured credit facilities, the Group considers a minimum of 50% LGD for senior debt and 75% LGD for subordinated debt. Incorporation of forward-looking information The Group considers key economic variables that are expected to have an impact on the credit risk and the ECL in order to incorporate forward looking information into the ECL models. These primarily reflect reasonable and supportable forecasts of the future macro-economic conditions. The consideration of such factors increases the degree of judgment in determination of ECL. The Group employs statistical models (GCorr macro model) to incorporate macro-economic factors on historical default rates. The Group considers 3 scenarios (baseline, upside and downside) of forecasts of macro-economic data separately for each geographical segments and appropriate probability weights are applied to these scenarios to derive a probability weighted outcome of expected credit loss. The management reviews the methodologies and assumptions including any forecasts of future economic conditions on a regular basis. 40 F-058
255. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2018 25. FINANCIAL INSTRUMENT AND RISK MANAGEMENT (continued) (i) Credit risk (continued) Maximum exposure to credit risk The table below shows the maximum exposure to credit risk for the components of the consolidated statement of financial position, without taking account of any collateral and other credit enhancements. The gross maximum exposure is shown net of deferred profit and provision, before the effect of mitigation through the use of master netting and collateral agreements. Credit risk exposures relating to consolidated statement of financial position items: Balances with banks Due from banks Financing receivables Investment in sukuk Other assets Total KD 000’s KD 000’s Gross maximum exposure 2017 2018 34,623 315,673 1,605,833 65,844 8,748 ────────── 2,030,721 Credit risk exposures relating to contingent liabilities: Acceptances Letters of credit Letters of guarantee Total ────────── 1,777,982 ────────── ────────── 17,181 9,941 263,281 36,958 22,066 269,324 ────────── ────────── ────────── ────────── 290,403 Total credit risk exposure 12,653 402,902 1,304,416 43,891 14,120 2,321,124 ═════════ 328,348 2,106,330 ═════════ Credit risk can also arise due to a significant concentration of Bank’s assets to any single counterparty; this risk is managed by diversification of the portfolio. The 20 largest gross customers’ accounts for 25% (2017: 25%) of total credit risk exposures as at 31 December 2018. 41 F-059
256. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2018 25. FINANCIAL INSTRUMENT AND RISK MANAGEMENT (continued) (i) Credit risk (continued) Risk concentrations of the maximum exposure to credit risk Concentrations of credit risk arise when a number of counterparties are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentrations of credit risk indicate the relative sensitivity of the Bank’s performance to developments affecting a particular industry or geographic location. Geographical and industry sector concentrations of financial assets and off balance sheet items are as follows: 2017 Financial assets 59,067 7,020 71,988 843 1,891,803 12,226 15,809 1,371 260,997 33,176 3,836 44,454 1,260 1,695,256 19,705 58 30,756 2,274 275,555 ────────── ────────── ────────── ────────── 2,030,721 290,403 1,777,982 328,348 ═════════ ═════════ ═════════ ═════════ 245,684 495,105 597,396 119,930 572,606 11,996 2,038 144,982 131,387 226,227 505,154 491,166 144,202 411,233 27,543 5,824 149,789 145,192 ────────── ────────── ────────── ────────── 2,030,721 290,403 1,777,982 328,348 ═════════ ═════════ ═════════ ═════════ Geographic region: Asia North America Middle east (excluding Kuwait) Europe Kuwait Industry sector: Personal Banking and financial institutions Real Estate Construction Others KD 000’s KD 000’s 2018 Financial Contingent assets liabilities Contingent liabilities Credit risk mitigation Credit risk mitigation techniques that the Bank is permitted to use are collateral, netting and guarantees provided under certain conditions, which include such agreements being binding on all parties and legal enforceability, are met. The Bank’s lending policy specifies the acceptable types of collateral, source of valuation, accuracy of valuation and frequency of revaluation in respect of collateral. The policy also specifies the maximum facility commitment to collateral value and approval levels for different types of collateral and facility. The accepted collaterals are cash, first demand bank guarantees, securities and real estate. As part of its general collateral control mechanism, the Bank periodically revalues all collateral to ascertain that the collateral cover is not lower than the value at the time of the original approval. The Bank also continuously monitors the validity and expiry dates of mortgages to ensure their timely renewal. The main types of guarantors are individuals and corporate entities. Since none of the Bank’s guarantor counterparties have been rated by any of the three rating agencies (approved by the CBK for the purposes of calculation of capital adequacy), the Bank has not taken any guarantor related credit risk mitigation allowance while arriving at the capital adequacy. Collateral and other credit enhancements The amount and type of collateral required depend on an assessment of the credit risk of the counterparty. Guidelines are implemented regarding the acceptability of types of collateral and valuation parameters. 42 F-060
257. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2018 25. FINANCIAL INSTRUMENT AND RISK MANAGEMENT (continued) (i) Credit risk (continued) Collateral and other credit enhancements (continued) Management monitors the market value of collateral, requests additional collateral in accordance with the underlying agreement, and monitors the market value of collateral obtained during its review of the adequacy of the allowance for impairment losses. It is the Bank’s policy to dispose-off repossessed properties in an orderly fashion. The proceeds are used to reduce or repay the outstanding claim. In general, the Bank does not occupy repossessed properties for business use. At 31 December 2018, 53% (2017: 51%) of the total outstanding financing receivables were fully secured. Credit quality of financial instruments The Bank classifies the various credit risk exposure which are neither past due nor impaired into two categories of credit quality as under:  High quality : Regular exposures covered fully by collateral in excess of 100% of the outstanding amount.  Moderate quality : All other regular exposures where the collateral does not fully cover the outstanding amount. The table below shows the credit risk exposure by credit quality of assets by class and grade, net of deferred profit and provision: 2018 Balances with banks Due from banks Financing receivables Investment in sukuk Other assets Neither past due nor impaired High Moderate quality quality 34,623 315,673 617,999 8,748 776,563 65,844 - Past due and impaired 211,271 - KD 000’s Total 34,623 315,673 1,605,833 65,844 8,748 ────────── ────────── ────────── ────────── ═════════ ═════════ ═════════ ═════════ 12,653 402,902 489,734 14,120 673,232 43,891 - 141,450 - 12,653 402,902 1,304,416 43,891 14,120 977,043 2017 Balances with banks Due from banks Financing receivables Investment in sukuk Other assets 842,407 211,271 2,030,721 ────────── ────────── ────────── ────────── ═════════ ═════════ ═════════ ═════════ 919,409 43 717,123 141,450 1,777,982 F-061
258. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2018 25. FINANCIAL INSTRUMENT AND RISK MANAGEMENT (continued) (i) Credit risk (continued) Credit quality of financial instruments (continued) Ageing analysis of past due but not impaired or impaired of financing receivables as per class of financial assets: 2018 Up to 30 days 31 – 60 days 61 – 90 days 91 – 180 days More than 180 days 2017 Up to 30 days 31 – 60 days 61 – 90 days 91 – 180 days More than 180 days Financing receivables Corporate Past due but not impaired Impaired 111,437 21,956 48,922 - Financing receivables Consumer Past due but not impaired Impaired 1,584 7,527 12,039 2,765 1,655 - 2,114 1,272 KD 000’s Total Past due but not impaired 123,476 24,721 50,577 - Impaired 3,698 8,799 ────────── ────────── ────────── ────────── ────────── 182,315 9,111 16,459 3,386 198,774 ────────── 12,497 ═════════ ═════════ ═════════ ═════════ ═════════ ═════════ 46,612 32,238 11,844 - 3,238 28,100 11,678 2,541 1,796 - 1,995 1,408 58,290 34,779 13,640 - 5,233 29,508 ────────── ────────── ────────── ────────── ────────── ────────── ═════════ ═════════ ═════════ ═════════ ═════════ ═════════ 90,694 31,338 16,015 3,403 106,709 34,741 As at 31 December 2018, the fair value of collaterals held by the Bank against individually past due or impaired amounted to KD 195,138 thousand (2017: KD 159,695 thousand). (ii) Liquidity risk Liquidity risk is the risk that the Bank will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset. To limit liquidity risk, management has arranged diversified funding sources in addition to its core deposit base, manages assets with liquidity in mind, and monitors liquidity on a daily basis. The Bank’s management of liquidity risk is consistent with its overall risk management framework and includes establishing minimum liquid asset requirements and limits with regards to the acceptance of short term wholesale deposits to protect against short term liquidity demands. The Bank monitors liquidity risk by measuring the liquidity gaps on a daily basis and the position is reviewed by asset liability management committee (“ALCO”) on a monthly basis. Similarly liquidity reserve position and the ratio of financing facilities to eligible deposits are monitored on a daily basis. 44 F-062
259. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2018 25. FINANCIAL INSTRUMENT AND RISK MANAGEMENT (continued) (ii) Liquidity risk (continued) The Bank measures liquidity risk by preparing and monitoring the maturity profile of its assets and liabilities as disclosed below: 2018 Assets Cash and balances with banks Due from banks Financing receivables Investment securities Investment in an associate Investment properties Other assets Property and equipment Total assets Liabilities Due to banks and financial institutions Depositors’ accounts Other liabilities Total liabilities Net liquidity gap 2017 Assets Cash and balances with banks Due from banks Financing receivables Investment securities Investment in an associate Investment properties Other assets Property and equipment Total assets Liabilities Due to banks and financial institutions Depositors’ accounts Other liabilities Total liabilities Net liquidity gap KD 000’s Up to 1 month 1-3 months 3-12 months Over 1 year 41,585 263,286 165,489 77,619 2,267 - 14,572 318,845 344 - 37,815 601,004 7,405 - 520,495 28,356 1,518 58,523 971 28,501 41,585 315,673 1,605,833 105,975 1,518 58,523 10,987 28,501 ────────── ────────── ────────── ────────── ────────── ────────── ────────── ────────── ────────── ────────── 75,319 593,791 38,108 112,658 266,677 9,022 237,050 322,396 - 92,510 135,671 8,789 517,537 1,318,535 55,919 ────────── ────────── ────────── ────────── ────────── ────────── ────────── ────────── ────────── ────────── 550,246 707,218 333,761 388,357 646,224 559,446 638,364 236,970 Total 2,168,595 1,891,991 (156,972) (54,596) 86,778 401,394 276,604 ═════════ ═════════ ═════════ ═════════ ═════════ 19,450 354,173 133,921 55,963 4,563 - 32,265 194,451 239 - 553,529 6,563 - 16,464 422,515 27,877 1,518 60,391 5,933 26,225 19,450 402,902 1,304,416 83,840 1,518 60,391 17,298 26,225 ────────── ────────── ────────── ────────── ────────── ────────── ────────── ────────── ────────── ────────── 99,039 488,863 35,277 42,106 405,162 10,749 169,502 253,567 - 83,791 55,621 8,472 394,438 1,203,213 54,498 ────────── ────────── ────────── ────────── ────────── ────────── ────────── ────────── ────────── ────────── 568,070 623,179 226,955 458,017 560,092 423,069 560,923 147,884 1,916,040 1,652,149 (55,109) (231,062) 137,023 413,039 263,891 ═════════ ═════════ ═════════ ═════════ ═════════ 45 F-063
260. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2018 25. FINANCIAL INSTRUMENT AND RISK MANAGEMENT (continued) (ii) Liquidity risk (continued) The table below summarises the maturity profile of the Group’s financial liabilities based on contractual undiscounted repayment obligations. Repayments which are subject to notice are treated as if notice were to be given immediately. KD 000’s 2018 Due to banks and financial institutions Depositors’ accounts Other liabilities 2017 Due to banks and financial Institutions Depositors’ accounts Other liabilities Less than 1 month 1-3 Months 3-12 Months 1 to 5 years Over 5 years 76,108 594,699 38,108 113,838 267,085 9,022 239,532 322,889 - 93,397 135,878 - 522,875 - 1,320,551 8,789 55,919 708,915 389,945 562,421 229,275 8,789 1,899,345 100,265 489,496 35,277 42,627 405,687 10,749 171,340 253,896 - 84,890 55,693 - 399,122 - 1,204,772 8,472 54,498 625,038 459,063 425,236 140,583 8,472 1,658,392 Total ────────── ────────── ───────── ────────── ───────── ───────── ─ ─ ─ ═════════ ═════════ ════════ ═════════ ════════ ════════ ═ ═ ═ ────────── ────────── ───────── ────────── ───────── ───────── ─ ─ ─ ═════════ ═════════ ════════ ═════════ ════════ ════════ ═ ═ ═ The table below shows the contractual expiry of the Group’s contingent liabilities and commitments. KD 000’s 2018 Contingent liabilities Commitments 2017 Contingent liabilities Commitments (iii) Market risk Less than 1 month 1-3 months 3-12 Months 1 to 5 years Over 5 years Total 14,094 7,696 44,136 5,968 106,489 70,487 122,797 40,536 2,887 40,588 290,403 165,275 ────────── ────────── ────────── ────────── ───────── ────────── 21,790 50,104 176,976 163,333 43,475─ 455,678 ═════════ ═════════ ════════ ═════════ ════════ ═════════ ═ ═ 44,586 12,533 43,489 20,368 91,683 86,435 140,551 30,901 8,039 18,813 328,348 169,050 ────────── ────────── ────────── ────────── ───────── ────────── 57,119 63,857 178,118 171,452 26,852─ 497,398 ═════════ ═════════ ════════ ═════════ ════════ ═════════ ═ ═ Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises of three types of risk including profit rate risk, currency risk and other price risk (other than those arising from rate of return risk or currency risk). The objective of market risk management is to manage and control exposures within acceptable parameters, whilst optimising returns. Given the Group’s current profile of financial instruments, the principal exposure is the risk of loss arising from fluctuations in the future cash flows or fair values of these financial instruments because of a change in achievable rates. This is managed principally through monitoring gaps between effective profit and rental rates and by having approved rates and bands reviewed at regular re-pricing meetings. 46 F-064
261. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2018 25. FINANCIAL INSTRUMENT AND RISK MANAGEMENT (continued) (iii) Market risk (continued) Market risk management structure The overall responsibility of managing the Bank’s market risks is of ALCO. The day to day management of market risks is the responsibility of the treasury department which is headed by the General Manager - Treasury who reports to the Chief Executive Officer. The International Banking Department is responsible for proposing country limits based on Moody’s long term sovereign currency debt rating, or equivalent rating by the two other rating agencies, and reviewing them annually. The measurement, monitoring and reporting of market risks is the responsibility of the market risk division within risk management department. Market risk management strategy and process The Group has established risk management policies and limits within which exposure to market risks is monitored and controlled. (iii a) Currency risk Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Group views itself as a Kuwaiti entity, with the Kuwaiti Dinars as its functional currency. The Board has set limits on positions by currency. Positions are monitored on a daily basis to ensure that they are maintained within established limits. The Group had the following net exposures denominated in foreign currencies: US Dollars Qatari Riyal Euro Sterling Pounds Saudi Riyal Others KD 000’s 2018 KD 000’s 2017 1,413 (643) 17 18 (137) 60 867 (989) 18 (73) (9) (270) ────────── ────────── ═════════ ═════════ 728 (456) The sensitivity analysis is not disclosed since the Group does not have significant exposure to foreign exchange risk. (iii b) Equity price risk This is a risk that the fair value or future cash flow of a financial instrument will fluctuate as a result of changes in market prices (other than those arising from rate of return risk or currency risk), whether those changes are caused by factors specific to the individual instrument or its issuer or factors affecting all instruments traded in the market. The Group manages this risk through diversification of investments in terms of geographical distribution and industry concentration. The sensitivity of the Group’s consolidated financial statements to the equity price risk is given below. For investment securities classified as FVOCI/ Available for sale, a five percent increase in stock prices as at 31 December 2018 would have increased equity by KD 3,292 thousand (2017: KD 2,835 thousand). For such investment securities classified as at FVTPL, the impact on profit or loss would have been an increase of KD 631 thousand (2017: an increase KD 3 thousand). An equal change in the opposite direction would have had equal, but opposite effect to the amounts shown above, on the basis that all other variables remain constant. 47 F-065
262. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2018 25. FINANCIAL INSTRUMENT AND RISK MANAGEMENT (continued) (iv) Operational risk Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. The Group’s business and support units have primary responsibility for identifying, assessing and managing their operational risks. They employ internal control techniques to reduce their likelihood or impact to tolerable levels within the Group’s risk appetite. Where appropriate, risk is mitigated by way of insurance. The Group has a set of policies and procedures that are applied to identify, assess and control operations risk in addition to other types of risks relating to the banking and financial activities of the Bank. Operational risk is managed through the Risk Management Department. This department ensures compliance with policies and procedures to identify, assess, control and monitor operational risk as part of overall risk management. The management of operational risks complies in all material respects with CBK instructions dated 14 November 1996, regarding general guidelines for internal control systems and directive issued on 13 October 2003, regarding “Sound practices for management and control of operational risks”. (v) Fair values of financial instruments Fair values are obtained from quoted market prices, discounted cash flow models and other models as appropriate. Other financial assets and liabilities are carried at amortised cost and the carrying values are not materially different from their fair values as most of these assets and liabilities are of short term maturities or are repriced immediately based on market movement in profit rates. Fair values of remaining financial assets and liabilities carried at amortised cost are estimated mainly using discounted cash flow models incorporating certain assumptions such as credit spreads that are appropriate in the circumstances. Fair value of the Group’s financial assets that are measured at fair value on a recurring basis. 48 F-066
263. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2018 25. FINANCIAL INSTRUMENT AND RISK MANAGEMENT (continued) (v) Fair values of financial instruments (continued) Some of the Group’s financial assets are measured at fair value at the end of each reporting period. The following table gives information about how the fair values of these financial assets are determined (in particular, the valuation techniques(s) and inputs used). KD 000’s Fair value as at 2018 2017 Financial assets Fair value Hierarchy Sector FVTPL - Quoted equity securities 47 11,963 46 8 Level 1 Level 1 617 - 8 Level 1 Level 1 Telecom Investment Financial Institutions Oil and Gas - 12,570 964 Level 1 Level 1 Investment Banking 6,267 14,819 2,648 1,309 2,453 8 5,746 14,518 2,346 1,302 2,441 - Level 3 Level 3 Level 3 Level 3 Level 3 Level 3 Investment Services Real Estate Healthcare Educational Oil and Gas 52,583 13,261 - 30,108 13,049 734 Level 1 Level 1 Level 3 Financial Institutions Investment Real Estate Available for sale - Quoted equity securities FVOCI/ Available for sale - Unquoted equities FVOCI - Investment in Sukuk 49 F-067
264. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2018 25. FINANCIAL INSTRUMENT AND RISK MANAGEMENT (continued) (v) Fair values of financial instruments (continued) The following table shows an analysis of financial investments recorded at fair value by level of the fair value hierarchy: KD 000’s 2018 Investment securities Financial assets at FVTPL: Quoted equity securities Level 1 Level 2 Level 3 Total 12,627 - - 12,627 65,844 - 27,504 - 27,504 65,844 ──────── ──────── ──────── ──────── ════════ ════════ ════════ ════════ 62 - - 62 13,534 43,157 - 26,353 734 13,534 26,353 43,891 ──────── ──────── ──────── ──────── ════════ ════════ ════════ ════════ Financial assets at FVOCI: Unquoted equity securities Investment in sukuk 78,471 2017 Investment securities Financial assets at FVTPL: Quoted equity securities Financial assets available for sale: Quoted equity securities Unquoted equity securities Investment in sukuk 56,753 - - 27,504 27,087 105,975 83,840 The methodologies and assumptions used to determine fair values of financial instruments is described in fair value section of note 2 “Significant Accounting policies”. Description of Significant unobservable inputs to valuation: Financial asset Technique Unquoted equity shares DCF, Market comparable, Asset base valuation and Book value Significant unobservable inputs Range (Weighted average) Long term growth rate 4 - 7% for cash flows for subsequent years Sensitivity of the input to fair value Profit margin growth 4 - 7% Discount for lack of liquidity 10 - 20% Higher the growth rate, higher the fair value. Higher the discount rate, lower the fair value. Higher the growth, higher the fair value. Discount for lack of marketability represent the amounts that the Group has determined that market participants would take into account these when pricing the investments An increase in the fair value would only impact equity (through OCI) and, would not have an effect on profit or loss. 50 F-068
265. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2018 25. FINANCIAL INSTRUMENT AND RISK MANAGEMENT (continued) (v) Fair values of financial instruments (continued) During the year ended 31 December 2018, there were no transfers between Level 1 and Level 2 fair value measurements, and no transfers into and out of Level 3 fair value measurements. Reconciliation of investments recorded in level 3 fair value: KD 000’s 2018 27,087 (858) 1,256 19 As at 1 January Disposals Impairment losses Change in fair value Foreign currency exchange ───────── As at 31 December 26. KD 000’s 2017 29,919 (1,254) (1,833) 359 (104) ───────── 27,504 27,087 ═════════ ═════════ CAPITAL MANAGEMENT AND CAPITAL ADEQUACY Capital management The primary objectives of the Group’s capital management is to ensure that the Group complies with externally imposed capital requirements and that the Group maintains strong credit ratings and healthy capital ratios in order to support its business and to maximise shareholders’ value. The Group actively manages its capital base in order to cover risks inherent in the business. The adequacy of the Group’s capital is monitored using, among other measures, the rules and ratios established by the Basel Committee on Banking Supervision (BIS rules/ratios) and adopted by the CBK in supervising the Group. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividend payment to shareholders, return capital to shareholders or issue capital securities. No changes were made in the objectives, policies and processes from the previous year in this respect. Capital adequacy The Group’s regulatory capital and capital adequacy ratios (“Basel III”) calculated in accordance with CBK circular number 2/RB, RBA/336/2014 dated 24 June 2014 are shown below: KD 000’s 2018 KD 000’s 2017 1,704,218 1,406,336 Capital required 221,548 182,824 Capital available Tier 1 capital Tier 2 capital 263,306 20,144 251,615 16,305 Risk weighted assets ───────── ───────── ═════════ ═════════ 15.45% 16.63% 17.89% 19.05% 283,450 Total capital Tier 1 capital adequacy ratio Total capital adequacy ratio 51 267,920 F-069
266. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2018 26. CAPITAL MANAGEMENT AND CAPITAL ADEQUACY (continued) The Group’s financial leverage ratio calculated in accordance with CBK circular number 2/RBA/343/2014 dated 21 October 2014 is shown below: Tier 1 capital Total exposure Financial leverage ratio KD 000’s 2018 KD 000’s 2017 263,306 2,513,622 10.48% 251,615 2,305,212 10.92% The disclosures relating to the capital adequacy regulations issued by CBK as stipulated in CBK circular number 2/RB, RBA/336/2014 dated 24 June 2014 and disclosures related to financial leverage ratio as stipulated in CBK circular number 2/RBA/343/2014 dated 21 October 2014 are included under the ‘Disclosures’ section of the year 2018 annual report. 52 F-070
267. KUWAIT INTERNATIONAL BANK K .S.C.P AND ITS SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 F-071
268. Kuwait International Bank K .S.C.P. and its Subsidiary INDEX Page Independent Auditors’ Report 1–5 Consolidated Statement of Profit or Loss 6 Consolidated Statement of Profit or Loss and Other Comprehensive Income 7 Consolidated Statement of Financial Position 8 Consolidated Statement of Changes in Equity 9 Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements 10 11 – 46 F-072
269. Deloitte & Touche Al-Wazzan & Co. Ahmed Al-Jaber Street, Sharq Dar Al-Awadi Complex, Floors 7 & 9 Ernst & Young Al Aiban, Al Osaimi & Partners P.O. Box 74 18–21st Floor, Baitak Tower Ahmed Al Jaber Street Safat Square 13001, Kuwait Tel: +965 2295 5000 Fax: +965 2245 6419 kuwait@kw.ey.com ey.com/mena P.O. Box 20174, Safat 13062 Kuwait Tel : + 965 22408844, 22438060 Fax: + 965 22408855, 22452080 www.deloitte.com INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS OF KUWAIT INTERNATIONAL BANK K.S.C.P. Report on the Audit of the Consolidated Financial Statements Opinion We have audited the consolidated financial statements of Kuwait International Bank K.S.C.P. (the “Bank”) and its subsidiary (together, the “Group”), which comprise the consolidated statement of financial position as at 31 December 2017, and the consolidated statement of profit or loss, consolidated statement of profit or loss and other comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at 31 December 2017, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRSs), as adopted for use by the State of Kuwait. Basis for Opinion We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditors’ Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code), and we have fulfilled our other ethical responsibilities in accordance with the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current year. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context. Impairment of financing receivables Impairment of financing receivables is a highly subjective area due to the level of judgment applied by management in determining provisions, which is dependent on the credit risk related to that financing receivable. Certain judgments applied by management in accounting for impairment of financing receivables include the identification of impairment events, the valuation of collateral and assessment of customers that may default, and the future cash flows of financing receivables granted. F-073
270. INDEPENDENT AUDITORS ’ REPORT TO THE SHAREHOLDERS OF KUWAIT INTERNATIONAL BANK K.S.C.P. (continued) Report on the Audit of the Consolidated Financial Statements (continued) Key Audit Matters (continued) Due to the significance of financing receivables (representing 68.08% of the total assets) and the related estimation uncertainty, this is considered a key audit matter. The basis of the impairment provision policy is presented in the accounting policies and disclosures related to exposure to credit risk are presented in Note 25 to the consolidated financial statements. Our audit procedures included the assessment of controls over the granting, recording and monitoring processes of financing receivables to confirm the operating effectiveness of the key controls in place. In addition, we assessed the methodologies, inputs and assumptions used by the Group in identifying the impaired facilities and determining the adequacy of impairment provision. We tested a sample of financing receivables, and assessed the criteria for determining whether an impairment event had occurred, by focusing on those with the most significant potential for impairment due to increased uncertainty of recovery in the current market circumstances and specifically challenged management’s assessment of the recoverable amount. In addition to testing the key controls, we selected samples of financing receivables granted as at the reporting date and assessed critically the criteria for determining whether an impairment event had occurred and therefore whether there was a requirement to calculate an impairment provision. For the samples selected, we also verified whether all impairment events as identified by us had also been identified by the Bank’s management. Our selected samples also included non-performing financing receivables, where we assessed management’s forecast of recoverable cash flows, valuation of collaterals, estimates of recovery on default and other sources of repayment. For the performing financing receivables, we assessed that the borrowers did not exhibit any possible default risk that may affect the repayment abilities. We have also assessed appropriateness of the Bank’s financial statement disclosures on allowance for impairment of financing receivables as detailed on Note 11. Other information included in the Group’s 2017 Annual Report Management is responsible for the other information. Other information consists of the information included in the Group’s 2017 Annual Report, other than the consolidated financial statements and our auditor’s report thereon. We obtained the report of the Bank’s Board of Directors, prior to the date of our auditor’s report, and we expect to obtain the remaining sections of the Group’s 2017 Annual Report after the date of our auditor’s report. Our opinion on the consolidated financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of other information, we are required to report that fact. We have nothing to report in this regard. 2 F-074
271. INDEPENDENT AUDITORS ’ REPORT TO THE SHAREHOLDERS OF KUWAIT INTERNATIONAL BANK K.S.C.P. (continued) Report on the Audit of the Consolidated Financial Statements (continued) Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRSs, as adopted for use by the State of Kuwait, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Group’s financial reporting process. Auditors’ Responsibilities for the Audit of the Consolidated Financial Statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:  Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.  Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.  Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. 3 F-075
272. INDEPENDENT AUDITORS ’ REPORT TO THE SHAREHOLDERS OF KUWAIT INTERNATIONAL BANK K.S.C.P. (continued) Report on the Audit of the Consolidated Financial Statements (continued) Auditors’ Responsibilities for the Audit of the Consolidated Financial Statements (continued)  Conclude on the appropriateness of management’s use of the going concern basis of accounting and based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors’ report. However, future events or conditions may cause the Group to cease to continue as a going concern.  Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.  Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current year and are therefore the key audit matters. We describe these matters in our auditors’ report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. 4 F-076
273. F-077
274. Kuwait International Bank K .S.C.P. and its Subsidiary CONSOLIDATED STATEMENT OF PROFIT OR LOSS For the year ended 31 December 2017 Notes Financing income Finance cost and distribution to depositors 3 4 Net financing income Fees and commission income Net gain from foreign exchange Investment income Other income KD 000’s 2016 74,559 (25,514) 71,006 (21,257) ────────── ────────── 9,281 861 4,469 595 8,789 815 2,666 1,173 49,045 5 6 TOTAL OPERATING INCOME ────────── ────────── ────────── (17,603) (13,288) (1,889) TOTAL OPERATING EXPENSES 7 PROFIT FROM OPERATIONS ────────── ────────── 31,471 33,093 (12,353) ────────── ────────── 8 19,588 (178) (520) (197) (450) ────────── ────────── ═════════ ═════════ 17,701 92 18,203 40 18,243 ────────── ────────── ═════════ ═════════ 17,793 Basic and diluted earnings per share attributable to the shareholders of the Bank (13,505) ────────── 17,793 Attributable to: Shareholders of the Bank Non-controlling interests (30,099) ────────── (174) (508) (193) (450) PROFIT FOR THE YEAR (16,109) (11,987) (2,003) ────────── 19,118 Provision for: Contribution for Kuwait Foundation for the Advancement of Sciences (KFAS) Contribution for National Labor Support Tax (NLST) Contribution for Zakat Board of Directors’ remuneration 63,192 ────────── (32,780) Profit from operations before provisions and impairment losses 49,749 ────────── 64,251 Staff costs General and administrative expenses Depreciation Provisions and impairment losses 2017 18.96 fils ═════════ The accompanying notes from 1 to 26 form an integral part of these consolidated financial statements. 6 18,243 19.50 fils ═════════ F-078
275. Kuwait International Bank K .S.C.P. and its Subsidiary CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME For the year ended 31 December 2017 2017 Profit for the year Other comprehensive income/(loss): Items to be reclassified to consolidated statement of profit or loss in subsequent periods Financial assets available for sale: - Change in fair values - Transfer to consolidated statement of profit or loss on impairment - Transfer to consolidated statement of profit or loss on sale 17,793 18,243 ────────── ────────── 429 485 (317) ────────── 597 Item that will not be classified to consolidated statement of profit or loss in subsequent periods Revaluation of property and equipment Other comprehensive income/(loss) for the year included directly in equity Total comprehensive income for the year Attributable to: Shareholders of the Bank Non-controlling interests Total comprehensive income for the year KD 000’s 2016 (2,938) 95 271 ────────── (2,572) (77) (157) ────────── ────────── ────────── ────────── ═════════ ═════════ 18,123 110 15,531 63 ────────── ────────── ═════════ ═════════ 440 18,233 18,233 The accompanying notes from 1 to 26 form an integral part of these consolidated financial statements. 7 (2,649) 15,594 15,594 F-079
276. F-080
277. Kuwait International Bank K .S.C.P. and its Subsidiary CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2017 Balance as at 1 January 2017 Profit for the year Other comprehensive income/(loss) Total comprehensive income/(loss) Depreciation transfer for buildings Dividends (Note 19) Transfer to reserves Balance as at 31 December 2017 Balance as at 1 January 2016 Profit for the year Other comprehensive (loss)/ income Total comprehensive income/(loss) Depreciation transfer for buildings Dividends (Note 19) Transfer to reserves Balance as at 31 December 2016 Equity attributable to the shareholders of the Bank Other reserves Treasury Fair Statutory Voluntary shares Retained valuation Revaluation reserve reserve reserve earnings reserve surplus Share capital Share premium Treasury shares 103,732 - 49,480 - (45,234) - 32,754 - 26,671 - 4,846 - 49,751 17,701 - 13,498 579 - - - 1,902 1,902 - 17,701 596 (9,337) (3,804) 579 - 103,732 49,480 (45,234) 34,656 28,573 4,846 54,907 14,077 103,732 - 49,480 - (45,234) - 30,800 - 24,717 - 4,846 - 43,305 18,203 - 16,093 (2,595) - - - 1,954 1,954 - 18,203 554 (8,403) (3,908) (2,595) - 103,732 49,480 (45,234) 32,754 26,671 4,846 49,751 13,498 ───────── ───────── ───────── ───────── ───────── ───────── ───────── ───────── Total other reserves Noncontrolling interests KD 000’s Total equity Total 16,283 (157) 143,803 17,701 422 251,781 17,701 422 3,214 92 18 254,995 17,793 440 (157) (596) - 18,123 (9,337) - 18,123 (9,337) - 110 - 18,233 (9,337) - 15,530 152,589 260,567 3,324 263,891 16,914 (77) 136,675 18,203 (2,672) 244,653 18,203 (2,672) 3,151 40 23 247,804 18,243 (2,649) (77) (554) - 15,531 (8,403) - 15,531 (8,403) - 63 - 15,594 (8,403) - 16,283 143,803 251,781 3,214 254,995 ───────── ───────── ───────── ───────── ───────── ───────── ───────── ───────── ───────── ───────── ───────── ───────── ───────── ───────── ───────── ───────── ───────── ───────── ════════ ════════ ════════ ════════ ════════ ════════ ════════ ════════ ════════ ════════ ════════ ════════ ════════ ───────── ───────── ───────── ───────── ───────── ───────── ───────── ───────── ───────── ───────── ───────── ───────── ───────── ───────── ───────── ───────── ───────── ───────── ───────── ───────── ───────── ───────── ───────── ───────── ───────── ───────── ════════ ════════ ════════ ════════ ════════ ════════ ════════ ════════ ════════ ════════ ════════ ════════ ════════ The accompanying notes from 1 to 26 form an integral part of these consolidated financial statements. 9 F-081
278. Kuwait International Bank K .S.C.P. and its Subsidiary CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended 31 December 2017 Notes CASH FLOWS FROM OPERATING ACTIVITIES Profit for the year Adjustments for: Net gain from foreign exchange Dividend income Realised (gain)/loss from investment securities Gain on sale of an associate Share of results from an associate Gain from sale of investment property Rental income from investment properties Depreciation Provisions and impairment losses 6 6 6 6 6 7 Changes in operating assets and liabilities: Due from banks Financing receivables Other assets Due to banks and financial institutions Depositors’ accounts Other liabilities Net cash used in operating activities 17,793 18,243 (861) (1,203) (1,415) 15 (627) (1,239) 1,889 12,353 (815) (1,636) 252 (7) (1,275) 2,003 13,505 ────────── ────────── 26,705 30,270 (61,234) (69,316) (2,509) (23,639) 78,381 7,381 23,134 (107,802) (2,228) (65,881) 106,782 9,235 ────────── ────────── ────────── ────────── (93,546) 95,406 1,500 (2,579) 1,203 1,239 (66,195) 40,718 (1,539) 1,636 1,275 (44,231) CASH FLOWS FROM INVESTING ACTIVITIES Purchase of investment securities Proceeds from sale of investment securities Proceeds from sale of investment property Purchase of property and equipment Dividend income received Rental income received Net cash from/(used in) investing activities ────────── ────────── ────────── (9,310) ────────── Net cash used in financing activities (9,310) ────────── NET DECREASE IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at the beginning of year (50,318) 100,834 ────────── 21 (6,490) ────────── 3,223 CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR 2017 KD 000’s 2016 50,516 ═════════ The accompanying notes from 1 to 26 form an integral part of these consolidated financial statements. 10 (24,105) (8,338) ────────── (8,338) ────────── (38,933) 139,767 ────────── 100,834 ═════════ F-082
279. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2017 1. INCORPORATION AND ACTIVITIES Kuwait International Bank K.S.C.P. (the “Bank”) is a Kuwaiti public shareholding company incorporated in the State of Kuwait on 13 May 1973 as a specialised bank and is regulated by the Central Bank of Kuwait (“CBK”). The Bank’s shares are listed on the Boursa Kuwait. In June 2007, CBK licensed the Bank to operate in accordance with Islamic Shariaá from 1 July 2007. From that date, all activities are conducted in accordance with Islamic Shariaá, as approved by the Bank’s Fatwa and Shariaá Supervisory Board. The Bank is engaged principally in providing Islamic banking services, the purchase and sale of properties, leasing, and other trading activities. Trading activities are conducted on the basis of purchasing various commodities and selling them on murabaha at agreed profit margin which can be settled in cash or on installment credit basis. The registered office of the Bank is at West Tower – Joint Banking Center, P.O. Box 22822, Safat 13089, Kuwait. The Bank operates through 26 local branches (2016: 28) and employed 730 employees as of 31 December 2017 (2016: 704). The Bank owns 73.6% of issued share capital of Ritaj Takaful Insurance Company K.S.C.C. (“Ritaj”), Kuwait. Ritaj is engaged in providing Shariaá compliant insurance services. The consolidated financial statements of the Bank and its subsidiary (together the “Group”) for the year ended 31 December 2017 were authorised for issue in accordance with a resolution of the Bank’s Board of Directors on 10 January 2018. The Annual General Assembly (“AGM”) of the Bank’s shareholders has the power to amend these consolidated financial statements after issuance. 2. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES 2.1 BASIS OF PREPARATION These consolidated financial statements have been prepared in accordance with the regulations of the State of Kuwait for financial services institutions regulated by the CBK. These regulations require adoption of all International Financial Reporting Standards (“IFRS”) except for the International Accounting Standard ‘(IAS) 39: Financial Instruments: Recognition and Measurement’ requirement for collective provision, which has been replaced by the CBK’s requirement for a minimum general provision as described under the accounting policies for impairment and un-collectability of financial assets (Note 2.5). The consolidated financial statements have been prepared under the historical cost basis except for the measurement at fair value of financial assets classified as fair value through profit or loss, or financial assets classified as available for sale and property and equipment. The consolidated financial statements are presented in Kuwaiti Dinars (“KD”) which is the functional currency of the Bank and Ritaj, rounded to the nearest thousand Dinars, except when otherwise stated. 2.2 CHANGES IN ACCOUNTING POLICIES AND DISCLOSURES The accounting policies used in the preparation of these consolidated financial statements are consistent with those used in the previous financial year, except for the adoption of the amendments to the existing standards relevant to the Group, effective from 1 January 2017, which did not result in any material impact on the accounting policies, financial position or performance of the Group. 11 F-083
280. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2017 2. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) 2.3 STANDARDS AND INTERPRETATIONS ISSUED BUT NOT YET ADOPTED The standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Group’s consolidated financial statements are disclosed below. The Group intends to adopt these standards, if applicable, when they become effective. IFRS 9 Financial Instruments (effective for financial years beginning on or after 1 January 2018) The IASB issued IFRS 9 ‘Financial Instruments’ in its final form in July 2014 and is effective for annual periods beginning on or after 1 January 2018. IFRS 9 sets out the requirements for recognizing and measuring financial assets and financial liabilities, impairment of financial assets and hedge accounting. This standard replaces IAS 39 Financial Instruments: Recognition and Measurement. The Group has determined the date of initial application for IFRS 9 to be 1 January 2018. The classification, measurement and impairment requirements are applied retrospectively by adjusting the opening consolidated statement of financial position at 1 January 2018. The Group will not restate the comparatives as permitted by IFRS 9. (a) Classification and measurement The classification and measurement of financial assets will depend on how these are managed (the entity’s business model) and their contractual cash flow characteristics. These factors determine whether the financial assets are measured at amortised cost, fair value through other comprehensive income or fair value through statement of profit or loss. Equity instruments are measured at fair value through profit or loss. However, the Group may, at initial recognition of a nontrading equity instrument, irrevocably elect to designate the instrument as fair value through OCI, with no subsequent recycling to consolidated statement of profit or loss. This designation is also available to non-trading equity instrument holdings on date of transition. The adoption of this standard will have impact on the classification and measurement of Group's financial assets but is not expected to have a significant impact on the classification and measurement of financial liabilities. Upon adoption of IFRS 9, the Group expects certain changes in classification of financial assets and related reclassifications between retained earnings and fair value reserve. The Group does not expect a material impact on retained earnings and fair value reserve due to changes in classification of financial assets (b) Hedge accounting The general hedge accounting requirements aim to simplify hedge accounting, creating a stronger link with risk management strategy and permitting hedge accounting to be applied to a greater variety of hedging instruments and risks. As at 31 December 2017, the Group does not have any hedge relationships. Hence, the hedging requirements of IFRS 9 will not have a significant impact on Group’s consolidated financial statements. (c) Impairment of financial assets IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with a forward-looking ‘expected credit loss’ (“ECL”) model. This will require considerable judgment about how changes in economic factors affect ECLs, which will be determined on a probability-weighted basis. Under IFRS 9, the impairment requirements apply to financial assets measured at amortised cost, debt instruments classified as fair value through other comprehensive income and certain loan commitments and financial guarantee contracts. At initial recognition, allowance is required for expected credit losses (‘ECL’) resulting from default events that are possible within the next 12 months (‘12-month ECL’). In the event of a significant increase in credit risk, allowance is required for ECL resulting from all possible default events over the expected life of the financial instrument (‘lifetime ECL’). The Bank will determine the potential impact of the expected provision for credit losses in accordance with IFRS 9 during the period ended 31 March 2018. The Bank will also comply with instructions of Central Bank of Kuwait in this regard. (d) Disclosures The new standard also introduces expanded disclosure requirements and changes in presentation. These are expected to change the nature and extent of the Group’s disclosures about its financial instruments particularly in the year of the adoption of the new standard. The Group’s assessment included an analysis to identify data gaps against current process. The Group is in process of implementing the system and controls changes that it believes will be necessary to capture the required data. 12 F-084
281. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2017 2. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) 2.3 STANDARDS AND INTERPRETATIONS ISSUED BUT NOT YET ADOPTED (continued) IFRS 15 Revenue from Contracts with Customers (effective for financial years beginning on or after 1 January 2018) IFRS 15 was issued by IASB on 28 May 2014, effective for annual periods beginning on or after 1 January 2018. IFRS 15 supersedes IAS 11 Construction Contracts and IAS 18 Revenue along with related IFRIC 13, IFRIC 15, IFRIC 18 and SIC 31 from the effective date. This new standard removes inconsistencies and weaknesses in previous revenue recognition requirements, provides a more robust framework for addressing revenue issues and improves comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. Revenue under IFRS 15 will need to be recognised as goods and services are transferred, to the extent that the transferor anticipates entitlement to goods and services. The standard will also specify a comprehensive set of disclosure requirements regarding the nature, extent and timing as well as any uncertainty of revenue and corresponding cash flows with customers. The Group has assessed the impact of IFRS 15. Based on the assessment, adoption of IFRS 15 is not expected to have any material effect on the Group's consolidated financial statements. IFRS 16 Leases (effective for financial years beginning on or after 1 January 2019) In January 2016, the IASB issued IFRS 16 ‘Leases’ with an effective date of annual periods beginning on or after 1 January 2019. IFRS 16 results in lessees accounting for most leases within the scope of the standard in a manner similar to the way in which finance leases are currently accounted for under IAS 17 ‘Leases’. Lessees will recognise a ‘right of use’ asset and a corresponding financial liability on the statement of financial position. The asset will be amortised over the length of the lease and the financial liability measured at amortised cost. Lessor accounting remains substantially the same as in IAS 17. The Group is in the process of evaluating the impact of IFRS 16 on the Group's consolidated financial statements. 13 F-085
282. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2017 2. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) 2.4 BASIS OF CONSOLIDATION The financial statements of subsidiary is included in the consolidated financial statements of the Group from the date that control commences until the date that control ceases. Where necessary, adjustments are made to the financial statements of subsidiary to bring its accounting policies in line with those used by the Bank. All significant intra-group balances, transactions and unrealized gains or losses resulting from intra group transactions and dividends are eliminated in full. The subsidiary’s financial statements are prepared either to the Bank’s reporting date or to a date not earlier than three months of the Bank’s reporting date. Interest in the equity of subsidiaries not attributable to the Group is reported as non-controlling interests in the consolidated statement of financial position. Non-controlling interests in the acquiree is measured at the proportionate share in the recognized amount of the acquiree’s identifiable net assets. Losses are allocated to the non-controlling interests even if they exceed the non-controlling interest’s share of equity in the subsidiary. Transactions with non-controlling interests are treated as transactions with equity owners of the Group. Gains or losses on disposals of non-controlling interests without loss of control are recorded in equity. On loss of control, the Group derecognises the assets and liabilities of the subsidiary, any non-controlling interests and the other components of equity related to the subsidiary. Any surplus or deficit arising on loss of control is recognised in the consolidated statement of profit or loss. If the Group retains any interest in the previous subsidiary, then such interest is measured at fair value at the date that control is lost. Subsequently it is accounted for as an equity-accounted investee or as a financial asset depending on the level of influence retained. 2.5 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business Combinations Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Group. The Group controls an investee if and only if the Group has:  Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee);  Exposure, or rights, to variable returns from its involvement with the investee; and  The ability to use its power over the investee to affect its returns. When the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including:  The contractual arrangement with the other vote holders of the investee;  Rights arising from other contractual arrangements;  The Group’s voting rights and potential voting rights; The Group measures goodwill at the acquisition date as:  The fair value of the consideration transferred; plus  The recognised amount of any non-controlling interests in the acquiree; plus  If the business combination is achieved in stages, the fair value of the pre-existing equity interest in the acquiree; less  The net recognised amount of the identifiable assets acquired and liabilities assumed. When the excess is negative, a bargain purchase gain is recognised immediately in consolidated statement of profit or loss. Transactions costs, other than those associated with the issue of debt or equity securities, that the Group incurs in connection with a business combination are expensed as incurred. 14 F-086
283. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2017 2. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) 2.5 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Financial instruments – Classification, recognition, de-recognition and measurement Classification As per IAS 39, the Group classifies its financial instruments as “financial assets at fair value through profit or loss”, “loans and receivables”, “financial assets available for sale” or “financial liability other than at fair value through profit or loss”. Management determines the appropriate classification of each instrument at the time of acquisition. Cash and balances with banks, due from banks including tawarruq with CBK, financing receivables and certain other assets are classified as “loans and receivables”. Loans and receivables These are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. The Bank offers Shariaá compliant products and services such as Murabaha, Istisna’a, Wakala and Ijara which are classified as “loans and receivables” and presented as financing receivables in the consolidated statement of financial position. The amount due is settled either by installments or on a deferred payment basis. Murabaha is a sale agreement for commodities and real estate to “a promise to buy” customer, at a price comprising of cost plus agreed profit, after the Bank has acquired the asset. Istisna’a is a sale contract between a contract owner and a contractor whereby the contractor based on an order from the contract owner undertakes to manufacture or otherwise acquire the subject matter of the contract according to specifications, and sells it to the contract owner for an agreed upon price and method of settlement whether that be in advance, by installments or deferred to a specific future date. Wakala is an agreement whereby the Group provides a sum of money to a customer under an agency arrangement, who invests it according to specific conditions in return for a fee. The agent is obliged to return the amount in case of default, negligence or violation of any terms and conditions of the wakala. Group as a lessor Ijara receivable Ijara is an Islamic transaction involving the purchase and immediate lease of an asset at cost where the lessor conveys to the lessee the right to use the asset for an agreed period of time in return for a payment or series of payments. At the end of the lease term the lessee has the option to purchase the asset. Ijara receivables are stated at the aggregate of the minimum lease payments due less provision for impairment, if any, and are presented net of deferred income. Operating leases Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Leased assets are stated at amounts equal to the net investment outstanding in the leases. Financial assets at fair value through profit or loss These are financial assets that are either financial assets held for trading or those designated as fair value through profit or loss upon initial recognition. A financial asset is classified in this category only if they are acquired principally for the purpose of generating profit from short-term fluctuation in price or if so designated by the management in accordance with a documented risk management or investment strategy and reported to key management personnel on that basis. 15 F-087
284. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2017 2. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) 2.5 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Financial assets available for sale Financial assets available for sale (“AFS”) include equity investments and debt securities (i.e. Sukuks). Equity investments classified as available for sale are those, which are neither classified as held for trading nor designated at fair value through profit or loss. Debt securities in this category are those which are intended to be held for an indefinite period of time and which may be sold in response to needs for liquidity or in response to changes in the market conditions. After initial measurement, AFS financial investments are subsequently measured at fair value with unrealised gains or losses recognised in statement of profit or loss and other comprehensive income and credited in the AFS reserve until the investment is derecognised, at which time the cumulative gain or loss is recognised in investment income, or the investment is determined to be impaired, when the cumulative loss is reclassified from the AFS reserve to the statement of profit or loss. Profit earned whilst holding AFS financial investments is reported as investment income using the effective interest rate method. Financial liabilities other than at fair value through profit or loss Financial liabilities which are not held for trading are classified as “other than at fair value through profit or loss”. Financial liabilities include due to banks and financial institutions, depositors’ accounts created by Mudaraba and Wakala contracts and other liabilities. Mudaraba represents an agreement whereby the Bank and the customer share an agreed percentage of any profit earned on customers’ investments as agreed. Wakala represents an agreement whereby the Bank aims to provide a certain rate of return for the transactions entered on behalf of the customer. Recognition and de-recognition A financial asset or a financial liability is recognised when the Group becomes a party to the contractual provisions of the instrument. All regular way purchases and sales of financial assets are recognised using settlement date accounting i.e. the date that the Group receives or delivers the assets. Changes in fair value between the trade date and settlement date are recognised in the consolidated statement of profit or loss, or in consolidated statement of profit or loss and other comprehensive income in accordance with the policy applicable to the related instrument. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulations or conventions in the market place. A financial asset is de-recognised (in whole or in part) where:  the contractual rights to receive cash flows from the assets have expired, or  the Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a ‘pass through’ arrangement, or  the Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. When the Group has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Group’s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay. A financial liability is derecognised when the obligation specified in the contract is discharged, cancelled or expired. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in the consolidated statement of profit or loss. 16 F-088
285. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2017 2. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) 2.5 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Property acquired on settlement of debt is stated at the lower of the related financing receivables and the current fair value of such assets. Gains or losses on disposal and revaluation losses are recognised in the consolidated statement of profit or loss. Measurement All financial assets and liabilities are initially measured at fair value of the consideration given plus transaction costs except for financial assets classified as financial assets at fair value through profit or loss. Transaction costs on financial assets classified as investments at fair value through profit or loss are recognised in the consolidated statement of profit or loss. On subsequent measurement financial assets classified as “financial assets at fair value through profit or loss” are measured and carried at fair value. Realised and unrealised gains/ losses arising from changes in fair value are included in the consolidated statement of profit or loss. “Loans and receivables” are carried at amortised cost using effective yield method, less any provision for impairment. Those classified as “financial assets available for sale” are subsequently measured at fair value until the investment is sold or otherwise disposed of, or the investment is determined to be impaired, at which time the cumulative gain or loss previously reported in other comprehensive income is included in the consolidated statement of profit or loss for the year. “Financial liabilities other than at fair value through profit or loss” are subsequently measured at amortised cost. Impairment and uncollectability of financial assets The Group assesses at each reporting date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred ‘loss event’) and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in profit or principal payments, the probability that they will enter bankruptcy or other financial reorganization and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. Financial assets carried at amortised cost For financial assets carried at amortised cost the Group first assesses individually whether objective evidence of impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognized are not included in a collective assessment of impairment. The amount of any impairment loss identified is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The present value of the estimated future cash flows is discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the loss is recognized in consolidated statement of profit or loss. Facilities together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realised or has been transferred to the Group. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognized, the previously recognized impairment loss is increased or reduced by adjusting the allowance account. Reversal of impairment losses recognised in prior years is recorded when there is an indication that the impairment losses recognised for the asset no longer exist or have decreased and the decrease can be related objectively to an event occurring after the impairment loss was recognised. Except for equity instrument classified as available for sale, reversal of impairment losses are recognised in the consolidated statement of profit or loss to the extent the carrying value of the asset does not exceed its amortised cost at the reversal date. For available for sale equity investments, reversals of impairment losses are recorded as increases through consolidated statement of profit or loss and other comprehensive income. Financial assets are written off when there is no realistic prospect of recovery. 17 F-089
286. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2017 2. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) 2.5 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) General provision In accordance with the CBK instructions, a minimum general provision is made on all applicable credit facilities (net of certain categories of collateral) that are not provided for specifically. The minimum general provision in excess of the present 1% for cash facilities and 0.5% for non-cash facilities is retained as a general provision until further directive from the CBK. Offsetting Financial assets and financial liabilities are only offset and the net amount reported in the consolidated statement of financial position when there is a legally enforceable right to set off the recognised amounts and the Group intends to settle on a net basis. Collateral pending sale The Group occasionally acquires non-monetary assets in settlement of certain financing receivables. Such assets are stated at the lower of the carrying value of the related financing receivables and the current fair value of such assets. Gains or losses on disposal, and revaluation losses, are recognised in the consolidated statement of profit or loss. Financial guarantees In the ordinary course of business, the Group provides financial guarantees, consisting of letters of credit, guarantees and acceptances. Financial guarantees are initially recognised in the consolidated financial statements at fair value, being the premium received, in other liabilities. The premium received is recognised in the consolidated statement of profit or loss in ‘fees and commission income’ on a straight-line basis over the life of the guarantee. Subsequently, the liability is measured at the higher of the best estimate of the expenditure required to settle the present obligation at the reporting date and the amount recognized less cumulative amortization. When a payment under the guarantee is likely to become payable, the present value of the expected net payments less the unamortised premium, is charged to the consolidated statement of profit or loss. Financial guarantees and letter of credit are assessed and provision for impairment is made in a similar manner to that for financing receivables. Revenue recognition Income from Murabaha, Istisnaa and Wakala are recognised on an effective yield basis which is established on initial recognition of the asset and is not revised subsequently. Income from Ijara is recognised over the term of the Ijara agreement to yield a constant rate of return on the net investment outstanding. The calculation of the effective yield includes all fees paid or received, transactions costs and discounts or premiums that are an integral part of the effective yield. Fees and commission income that relate mainly to transaction and service fees is recognised as the related services are performed. Dividend income is recognised when the right to receive payment is established. Other fees are recognised as the services are provided. Rental income from investment properties is recognised on a straight line basis over the period of the lease. Once a financial instrument categorised as “financing receivables” is written down to its estimated recoverable amount, related income is thereafter recognised on the unimpaired portion based on the original effective yield rate that was used to discount the future cash flows for the purpose of measuring the recoverable amount. 18 F-090
287. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2017 2. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) 2.5 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Finance cost Finance cost is directly attributable to due to banks and financial institutions and depositors’ accounts. All finance costs are expensed in the period they occur. Foreign currency Foreign currency transactions are recorded at rates of exchange ruling at the date of the transactions. Monetary assets and liabilities in foreign currencies outstanding at the year-end are translated into Kuwaiti Dinars at rates of exchange ruling at the reporting date. Any resultant gains or losses are taken to the consolidated statement of profit or loss. Non-monetary items carried at fair value that are denominated in foreign currencies are translated at the rates prevailing on the date when the fair value was determined. Translation difference on non-monetary items classified as “at fair value through profit or loss” are reported as part of the fair value gain or loss in the consolidated statement of profit or loss whereas, where as those on non-monetary items classified as “available for sale” financial assets are included in consolidated statement of profit or loss and other comprehensive income. Dividends on ordinary shares Dividends on ordinary shares are recognised as a liability and deducted from equity when they are approved by the Bank’s shareholders in the Annual General Assembly. Dividends for the year that are approved by the Annual General Assembly after the reporting date are disclosed as an event after the reporting date. Statutory contributions Kuwait Foundation for the Advancement of Sciences (KFAS) The Bank calculates the contribution to KFAS at 1% of profit in accordance with the calculation based on the KFAS’s Board of Directors resolution, excluding transfer to statutory reserve from profit for the year. National Labour Support Tax (NLST) The Bank calculates NLST in accordance with Law No. 19 of 2000 and the Minister of Finance Resolution No. 24 of 2006 at 2.5% of taxable profit for the year. Cash dividends from listed companies which are subject to NLST are deducted from the profit for the year to determine the taxable profit. Zakat Contribution to Zakat is calculated at 1% of the profit in accordance with the Ministry of Finance resolution No. 58/2007. Cash and cash equivalents For the purpose of the consolidated statement of cash flows, cash and cash equivalents includes, cash and balances with banks (as set out in Note 9) and Murabaha finance with banks (contractual maturity of 90 days or less) (as set out in Note 10). Investment in associates An associate is an entity over which the Group exerts significant influence. Investment in associates is accounted for under the equity method of accounting. Where an associate is acquired and held exclusively for resale, it is accounted for as a noncurrent asset held for resale under IFRS 5. 19 F-091
288. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2017 2. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) 2.5 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Under the equity method, the investment in associate is initially recognised at cost and adjusted thereafter for the postacquisition change in the Group’s share of the associate’s net assets. Goodwill relating to an associate is included in the carrying amount of the investment and is neither amortised nor individually tested for impairment. The Group recognises in the consolidated statement of profit or loss its share of the total recognised profit or loss of the associate from the date that influence or ownership effectively commenced until the date that it effectively ceases. Distributions received from the associate reduce the carrying amount of the investment. Adjustments to the carrying amount may also be necessary for changes in Group’s share in the associate arising from changes in the associate’s equity that have not been recognised in the associate’s profit or loss statement. The Group’s share of those changes is recognised in the consolidated statement of profit or loss and other comprehensive income. Unrealised gains on transactions with associates are eliminated to the extent of the Group’s share in the associate. Unrealised losses are also eliminated unless the transaction provides evidence of impairment in the asset transferred. An assessment for impairment of investments in associates is performed when there is an indication that the asset has been impaired, or that impairment losses recognised in prior years no longer exist. If such indication exists, the Group estimates the asset’s recoverable amount. A previously recognised impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognised. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in the consolidated statement of profit or loss. The associate’s financial statements are prepared either to the Group’s reporting date or to a date not earlier than three months of the Group’s reporting date using consistent accounting policies. Where practicable, adjustments are made for the effects of significant transactions or other events that occur between the reporting date of the associates and the Group’s reporting date. Upon loss of significant influence over the associate, the Group measures and recognises any retained investment at fair value. Any difference between carrying amount of the investment in associate upon loss of significant influence and the fair value of the retained investment and proceeds from disposal is recognised in the consolidated statement of profit or loss. Investment properties Land and buildings, held for long-term capital appreciation and rental yields, and not occupied by the Group, are classified as investment properties. These also include properties acquired by the Group in settlement of financing receivables. Investment properties are carried at cost which includes purchase price and transaction costs less accumulated depreciation and impairment losses. Freehold land is not depreciated. Depreciation is computed on a straight line basis over the estimated useful lives of 20 years. The fair value is determined periodically by external valuers. The asset’s residual values and useful lives are reviewed, and adjusted if appropriate, at each year end. The carrying amount of each item is reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, the assets are written down to their recoverable amount and the impairment loss is recognised in the consolidated statement of profit or loss. Impairment is tested at the lowest level of the cash generating unit (CGU) to which the item belongs. An investment property is derecognised when either it has been disposed of, or when the investment property is permanently withdrawn from use and no future economic benefit is expected from its disposal. Any gains or losses on the retirement or disposal of an investment property are recognised in the consolidated statement of profit or loss in the period of retirement or disposal. Transfers are made to or from investment property only when there is a change in use. For a transfer from investment property to property and equipment, the deemed cost for subsequent accounting is the carrying value at the date of change in use. If property and equipment becomes an investment property, the Group accounts for such property in accordance with the policy stated under property and equipment up to the date of change in use. When the Group begins to redevelop an existing investment property with a view to selling the property, it is transferred to trading properties at carrying value. 20 F-092
289. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2017 2. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) 2.5 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Property and equipment Land and buildings are measured at fair value less accumulated depreciation on buildings and impairment losses recognised after the date of the revaluation. Valuations are performed annually to ensure that the fair value of a revalued asset does not differ materially from its carrying amount. Any revaluation change is credited to the revaluation surplus reserve in equity, except to the extent that it reverses a revaluation decrease of the same asset previously recognised in the consolidated statement of profit or loss, in which case the increase is recognised in the consolidated statement of profit or loss. A revaluation deficit is recognised in the consolidated statement of profit or loss, except to the extent that it offsets an existing surplus on the same asset recognised in the revaluation surplus reserve. An annual transfer from the revaluation surplus reserve to retained earnings is made for the difference between depreciation based on the revalued carrying amount of the assets and depreciation based on the asset’s original cost. Additionally, accumulated depreciation as at the revaluation date is eliminated against the gross carrying amount of the asset and the net amount is restated to the revalued amount of the asset. Upon disposal, any revaluation reserve relating to the particular asset being sold is transferred to retained earnings. The useful life of buildings is estimated to be 20 years. Computer and other equipment are carried at cost less accumulated depreciation and accumulated impairment loss. Depreciation is charged on a straight-line basis over their estimated useful lives of 3 - 5 years. Fair value measurements Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:  In the principal market for the asset or liability, or  In the absence of a principal market, in the most advantageous market for the asset or liability. The principal or the most advantageous market must be accessible to by the Group. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. All assets and liabilities for which fair value is measured or disclosed in the consolidated financial statements are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole: Level 1: inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date; Level 2: inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability either directly or indirectly; and. Level 3: inputs are unobservable inputs for the asset or liability. For financial instruments quoted in an active market, fair value is determined by reference to quoted market prices. Bid prices are used for assets and offer prices are used for liabilities. The fair value of investments in mutual funds, unit trusts or similar investment vehicles are based on the last published net assets value. 21 F-093
290. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2017 2. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) 2.5 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) For unquoted financial instruments fair value is determined by reference to the market value of a similar investment, discounted cash flows, other appropriate valuation models or brokers’ quotes. For financial instruments carried at amortised cost, the fair value is estimated by discounting future cash flows at the current market rate of return for similar financial instruments. For investments in equity instruments, where a reasonable estimate of fair value cannot be determined, the investment is carried at cost less impairment. The fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. For assets and liabilities that are recognised in the consolidated financial statements on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. For the purpose of fair value disclosures, the Group has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained above. Impairment of non-financial assets The Group assesses at each reporting date whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Group estimates the asset’s recoverable amount. An asset’s or cash-generating unit’s (CGU) recoverable amount is the higher of its fair value less costs to sell and its value in use. Where the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs to sell, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded companies or other available fair value indicators. For non-financial assets excluding goodwill, an assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, the Group estimates the asset’s or CGU’s recoverable amount. A previously recognised impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognised. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceeds the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in the consolidated statement of profit or loss. Post-employment benefits The Group is liable under Kuwait Labour Law to make payments under defined benefit plans to employees at cessation of employment. The defined benefit plan is unfunded and is based on the liability that would arise on involuntary termination of all employees on the reporting date. This basis is considered to be a reliable approximation of the present value of this liability. Provisions Provisions are recognised when, as a result of past events, it is probable that an outflow of economic resources will be required to settle a present, legal or constructive obligation and the amount can be reliably estimated. 22 F-094
291. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2017 2. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) 2.5 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Treasury shares The Bank’s holding in its own shares is stated at acquisition cost and is recognised in equity. The treasury shares are accounted for using the cost method. Under this method, the weighted average cost of the shares reacquired is charged to a contra account in the equity. When the treasury shares are sold, gains are credited to a separate account in equity, “treasury shares reserve”, which is not distributable until all the treasury shares are disposed. Any realised losses are charged to the same account to the extent of the credit balance on that account. Any excess losses are charged to retained earnings then to the voluntary reserve and statutory reserve. Gains realised subsequently on the sale of treasury shares are first used to offset any previously recorded losses in the order of reserves, retained earnings and the treasury shares reserve account. These shares are not entitled to any cash dividend that the Bank may propose. The issue of bonus shares increases the number of shares proportionately and reduces the average cost per share without affecting the total cost of treasury shares. Contingencies Contingent assets are not recognised in the consolidated financial statements, but are disclosed when an inflow of economic benefit is probable. Contingent liabilities are not recognised in the consolidated financial statements, but are disclosed unless the possibility of an outflow of resources embodying economic benefit is remote. Segment information A segment is a distinguishable component of the Group that engages in business activities from which it earns revenues and incurs costs. The operating segments are used by the management of the Group to allocate resources and assess performance. Operating segments exhibiting similar economic characteristics, product and services and class of customers are appropriately aggregated and reported as reportable segments. 2.6 SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS The preparation of the Group’s consolidated financial statements requires management to make judgments, estimates and assumptions that affect the reported amount of revenues, expenses, assets and liabilities, and the accompanying disclosures, as well as the disclosure of contingent liabilities. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods. Judgments In the process of applying the Group’s accounting policies, management has made the following judgments, apart from those involving estimations, which have the most significant effect on the amounts recognised in the consolidated financial statements: Classification of investments On acquisition of an investment, the Group decides whether it should be classified as "financial assets at fair value through profit or loss" or "financial assets available for sale". The Group classifies investments as ‘financial assets at fair value through profit or loss’ if they are acquired primarily for the purpose of short term profit making or if they are managed and their performance is evaluated on a reliable fair value basis in accordance with a documented investment strategy. All other investments are classified as "available for sale". 23 F-095
292. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2017 2. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) 2.6 SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS (continued) Impairment of financial assets available for sale The Group treats "financial assets available for sale" equity investments as impaired when there has been a significant or prolonged decline in their fair value below their cost. The determination of what is "significant" or "prolonged" requires significant judgement. In addition, the Group also evaluates among other factors, normal volatility in the share price for quoted equities and the future cash flows and the discount factors for unquoted equities. Impairment may be considered appropriate when there is evidence of deterioration in the financial position of the investee, industry and sector performance; changes in technology and operational and financing cash flows. Classification of real estate Management decides on acquisition of a real estate whether it should be classified as trading, investment property, property under development or property and equipment. The Group classifies it as “trading property” if it is acquired principally for sale in the ordinary course of business. The Group classifies it as “investment property” if it is acquired to generate rental income or for capital appreciation, or for undetermined future use. The Group classifies property as “property under development” if it is acquired with the intention of development. The Group classifies property as “property and equipment when it is acquired for owner occupation. Estimation uncertainty and assumptions The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below: Impairment losses on financing receivables and investments in debt instruments The Group reviews problem financing receivables and investments in debt instruments on a regular basis to assess whether a provision for impairment should be recorded in the consolidated statement of profit or loss. In particular, considerable judgment by management is required in the estimation of the amount and timing of future cash flows when determining the level of provisions required. Such estimates are necessarily based on assumptions about several factors involving varying degrees of judgment and uncertainty. Valuation of financial instruments with significant unobservable inputs Valuation techniques for financial instruments with significant unobservable inputs includes estimates such as expected cash flows discounted at current rates applicable for items with similar terms and risk characteristics; recent arm’s length market transactions; current fair value of another instrument that is substantially the same; valuation models etc. Any changes in these estimates and assumptions as well as the use of different, but equally reasonable estimates and assumptions may have an impact on the carrying values of unquoted financial assets. 24 F-096
293. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2017 3. FINANCING INCOME Income from Murabaha Income from Wakala Income from Ijara Others 2017 KD 000’s 2016 28,845 33,713 11,174 827 26,896 31,710 11,874 526 ────────── ────────── ═════════ ═════════ 74,559 4. 71,006 FINANCE COST AND DISTRIBUTION TO DEPOSITORS The Bank’s Board of Directors determined the depositors’ share of profit based on the results for the respective year. 5. FEES AND COMMISSION INCOME This represents income earned from property appraisals, property management fees, letters of credit and guarantee fees, debit/credit card and point of sales fees etc. 6. INVESTMENT INCOME 2017 Dividend income Realised gain/(loss) from sale of investment securities Gain on sale of an associate Share of results from associate Gain from sale of investment property Rental income from investment properties 1,203 1,415 (15) 627 1,239 ────────── ═════════ ═════════ 2017 KD 000’s 2016 PROVISIONS AND IMPAIRMENT LOSSES Reversal of impairment losses on Murabaha finance with banks Financing receivables (Note 11) Reversal of impairment losses on financing receivables Financial assets available for sale Reversal of impairment on non-cash credit facilities 2,666 (181) 14,113 (1,209) 1,376 (594) (93) 11,348 (1,045) 2,319 (176) ────────── ────────── ═════════ ═════════ 12,353 25 1,636 (252) 7 1,275 ────────── 4,469 7. KD 000’s 2016 13,505 F-097
294. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2017 8. BASIC AND DILUTED EARNINGS PER SHARE Basic and diluted earnings per share is computed by dividing the profit for the year attributable to the shareholders of the Bank by the weighted average number of shares issued, less treasury shares. The computation of earnings per share is as follows: 2017 Profit for the year attributable to the shareholders of the Bank KD 000’s 2016 17,701 18,203 ═════════ ═════════ (Shares in ‘000) 2017 Weighted average number of shares issued Less: Weighted average number of treasury shares Weighted average number of shares outstanding 9. 1,037,327 (103,638) ────────── ────────── ═════════ ═════════ ────────── ────────── ═════════ ═════════ 2017 KD 000’s 2016 6,797 2,466 10,187 7,798 4,301 6,041 ────────── ────────── 18.96 fils CASH AND BALANCES WITH BANKS Cash Balances with banks Balances with CBK 10. 1,037,327 (103,638) 933,689 Basic and diluted earnings per share 2016 933,689 19.50 fils 19,450 18,140 ═════════ ═════════ 2017 KD 000’s 2016 306,268 31,066 65,568 284,629 82,694 25,973 DUE FROM BANKS Tawarruq transactions with CBK and government debts Murabaha finance with banks (contractual maturity of 90 days or less) Murabaha finance with banks (contractual maturity of more than 90 days) ────────── ────────── ═════════ ═════════ 402,902 26 393,296 F-098
295. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2017 11. FINANCING RECEIVABLES Financing receivables comprise of facilities extended to the customers of the Bank in the form of Murabaha, Wakala, Ijara and other contracts. Wherever necessary, financing receivables are secured by acceptable forms of collateral to mitigate the related credit risk. Financing receivables comprise the following: KD 000’s 2016 2017 Financing receivables Murabaha receivables 461,325 507,259 Wakala receivables 694,613 742,429 Ijara receivables 229,972 185,308 Other receivables 17,250 5,924 ───────── ───────── ───────── ───────── ───────── ───────── ════════ ════════ 2017 KD 000’s 2016 1,116,304 233,240 1,103,740 214,269 ───────── ───────── 1,349,544 (45,128) 1,318,009 (49,553) ───────── ───────── ════════ ════════ 1,440,920 (91,376) Less: Deferred profit Net receivables Less: Provision for impairment 1,349,544 (45,128) 1,304,416 Further analysis of financing receivables based on class of financial assets is given below: Corporate Retail Less: Provision for impairment 1,304,416 1,403,160 (85,151) 1,318,009 (49,553) 1,268,456 1,268,456 Movement in provision for impairment: Balance at beginning of year Provision charged (Note 7) Amounts written off /recovery Reclassification of provision Balance at end of year KD 000’s Specific provision 2017 General provision Total Specific provision 2016 General provision 3,087 7,986 (15,780) 9,950 46,466 3,362 7 (9,950) 49,553 11,348 (15,773) - 2,782 6,900 (6,595) - 39,243 7,213 10 - 42,025 14,113 (6,585) - 5,243 39,885 45,128 3,087 46,466 49,553 Total ────────── ────────── ────────── ────────── ────────── ────────── ═════════ ═════════ ═════════ ═════════ ═════════ ═════════ The management believes that the impairment provision for credit facilities complies in all material respects with the specific provision requirements of CBK. The surplus general provision arising on the change in the general provision rate in March 2007 amounts to KD 5,044 thousand and is retained as general provision until further directive from the CBK. Provision on non-cash credit facilities of KD 5,932 thousand (2016: KD 6,108 thousand) is included in other liabilities (Note 18). 27 F-099
296. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2017 12. INVESTMENT SECURITIES 2017 Financial assets at fair value through profit or loss: Quoted equity securities 62 Financial assets available for sale: Quoted equity securities Unquoted equity securities Investment in sukuks ────────── 13,534 26,353 43,891 13,087 28,935 43,927 ────────── Associate of Ritaj Partners Properties Co. W.L.L. Kuwait Principal activity Real Estate ────────── 85,949 ────────── ────────── ═════════ ═════════ % of holding 2016 2017 2017 KD 000’s 2016 25.5 1,518 1,533 83,840 INVESTMENT IN AN ASSOCIATE Country of incorporation 58 ────────── 83,778 13. KD 000’s 2016 25.5 86,007 There was no published price quotation for the associate of the Group. Furthermore, there is no significant restrictions on the ability of the associate to transfer funds to the Group in the form of cash dividends or repayment of credit facilities. 14. INVESTMENT PROPERTIES 2017 Balance at beginning of year Additions (a) Disposal Depreciation Balance at end of year 40,235 23,147 (2,873) (118) KD 000’s 2016 40,353 (118) ────────── ────────── ═════════ ═════════ 60,391 40,235 (a) Properties amounting to KD 23,147 thousand are on account of Ijara contracts of two customers who defaulted in fulfilling contractual obligations towards the Bank. These are carried at lower of the fair value of those properties or the related financial receivables due. The fair value of investment properties as at 31 December 2017 was KD 64,035 thousand (2016: KD 44,705 thousand) which was determined by independent valuers who have appropriate qualifications and recent experience in the valuation of properties in the relevant locations. The fair values were determined based on combination of valuation techniques which include market comparison approach and income capitalization approach. In estimating the fair values of the properties, the highest and the best use of the properties is their current use where price per square meter, annual lease income and recent sale transaction for similar properties are the significant inputs. There has been no change to the valuation techniques during the year. All of the Group’s investment properties are included in level 3 of fair value hierarchy. 15. PROPERTY AND EQUIPMENT Freehold land and buildings were revalued at KD 20,972 thousand (2016: KD 21,778 thousand) using the average of the fair values determined by two external valuers who have appropriate qualifications and recent experience in the valuation of properties in the relevant locations. The fair values were determined based on combination of valuation techniques which include market comparison approach and income capitalization approach and are included in level 3 of the fair value hierarchy. In estimating the fair values of the properties, the highest and the best use of the properties is their current use. There has been no change to the valuation techniques during the year. Other equipment are carried at cost less accumulated depreciation amounting to KD 5,253 thousand (2016: KD 3,796 thousand). If buildings had been carried at cost less depreciation, the net carrying amount that would have been included in these consolidated financial statements is KD 8,649 thousand (2016: KD 7,218 thousand). 28 F-100
297. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2017 16. DUE TO BANKS AND FINANCIAL INSTITUTIONS Murabaha payable to banks Murabaha payable to financial institutions Current and call accounts 2017 KD 000’s 2016 86,892 296,467 11,079 125,439 281,960 10,678 ────────── ────────── ═════════ ═════════ 394,438 418,077 Murabaha payable to banks includes unsecured syndication Murabaha financing amounting to USD 140 million equivalent to KD 42.5 million (2016: USD 260 million equivalent to KD 80 million) repayable in August 2018. 17. DEPOSITORS’ ACCOUNTS Depositors’ accounts represent Current accounts, Savings accounts, Call accounts, Margin accounts, Mudaraba and Wakala. 18. OTHER LIABILITIES Depositors’ profit payable Provision on non-cash credit facilities (Note 11) Accrued staff benefits Payables and purchase orders Dividend payable Accrued expenses Taxes and other dues Recovery pending final decision (a) Others 2017 KD 000’s 2016 6,989 5,932 11,861 8,063 1,227 4,218 1,325 10,749 4,134 4,176 6,108 11,051 5,396 1,199 3,010 1,345 10,749 5,092 ────────── 54,498 ═════════ ────────── 48,126 ═════════ (a) Recovery pending final decision represents an amount recovered by the Bank from a defaulted customer through the Kuwait Ministry of Justice (Execution Department), subject to final court decision. 19. SHAREHOLDERS’ EQUITY a) Share capital The authorised, issued and fully paid up capital of the Bank comprises of 1,037,326,672 ordinary shares of 100 fils each (2016: 1,037,326,672 shares of 100 fils each), all shares are paid up in cash. b) Treasury shares Number of treasury shares (‘000 shares) Percentage of treasury shares Cost of shares (KD 000’s) Market value of shares (KD 000’s) 2017 2016 103,637 9.99% 45,234 23,629 103,637 9.99% 45,234 21,349 Weighted average market price of the Bank’s shares for the current year is 240 fils per share (2016: 195 fils per share). The Board of Directors has been authorised by the shareholders to purchase treasury shares up to a maximum of 10% of the share capital of the Bank. Reserves equivalent to the cost of the treasury shares held are not available for distribution. An amount of KD 45,234 thousand (2016: KD 45,234 thousand) from statutory and voluntary reserves equivalent to the cost of the treasury shares held by the Group is not available for distribution throughout the holding period of treasury shares. 29 F-101
298. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2017 19. SHAREHOLDERS’ EQUITY (continued) c) Dividends The Board of Directors’ meeting held on 10 January 2018 recommended the distribution of cash dividend of 10 fils per share amounting to KD 9,337 thousand (2016: 10 fils per share amounting to KD 9,337 thousand) on outstanding shares (excluding treasury shares). This proposal is subject to the approval by the shareholders’ Annual General Assembly. The cash dividends for the year ended 31 December 2016 were approved by the shareholders at the Annual General Assembly held on 18 March 2017. 20. OTHER RESERVES a) Statutory reserve In accordance with the Companies’ Law (as amended) and the Articles of Association, the Bank is required to transfer to statutory reserve, 10% of the profit for the year before contribution to KFAS, NLST, Zakat and directors’ remuneration. Distribution of the statutory reserve is limited to the amount required to enable the payment of a dividend of 5% of share capital in years when retained earnings are not sufficient for the payment of a dividend of that amount. The Bank has transferred KD 1,902 thousand to the statutory reserve for the year ended 31 December 2017 (2016: KD 1,954 thousand). b) Voluntary reserve In accordance with the Bank’s Articles of Association, 10% of the profit for the year before contribution to KFAS, NLST, Zakat and directors’ remuneration is required to be transferred to voluntary reserve. Such annual transfers may be discontinued by a resolution of the Bank’s shareholders Annual General Assembly upon a recommendation by the Board of Directors. The Bank has transferred KD 1,902 thousand to the voluntary reserve for the year ended 31 December 2017 (2016: KD 1,954 thousand). c) Share premium The share premium account is not available for distribution. d) Revaluation surplus The revaluation surplus represents the surplus of market value over carrying value of freehold land and buildings (net of incremental depreciation). The balance in this reserve will be directly transferred to retained earnings on disposal of the underlying assets. 21. CASH AND CASH EQUIVALENTS Cash and balances with banks (Note 9) Murabaha finance with banks (contractual maturity of 90 days or less) (Note 10) 2017 KD 000’s 2016 19,450 31,066 18,140 82,694 ────────── ────────── ═════════ ═════════ 50,516 22. 100,834 COMMITMENTS AND CONTINGENT LIABILITIES To meet the financial needs of customers, the Group enters into various contingent liabilities and revocable commitments. Even though these obligations may not be recognised on the consolidated statement of financial position, they expose the Group to credit risk and therefore form part of the overall risk of the Group. The total outstanding commitments and contingent liabilities are as follows: Acceptances Letters of credit Letters of guarantee 2017 KD 000’s 2016 36,958 22,066 269,324 20,673 12,858 240,911 ────────── ────────── ═════════ ═════════ 328,348 274,442 The Group also has revocable commitments to extend credit amounting to KD 169,050 thousand (2016: KD 207,286 thousand). 30 F-102
299. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2017 23. RELATED PARTY TRANSACTIONS These are transactions with certain related parties (major shareholders, associates, directors and executive officers of the Group, close members of their families and companies in which they are principal owners or over which they are able to exercise significant influence) who were customers of the Group in the ordinary course of business. Such transactions were made on substantially the same terms including profit rates as those prevailing at the same time for comparable transactions with unrelated parties and did not involve more than a normal amount of risk. Transactions with subsidiary is eliminated in full and hence not disclosed. The transactions and balances with related parties included in this consolidated financial statements are as follows: Balances Financing receivables Credit cards Deposits Commitments Collaterals against credit facilities Transactions Financing income Distribution to depositors Major shareholders and other related parties Associate Directors and Executive officers 2017 2016 66,523 1,700 9,490 66,938 7 - 26,555 58 3,478 661 46,411 93,078 58 5,185 10,151 113,349 94,543 35 12,122 10,138 149,688 3,095 - - 1,189 34 4,284 34 3,820 33 2017 Directors Financing receivables Deposits Commitments Collaterals against credit facilities Executive officers Financing receivables Credit cards Deposits Commitments Collaterals against credit facilities KD 000’s No. of Directors and Executive officers 2016 No. of Directors and Amount KD 000’s Executive officers Amount KD 000’s 4 7 4 4 26,491 2,977 579 46,377 4 7 5 4 44,285 10,307 177 77,991 13 10 20 16 8 64 58 501 82 34 6 7 15 13 5 56 35 210 53 22 2017 KD 000’s 2016 1,859 98 1,554 113 The key management and directors’ remuneration during the year was as follows: Key management personnel compensation: Short-term benefits Post-employment benefits ────────── ────────── ═════════ ═════════ 1,957 1,667 The Bank’s Board of Directors has proposed Directors’ fees of KD 450 thousand for the year ended 31 December 2017 (2016: KD 450 thousand) which is within the limit permissible under local regulations and are subject to approval of shareholders at their Annual General Meeting (AGM). Remuneration of Chairman and Board of Directors includes compensation for contribution related to participation in the board committees in accordance with Board of Directors’ decisions. In addition to the Board of Directors’ remuneration, an amount of KD 144 thousand (2016: KD 144 thousand) is paid to the Chairman as approved by the shareholders at their AGM dated 18 March 2017 (2016: AGM dated 27 March 2016). 31 F-103
300. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2017 24. SEGMENT INFORMATION The Group’s operating segments are determined based on the reports reviewed by the CEO that are used for strategic decisions. These segments are strategic business units that offer different products and services. They are managed separately since the nature of the products and services, class of customers and marketing strategies of these segments are different. These operating segments meet the criteria for reportable segments and are as follows: Commercial and International Banking - Comprising of range of banking services and investment products to corporate customers providing commodity and real estate Murabaha finance, Ijara and Wakala facilities. Retail Banking - Comprising of range of banking services and investment products to individual customers, providing commodity Murabaha finance, Ijara and Wakala facilities. Treasury, Fund Management and Institutional Banking - Comprising of liquidity management, correspondent banking, clearing, Murabaha investments, exchange of deposits with banks and financial institutions. Investment Management - Comprising of investment in an associate and other investments, including investment properties. Others - Comprising of those which is not pertaining to the above segments and includes those relating to a subsidiary. Management monitors the operating segments separately for the purpose of making decisions about resource allocation and performance assessment. The Group measures the performance of operating segments through measures of segment operating income and results in management reporting system. Segment assets principally comprise of all assets and segment liabilities comprise of all liabilities that are attributable to the segment. Commercial and International 2017 Segment operating income Segment results - Depreciation - Provisions and impairment losses Segment profit/(loss) Segment assets Segment liabilities 2016 Segment operating income Segment results - Depreciation - Provisions and impairment losses Segment profit/(loss) Segment assets Segment liabilities 54,576 Retail 8,104 Treasury, Fund Management and Institutional Banking (5,985) Investment Management 4,914 Others 2,642 KD 000’s Total 64,251 ═════════ ═════════ ═════════ ═════════ ═════════ ═════════ (7,957) 24,251 (2,252) 55 2,758 (2,319) (1,006) (1,889) 175 (8,265) (1,889) (12,353) 17,793 ═════════ ═════════ ═════════ ═════════ ═════════ ═════════ 1,093,189 233,077 424,330 125,279 40,165 1,916,040 ═════════ ═════════ ═════════ ═════════ ═════════ ═════════ 271,500 ═════════ 53,509 610,000 ═════════ 10,407 721,116 ═════════ (6,699) - ═════════ 3,295 49,533 ═════════ 2,680 1,652,149 ═════════ 63,192 ═════════ ═════════ ═════════ ═════════ ═════════ ═════════ (10,681) 19,408 (2,080) 1,640 38 4,222 (1,376) (1,124) (2,003) 594 (5,903) (2,003) (13,505) 18,243 ═════════ ═════════ ═════════ ═════════ ═════════ ═════════ 1,083,197 215,709 404,471 106,671 35,982 ═════════ ═════════ ═════════ ═════════ ═════════ 1,846,030 ═════════ 307,146 494,765 744,426 - 44,698 1,591,035 ═════════ ═════════ ═════════ ═════════ ═════════ ═════════ The Group operates from the State of Kuwait only. 32 F-104
301. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2017 25. FINANCIAL INSTRUMENT AND RISK MANAGEMENT (a) Strategy in using financial instruments As an Islamic commercial bank, the Bank’s activities are principally related to the sourcing of funds through Shariaá compliant financial instruments, within the guidelines prescribed by CBK and deploying these funds in Shariaá compliant financing and investment activities, to earn a profit. The profits are shared between the shareholders as well as the profit sharing deposit account holders, as per policies and proportions determined by the Board of Directors and Fatwa and Shariaá Supervisory Board. The funds raised vary in maturity between short and longer tenors and are mainly in Kuwaiti Dinars, apart from major foreign currencies (including GCC currencies). While deploying the funds, the Bank focuses on the safety of the funds as well as maintaining sufficient liquidity to meet all claims that may fall due. Safety of shareholders and depositor funds is further enhanced by diversification of financing activities across economic and geographic sectors, as well as borrower types. (b) Overall risk management The main objective of risk management in the Group is to achieve an optimum balance between the twin goals of profit maximisation and capital maintenance. The Group’s risk management framework is built around this objective and seeks to address specific concerns of the various stakeholders such as shareholders, CBK, rating agencies, customers, depositors and the general public. The Group’s commitment to the creation and maintenance of effective risk management systems and procedures is evidenced by the oversight responsibility given to the Board Risk Management Committee. The Group has established a prudent and professional approach to risk taking with the following underlying principles that support its risk management framework:  Actively promoting an overall culture that accords high value to disciplined and effective risk management;  Using professionally qualified people with appropriate risk management skills;  Disciplined processes for evaluation and acceptance of risk within appropriate limits in individual transactions, products and the management of financing and investments;  A management information system that provides timely and accurate information on risks to the relevant management group and the commitment to continuously upgrade these systems and apply the most up-to-date analytical tools and systems to properly capture risks, monitor positions and determine the impact of potential management actions; and  An internal audit function to ensure ongoing adherence to and integrity of risk management processes. The Bank has a Risk Management Department, which is primarily responsible for the risk management in the Bank. The Risk Management Department is structured in a manner which facilitates focused attention on each of the specific risk arising from financial instruments areas, e.g., credit, liquidity, market (encompassing foreign exchange, profit rate, equity risks) and other risks such as operational risks. The Group’s risk management methodologies include:  Pro-active methodologies such as continuous review and enhancement of: the Group’s policies and procedures; development and enhancement of risk measurement tools such as risk grading models, pricing models and VaR models; risk inputs in respect of the Group’s strategic planning as well as structuring and review of product and services.  On-going methodologies, such as risk management inputs in respect of proposed financing and investment applications; compliance review - post approval - of financing and investment facilities; periodical review of the financing and investment portfolio by way of reports and highlighting perceived risks to top management as well as line functionaries; continuous monitoring of market, operational and technology related risks.  Post fact methodologies, such as review of proposals and trends in respect of provisions; write-offs and disposal of investments. 33 F-105
302. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2017 25. FINANCIAL INSTRUMENT AND RISK MANAGEMENT (continued) (i) Credit risk Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. This includes the risk of decline in the credit standing of the customer. While such decline does not imply default, it increases the probability of the customer defaulting. Financial instruments that create credit risk include financing facilities, contingent liabilities and commitments to extend credit and investment in debt securities i.e. investment in sukuks. Credit risk management structure To manage credit risk, the Group has established a board level Financing and Investment Committee (BFIC) and the following management committees:  Financing and Investment Committee  Provision Committee The BFIC is responsible for reviewing and approving the management level Financing and Investment Committee’s recommendations with regard to credit facilities, financing relationships, financing limits, pricing and profitability. The management level Financing and Investment Committee (the Committee) is responsible for safeguarding the asset quality of the Bank and ensuring profitable use of funds. The Committee reviews the Bank’s credit policy in line with CBK guidelines for commercial and retail credit as well as the inter-bank and country limits. The Committee approves or renews credit proposals within the Committee’s lending limits and reviews and concurs in the approval process for extension of credit in excess of the authority of the Committee. The Provision Committee is primarily responsible for determining the provisions required for impaired facilities when the facility is not already classified as irregular according to CBK regulations (i.e. the Watch list classification of financing facilities). In addition, the Committee also reviews the required provisions for irregular financing facilities to ensure compliance with CBK regulations. In accordance with the instructions of the CBK dated 18 December 1996, setting out the rules and regulations regarding the classification of credit facilities, the Bank has formed an internal committee which is composed of competent professional staff and which is responsible for the study and evaluation of the existing credit facilities of each customer of the Bank. This Committee, which meets regularly throughout the year, is required to identify any abnormal situations and difficulties associated with a customer’s position, which may cause the debt to be classified as irregular, and to determine an appropriate provisioning level. The Committee also studies the position of customers whose irregular balances exceed 25% of their total debt, in order to determine whether further provisions are required. Credit risk management strategy and process The Bank manages its credit facilities portfolio with the objective of ensuring that it is well diversified and it earns a level of return appropriate to the risk it assumes. In the course of normal business, the Bank deploys its funds in various credit facilities, with the primary objective of generating profits for the shareholders and deposit holders. However, at the same time, the Bank seeks to ensure the quality of the credit facilities. The Bank continually strives to achieve an optimal balance between the return and credit quality of the portfolio. The Bank’s policies and procedures manuals, dealing with credit, lay down the credit risk management framework by specifying various covenants and credit standards which include:  clear definition of roles and responsibilities of the various functionaries involved in the different stages of the credit facility life cycle;  establishing clear approval authority structure both for routine as well as exceptional credit facilities;  listing beneficiary, facility, collateral and pricing parameters for the Bank’s product-set;  standardising credit approval packages;  defining criteria for collateral valuation and policies for collateral management;  detailing the procedures for the entire credit life-cycle, including problem loan management;  ensuring, by way of limits, a diversification of the credit portfolio across geographies (countries/regions), sectors, and counterparties. 34 F-106
303. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2017 25. FINANCIAL INSTRUMENT AND RISK MANAGEMENT (continued) Credit risk measurement The Bank measures credit risk in terms of asset quality using two primary measures - the provisioning ratio and the nonperforming financing receivables ratio. The non-performing financing receivables ratio is the ratio of non-performing financing receivables to total financing receivables. Past due and impaired The following classifications of credit exposures is considered by the Bank for identifying impaired credit facilities: Watchlist category requiring specific provisions: Includes regular clients but upon management’s discretion, provisions have been taken to confront any possible future deterioration, in addition to credit facilities that are overdue for 90 days or less (inclusive). The specific provision percentage is determined based on each case and after a thorough study by the management and after deducting deferred, suspended profit and eligible collateral. Sub-standard: If facilities are irregular for a period of 91 – 180 days (inclusive), a provision rate of minimum 20% is applied on the total of the facilities net of deferred and suspended profit and eligible collateral. Doubtful Debts: If debts are irregular for a period of 181 – 365 days (inclusive), a provision rate of minimum 50% is applied on the total of the facilities net of deferred and suspended profit and eligible collateral. Bad Debts: If debts are irregular for more than 365 days, a provision rate of 100% is applied on the total of the facilities net of deferred and suspended profit and eligible collateral. Maximum exposure to credit risk The table below shows the maximum exposure to credit risk for the components of the consolidated statement of financial position, without taking account of any collateral and other credit enhancements. The gross maximum exposure is shown net of deferred profit and provision, before the effect of mitigation through the use of master netting and collateral agreements. KD 000’s Credit risk exposures relating to consolidated statement of financial position items: Balances with banks Due from banks Financing receivables Investment securities - Sukuks Other assets Total Gross maximum exposure 2016 2017 12,653 402,902 1,304,416 43,891 14,120 ────────── 1,777,982 Credit risk exposures relating to contingent liabilities: Acceptances Letters of credit Letters of guarantee Total ────────── 1,727,359 ────────── ────────── 36,958 22,066 269,324 20,673 12,858 240,911 ────────── ────────── ────────── ────────── 328,348 Total credit risk exposure 10,342 393,296 1,268,456 43,927 11,338 2,106,330 ═════════ 274,442 2,001,801 ═════════ Credit risk can also arise due to a significant concentration of Bank’s assets to any single counterparty; this risk is managed by diversification of the portfolio. The 20 largest gross customers account for 25% (2016: 25%) of total credit risk exposures as at 31 December 2017. 35 F-107
304. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2017 25. FINANCIAL INSTRUMENT AND RISK MANAGEMENT (continued) Risk concentrations of the maximum exposure to credit risk Concentrations of credit risk arise when a number of counterparties are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentrations of credit risk indicate the relative sensitivity of the Bank’s performance to developments affecting a particular industry or geographic location. Geographical and industry sector concentrations of financial assets and off balance sheet items are as follows: 2016 Financial assets 77 16,842 32,182 34,359 1,694,522 19,705 58 30,756 2,274 275,555 34 18,866 4,423 51,755 1,652,281 19,540 116 18,616 3,225 232,945 ────────── ────────── ────────── ────────── 1,777,982 328,348 1,727,359 274,442 ═════════ ═════════ ═════════ ═════════ 226,227 502,166 491,169 144,202 414,218 29,513 25,057 193,830 79,948 207,547 400,953 532,611 93,229 493,019 24,867 5,753 132,797 111,025 ────────── ────────── ────────── ────────── 1,777,982 328,348 1,727,359 274,442 ═════════ ═════════ ═════════ ═════════ Geographic region: Asia North America Middle east (excluding Kuwait) Europe Kuwait Industry sector: Personal Banking and financial institutions Real Estate Construction Others KD 000’s 2017 Financial Contingent assets liabilities Contingent liabilities Credit risk mitigation Credit risk mitigation techniques that the Bank is permitted to use are collateral, netting and guarantees provided under certain conditions, which include such agreements being binding on all parties and legal enforceability, are met. The Bank’s lending policy specifies the acceptable types of collateral, source of valuation, accuracy of valuation and frequency of revaluation in respect of collateral. The policy also specifies the maximum facility commitment to collateral value and approval levels for different types of collateral and facility. The accepted collaterals are cash, first demand bank guarantees, securities and real estate. As part of its general collateral control mechanism, the Bank periodically revalues all collateral to ascertain that the collateral cover is not lower than the value at the time of the original approval. The Bank also continuously monitors the validity and expiry dates of mortgages to ensure their timely renewal. The main types of guarantors are individuals and corporate entities. Since none of the Bank’s guarantor counterparties have been rated by any of the three rating agencies (approved by the CBK for the purposes of calculation of capital adequacy), the Bank has not taken any guarantor related credit risk mitigation allowance while arriving at the capital adequacy. Collateral and other credit enhancements The amount and type of collateral required depend on an assessment of the credit risk of the counterparty. Guidelines are implemented regarding the acceptability of types of collateral and valuation parameters. 36 F-108
305. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2017 25. FINANCIAL INSTRUMENT AND RISK MANAGEMENT (continued) Management monitors the market value of collateral, requests additional collateral in accordance with the underlying agreement, and monitors the market value of collateral obtained during its review of the adequacy of the allowance for impairment losses. It is the Bank’s policy to dispose off repossessed properties in an orderly fashion. The proceeds are used to reduce or repay the outstanding claim. In general, the Bank does not occupy repossessed properties for business use. At 31 December 2017, 51% (2016: 58%) of the total outstanding financing receivables were fully secured. Credit quality of financial instruments The Bank classifies the various credit risk exposure which are neither past due nor impaired into two categories of credit quality as under:  High quality : Regular exposures covered fully by collateral in excess of 100% of the outstanding amount.  Moderate quality : All other regular exposures where the collateral does not fully cover the outstanding amount. The table below shows the credit risk exposure by credit quality of assets by class and grade net of deferred profit and provision: 2017 Balances with banks Due from banks Financing receivables Investment securities - Sukuks Other assets Neither past due nor impaired High Moderate quality quality Past due and impaired KD 000’s Total 12,653 402,902 489,734 14,120 673,232 43,891 - 141,450 - 12,653 402,902 1,304,416 43,891 14,120 ────────── ────────── ────────── ────────── 919,409 717,123 141,450 1,777,982 ═════════ ═════════ ═════════ ═════════ 10,342 393,296 574,798 11,338 516,987 43,927 - 176,671 - 10,342 393,296 1,268,456 43,927 11,338 ────────── ────────── ────────── ────────── 989,774 560,914 176,671 1,727,359 ═════════ ═════════ ═════════ ═════════ 2016 Balances with banks Due from banks Financing receivables Investment securities - Sukuks Other assets 37 F-109
306. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2017 25. FINANCIAL INSTRUMENT AND RISK MANAGEMENT (continued) Ageing analysis of past due but not impaired or impaired of financing receivables as per class of financial assets: 2017 Up to 30 days 31 – 60 days 61 – 90 days 91 – 180 days More than 180 days 2016 Up to 30 days 31 – 60 days 61 – 90 days 91 – 180 days More than 180 days Financing receivables Corporate Past due but not impaired Impaired Financing receivables Consumer Past due but not impaired Impaired KD 000’s Total Past due but not impaired Impaired 46,612 32,238 11,844 - 3,238 28,100 11,678 2,541 1,796 - 1,995 1,408 58,290 34,779 13,640 - 5,233 29,508 ────────── ────────── ────────── ────────── ────────── ────────── 90,694 31,338 16,015 3,403 106,709 34,741 ═════════ ═════════ ═════════ ═════════ ═════════ ═════════ 96,066 4,618 41,132 - 3,925 11,583 11,077 3,812 1,515 - 1,477 1,466 107,143 8,430 42,647 - 5,402 13,049 ────────── ────────── ────────── ────────── ────────── ────────── 141,816 15,508 16,404 2,943 158,220 18,451 ═════════ ═════════ ═════════ ═════════ ═════════ ═════════ As at 31 December 2017, the fair value of collaterals held by the Bank against individually past due or impaired amounted to KD 159,695 thousand (2016: KD 206,227 thousand). (ii) Liquidity risk Liquidity risk is the risk that the Bank will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset. To limit liquidity risk, management has arranged diversified funding sources in addition to its core deposit base, manages assets with liquidity in mind, and monitors liquidity on a daily basis. The Bank’s management of liquidity risk is consistent with its overall risk management framework and includes establishing minimum liquid asset requirements and limits with regards to the acceptance of short term wholesale deposits to protect against short term liquidity demands. The Bank monitors liquidity risk by measuring the liquidity gaps on a daily basis and the position is reviewed by asset liability management committee (“ALCO”) on a monthly basis. Similarly liquidity reserve position and the ratio of financing facilities to eligible deposits are monitored on a daily basis. 38 F-110
307. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2017 25. FINANCIAL INSTRUMENT AND RISK MANAGEMENT (continued) The Bank measures liquidity risk by preparing and monitoring the maturity profile of its assets and liabilities as disclosed below: 2017 Assets Cash and balances with banks Due from banks Financing receivables Investment securities Investment in an associate Investment properties Other assets Property and equipment Total assets Liabilities Due to banks and financial institutions Depositors’ accounts Other liabilities Total liabilities Net liquidity gap 2016 Assets Cash and balances with banks Due from banks Financing receivables Investment securities Investment in an associate Investment properties Other assets Property and equipment Total assets Liabilities Due to banks and financial institutions Depositors’ accounts Other liabilities Total liabilities Net liquidity gap KD 000’s Up to 1 month 1-3 months 3-12 months Over 1 year 19,450 354,173 133,921 55,963 4,563 - 32,265 194,451 239 - 553,529 6,563 - 16,464 422,515 27,877 1,518 60,391 5,933 26,225 19,450 402,902 1,304,416 83,840 1,518 60,391 17,298 26,225 ────────── ────────── ────────── ────────── ────────── ────────── ────────── ────────── ────────── ────────── 99,039 488,863 35,277 42,106 405,162 10,749 169,502 253,567 - 83,791 55,621 8,472 394,438 1,203,213 54,498 ────────── ────────── ────────── ────────── ────────── ────────── ────────── ────────── ────────── ────────── 568,070 623,179 226,955 458,017 560,092 423,069 560,923 147,884 Total 1,916,040 1,652,149 (55,109) (231,062) 137,023 413,039 263,891 ═════════ ═════════ ═════════ ═════════ ═════════ 18,140 324,321 170,495 55,535 1,621 - 42,901 194,580 130 - 26,074 476,236 5,609 - 427,145 30,472 1,533 40,235 5,429 25,574 18,140 393,296 1,268,456 86,007 1,533 40,235 12,789 25,574 ────────── ────────── ────────── ────────── ────────── ────────── ────────── ────────── ────────── ────────── 126,693 520,051 29,617 68,087 332,934 - 143,215 215,704 - 80,082 56,143 18,509 418,077 1,124,832 48,126 ────────── ────────── ────────── ────────── ────────── ────────── ────────── ────────── ────────── ────────── 570,112 676,361 237,611 401,021 507,919 358,919 530,388 154,734 1,846,030 1,591,035 (106,249) (163,410) 149,000 375,654 254,995 ═════════ ═════════ ═════════ ═════════ ═════════ 39 F-111
308. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2017 25. FINANCIAL INSTRUMENT AND RISK MANAGEMENT (continued) The table below summarises the maturity profile of the Group’s financial liabilities based on contractual undiscounted repayment obligations. Repayments which are subject to notice are treated as if notice were to be given immediately. KD 000’s 2017 Due to banks and financial institutions Depositors’ accounts Other liabilities 2016 Due to banks and financial Institutions Depositors’ accounts Other liabilities Less than 1 month 1-3 Months 3-12 Months 1 to 5 years Over 5 years 100,265 489,496 35,277 42,627 405,687 10,749 171,340 253,896 - 84,890 55,693 - 399,122 - 1,204,772 8,472 54,498 625,038 459,063 425,236 140,583 8,472 1,658,392 127,452 520,766 29,617 68,495 333,392 - 144,094 216,001 - 80,465 56,220 10,749 420,506 - 1,126,379 7,760 48,126 677,835 401,887 360,095 147,434 7,760 1,595,011 Total ────────── ────────── ───────── ────────── ───────── ───────── ─ ─ ─ ═════════ ═════════ ════════ ═════════ ════════ ════════ ═ ═ ═ ────────── ────────── ───────── ────────── ───────── ───────── ─ ─ ─ ═════════ ═════════ ════════ ═════════ ════════ ════════ ═ ═ ═ The table below shows the contractual expiry of the Group’s contingent liabilities and commitments. KD 000’s 2017 Contingent liabilities Commitments 2016 Contingent liabilities Commitments (iii) Market risk Less than 1 month 1-3 months 3-12 Months 1 to 5 years Over 5 years Total 44,586 12,533 43,489 20,368 91,683 86,435 140,551 30,901 8,039 18,813 328,348 169,050 ────────── ────────── ────────── ────────── ───────── ────────── 57,119 63,857 178,118 171,452 26,852─ 497,398 ═════════ ═════════ ════════ ═════════ ════════ ═════════ ═ ═ 30,807 19,691 49,023 29,246 62,858 74,485 126,972 33,001 4,782 50,863 274,442 207,286 ────────── ────────── ────────── ────────── ───────── ────────── 50,498 78,269 137,343 159,973 55,645─ 481,728 ═════════ ═════════ ════════ ═════════ ════════ ═════════ ═ ═ Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises of three types of risk including interest rate risk, currency risk and other price risk (other than those arising from rate of return risk or currency risk). The objective of market risk management is to manage and control exposures within acceptable parameters, whilst optimising returns. Given the Group’s current profile of financial instruments, the principal exposure is the risk of loss arising from fluctuations in the future cash flows or fair values of these financial instruments because of a change in achievable rates. This is managed principally through monitoring gaps between effective profit and rental rates and by having approved rates and bands reviewed at regular re-pricing meetings. 40 F-112
309. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2017 25. FINANCIAL INSTRUMENT AND RISK MANAGEMENT (continued) Market risk management structure The overall responsibility of managing the Bank’s market risks is of ALCO. The day to day management of market risks is the responsibility of the treasury department which is headed by the Head of Treasury who reports to the Chief Executive Officer. The International Banking Department is responsible for proposing country limits based on Moody’s long term sovereign currency debt rating, or equivalent rating by the two other rating agencies, and reviewing them annually. The measurement, monitoring and reporting of market risks is the responsibility of the market risk division within risk management department. Market risk management strategy and process The Group has established risk management policies and limits within which exposure to market risks is monitored and controlled. (iii a) Currency risk Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Group views itself as a Kuwaiti entity, with the Kuwaiti Dinars as its functional currency. The Board has set limits on positions by currency. Positions are monitored on a daily basis to ensure that they are maintained within established limits. The Group had the following net exposures denominated in foreign currencies: US Dollars Qatari Riyal Euro Sterling Pounds Saudi Riyal Others 2017 KD 000’s 2016 867 (989) 18 (73) (9) (270) ─────── (456) ═══════ 2,965 (1,560) 222 (21) (870) (255) ─────── 481 ═══════ A sensitivity analysis is not disclosed since the Group does not have significant exposure to foreign exchange risk. (iii b) Equity price risk This is a risk that the fair value or future cash flow of a financial instrument will fluctuate as a result of changes in market prices (other than those arising from rate of return risk or currency risk), whether those changes are caused by factors specific to the individual instrument or its issuer or factors affecting all instruments traded in the market. The Group manages this risk through diversification of investments in terms of geographical distribution and industry concentration. The sensitivity of the Group’s consolidated financial statements to the equity price risk is given below. For investments classified as available for sale, a five percent increase in stock prices as at 31 December 2017 would have increased equity by KD 2,835 thousand (2016: an increase of KD 2,802 thousand). For such investments classified as at fair value through profit or loss, the impact on profit or loss would have been an increase of KD 3 thousand (2016: an increase KD 3 thousand). An equal change in the opposite direction would have had equal, but opposite effect to the amounts shown above, on the basis that all other variables remain constant. 41 F-113
310. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2017 25. FINANCIAL INSTRUMENT AND RISK MANAGEMENT (continued) (iv) Operational risk Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. The Group’s business and support units have primary responsibility for identifying, assessing and managing their operational risks. They employ internal control techniques to reduce their likelihood or impact to tolerable levels within the Group’s risk appetite. Where appropriate, risk is mitigated by way of insurance. The Group has a set of policies and procedures that are applied to identify, assess and control operations risk in addition to other types of risks relating to the banking and financial activities of the Bank. Operational risk is managed through the Risk Management Department. This department ensures compliance with policies and procedures to identify, assess, control and monitor operational risk as part of overall risk management. The management of operational risks complies in all material respects with CBK instructions dated 14 November 1996, regarding general guidelines for internal control systems and directive issued on 13 October 2003, regarding “Sound practices for management and control of operational risks”. (v) Fair values of financial instruments Fair values are obtained from quoted market prices, discounted cash flow models and other models as appropriate. Other financial assets and liabilities are carried at amortised cost and the carrying values are not materially different from their fair values as most of these assets and liabilities are of short term maturities or are repriced immediately based on market movement in interest rates. Fair values of remaining financial assets and liabilities carried at amortised cost are estimated mainly using discounted cash flow models incorporating certain assumptions such as credit spreads that are appropriate in the circumstances. Fair value of the Group’s financial assets that are measured at fair value on a recurring basis. 42 F-114
311. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2017 25. FINANCIAL INSTRUMENT AND RISK MANAGEMENT (continued) Some of the Group’s financial assets are measured at fair value at the end of each reporting period. The following table gives information about how the fair values of these financial assets are determined (in particular, the valuation techniques(s) and inputs used). Fair value Hierarchy Sector 10 42 6 Level 1 Level 1 Level 1 Oil and Gas Telecom Investment 12,570 964 11,542 1,545 Level 1 Level 1 Investment Banking 5,746 16,959 2,346 1,302 - 4,586 17,841 2,314 2,335 1,859 Level 3 Level 3 Level 3 Level 3 Level 3 Investment Services Real Estate Healthcare Industrial 30,108 13,049 734 32,154 9,256 1,533 984 Level 1 Level 1 Level 1 Level 3 Financial Investment Services Real Estate KD 000’s Fair value as at 2017 2016 Financial assets Financial assets at fair value through profit or loss - Quoted equity securities 8 46 8 Financial assets available for sale - Quoted equity securities Financial assets available for sale - Unquoted equity securities Financial assets available for sale - Sukuks 43 F-115
312. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2017 25. FINANCIAL INSTRUMENT AND RISK MANAGEMENT (continued) The following table shows an analysis of financial investments recorded at fair value by level of the fair value hierarchy: 2017 Investment securities Financial assets at fair value through profit or loss: Quoted equity securities Financial assets available for sale: Quoted equity securities Unquoted equity securities Investment in sukuks Level 1 Level 2 Level 3 KD 000’s Total 62 - - 62 13,534 43,157 - 26,353 734 13,534 26,353 43,891 ──────── ──────── ──────── ──────── ════════ ════════ ════════ ════════ 58 - - 58 13,087 42,943 - 28,935 984 13,087 28,935 43,927 ──────── ──────── ──────── ──────── ════════ ════════ ════════ ════════ 56,753 2016 Investment securities Financial assets at fair value through profit or loss: Quoted equity securities Financial assets available for sale: Quoted equity securities Unquoted equity securities Investment in sukuks 56,088 - - 27,087 29,919 83,840 86,007 The methodologies and assumptions used to determine fair values of financial instruments is described in fair value section of note 2 “Significant Accounting policies”. Description of Significant unobservable inputs to valuation: Financial asset Technique Unquoted equity shares and sukuks DCF, Market comparable, Asset base valuation and Book value Significant unobservable inputs Range (Weighted average) Long term growth rate 4 - 7% for cash flows for subsequent years Sensitivity of the input to fair value Profit margin growth 4 - 7% Discount for lack of liquidity 10 - 20% Higher the growth rate, higher the fair value. Higher the discount rate, lower the fair value. Higher the growth, higher the fair value. Discount for lack of marketability represent the amounts that the Group has determined that market participants would take into account these when pricing the investments. In case of financial assets available for sale, the impairment charge in the profit or loss would depend on whether the decline is significant or prolonged. An increase in the fair value, other than for debt instruments would only impact equity (through OCI) and, would not have an effect on profit or loss. 44 F-116
313. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2017 25. FINANCIAL INSTRUMENT AND RISK MANAGEMENT (continued) During the year ended 31 December 2017, there were no transfers between Level 1 and Level 2 fair value measurements, and no transfers into and out of Level 3 fair value measurements. Reconciliation of investments recorded in level 3 fair value 2017 29,919 (1,254) (1,833) 359 (104) As at 1 January Disposals Impairment losses Change in fair value Realised gain from sale Foreign currency exchange ───────── As at 31 December 26. KD 000’s 2016 37,305 (3,716) (1,282) (2,440) 82 (30) ───────── 27,087 29,919 ═════════ ═════════ CAPITAL MANAGEMENT AND CAPITAL ADEQUACY Capital management The primary objectives of the Group’s capital management is to ensure that the Group complies with externally imposed capital requirements and that the Group maintains strong credit ratings and healthy capital ratios in order to support its business and to maximise shareholders’ value. The Group actively manages its capital base in order to cover risks inherent in the business. The adequacy of the Group’s capital is monitored using, among other measures, the rules and ratios established by the Basel Committee on Banking Supervision (BIS rules/ratios) and adopted by the CBK in supervising the Group. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividend payment to shareholders, return capital to shareholders or issue capital securities. No changes were made in the objectives, policies and processes from the previous year in this respect. Capital adequacy The Group’s regulatory capital and capital adequacy ratios (Basel III) calculated in accordance with CBK circular number 2/RB, RBA/336/2014 dated 24 June 2014 are shown below: 2017 KD 000’s 2016 1,406,336 1,252,553 Capital required 182,824 162,832 Capital available Tier 1 capital Tier 2 capital 251,615 16,305 242,817 14,510 Risk weighted assets ───────── ───────── ═════════ ═════════ 17.89% 19.05% 19.39% 20.54% 267,920 Total capital Tier 1 capital adequacy ratio Total capital adequacy ratio 45 257,327 F-117
314. Kuwait International Bank K .S.C.P. and its Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2017 26. CAPITAL MANAGEMENT AND CAPITAL ADEQUACY (continued) The Group’s financial leverage ratio calculated in accordance with CBK circular number 2/RBA/343/2014 dated 21 October 2014 is shown below: Tier 1 capital Total exposure Financial leverage ratio 2017 KD 000’s 2016 251,615 2,305,212 10.92% 242,817 2,263,621 10.73% The disclosures relating to the capital adequacy regulations issued by CBK as stipulated in CBK circular number 2/RB, RBA/336/2014 dated 24 June 2014 and disclosures related to financial leverage ratio as stipulated in CBK circular number 2/RBA/343/2014 dated 21 October 2014 are included under the ‘Disclosures’ section of the year 2017 annual report. 46 F-118
315. THE TRUSTEE KIB Tier 1 Sukuk Limited c /o MaplesFS Limited P.O. Box 1093 Queensgate House Grand Cayman, KY1-1102 Cayman Islands THE BANK Kuwait International Bank K.S.C.P. West Tower, Joint Banking Centre P.O. Box 22822 Safat 13089 Kuwait THE DELEGATE Citibank N.A., London Branch Citigroup Centre Canada Square Canary Wharf London E14 5LB United Kingdom REGISTRAR PRINCIPAL PAYING AGENT, TRANSFER AGENT AND CALCULATION AGENT Citigroup Global Markets Europe AG Reuterweg 16 60323 Frankfurt Germany Citibank N.A., London Branch Citigroup Centre Canada Square Canary Wharf London E14 5LB United Kingdom LISTING AGENT Maples and Calder 75 St. Stephen's Green Dublin 2, D02 PR50 Ireland
316. LEGAL ADVISERS To the Bank as to English law To the Bank as to Kuwaiti law Allen & Overy LLP 11th Floor, Burj Daman Building Happiness Street Dubai International Financial Centre P.O. Box 506678 Dubai United Arab Emirates ASAR Al Ruwaveh & Partners Salhiya Complex Gate 1, 3rd Floor Mohammad Thunayan Al-Ghanim Street Kuwait City P.O. Box 447, Safat 13005 Kuwait To the Managers as to English law To the Managers as to Kuwaiti law Dentons & Co Level 18, Boulevard Plaza 2 Burj Khalifa District P.O. Box 1756 Dubai United Arab Emirates International Counsel Bureau Al Hamra Business Tower 58th Floor Sharq, Kuwait City Kuwait To the Trustee and the Bank as to Cayman Islands law To the Delegate as to English law Maples and Calder (Dubai) LLP Level 14, Burj Daman Dubai International Financial Centre P.O. Box 119980 Dubai United Arab Emirates Dentons UK & Middle East LLP 1 Fleet Place London EC4M 7WS United Kingdom INDEPENDENT AUDITORS To the Bank Deloitte & Touche (Al Wazzan & Co) Ahmed Al-Jaber Street, Sharq Dar Al-Awadi Complex, Floors 7 & 9 P.O. Box 20174, Safat 13062 Kuwait Ernst & Young (Al Aiban, Al Osaimi & Partners) Baiak Tower, 18th Floor Safat Square, Ahmed Al-Jaber P.O. Box 74, Safat 13001 Kuwait
317. JOINT GLOBAL CO-ORDINATORS Citigroup Global Markets Limited Citigroup Centre Canada Square Canary Wharf London E14 5LB United Kingdom Standard Chartered Bank P .O. Box 999 Dubai United Arab Emirates JOINT LEAD MANAGERS Citigroup Global Markets Limited Citigroup Centre Canada Square Canary Wharf London E14 5LB United Kingdom Dubai Islamic Bank PJSC P.O. Box 1080 Dubai United Arab Emirates First Abu Dhabi Bank PJSC FAB Building Khalifa Business Park Al Qurm District P.O. Box 6316 Abu Dhabi United Arab Emirates KAMCO Investment Company K.S.C.P. Al-Shaheed Tower Khalid Bin Waleed Street P.O. Box 28873, Safat 13149 Sharq Kuwait KFH Capital Investment Company K.S.C.C. Level 23 Baitak Tower Safat Square Ahmed Al Jaber Street Kuwait City P.O. Box: 3946 Safat13040 Kuwait Standard Chartered Bank P.O. Box 999 Dubai United Arab Emirates CO-MANAGER Boubyan Bank K.S.C.P. Al Hamad Towers, Building 3 Abu Bakr Al Siddiq Street Al Qibla Area 25507 Safat 13116 State of Kuwait